Identifier
Created
Classification
Origin
06KUALALUMPUR1034
2006-06-06 09:15:00
CONFIDENTIAL
Embassy Kuala Lumpur
Cable title:  

MALAYSIAN GOVERNMENT PROCUREMENT IN THE FTA

Tags:  ETRD EFIN EINV MY 
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VZCZCXYZ0000
PP RUEHWEB

DE RUEHKL #1034/01 1570915
ZNY CCCCC ZZH
P 060915Z JUN 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 6818
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
C O N F I D E N T I A L KUALA LUMPUR 001034 

SIPDIS

SIPDIS

STATE PASS USTR FOR B. WEISEL AND J. JENSEN
COMMERCE FOR 4430/MAC/EAP/BAKER
TREASURY FOR OASIA

E.O. 12958: DECL: 06/05/2016
TAGS: ETRD EFIN EINV MY
SUBJECT: MALAYSIAN GOVERNMENT PROCUREMENT IN THE FTA

REF: A. KUALA LUMPUR 0930


B. KUALA LUMPUR 0797

Classified By: Charge' David B. Shear for reasons 1.5 (A & B).

C O N F I D E N T I A L KUALA LUMPUR 001034

SIPDIS

SIPDIS

STATE PASS USTR FOR B. WEISEL AND J. JENSEN
COMMERCE FOR 4430/MAC/EAP/BAKER
TREASURY FOR OASIA

E.O. 12958: DECL: 06/05/2016
TAGS: ETRD EFIN EINV MY
SUBJECT: MALAYSIAN GOVERNMENT PROCUREMENT IN THE FTA

REF: A. KUALA LUMPUR 0930


B. KUALA LUMPUR 0797

Classified By: Charge' David B. Shear for reasons 1.5 (A & B).


1. (C) Summary: Government procurement plays a large role in
the Malaysian economy -- valued at an estimated 20% of GDP.
The Government of Malysia has formal procurement rules and
officials explain that they are designed to serve a variety
of goals, including economic development and the improvement
of ethnic Malay economic status. American firms operating in
Malaysia complain that implementation of the rules lacks
transparency; they suggest that corruption is a significant
problem. particularly for larger contracts; and they find
"bumiputera" set asides for ethnic Malays restrictive, if not
prohibitive. U.S. firms would like to see more discipline in
the process so that procurement goes to tender through a
definable, systematic and fair system. They also would like
greater market access, perhaps through a phase out of
bumiputera preferences over an agreed timeframe. Finally,
they want a mechanism that would allow them to submit
questions and complaints about tender awards and have them
answered in a timely fashion.


2. (C) Phasing out bumiputera preferences may not be
feasible, but even achieving transparent, rules based
procurement would make a big difference to U.S. firms.
Linking our goals to international "best practices" may make
them more acceptable to Malaysian officials. We also can
point to Prime Minister Abdullah's public statements about
the importance of improving public service delivery and
defeating corruption as support for our position. End
Summary.

GOM Procurement - The Theory
--------------


3. (U) Government of Malaysia (GOM) procurement policies are
consistent with the "bumiputera policy" that aims to advance
the economic interests of ethnic Malays (REF A). The
government frankly acknowledges that it uses tenders and
contracts to advance the development of a Malay business
community. Malaysian bidders are extended a preference that

varies with the contract size, and bumiputera firms enjoy an
additional preference factor. For example, the Ministry of
Defense's general guidelines state that all tenders under RM
100,000 ($27,778) will be reserved for bumiputera companies.
International tenders will be offered only if the goods and
services are not available locally. Each ministry prepares
the contract specifications and tender documents and
advertises for bids. For international tenders, bidders have
at least 56 days to submit bids and must furnish a tender
deposit (195 days for defense tenders). Bids are evaluated
on technical and financial grounds. The agency's tender
board or the Ministry of Finance awards the contract. The
American Malaysian Chamber of Commerce (AMCHAM) estimates
that government tenders accounted for about 20% of Malaysia's
GDP in 2004.


