Impact of AFTA

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IMPACT OF AFTA ON ACFMEMBER COUNTRIES

Prepared for

The ASEAN Constructors Federation (ACF)

Shamsul Majid, CFA, MBA(Finance), BSc (Imperial College) Project LeaderRaida 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. Executive Summary

1. Preliminaries

1.0 Introduction1.1 Objectives1.2 Approach1.3 Limitations1.4 Organization of Report

2. AFTA2.1 Creation and Objectives of AFTA2.2 Framework of CEPT2.3 CEPT and Member Countries2.4 Trade Facilitation Measures2.5 Progress Thus Far2.6 AFTA within the Context of AEC2.6.1 AEC2.6.2 AFAS2.6.3 AIA

3. Analysis of the Construction Industry3.1 Regional Overview3.2 Country Overview3.3 Segmental Analysis3.4 Supply & Supply Conditions on Labour3.5 Cross-Border Investment

3.6 Policies and Regulations of Member Countries

4. Liberalization of the Construction Industry4.1 AFTA and the Construction Industry4.2 Views and Concerns Raised by Construction Players on AFTA4.3 Degree of Readiness towards AFTA4.4 AFAS and the Construction Industry4.5 Views and Concerns Raised by Construction Players on AFAS4.6 Degree of Readiness towards AFAS

5. Impact of AFTA and AFAS on Construction Industry5.1 Overview of Competition in the Construction Industry

5.2 Issues and Challenges in Cross-Border Movement of Construction Players5.3 Current Strengths and Weaknesses of ACF Members5.4 Possible Impact of Trade Liberalization to Individual Members5.4.1 Market and Demand Growth Effects5.4.2.1 Investment Capital5.4.2.2 Labour5.4.2.3 Professionals5.4.2.4 Materials5.4.3 Trade Effects


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6. Conclusions and Recommendations6.1 Imperatives for Readiness6.1.1 Member Firms6.2.1 Associations6.2.3 Governments

6.2. Framework for Cooperation6.2.1 Cooperation at Firm Level6.2.2 Cooperation at National Level6.2.3 Cooperation at Government Level6.2.4 Cooperation at Global Level

AppendicesA. Value of Gross Domestic Product by CountryB. Export and Import of Construction MaterialsC. AFAS: Schedule of Commitments Made by MembersD. 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 ASEANwithin the context of the construction industry, and how they will affect ACFmembers. As the construction industry involves the usage of both materials andservices 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 ASEANgovernments, namely ASEAN Free Trade Area (AFTA), ASEAN FrameworkAgreement on Services (AFAS) and ASEAN Investment Area (AIA). These threeinitiatives 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 stagesof development, both in terms of economic prosperity and readiness for tradeliberalization. At one end, Singapore is a free economy with first-world socialdemographics and physical infrastructure, while at the other end of the spectrum,Vietnam is in the transition phase of moving from a state-dominated centralizedeconomy to a socialist-oriented free-market system. At the same time, while Indonesia

is recuperating sluggishly from the Asian financial crisis, Thailand is experiencinghigh growth from its expansionary fiscal and monetary policies. All these featuresrequire careful consideration on the factors that influence the construction industry ineach member country.

In general, this study finds that ACF members have the potential of benefiting fromAFTA as trade liberalization initiatives will continue to take place in the medium tolong term irrespective of any political impediments that may slow the process in theshort term. There is a need for members to understand the likely impact of AFTA ontheir businesses and to prepare themselves for competition with foreign firms.

Although numerous issues have been identified at the country level as contributingfactors to the slow pace of cross-border movement of construction materials andservices, three common issues are relevant at the regional level. The first issue iscapital inadequacy and difficulties in getting the necessary financial assistance andservices when bidding for foreign projects; the second is the lack of understanding ofwhat and how the trade and economic liberalization will affect specific local playersin construction and construction-related industries, and thirdly there seems to be areluctance among construction players within the region to work together as it isperceived that they all share similar knowledge and expertise, hence little opportunityto 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 theirgovernments as an input mechanism prior to the development of national and regionalpolicies. This requires the setting up of a coordination unit that will not onlyparticipate in the working groups in various national and regional institutions relatedto the construction industry, but also to identify potential member firms that can worktogether in competing for regional and international projects. Others include thedevelopment of procedures for trade facilitation for bulky construction materials andmechanisms for mutual recognition of workers and professional qualifications. At theglobal level, ACF should lead the efforts in creating ASEAN-wide construction


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companies that can compete with other established construction companies ininternational projects. At the same time, the members of the federation must worktogether in identifying critical construction sub-sectors that require temporaryprotection or special incentives prior to the signing of regional trade agreements,either in the form of bilateral trade agreement with other major trading partners ormultilateral trade agreement like WTO. Hence, it is necessary that ACF initiates the

following activities firstly, develop a comprehensive database of its members for thepurpose of facilitating alliances and joint-venture in bidding for both regional andinternational projects. Secondly, the federation should develop a database ofinformation that describes the procedures of doing business in each member country,as well as news on business opportunities in ASEAN countries. Lastly, it should setup focused teams that are able to handle communications with governments andASEAN Secretariat in assisting, lobbying and providing feedbacks in the developmentof 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$28.85billion in 2002 (Refer Appendix A). Construction demand generally recoveredfollowing the Asian financial crisis and has since been a great source of the countrieseconomic growth. Indonesia has become the largest construction industry incomparison 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 thepositive result of economic development. The next largest construction industry fromthe ACF members is Singapore at US$4.68 billion. The rapid growth of infrastructurein these countries is due to the development of buildings and other infrastructureprojects. 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 isdue to the changes in public support in terms of finances and the stage of economicdevelopment of each country. Percentage shares of each of the constructionindustrys GDP have decreased for Singapore, Thailand and Indonesia from 1998 to2002. However, in Malaysia, Philippines and Vietnam, GDP construction share haddecreased from 1998 to 1999. Improvement of the construction GDP shares was seenin the year 2000 for Philippines, and after the year 2000 for Malaysia. Vietnam, onthe 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 theregion in terms of better procurement of construction materials, allowing trade ofconstruction materials to move more freely than before. Indonesia, Malaysia,Philippine, and Thailand were some of the countries that were badly affected by thefinancial crisis. However, they began their recovery in 1999 with the resumption ofgrowth. This growth was partly driven by the construction industry, which helped tospeed up Asias recovery of the financial crisis.

