Setting targets: Government development plans steer investment flows

To understand Malaysia’s criteria for recruiting foreign investment, one has to understand something of the country’s tradition of development planning. Malaysia avoided Asia’s post-war wave of communism, but the nationalist government has a similar-sounding tradition of crafting five-year plans. Although short of real central planning, these development plans set goals forgovernment, public services and the business sector, and since much of the business sector is government-owned or dependent on the state for its income, the plans are more than just advice.

Five-year plans are still produced – the government is on its 10th Malaysia Development Plan, which covers the period 2011-15 – but they have lost importance as governments have introduced additional, theme-oriented development plans. The government of Prime Minister Najib Razak has two such agendas: the Government Transformation Programme, a programme for reform of public administration, and the Economic Transformation Programme, which charts a course of business development and related policy reforms.

Investment Guidance

The planning process carried out by the government’s Economic Planning Unit (EPU), includes identifying prospective business opportunities, crafting investment plans and steering investment in line with those agendas. The government also uses such schemes to guide its recruitment of foreign investments, offering relatively generous tax breaks and other incentives for projects aligned with the plan.

The government’s investment agency, the Malaysian Investment Development Authority (MIDA), decides which investments qualify for incentives. These include partial or total relief from corporate income tax for a set period, and sometimes also exemptions from other taxes, duties or regulations. The incentives available vary by business sector and location. Tax holidays for projects in most sectors and locations are capped at a five-year, 70% discount off income used to calculate income tax. Investments in priority sectors and locations can receive 10-year, 100% income tax holidays.

The incentives are improved for projects in five priority development regions called economic corridors, which comprise the peninsula’s eastern, northern and southern extremes and the Borneo regions of Sarawak and Sabah. Also, the Tun Razak Exchange (TRX), a site in downtown Kuala Lumpur (KL) being developed as a new financial district, offers incentives to developers and financial firms that locate there (see analysis).

Every NKEA Has Its EPPS

With the ETP, the government introduced another layer of more specific planning, creating more than 150 investment targets to be reached by 2020. The ETP identified 12 priority areas for investment, called National Key Economic Areas (NKEAs). These include 11 economic sectors, covering nearly the whole economy, and one geographic region, Greater KL. For each NKEA, the government set a number of goals called entry point projects (EPPs). For example, one of nine EPPs set for the Greater KL NKEA is to draw 100 multinationals from the Forbes 2000 list to locate in the capital region. The government agency set up to implement the ETP, the Performance Management and Delivery Unit (PEMANDU), monitors and reports progress on each of the EPP goals annually.

Some EPP objectives specifically target foreign investors, while others are aimed at rallying domestic investment, and many EPPs are government or state company projects. Some EPP goals are stated vaguely, such as “establishing the country as one of the world’s premium nature and ecotourism destinations”, while others are highly specific, such as attracting two additional producers of substrates for integrated circuits and five additional producers of solar panels.

Progress

By the end of the programme’s first full year in 2011, PEMANDU announced that RM179bn ($55.9bn) worth of projects related to EPPs were under way. But that number exaggerated the extent that the government plans and controls how businesses invest. The targets for private investment were crafted after discussions with private sector executives, and partly represented what the executives were planning to do. The investments included major public projects such as the Klang Valley Mass Rapid Transit system.

New EPP-related projects have dropped off since 2011, falling to 39 projects worth RM32bn ($10bn) in 2012 and 47 worth RM8bn ($2.5bn) in 2013. Few new EPPs have been announced, and some of the EPPs launched early on, such as the solar panel target, have lost urgency as markets have shifted. Meanwhile, overall investment grew, and MIDA continued to hand out tax incentives to new investments that fit generally with government goals, even if they were not designated as EPP-related. PEMANDU has explained that EPPs were front-loaded by design and has not signalled plans to bring out large numbers of new EPPs. The EPU is now working on an 11th Malaysia Plan for 2016-20.

A New Financial Centre

TRX is one of the more aggressive examples of government planning. KL is growing quickly enough that the 28 ha of prime downtown land allocated to the project could find willing developers and occupants without government help. But Prime Minister Najib Razak, who named the project after his father, is determined to make the district into a showcase new financial centre. Najib’s administration is offering generous incentives to developers and occupants, to accelerate the pace of development and persuade financial services firms to locate there.

Local developers that build in line with the project master plan can claim a tax exemption on 70% of net income from sales or rentals for the first five years they derive income. Malaysian financial firms and their affiliates are being offered a generous package of incentives, including income tax deductions for the costs of relocating, completing new office space and on the first 10 years of rent; special tax treatment if the financial company buys or finances construction of its own office space; plus exemption from stamp duty on transactions related to leasing, building or buying office space.

While it seems likely that much of Malaysia’s financial sector will respond to the incentives and move at least part of their operations in the district, it is less clear whether international financial groups not present in Malaysia will be sufficiently motivated. The US government and others involved in free trade agreement negotiations with Malaysia have pointed to the TRX project as a reason why the government should give foreign investors access to retail banking, which in countries that allow it is usually the main target of foreign investment in the financial sector.

Planning Singapore Sprawl

The priority investment zone that has seen the most intensive development to date is Iskandar Malaysia in the state of Johor on the southern tip of Peninsular Malaysia.

Centred around the former blue-collar industrial town of Johor Bahru, known as JB, the area is connected by two bridges to Singapore. Over the past decade JB and its surroundings have been attracting a sprawl of developments catering to Singaporeans, including residential towers in the city centre and tract housing, golf courses and theme parks in the suburbs. With the Iskandar Malaysia development plan, the government and local authorities are accelerating and organising a more defined urban and suburban plan.

Stephen Hagger, managing director and head of equities at Credit Suisse Malaysia, told OBG that JB was becoming “the Shenzhen of Malaysia,” comparing it to the highly developed Chinese city that faces Hong Kong. “It’s the obvious thing to do,” he said.

The plan includes a rejuvenation of downtown JB and a clean-up of the river running through it, as well as many more residential towers and hotels. Two suburban areas to the west and east of JB, Nusajaya and Bandar Seri Alam, are being developed as centres of education and health care. Nusajaya’s Educity project includes branches of the UK’s Newcastle, Southampton and Reading universities, Singapore’s Raffles University and the Netherlands Maritime Institute, as well as international schools run by Raffles and the UK’s Marlborough College. Bandar Seri Alam’s City of Knowledge includes branches of Malaysian universities, colleges and private schools. The two neighbourhoods will have a total of three hospitals and a health clinic complex, largely targeting Singaporeans.

Oil & Gas Project

Further out in Pengerang, an undeveloped area east of Singapore, state oil and gas company Petronas has announced plans to spend RM90bn ($28.1bn) to build a massive oil and gas processing and trans-shipment complex. Called the Pengerang Integrated Petroleum Complex, it will include oil and liquid natural gas terminals and storage, a liquefied natural gas regasification plant, an oil refinery, several petrochemicals plants, and a dedicated power plant and water supply. Petronas describes the complex as Malaysia’s biggest single investment project.

The Johor region’s main challenge is that Malaysia and Singapore were until recently unable to agree on plans to expand commuter links, which has led to severe congestion of the bridges and border crossing stations during rush hours. The two are now cooperating on plans to build a third bridge and extend Singapore’s mass transit network to JB, but congestion is expected to get worse until these projects are completed in 2018 or later.