4. (U) A ministry may directly purchase from known suppliers
when procuring goods, services or works under RM 50,000
($13,889). For purchases of RM 50,000 ($13,889) to RM
200,000 ($55,556),a ministry must solicit quotations from at
least five suppliers or contractors, each of whom must be
registered with the government. Companies must register with
the Government Procurement Management Division at the
Ministry of Finance and there is now a system of
e-registration. Procurement of goods, services and works
above the value of RM 200,000 ($55,556) must be considered
and awarded by Tender Boards established at each federal
ministry. However, goods and services tenders over RM 30
million ($8.3 million) and works tenders over RM 50 million
($13.9 million) must be referred to the Ministry of Finance.
Its Government Procurement Management Division procures
common-use items (e.g. office equipment and supplies,
furniture and vehicles) via Federal Central Contracts usually
made through open local tenders. Federal and state agencies
are required to purchase from these contracts.
Government-linked companies (GLCs) are not bound legally by
the Government's procurement procedures. In practice, some
GLCs allow foreign companies to bid directly, others allow
for no foreign competition, and still others seem to require
companies to follow the basic Ministry of Finance guidelines.



5. (U) GOM rules state that all tenders must be advertised in
at least one local newspaper in the Malay language.
International tenders must be advertised in one Malay and one
English newspaper. Some procurement opportunities can also
be accessed through Malaysia's myGovernmet website
(www.gov.my/MYGOV/BI/MISC/GovernmentTender) or the respective
ministries' homepages. There also are a number of private or
quasi-private companies that offer websites purporting to
list all government tenders. Not all of the ministries
advertise their tenders online, nor do all of them do so in
English. In any case, many of the tender announcements
require the prospective bidder to buy tender documents from
the ministry in person, which would only be possible after
showing an original Ministry of Finance registration
document.


6. (U) Malaysia has not signed on to the WTO Government
Procurement Agreement (GPA),and has not entered negotiations
or sought observer status. It has declined to include
government procurement in its bilateral FTA agreements to
date. Malaysia's lack of participation in GPA has a negative
impact on U.S. companies in Malaysia because they are not
allowed to participate in U.S. government procurement. One
example is Dell Computers, which maintains a special assembly
line in the U.S. for USG sales, since cannot source from its
factory in Malaysia.

GOM Procurement - In Practice
--------------


7. (SBU) In actual practice, many Malaysian government
tenders do not follow the government's procurement rules. In
fact, even obtaining a copy of the Ministry of Finance
circular detailing the rules can be a challenge. (Note:
USTR requested a copy of Finance's procurement regulations at
the first TIFA discussions with no success. Econoff recently
reiterated this request with the same results. End Note.)
Malaysia's procurement process falls short in three key
areas: lack of transparency, outright corruption, and
bumiputera requirements and preferences.

Lack of Transparency
--------------


8. (SBU) Members of the American-Malaysian Chamber of
Commerce (AMCHAM) would like much greater transparency in how
contracts are awarded, and have recommended a model similar
to what exists in Singapore (i.e., the Ministry of Finance
posts all tenders online, indicates which companies were
chosen for the tenders, and the criteria which determined
their selection). While many U.S. firms chafe at Malaysia's
policy of granting most government tenders to bumiputera
firms, they acknowledge this practice is similar to some USG
procurement, with certain projects earmarked for bids from
qualified small and minority-owned businesses, or with those
firms receiving additional "points" in the decision process.
AMCHAM's general stance on the issue of bumiputera
preferences is that it would like to see them reduced, and
eventually removed, over time so this sector will be more
open to competition.


9. (SBU) However, simply increasing transparency would
benefit AMCHAM members. If Malaysia were to clearly indicate
which projects are earmarked for qualified bidders from
particular groups, foreign bidders could plan accordingly.
However, GOM agencies frequently award contracts without
having gone through the established bidding process. There
also are instances of government agencies being directed to
purchase products through designated local or bumiputera
firms.

Frequent Favouritism
--------------


10. (C) In some cases, a prime contractor is selected without
a formally announced tender. For example, the Chinese
language daily Nanyang Siang Pau recently reported that a
project from the Ninth Malaysia Plan (9MP) to develop the
South Johor economic region (a contract worth RM 10.2 billion
or $2.8 billion) has been directed to UEM World Berhad,
apparently without tender. UEM is owned by Khazanah, the
GOM's development arm, and is the largest land owner in the
south Johor region. There are widespread rumors that
projects from the Ninth Malaysia Plan (9MP) (REF B) are being
handed out with no formal tendering process.