Export

Export and import of construction materials have recovered (However unavailabilityof 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 year2002 in comparison to 1998 (Refer Appendix B). For example, Indonesias exporthad increased more than 300 percent in 2002, an increase of construction materials forglobal 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$9.22billion to US$26.094 billion, while Thailand increased from US$4.912 billion toUS$7.095 billion (2001). This indicates that the producers of construction materials


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in ACF countries, whether for semi-finished materials or finished materials, arebecoming larger and also increasing in number, and thus an important supplier for theconstruction industry. The two largest exporters of construction materials from theACF member countries are Malaysia and Singapore, having a value of US$26.672billion and US$26.094 billion respectively. The main reason for this is becauseSingapore and Malaysia re-exports the construction materials by adding value to the

products (finished and semi-finished goods). The fact that Malaysia and Singaporeact 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 largeamount. The major ACF countries importers of construction materials from theworld are Singapore, followed by Malaysia. As explained above, Singapores importof 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 sameyear 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 chooseto import their materials from particular countries, even if transport costs areconsidered. In contrast, abundance in local supply is also a factor why certaincountries choose to use their own materials instead of importing from other countries.The specific details on the amount of materials imported and exported for eachcountry will be discussed later in this chapter.

Private Sector

The investments of construction projects from the private sector are likely to be themain 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 manyprojects are spent on the telecommunications and energy sectors that are increasinglybeing privatized. Investment in these sectors envisions a transition to a more modernenergy and telecommunication sector that is more efficient and reliable.

Table 1: Private Sector Development

Source: World Bank, 2003. n.a. not available

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

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 1,105.5Philippines 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


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while Philippines spent about US$1.279 in 1990-1995 to US$5.528 billion in 1996-2000. 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 alarge amount in the transportation sector. However, for the water and sanitationsector, 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 countrieshave assistance from their governments who had made substantial investment ininfrastructure, recognizing that inadequate and inefficient infrastructure constitutes amajor barrier to growth, FDI inflow and poverty reduction. The Malaysiangovernment for instance, in its mid-term review of Eighth Malaysian Plan (2001-2005), increased the development allocation to US$42.1 billion. Thailandsgovernment on the other hand invested most in infrastructure projects such astelecommunication and energy. A representative of the Thailand Contractors

Association indicated that Thailand is expected to spend US$25 billion oninfrastructure in the next 5 years. More details on other ACF countries are discusslater.

Labour and Professional Services

In terms of employment, labour mobility within ACF member countries is currentlydriven by economic reasons such as seeking employment, better income and workingconditions. Malaysia and Singapore are the main destination for workers fromcountries like Indonesia, Philippines, Thailand, and Vietnam. As expected, thegreatest pressures of labour mobility naturally comes from Indonesia due to their largepopulation. The National Centre for Economic Research - Indonesian Institute of

Sciences found that movement of highly skilled professional to Malaysia andSingapore appears to be associated with their inflow of foreign investment, while themovement of the large number of semi-skilled and unskilled migrant workers ismostly associated with labor shortage in the destination countries. Also, socio-economic and political pressures in the sending countries account for some of thepeople movement. This will be elaborated later in the chapter.

3.2 Country Overview

3.2.1 Indonesia

Construction investment in Indonesia is strongly linked to economic growth (Refer

Table 2). Thus, the recovery of Indonesias construction sector will depend on therecovery of the Indonesian economy. In 1999, the growth in the construction sectorwas -1.91 percent but in the year 2000, the growth in the construction sectorrecovered to 5.64 percent due to stable economic growth rate (Asian DevelopmentBank, 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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perhaps a slower economic growth before this year. Furthermore, the Malaysianconstruction industry is in the process of recovering from price escalation of majorbuilding materials such as steel bars. In Malaysia, the price control of steel bars bythe 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 1.01percent in 2000, 2.33 percent in 2001, and 2.32 in 2002. The industry remainscompetitive with other ACF member countries and this growth was supported by therapid expansion in the construction sector, with the development of highways,upgrading ports and airports, Putrajaya, and other infrastructure projects by mainplayers in the construction industry such as Sunway Construction Bhd, Roadbuilder,Perspec Prime (M) Sdn. Bhd., and many others. Many of the companies interviewedand feedback from the Form For Views discussed about Malaysias good track recordof infrastructure construction particularly highways, and this make the contractorsmore attractive in getting job overseas.

Spending on expansion can also be seen under the Eighth Malaysian Plan (2001-

2005), where the government budget about US$3.68 billion on building newinfrastructure and expansion of the old ones. In the Eighth Malaysian Plan (2001 2005), the Government planned a budget of about US$263 million for airportsinfrastructure alone (UK Trade and Investment, 2003). The development of airportsremains 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 theeconomy. Table 3 below shows the growth of construction sector from 1998 to 2002in comparison with the growth of GDP of the country.

Table 3: Malaysia Growth of the Construction sector

Year 1999 2000 2001 2002

Real growth of output, annual changes (%)GDP 6.14 8.33 0.45 4.21

Construction -4.35 1.01 2.33 2.32Source : Asian Development Bank, 2003

Malaysia : Construction and GDP, 1999-2002

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

1999 2000 2001 2002

Year

Percenta

ge % Growth in GDP

% Growth in Construction

GDP


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In Malaysia, the government shapes the direction of the nation towards anindustrialized status. Public sector projects in health and education area steer thedevelopment in construction. In addition, privatization has fostered the private sectorto supplement the government in the provision of infrastructure in Malaysia. Severalcompanies that were interviewed did mentioned that the construction industry inMalaysia 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 projectshave been undertaken, or at least many, most companies would venture outside ofcountry 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 ofinvestment and projects implementation and the rise of interest rates. The growth ofconstruction GDP in 1999 was -1.54 percent (Refer Table 4). The downturn ofPhilippines construction industry was short-lived and return to a solid economicgrowth in 2000 where the construction sector peaked to a GDP growth of 26.27percent. Nonetheless, construction GDP contracted significantly in the following year

with a growth of only -4.97 percent. Growth would have been stronger but theslowdown was due to political turbulence that weakened consumer and businessconfidence. Due to this, the government formulated the Medium-Term PhilippineDevelopment Plan covering the period of 2001 to 2004, to help raise the livingstandards of the Philippine people with the construction of roads, irrigation, basicdrinking water supply, building of schools and many others.

Although the government would like to achieve the Medium-Term PhilippinesDevelopment Plan goal, the lack of funds available inside the country causes them toobtain financial support from various international institutions. Thus, infrastructureprojects in Philippines are mostly funded through general revenues, loans formvarious international financial institutions which are the World Bank, Asian

Development Bank, OECF, and various grants. Further, it must be noted that privateinvestment is much higher in comparison to the public sector in the year 2001 to2003. For instance, the proportion of the two sectors was about 63 percent on privateand 37 percent on public in 2001 (National Statistical Coordination Board (NSCB),National Statistic Office (NSO), 2001).

Table 4: Philippines Growth of Construction sector

Year 1999 2000 2001 2002

Real growth of output, annual changes (%)

GDP 3.40 5.97 2.95 4.43

Construction -1.54 26.27 -4.97 -3.27Source : Asian Development Bank, 2003


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Philippines : Construction and GDP, 1999-2002

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

1999 2000 2001 2002

Year

Percentage % Growth in GDP

% Growth In Construction

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 3.62in 20031. This signifies that there will still be opportunities for changes in the numberof export and import materials from the Philippines. Feedback of Form For Viewsreceived indicated that the key opportunities in the Philippines building andconstruction industry that should be looked upon include high-quality, low-costmaterials, new mass-housing technology, local manufacturing insulation products,steel products, construction equipment, contracting and consulting, especially forinfrastructure projects.

With the coming of AFTA, local contractors need to be more specialized, take part indesign-build and turnkey projects, and prove more training for the technicalpersonnel. In the interviews, it was also mentioned that 87 percent of the contractorsare actually small players. Thus, there is a need for these small players to unitetogether 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 othercountries to venture into Philippines infrastructure sector. Some of which includesthe road maintenance, toll-road construction (eg. sub-contracting), buildingdevelopment, and engineering services.

3.2.4 Singapore

The size of Singapore constructions industry has been falling from the year 1998where the construction share of GDP was at high 9.36 percent and fell to 5.38 percentin the year 2002. The growth of the construction sector has also not beenencouraging. In 1999, the growth of construction GDP fell to -8.99 percent. In thefollowing year, the reduction of construction GDP growth has not been large butnevertheless, 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 comparisonwith 9.36 percent in 1998. According to the Building and Construction Authority, atleast 11 firms have dropped out of its registry in the first half of 2002, compared to 15for the whole of 2001. Further, a September survey by Singapore Confederation ofIndustry 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 1999 2000 2001 2002


GDP 6.42 9.41 -2.37 2.25

Construction -8.99 -1.85 -3.20 -10.83Source : Asian Development Bank, 2003

Singapore : Construction and GDP, 1999-2002

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

1999 2000 2001 2002

Year

Percebtage % Growth in GDP


GDP

Although the industry has not been improving, Singapore government seeks to ensurethat the trading system is open to increase their trade with other countries and thushelp in recovering their construction industry. The reduction of CEPT tariff rates forSingapore has long been reduced to 0%. Thus, the elimination of restriction to enterSingapore market has attracted many international companies to do business in andwith 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 cominginto Singapores market is due to the superior quality of their projects. This isbecause all projects built in Singapore are subject to review under the countrysConstruction Quality Assessment System (CONQUAS). Its objective is to examinecontractors work in three areas, which are structural, architectural and externalworks. It measures the extent to which a building conforms to the contractspecifications. Further, most sizeable construction organizations aim to attain ISO9000 and ISO 14000 certification. As discussed in the interviews, this qualificationsare imposed on every practitioners in the industry, not only foreigners, but also local


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players. Thus, the Singaporean government is actually creating the same levelplaying field for all players, be it local or foreigners. With AFTA coming, one of themain concern for them is having lack of track records especially in terms ofexperience in building extensive highways and airports. Can they actually ventureinto other foreign countries and compete with other players who have extensive trackrecords?

3.2.5 Thailand

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

Table 6: Thailand Growth of Construction sector

Year 1999 2000 2001 2002

Real growth of output, annual changes (%)GDP 4.45 4.65 1.94 5.22

Construction -6.84 -9.54 -0.95 5.96Source : Asian Development Bank, 2003

Thailand : Construction and GDP, 1999-2002

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1999 2000 2001 2002

Year

Percent

age % Growth in GDP


GDP

The average CEPT tariff rates for Thailand had also declined from 10.56 percent in1998 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 theworld (Refer Appendix B). Further, liberalization of the construction industry hashelped many local players to form strategic alliances with overseas firms. Under thenew law, overseas companies will be allowed to hold majority stakes in local firms, asopposed to a limit of 49 percent in the past (Ministry of International Trade andIndustry, 2001).

In Thailand, there is a National Information Technology 2000 policy to ensure there isdevelopment 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 thatforeigners 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 positivefactors, exports grew an average of 20% annually from 1990 to 1994. In 1995, exportearnings reached US$5.3 billion, more than five times higher than export earnings in1988 and 38% higher than in 1994.

Vietnam construction industry has had a positive growth throughout 1998 to 2002. In1999, the growth of GDP on construction was 2.4 percent (Table 7). A much higherincrement 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$1.9billion in 2001) in comparison with other ACF member countries, the country hascertainly been developing and expanding their construction market in a short period oftime.

Table 7: Vietnam Growth of Construction sector

Year 1999 2000 2001 2002


GDP 4.77 6.79 6.89 7.04

Construction 2.40 7.51 12.78 10.57Source : Asian Development Bank, 2003

Vietnam : Construction and GDP, 1999-2002

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1999 2000 2001 2002

Year

Percentage % Growth in GDP


GDP

Vietnamese government has engaged in a number of measures to establish a goodenvironment for the construction industry. Some of them would be the liberalizationof construction investment, the extension of permits issued to foreign-invested firms,and tariff reductions for the import of construction materials. However, in order toinvest in huge infrastructure projects, the Vietnamese government has limitedfinancial resources and therefore need various funding from home and abroad. Forexample, 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 itemsare reduced from an average of 3.92 percent in 1998 to 1.78 percent in 2003 (ASEANSecretariat, 2004). The dropping of the import duty for construction materials as partof 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 bereduced to 0 percent.

The Vietnamese Government usesquotas for imported items as a manner of balancingmarket demand and supply which is due to the instability of local production and thedemand for some construction materials. For example, the demand for cement oftenincreases 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 cementproducts under quota. During other times of the year, cement import is forbidden toprotect local cement producers.

Other countries have large opportunities in terms of supplying what the Vietnamese

manufacturers cannot produce, or where local production cannot meet marketdemands. Import has increased to US$454.97 million in the year 2003 (Refer Table8). Production of major materials in Vietnam are tiles and ceramics at US$410.25million, followed by bricks at US 241.13 million. In addition, value of Vietnameseexport in the construction industry has also increased throughout 1998 to 2002, from avalue 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 1999 2000 2001 2002 2003

Export value 22.54 19.29 28.82 35.25 46.21 64.70

Import value 142.29 130.46 155.41 250.35 324.98 454.97

Source : Vietnam Association of Construction Contractors, 2004

Table 9 : Production of Construction materialsValue in US$ mil

Year 1997 1998 1999 2000 2001 2002 2003

Industry sector

Cement 443.8 500.066 590.533 684.000 809.266 1034.733 117.4

Bricks 114.116 124.916 123.500 136.200 141.183 183.3 241.133

Tiles and ceramics 56.8 94 129.6 215.1 296.8 341.4 410.25

Glass 15.56 14.26 47.2 90.1 100.9 104.2 75.565Source : Vietnam Association of Construction Contractors, 2004

It was found out that one of the reasons for the decrease in demand in the constructionindustry is that common people do not have enough money to spend since they areunemployed, especially workers in heavy industries (coal, steel, miner, cement). Inthese industries, the supply exceeds the demand so significantly that the stocksincrease 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 nationaleconomy. 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 theeconomy, the policies have not been implemented as tentative. The foundation is notstrong enough to carry big changes.