11. (C) A representative of a U.S. aerospace company
complained about the basic unfairness of a system that does
not follow a transparent procedure. All too often, tenders
never actually get to the bidding stage; an award is simply
announced. While his firm has had success in Malaysia, he
observed he cannot plan when and where he should spend his
resources to compete. There is simply no way to know what is
coming and when, especially in the military arena.
Malaysia's Ministry of Defense has a published reference book
with basic policies and procedures, explaining registration
requirements, but does not always follow these procedures.
In any case, while his company may deal with different
ministries on different tenders, he explained that: "Finance
controls it (procurement). Regardless of the rules, they are
in control."


12. (C) The government programs manager of a U.S. ICT firm
complained about a similar lack of transparency in the
decision-making process. His firm once made the short-list
for a tender with Malaysia Telecom (a government linked
company),but lost to another company that did not even bid.
While the winning company may have been qualified, Malaysia
Telecom never explained its decision or why it had selected a
contractor who had not expressed enough interest to
participate in the tender process.

A Caveat on Transparency
--------------


13. (C) The U.S. aerospace executive observed, however, that
sometimes U.S. firms have been able to work the system to
their advantage. He cautioned that one potential unintended
consequence of the FTA negotiations might be an unraveling of
various waivers and special arrangements obtained by U.S.
companies currently operating in Malaysia. Over time, the
GOM has offered different incentives to different companies
to attract their investments. Should the FTA negotiations
instill more discipline into the system, some of these
preferences could be affected. He also stressed that if old
laws stay on the books, the GOM always has the option of
simply reinstating them. He noted that the capital controls
Malaysia enacted during the 1997 Asian financial crisis were
not new, but rather a case of the GOM enforcing laws that it
had relaxed.

Corruption
--------------


14. (C) Corruption is a significant problem, particularly for
larger contracts. The U.S. aerospace firm has done fairly
well on the commercial side of its business, but has not won
a major defense contract in Malaysia in over a decade. The
U.S. executive described a variety of defense deals made over
this period through shadowy agreements with no tendering
process. In one instance, Prime Minister Abdullah's
sister-in-law arranged a $400 million contract to purchase
military cargo aircraft from Airbus. The Prime Minister
announced the purchase following his return from a visit to
France. There had been no indication that the Malaysian
military were in the market for a new cargo aircraft prior to
this announcement. The U.S. executive asserted that PM
Abdullah's brother told him this deal was "done for political
or other reasons, such as commission." The executive
described similar scenarios for procurement of T91 Polish
tanks and SU-30 Russian Aircraft, alleging that the sellers,
as well as Malaysian politicians, agents, civil servants and
military personnel all received a 30% "commission." Once,
someone purporting to work for Deputy Prime Minister Najib
approached him about a deal suggesting, "you will get a part
of it." He declined this offer.


15. (C) The ICT company manager agreed that "there is
corruption. Transparency is just a nice word for it." He
described how his firm must work through partners who file
the tender, saying that he does not always know what is going
on with the tendering process. "After all, the Chairman
could go to jail if he knows too much," he stated. Malaysian
political parties, including the ruling United Malay National
Organization (UMNO),rely on "money politics" for much of
their operating funds. Projects or tenders often are awarded
as political patronage, with a cut of the funds circulating
back to the party through different channels.


16. (C) Malaysian firms also are targets of corruption. The
ICT firm executive related the experience of a cousin, whose
firm had bid on a government tender. A ministry tender board
informed her that she had won, but instructed her to double
the amount of her bid. Concerned about the suggested
corruption, she withdrew her bid. Our contact plans to
discuss this case with another cousin at the Anti-Corruption
Agency, but has no confidence that action wQl be taken.

Bumiputera Requirements and Preferences
--------------


17. (C) The U.S. aerospace firm has not found the system of
bumiputera procurement to be an impediment and simply works
through a Malay middleman. The firm prefers to maintain 100%
ownership of its local branch, rather than developing a local
partnership that would permit it to bid directly. The U.S.
executive would, however, like to see the FTA confirm a
commitment to open tendering throughout the GOM and its
related GLCs. He is concerned, for example, that Permodalan
Nasional Berhad (or PNB, a Malaysian government investment
trust),in its capacity as purchasing agent for Malaysian
Airlines, will make decisions behind closed doors that could
lock his firm out of the commercial aircraft market.