There is also the lack of competition and not having any sense of the "Kiasu" ("wantto 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, Vietnameconomy does not have enough competitive strength. The "sandwich" situation ofnew 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 theother hand, Vietnam has to open the door for foreign investors. Domestic producerswho lack of capital, expertise and competition cannot cope up with the suddenchanges.

Nevertheless, becoming a member of ASEAN is a progress step for Vietnam tointegrate 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 thecountry in enhancing their construction industry.

3.3 Analysis of Construction Materials

Past shortages of construction materials have resulted in the accelerated liberalizationof the construction materials industry. Since the implementation of AFTA, theincreasingly competitive and dynamic construction industry has been affecting theexport and import of construction materials among the ACF members. Moreover,infrastructure development programs and policies of industrial and regional expansionsupport the increased production of construction materials. The production anddemand 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 twosub-sectors, namely the manufacturing of long steel products and the manufacturingof flat steel products that are used as construction materials.

The volume of imports of all steel products of the ACF member countries haveconsistently far outweighed exports (Refer Appendix B). For example, import of steelfrom the ACF countries (with the exception of Vietnam) in the year 2001 is US$6.102billion as compared to export value of US$1.412 billion. Reductions in import dutieson steel that will take effect with AFTA will likely put downward pressure on theprices of some locally available steel products. The outlook for the industrial steelindustry may face intense pressure from countries with higher comparative advantagein steel production, and from inexpensive materials suitable for manufacturers needs.

Current demand for steel products has been strong owing to the continuing stronggrowth of the economy. Thailand is the largest exporter of steel among ACF membersfrom 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 maindestinations importing US$58 million in 2002. Thailands main players in the iron andsteel 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 wouldlike to see a waiver of AP requirement for products such as seamless pipes and hotrolled plate (above 30mm) which are not manufactured locally, and there are nosubstitutes for these products.

In the case of Indonesia, the steel industry has grown from 2000. The countryslargest steel producer PT Krakatau Steel reported considerable profit due to exportearnings. Nevertheless, the success was short lived because in 2001, the UnitedStates, the largest market for Indonesian steel products and a number of othercountries including Thailand imposed anti dumping import duty on Indonesian steelproducts. The import barriers abroad forced the countrys steel producers to turn todomestic 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 andproduction process. Vietnam produces long products but not flat steel products. As aresult, there is an excess in long products while imports of flat steel are rising. Thisimbalance of capacity in the long product sector was caused by inconsistency betweenthe 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% wascharged when importing them for special purposes. In 2001, the Vietnamesegovernment has limited the entry of long product to restore balance between demandand supply. Vietnamese steel producers should make full use of the relatively hightax 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, thelocal producers may have to consider exporting their long steel products to other ACFmember countries to avoid local surplus and achieve a more balance mix ofproduction process.

In recent years, the steel markets in the world have faced escalation of price, from2002 till early 2004. The price of steel has gone up due to increase in raw materialsprice, such as scrap steel, for its production. The scrap prices have almost tripledsince 2002. In early 2002, the price for scrap steel was US 110 dollars per tonne andit hit a record high in February 2004 to about US 300 dollars per tonne. This hascaused the shortages of steel bar influencing the pace of some construction projects toslowdown. 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 significantimprovement include the availability and quality of imported steel materials, and thedemands associated with the increased competition that could result from theimplementation 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 ContractorsAssociation. Due to this, ACF countries cement producers, particularly the smallplayers, would most likely concentrate on local demand instead of exporting theirmaterials overseas, with the exception of Thailand. Thailands cement industry isreputedly one of the largest in Southeast Asia, and until today, the country is a netexporter. Cement exports for Thailand in 2001 was US 360 million dollars but importwas only about US 5 million dollars (Refer Appendix A).

In 1998, there was a surplus of 35 million metric tonnes of cement in ASEANcountries (ASEAN Secretariat, 2003). Total production capacity of the ACF countriesin 1998 were 163 million metric tonnes (Asian Development Bank, 2001). Asiascombination of cheap labour and high infrastructure demand has persuaded

international cement companies to chase bargain assets in the region, especially sincethe onset of the financial crisis. Due to this, the six ASEAN countries agreed to buycement from each other as a solution to excess production capacity (ASEANSecretariat, 2003). With the implementation of AFTA, the co-operation amongcompanies from ACF should further assist in trading cement materials regionally.

Nevertheless, China is a potential supplier of cement for the ACF countries. Chinaaccounted for about 17 percent of the total world cement trade. But due to theeconomic crisis, the number had decreased by nearly 30 percent as the prices ofcement dropped. As the industry stabilized throughout the year 2000 till recently,China will likely continue in increasing its cement production capacity and improveits 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 totalproduction by 2005 (World Business Council for Sustainable Development, 2003).Thus, Chinas market could offer the ACF member countries cheaper price for cementand lower the constructions cost.

3.3.3 Timber / Wood

With the implementation of AFTA, the tariff for timber and wood materials willfurther be reduced. Besides focusing on the local market, countries that haveabundance of timber materials should focus on expanding the market regionally. Themain exporter of timber materials from the ACF countries are Malaysia andIndonesia. 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 oftimber materials, AFTA allow member countries to enjoy national treatment for anycross-border investments. Given its well-diversified wood- based industry and a highlevel of productivity, Malaysia and Indonesia could emerge as a manufacturing hubfor timber products in ASEAN.

These ACF countries producers and exporters must take proactive steps to overcomeissues such as increasing price competition due to the emergence of lower-costproducers such as China. To be able to compete more effectively, the ACF timber


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industry should take advantage of its strength in advanced wood manufacturingfacilities to produce high quality value-added timber products for the markets.

In Philippines, there is an increasing substitution of tropical timber by non-woodproducts 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 exportedtimber materials of Philippines has decreased from a value of US 142 million dollarsin 1998 to US 122 million dollars in the year 2002. The advantage of having the tarifflowered with the implementation of AFTA is that the Philippines could benefit fromimporting 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 todayhowever, is market-driven where it focused more on product value. Manufacturedtimber products must be able to satisfy consumer demands and preferences, whichamongst others include product quality and the issues of sustainability. Hence, thetimber 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 inthe construction industry which are considered as hardware. Amongst them aresanitary wares, paints and coatings, electrical components, floor and wall tiles, pipesand plumbing, furniture and wardrobe, as well as nails/screws/nuts and bolts.

These hardware materials are mostly secondary products, meaning that they areproduced from materials such as steel, cement or timber. For example, pipes andplumbing 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 andother materials.

In general, Malaysia and Singapore are the largest exporters as well as importers ofthese hardware building materials (Refer to Appendix B). As mentioned early in thischapter, the main reason for this is because Singapore and Malaysia re-exports theconstruction materials by adding value to the products The fact that Malaysia andSingapore act as transportation hub help them to import and re-export constructionmaterials. Basically Singapore is a net importer of many products from Malaysianamely, 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$1.9million) (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 Thailandpossesses 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 lookspromising as well. The potential for increased usage in decorative and quality paintfor construction are becoming significant. Singapore and Malaysia are viewed as mostfavourable 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 ischaracterized by skill type, gender, and industry (Sieh & Ong, 2003). In terms of skilltype, most foreign workers are in the lower-skilled categories. For example, inSingapore, of the 600,000 foreign workers, it was estimated that only 110,000workers 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 tohave widened due to easier mode of transportation and also because more economiesare emerging onto the global economic scene. Conventional routes of cross border

flows for foreign workers are also changing and this has resulted in migrant workersappearing 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 andsubcontractors 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 tothe well being of their economy. The pattern could be seen in Table 10 where thenumber of migrant workers has increased. Consistent with this trend, remittances fromforeign workers, both permanent and temporary, are the second largest source ofexternal funding for developing countries, after foreign direct investment (FDI). In2001, 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 SriLanka

1976 4.2 1.9 47.8 1.3 41.7 6.1 0.51980 236.2 16.2 214.6 21.5 129.8 30.1 7.6

1985 163.0 54.3 389.2 69.7 88.5 77.7 12.4

1990 143.6 86.3 598.8 63.2 115.5 103.8 42.7

1995 415.3 120.9 488.6 202.3 122.6 187.5 172.5

1998 355.2 411.6 562.4 175.4 104.0 267.7 158.3


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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 thepoor countries. For instance, Indonesian workers can earn US$2 or more per day inneighboring 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 whocould offer a higher income. In the case of Malaysia for instance, most foreignworkers came from Indonesia (Refer Table 11) and a large number (60,197) offoreign workers in Malaysia were construction workers. The relative share of youngadults in the populations of sending and receiving countries, and the reductions in thecost and inconvenience of travel has also assist in the acceleration of migration(Worldbank, 2003).

Table 11: Foreign workers in Malaysia (2002)

Number (persons) Share (%)

IndonesiaBangladeshNepaliPhilippinesMyanmarThailandPakistanOthers

566,983105,74448,25717,2876,5392,4402,218

20,098

73.713.76.32.20.80.30.32.6

Construction WorkersPlantation WorkersManufacturing WorkersServices Workers

Domestic MaidsOthers

60,197214,595283,40155,309

155,883181

7.827.936.87.2

20.30.0

Total 769,566 100.0Source: Malaysia, Department of Migration (January 2002)

Indonesia

Indonesia is an important source of labour supply due to the over surplus of theirunemployed worker. The official unemployment rate in 2002 for Indonesia is 10.3percent which is about 8,005 people (ILO Labour Statistics 2003). It is also one ofthe worlds major sources of unskilled international migrant workers. Although only4.2 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 companiesin Indonesia such as Total Bangun Persada, Jaya Konstruksi, and Pt. Wijaya Karyafelt that due to this reason, Indonesia has also become a major global source ofcontract migrant workers (Refer Table 12). The table only shows the number ofIndonesian overseas contract workers and due to unavailability of data, the number ofillegal workers are not specified.

Table 12: Estimated stocks of Indonesian overseas contract workers in 2000


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Country Number of workersMalaysia 1,376

Saudi Arabia 425

USA 100

Taiwan 90

Singapore 70

Hong Kong 40U.A. Emirates 35

Philippines 26

South Korea 12

Japan 3

Brunei 2Source : ILO Labour Statistics, 2001

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

Malaysia

Construction industry in Malaysia is also vital for generating employment. In the year2000, the industrys contribution to employment is about 9.3% of total employment inthe country. Table 13 shows the percentage of employment by industry in 1990, 1995and the year 2000. The percentage of construction labour has increased from 6.3percent in 1990 to 9.3 percent in 2000.

Malaysia has long been recognized as the most important source of foreign workersfor 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 15.5Mining &Quarrying 0.6 0.5 0.5

Manufacturing 19.9 25.3 27.5

Construction 6.3 9 9.3Services 47.2 46.5 47.3

Total 100 100 100Source: Construction Industry Development Board (CIDB), 2003

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


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India, and Pakistan also contribute a fair amount of construction workers in thiscountry.

However, firms in Malaysia such as Satujaya and Sunway construction expressedtheir concern with the fact that most of these construction workers are foreigners andsometimes contributes to the social problems in the country. It is also important to

acknowledge that most Malaysians who are unemployed would still prefer to pursueother areas instead of the construction industry, thus, this contributes to theunavailability of local workers to work in this areas.

Table 14: Issuance of Temporary Work Permits to Foreign Workers in Peninsular(2000)

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

Mobility of the Indonesian migrant workers to Malaysia has been an on-goingprocess. In contrast, few percentage of construction workers comes from Thailand andPhilippines.

Philippines

The growth rate for construction workers in Philippines has increased in 2003 byabout 5.7 percent (Refer Table 15). According to the Philippine ConstructionAssociation, the major advantage that the workers have over other ACF membercountries is their understanding over the English language, and thus make it easier tointeract with people from different countries.

Table 15: Employment in Philippines

Philippines

Growth Rate

Indicators 2001 2002 20032001-02

2002-03

Total Domestic Employment 29.2 30.1 30.5 3.1 1.7(in million workers)

ConstructionWorkers

Indonesians 110,764Thais 1,121

Filipinos 49

Cambodians -

Myanmarese 1,369Bangladeshi 29,275

Indians 3,305

Pakistanis 3,115

Sri Lankans -

Nepalese -

Total 148,998


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Average Construction Employment 1.6 1.6 1.7 0.7 6.3(in million workers)

% Share of Construction to total 5.4 5.3 5.6 (2.3) 5.7Employment

Source : Philippines Construction Association, 2004

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

Singapore

Singapore obtains foreign workforce from two different categories of countries. Onebeing the traditional countries which are those countries whose culture and workethos are compatible with those of Singapore. These countries include Malaysia,Republic of Korea, Hong Kong, Japan, and Macau (CIDB, 2004). Most of theselabours are actually from Malaysia. The other so called non-traditional sources arefrom Bangladesh, India, Indonesia, Philippines, Sri Lanka and Thailand.

Singapore's economic progress has been based on systematically upgrading the levelof technology in all sectors, and adopting high value-added activities, while phasingout labour-intensive ones. Whereas the employment of foreign workers is permitted insome sectors, continued reliance on such workers is not considered desirable, as it isthought that social and economic problems may result. From Table 16, we can seethat the number of construction workers in Singapore is decreasing from 131,300 in1999 to 114,474 in the year 2003. This is due to the fact that skilled workers areretained and dependency on less (in numbers) but quality worker are much sought forin their country.