18. (C) The government accounts for 30% of the U.S. ICT
firm's business in Malaysia. Our contact at the firm
believes agencies lack the freedom to select the best
contractor due to the bumiputera preferences. Our contact
also admitted that his business plan requires partners in
some areas and he would not bid on all contracts as a prime.
But in areas such as services (consulting, designing, and
maintenance and support, etc),he would like the customer to
be able to approach his firm, or for his firm to be able to
bid directly on government tenders, so it can bring its best
practices to the table. Also, our contact suggested that
local companies often are poor project managers. His firm
must take on management of many contracts even though it is
not the prime. Lamenting his firm's inability to bid
directly, he said: "By not being flexible and open to
foreign competition, it adds to costs. The prime contractor
adds their mark up. Are they giving the best service? Are
they giving any service? Sometime
s yes and sometimes no."


19. (C) A senior manager at another U.S. ICT firm suggested
the "rules are restrictive but not prohibitive." He
explained that his company does about 30% of its business in
Malaysia with the government through various middleman
companies or as a subcontractor on larger tenders. He would
also bid directly for some projects if the rules allowed.
But he cautioned that many U.S. firms would still not want to
bid on everything due to the heavy GOM regulations regarding
bonding. He said that while he is often comfortable with
taking on specific risk as a subcontractor on a portion of a
large tender, neither he nor his parent company would
necessarily want to take on the bond for the whole tender.
Without a significant change in the bonding rules and the
requirements for contract completion, this executive would
still choose carefully in responding to tenders.


20. (SBU) In its FTA submission, AMCHAM reported on a number
of other cases that describe the impact of the bumiputera
preferences and the lack of transparency in the system. The
most egregious and recent of these cases was the October 2005
Ministry of Finance Directive that government agencies may
only procure roadway, decorative, and outdoor lighting from
three bumiputera companies. Any ministry that does not
comply will be penalized and the unauthorized contractors
could be blacklisted from future GOM tenders.


21. (SBU) The Ministry of Finance took eight months to
respond to AMCHAM's request for a meeting to discuss this
case. In a May 2006 meeting, Finance Secretary General Sri
Izzuddin bin Dali explained the Ministry had reviewed these
companies and confirmed their qualifications. He submitted
that there would be a new circular posted on ministry's
website that more clearly explained the matter and that the
number of approved companies would be increased, most likely
to six. He did not respond to questions about tendering
procedures and why foreign companies were not allowed to bid.
He clearly stated that only companies which are majority
bumiputera-owned would be qualified to bid.

Government Procurement in the FTA
--------------


22. (C) The Malaysian government's high sensitivity
concerning government procurement is suggested by the
repeated efforts of GOM officials to try to remove this
subject from the FTA agenda, despite clear statements from
USG officials that it must be on the table. The topic also
has come under scrutiny in parliament and has been a target
of public concern in the press. No other issue has received
such intense local attention. Nevertheless, there are
tactics with the potential to make this issue more amenable
to negotiation.


23. (C) Those goals involving transparency, responsiveness
and simply getting the GOM to follow its own rules should be
easier to tackle, although some Malaysian officials bristle
at the suggestion that their system is not transparent. Even
though Malaysia is not a party to the GPA, couching our
objectives in terms of "international best practices" may
make them more acceptable. We also can point to Prime
Minister Abdullah's public statements about the importance of
improving public service delivery and defeating corruption.
Such linkages could be the "sugar" that helps Malaysian
negotiators accept the "medicine" of procurement reform.


24. (C) As noted REF A, the bumiputera preferences will be
the most difficult element of these negotiations.
Eliminating them, even with a phase out period, would be an
unrealistic objective. A more feasible approach might be to
seek a "de minimis" level below which bumiputera preferences
would be allowed to remain, but above which contracts would
be open to international competition. Even this may be more
than the Malaysian government could concede, but merely
instilling discipline, transparency and responsiveness in the
current system would make a big difference to U.S. firms.
SHEAR