Table 16: Number of Construction workers in Singapore

1999 1998 2001 2002 2003

Employment 131,330 130,730 124,925 119,068 114,474Source :Department of Statistics, Singapore, 2004

Thailand

The number of construction workers in Thailand has also increased throughout 1999to 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 (1121workers) in the year 2000 (Sieh & Ong, 2003).

Table 17: Number of workers (thousand persons) in Thailand (1999, 2001-2003)

1999 2001 2002 2003Construction 5,607.1 6,580.7 7,146.3 7,522.8

Other Industry 117,914.5 121,836.3 125,097.1 127,841.4

Total 123,521.6 128,417 132,243.4 135,364.2Source : 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 Thailandhas also increased as shown in Table 18. A large number had migrated to Singaporebetween these years, while the number of workers going into Malaysia had decreasedby the year 1997.

Table 18: Number of Thai Workers Going Abroad by Country of DestinationCountries 1990 1991 1992 1993 1994 1995 1996 1997*Middle East& Africa

27,392 21,482 23,029 17,019 17,614 19,987 22,607 16,367

E-Asia 12,229 16,931 24,984 77,661 105,861 134,524 110,516 106,830

ASEAN 17,263 21,546 31,181 40,939 44,626 46,257 50,425 42,829Singapore 6,464 9,488 11,337 14,171 15,100 15,624 17,601 16,601

Malaysia 2,087 2,473 6,608 11,358 12,232 11,830 9,363 5,820Brunei 8,009 8,840 12,729 14,750 16,553 17,292 20,714 16,024

Others 703 745 507 660 741 1,511 2,747 4,384

Western 6,140 3,890 2,524 2,331 1,663 1,528 1,888 2,112Total 63,024 63,849 81,718 137,950 169,764 202,296 185,436 168,138

% Shares by RegionMiddle East 43.5 33.7 28.2 12.3 10.4 9.9 12.2 9.7

E-Asia 19.4 26.5 30.6 56.3 62.3 66.5 59.6 63.5ASEAN 27.4 33.7 38.2 29.7 26.3 22.9 27.2 25.5

Western 9.7 6.1 3.0 1.7 1.0 0.8 1.0 1.3Note: * January to November 1997.Source: Department of Employment, Ministry of Labour and Social Welfare, fromhttp://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 in2001 (Asian Development Bank, 2003)). Nevertheless, the percentage rate ofunemployment is still high. In order to overcome unemployment at home, theVietnamese government put an effort to fight it by encouraging its people to work inneighboring countries. In the past few years, Malaysia and other ASEAN countrieshave become a growing market for Vietnamese labours. Most are employed in themanufacturing and construction industry. And unlike its Southeast Asian neighbourssuch as the Philippines and Indonesia, Vietnam is a relative latecomer to the idea ofexporting its workers overseas.

In 2002, about 2,763 Vietnamese workers were working in Malaysia, 110 in Laos, and2,801 in the rest of the world (Refer Table 19). The number employed in othercountries has increased and progress has been made in poverty reduction and jobcreation for the unemployed. Nevertheless, Vietnam is seriously lacking of humanresources locally. Local talents have not been employed and promoted properly.Consequently, many students study overseas and later do not want to go back sincethey 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 - 110 -

To the rest of the world 4120 2801 3348

Total 4120 5584 7054Source : Vietnam Association of Construction Contractors, 2004

Illegal Workers

The growth of illegal immigration has given rise to tightening of immigration rulesand regulations in ACF countries particularly with regards to semi-skilled andunskilled workers in most countries facing massive numbers of illegal peoplemovement (Sieh & Ong, 2003). Further, immigration rules are now moving towardsincorporating political and cultural rationale as compared to before where economic

justifications were emphasized. The case of preference for cultural affinity inselecting source migrant countries in Singapore and Malaysia has already beendiscussed by their governments and firms as a strategy to avert potential social andcultural conflicts.

Many factors contributed to the failure of the governments efforts to curb the illegalinflow of foreign workers (Kassim 1991, 1993; Zanifan Md. Zain 1991). Legalimportation 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 tocontrol 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 skilledworkforce comprised of engineering works, project management and many others.With AFAS, governments can promote on harmonization of qualifications andequalization of standards for skilled labour and professionals. Border entry pointdetails for such movement of people to conduct trade in services cannot be ignored.AFAS promises to benefit both the developed and the developing countries, withperhaps the former as the main beneficiaries of this mode (Sieh & Ong, 2003). Theflow of natural persons providing services among developed countries is verysignificant, as it is among developing countries, as well as between developed anddeveloping countries. Countries would have to pay immediate attention to theirrespective visa and work permit systems in order to identify areas to facilitatemovements of people if they earnestly wish to promote flows of skilled workers.

To illustrate further, Malaysia accepts foreign workers from countries such as thePhilippines, China, Indonesia, Thailand, Bangladesh and elsewhere. But theMalaysian government has some formal arrangements with these economies, but notwith all of them. There are agreements between Malaysia and the Philippines andbetween 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 hostand home governments in order that satisfaction is met on both sides. Similaragreements are also enforced between Singapore and some home governments offoreign workers that are employed in Singapore.


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The progressive liberalization of services under AFAS will help to address the issueon the needs of a similar ASEAN visa for professionals, which could be one means topromote greater cooperation. A good data base, which is currently lacking, will helpto facilitate the formulation and implementation of an ASEAN visa. Perhaps such dataissues may be taken up under certain agency or association that has expertise onrecord keeping across countries.

In the case of Singapore, some policy measures are in place to encourage immigrationof a permanent nature usually for higher level skills. Skilled workers holding workpermits are eligible for entry/reentry permits. Professional personnel on work passes(as distinguished from work permits) are granted permanent resident status. SocialIntegration Management Service is established by the government of Singapore toencourage permanent integration of workers with desirable skills into the labour force(Ruppert, 1999). A further step is taken by the Singapore government to encourageskilled 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 asplanned under AFAS provision will see further liberalization and bindings of servicesactivities. Other ACF countries such as Philippines, Thailand, and Indonesia aregenerally prepared to co-operate with foreign professional workers as discussed in theinterviews. The opportunity to work with other countries professionals should beseen as beneficial to develop ones own country.

Despite the reality that different countries have different needs and priorities withrespect to migrant or foreign workers, there is a need to look at the issues relating toforeign workers, either to reduce the incidence of unlawful people movement usuallyfrom the unskilled category, or to regulate the flow of highly skilled andknowledgeable professional people across borders.

Table 20: Summary of Suppliers Strengths

Suppliers Strengths

Country Steel Cement Timber Machinery Hardware

Indonesia ++ + +++ + 0

Malaysia + + +++ + 0

Philipppines 0 + 0 + 0

Singapore 0 + - ++ 0

Thailand +++ ++ 0 + 0

Vietnam 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 facilitatereduction in the cost of importing construction-related goods and materials within theASEAN region. Goods with a minimum 40% content originating from ASEANcountries are qualified to be categorized as local goods that will be accorded withCEPT privileges. In general, the official target of AFTA for ASEAN-6 was to havetariff for all items in the Inclusion List fall within 0-5% by January 2003. In the caseof Vietnam, the target deadline was set at January 2006.

As of 2003, the tariff for all construction-related goods and materials have fallenwithin the 0-5% tariff band, with the exception of Vietnam. To illustrate the range ofimport tariffs applicable to ACF member countries, Table 4.1 summarizes the tariff

rates applicable to selected construction materials. Four groups of countries emergedfrom their tariff patterns Vietnam with its high import barrier, Malaysia andThailand 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 howeach country intends to protect their domestic industries from foreign competitorswithin the short term.

With the coming of 0% import tariff by 2010 (for ASEAN-6 members), this will meanlower cost of importing materials from within the region. In turn, buyers will have awider choice to source their materials, both in terms of price and quality. Table 4.2indicates the average tariff rates applicable to HS code sections that are relevant to theconstruction industry.

Table 4.1: CEPT Tariff for Common Construction Materials for ACF MemberCountries (2003)

HS Code Item Indon Msia Phil Spore Thai Viet

2516.12.000 Granite Slabs 5% 5% 3% 0% 5% 5%

2715.00.000 Bitumen or asphalt 2.5% 5% 3% 0% 5% 1%

2523.21.000 Portland Cement(Type I)

0% 5% 3% 0% 5% 40%(E)

3917.23.000 PVC pipes 0% 5% 3% 0% 5% 5%

4418.20.000 Doors and woodframes

0% 5% 5% 0% 5% 5%

4418.30.000 Parquet panels 0% 5% 5% 0% 5% 5%

6904.10.000 Building bricks 5% 5% 5% 0% 5% 20%6905.10.000 Roof tiles 5% 5% 5% 0% 5% 20%

6912.00.000 Ceramic tableware,kitchenware, &toiletware

5% 5% 5% 0% 5% 50%(E)

7008.00.000 Multiple-walledinsulating glass

5% 5% 5% 0% 5% 20%

7213.10.000 Reinforcing steel barsand coils

5% 5% 3% 0% 5% 20%


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(E) indicates the material is temporarily excluded from CEPT scheme. However, the tariff must reachbetween 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 thebulky nature of construction materials, logistics constraints at both inland and sea, andsuitability to local condition requirements will continue to demand the use of locally-sourced materials. However, several concerns have been raised by construction firmsregarding AFTA:

4.2.1 Too Fast Implementation of Time Table

There is a concern among construction firms that the implementation or enforcementschedule of AFTA is too fast. Although the general feeling is that the impact will beneutral (due to the bulky nature of the construction materials), the concern is primarilyrooted 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 doingenough to educate relevant businesses about the potential impact of AFTA on theirbusiness.

4.2.3 Wide Discrepancy in the Strength and Competitiveness Levels amongASEAN Countries

Some of the firms from the less developed ACF member countries raised the issue ofuneven playing field that will be created upon full implementation of AFTA. Thesefirms felt that the big and financially strong construction companies, typically fromthe more developed ASEAN countries, will be able to muster their strength and

dominate large scale projects in neighbouring countries, using their ability to mobilizecheaper funds and efficiency in supply chain management through greater negotiatingpower 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 withthe possibility of having an oversupply of construction materials in their country as aresult of the dismantling of trade barriers. Some countries with unsophisticatedproduction facilities will find that their costs are far higher than those of foreignproducers who employ more advanced technology in their production process.

In the case of steel, countries like Vietnam and Malaysia use a combination of importtariff and import licenses to control the level of supply of the material, with the mainobjective of protecting the local producers. With the lowering and eventual removal ofimport tariff and other non-tariff barriers, there is a risk that a glut in the supply ofmaterials will lead to the demise of local firms, which in turn will increase thecountrys 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 toincrease the quality of their materials simply because foreign products of higherquality will threaten local suppliers. This will result in the need to invest in newequipment 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 thattrade liberalization in the form of tariff reduction is not free-lunch. There was astrong suspicion that other forms of barriers will be put in place in order to protectlocal companies, for example, license and permit application, quality accreditationand professional qualification requirements, financial and technical requirements, andcomposition of local staff.

4.3 Degree of Readiness towards AFTA

Despite the concerns raised by the construction firms, there are many among thoseinterviewed indicated that they are already prepared for AFTA, except for Vietnam.Singaporean companies said that they have been trained to compete in an open marketdue to the nature of its open economy. Malaysian and Thai companies claimed to beready as they have had several years of domestic experience to build up their technicaland financial strengths. Indonesian and Filipino companies reported that they havebeen 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 2ndround of negotiation is somewhat diverse although in general they are movingtowards further dismantling of trade barriers within the services sector.

It is important to note that AFAS, which is modeled after GATS, have to be readwithin the context of both horizontal and vertical commitments. Under AFAS, amember country must offer a better deal to its regional neighbours than what it hasoffered under GATS. This is the cornerstone of the initial aim of preparing ASEANcountries 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 specifylimitations that apply to all of the sectors included in the schedule; these often refer toa particular mode of supply (discussed below), especially with regard to commercialpresence and the movement of natural persons. Any reference to the sector-specificcommitments must therefore consider the horizontal entries. The second section of theschedule lists the commitments which apply to trade in services in a particular sectoror subsector.


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As an example, the commitments made by the Philippines in AFAS will mean aforeigner can only have a maximum of 40% equity in a company that wishes toprovide 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 companyafter it has been determined that no suitable Filipino has the competency to carry outthe same tasks (horizontal limitation).

The schedule of commitments offered by each ACF member country is provided inAppendix C. These are the sector-specific schedules that are relevant to theconstruction industry. Some of the terminologies that are used in the schedules areclarified below.

4.4.1 Market Access

Unlike goods and materials which have to be physically moved to the pointconsumption, the supply of services can be achieved in more ways as it need notrequire the presence of the supplier, either in the form of person or company, at thetime 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 inservices and defines four ways of accessing a market under the four modes ofsupply:

4.4.2 The Four Modes of Supply

Cross-border supply the possibility for non-resident service suppliers to supplyservices cross-border into the member's territory without the need to have physicalpresence. An example would be a developer from Malaysia hiring a Filipino civilengineer to draft a technical drawing for the formers project at home. The entireexercise can be done electronically via the internet: the developer could communicatehis requirement and output expectations through email, the engineer could then send

electronic files containing his drawings, and the transaction is finally concluded viatelegraphic transfer of currency to a Filipino bank. Note here that no service supplierneed to move across national borders.

Consumption abroad the freedom for the member's residents to purchase servicesin the territory of another member. An example would be a Singaporean companywishing to set up a plant in Malaysia engages a Malaysian construction firm to buildthe factory. In this case, the Singaporean manufacturing firm is importing constructionservices 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 a55:45 joint-venture company in Indonesia to undertake a construction project in theisland of Java. The ratio 55:45 foreign and local ownership is to comply the sector-specific limitation specified in Indonesian schedule in AFAS.

Presence of natural persons the possibilities offered for the entry and temporarystay in the Member's territory of foreign individuals in order to supply a service. Anexample 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 inVietnam.

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 foreignerswhen compared against its own citizens and its other preferred trading partners. BothMFN and National Treatment are also types of market access. The first is MFNTreatment, which stipulates that any privilege granted by a country to another(frequently through bilateral agreement) must be extended to other members. Thesecond is the National Treatment clause, which refers to the obligation of extendingthe same treatment enjoyed by domestic companies to those from another AFASmember country. In other words, there must be non-discriminatory treatment toforeigners from AFAS countries when doing business in the country.

4.5 Views and Concerns Raised by Construction Firms on AFAS

4.5.1 Lack of Understanding of what AFAS is All About

Many of the construction firms interviewed are aware of the liberalization of theservices sector although the understanding is typically in the form of investment andemployment constraints imposed on foreign companies. There is also a generalfeeling that the movement of construction labour is covered under AFAS although theagreement (as at the completion of 2nd round of negotiation) limits its coverage toprofessional service persons.

4.5.2 Supply of Services will be Dominated by Companies from MoreDeveloped ASEAN countries

There was a general feeling that professional service companies from the moredeveloped 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, aswell as their ability to attract foreign employees to work in their companies and residein the host country. A typical example quoted is Singapore, which has a combinationof excellent education system and attractiveness for foreigners to reside in thecountry. Either way, this provides the opportunity for Singaporean companies to hirebetter 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 andtechnical requirements, and composition of local staff. These requirements will deteror 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 areready for AFAS. In the case of Vietnam, the lack of guidelines and standards has


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enabled foreign companies to employ whatever standards that is acceptable to theauthority in their construction projects in Vietnam. In a way, this is a form ofliberalization, where foreign companies are allowed to do business without constraintsin the form of compliance to local standards and guidelines. Thus, Vietnamese firmsassert that the impact of AFAS will be neutral to them.

The Singaporean, Malaysian and Thai companies are confident that they will be ableto compete on a strong footing with the liberalization of the service industry. They arevery confident of their project management skills and are well equipped withtechnical competencies to compete within ASEAN and Asia.

Indonesian and Filipino companies, to a lesser extent, are confident that they will alsobe 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 atpar with foreign service providers. Coupled with stronger network ties with localmaterial suppliers, the construction firms in these two countries believe that it will notbe easy for foreigners to compete with the locals in their own country. However, thethreats from foreign service providers will be significant for large-scale projects,

where foreign companies are able to mobilize bigger and cheaper funds to competewith 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

No of Items in the Inclusion List Average Tariff Rates in 2003

HSSection

Description Indon Msia Phil Spore Thai Viet Indon Msia Phil Spore Thai Viet

25 SALT, SULPHUR,EARTH & STONE,LIME & CEMENT

56 55 58 56 70 49 1.7% 1.1% 3.0% 0% 4.9% 3.6%

39 PLASTICS &ARTICLES THEREOF

31 100 33 38 102 29 3.4% 4.1%

4.4% 0% 4.9% 13.5%44 WOOD & ARTICLES

OF WOOD, WOODCHARCOAL

67 69 25 28 37 14 0% 4.7% 4.5% 0% 5.0% 4.4%

69 CERAMIC PRODUCTS 25 33 26 28 34 15 4.1% 3.9% 4.8% 0% 5.0% 8.0%70 GLASS &

GLASSWARE55 60 49 42 64 36 4.5% 3.5% 4.3% 0% 5.0% 5.0%

72 IRON & STEEL 295 442 179 190 403 223 2.0% 2.7% 3.0% 0% 4.3% 4.3%73 ARTICLES OF IRON

OR STEEL133 154 118 99 164 149 2.7% 3.8% 4.7% 0% 4.7% 7.3%

74 COPPER & ARTICLESTHEREOF

72 66 58 70 75 64 0.2% 0.8% 3.5% 0% 4.6% 2.9%

76 ALUMINUM &ARTICLES THEREOF

72 46 47 38 52 44 1.3% 4.3% 3.9% 0% 4.7% 5.2%

78 LEAD & ARTICLESTHEREOF

15 13 10 10 19 10 0% 0.8% 3.4% 0% 4.9% 0%

Total Items / Avg Ratefor All

821 1038 603 599 1020 633 2.0% 3.0% 4.0% 0.0% 4.8% 5.4%


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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 buildinfrastructure and basic facilities such as houses, schools, roads and hospitals. Withexception of infrastructure and hospitals, these buildings do not require sophisticatedstructural design and finishing. A local contractor with access to local resourceswould be able to undertake a project with better control of costs and compliance todeadlines.

Furthermore, a contractor working in a foreign country will need to source most of thematerials and labour from local source due to the bulk nature of constructionmaterials. A foreign contractor will only have an edge over the local contractors if hehas 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 bybasic buildings and infrastructures that do not require sophisticated design andfinishing. Local general contractors would therefore be in a stronger position to takeup the tasks of completing those projects.

However, ASEAN countries will also be investing in other infrastructure projects thatrequire higher technology input, for example airports, marine ports and power plants.In the past, many of these projects were undertaken by a consortium of constructioncompanies comprising of locals and foreigners. Frequently, the foreign partners willbe responsible for the more sophisticated portion of the construction works, with littleor no opportunity for technology transfer to the local partners. Unless the situation isrectified, ASEAN construction firms will not be able to improve their technicalcapability to compete with non-ASEAN firms in sophisticated construction projects.

5.2 Issues and Challenges in Cross-Border Movement ofConstruction Players

Despite claims of strong foothold in domestic market, there is a consensus amongACF members on the challenges that need to be overcome if cross-border movementof 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 accessto 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 payhigher cost of funds for loans, as observed in the Philippines and Indonesia (see Table5.1). In other parts of the region, for example Malaysia, banks are no longer keen tofinance construction projects due to high non-performing loans from commercial andretail space loans (construction and properties sectors account for 43.8% of total NPLin December 2003).

For regional projects, contractors from countries with smaller or weaker bankingsector raised the issue of difficulty in raising performance bonds that are acceptable tothe project owner in the host country. For example, due to the junk rating of manyIndonesian 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 theproject owner in Singapore.

There are also other impediments in discouraging cross-border investment inconstruction projects. These include prohibition from opening up foreign currencyaccount, restricted repatriation of profits and existence of gaps between official andmarket exchange rates.

Table 5.1: Sovereign Rating and Indicative Interest Rates for ACF Member Countries

Country Foreign CurrencySovereig

Documents

Impact of AFTA