Transformers: The government’s development programme is starting to bear fruit

Politically driven yet focused on private sector growth, the Economic Transformation Programme (ETP), launched in 2010, is beginning to have a tangible impact on Malaysia’s economic and social development. Foreign investors are advised to pay close attention to the entry point projects (EPPs), which have become the main platform for new private sector participants in various key sectors. In 2011 some 110 projects were launched under the plan, resulting in a total investment commitment of $58bn. Private investment rose by 19.4% on the back of these projects, the highest rate in recent history. Combined, the initiatives launched in 2011 are expected to create 313,741 jobs and contribute $42bn to GNI by 2020. This is around 10% of the 3m jobs the ETP aims to create in this period, and 8% of the cumulative GNI target.

The latest boost came in September 2012, when Prime Minister Najib Razak unveiled seven projects with a total committed investment value of $1.8bn. Involving sectors such as energy, business services and health care, these schemes are expected to generate 18,522 jobs over the next eight years. Though some question these numbers, the programme compares well with previous development plans in terms of clearly defined details and priority areas. The ETP adopts a top-down approach to policymaking, but executives nonetheless speak of an unprecedented level of private sector involvement.

POLITICAL SUPPORT: The other difference is the huge effort that is being put into following through on initial consultation. The Performance Management and Delivery Unit (PEMANDU), the government agency tasked with implementation of the ETP, meets regularly to ensure steady progress on the 12 National Key Economic Areas (NKEAs). The unit is politically well supported, with the prime minister involved as the head of the NKEA steering committee.

As many as 1000 executives from 32 sectors were invited to initial brainstorming sessions, with a view to identifying the most actionable opportunities in each sector. This resulted in 12 NKEAs. These primarily consist of sectors that were deemed as less fragmented and contributed more than 1% of GDP.

NKEAS: In each NKEA – ranging from energy and tourism to health and agriculture – the government and the private sector identified between six and 16 EPPs, which are expected to become catalysts for growth and job creation. The method for selecting NKEAs was based on expected contribution to GNI.

This, in turn, was based on historical growth rates and global forecasts, as well as Malaysia’s competitive advantage internationally. Practical information from various workshops was distributed to both private and public sector top- and mid-level executives and small and medium-sized enterprises.

At the end of 2010 the focus shifted to attracting both domestic and foreign private sector investors.

In contrast to previous programmes, the government was keen to ensure that the new projects undertaken in the ETP get market funding and eventually be driven by the private sector. According to PEMANDU, the funding ratio of the ETP is projected to be 8:32:60 by the public sector, government-linked companies (GLCs) and the private sector, respectively. The biggest public outlay will be for the My Rapid Transit project, with most of the funding for the other 100-plus projects to come from the private sector.

Transparency remains a concern, however, according to Tony Pua, a member of Parliament for Petaling Jaya Utara and an economic commentator. “We need to have open tender process to increase transparency. Although it takes longer to administer, it will help drive investor confidence. You can already see how that worked in places like Penang,” he told OBG.

EARLY RESULTS: The results so far show the highest investment value from EPPs in the oil and gas sector, which posted a cumulative total of nearly $29bn, 41% of its 2020 target of $70bn. The second-largest amount was attracted by Greater Kuala Lumpur (KL) NKEA, which recorded almost $13bn at end-2011, 23% of its target. The third-highest NKEA by investment was tourism, which attracted $4.8bn of its target of $66bn. Wholesale and retail trade drew nearly $3.2bn of investment by end-2011, 10% of its 2020 target.

The ETP’s performance, however, is measured not just in terms of investment amounts, but also by how many jobs will be created by 2020. The biggest burden of expectation is placed on the education sector, with more than 300,000 jobs to come from this new area of economic activity by 2020. The sector’s EPP1, for instance, “Scaling up early child care and education centres”, is due to generate 130,000 jobs by 2020. Another 150,000 jobs are to come from EPP12, which seeks to promote Malaysia as an international education centre. Another major area of job and growth creation is the capital city, known as NKEA Greater KL which accounts for 30% of Malaysia’s GDP. EPP1 within this NKEA is expected to attract 100 leading multinationals in priority sectors, creating as many as 234,000 jobs and generating $13bn in GNI by 2020.

Although the ETP favours transformative new knowledge sectors that will give Malaysia a competitive edge internationally, priority areas also include traditional commodities, manufacturing and retail. Wholesale and retail, for instance, is expected to create over 250,000 jobs combined, while new projects in the electrical and electronics sector are expected to employ 200,000 new graduates by 2020.

In total, 131 EPPs have been identified in what the government hopes will be a vehicle to kick-start investment and private sector participation – a vision set out in the 10th Malaysia Plan. The government is also trying to address issues relating to the ease of doing business through strategic reform initiatives (SRIs). There is a recognition that, unless you remove red tape and liberalise certain sectors, many ETP projects may fail. “We remain committed to reducing government’s role in business to enable the private sector to take the lead; simplifying and reducing the cost of doing business,” Najib said in PEMANDU’s annual report.

The six SRIs launched in July 2011 were intended to compliment the ETP in areas such as competition, standards and liberalisation, human capital development, health care, the government’s role in business, public finance reform, public service delivery and narrowing disparity. Private sector investors interviewed by OBG report good progress on liberalisation, human capital and reducing government’s role in business through divestments in GLCs, such as palm oil producer Felda. However, slow progress in fiscal reform, which is part of public finance reform, and limited advancement on narrowing disparity is threatening the success of the ETP, according to several foreign and domestic private sector sources.

SUSTAINABILITY: Confidence in the government’s ability to continue co-investing in ETP projects depends on broadening the tax base and gradually removing energy and food subsidies. As signalled by credit ratings agencies in 2012, the heavy reliance on income from Petronas is unsustainable. This has been recognised by the government, which stated in PEMANDU’s annual report that it is “committed to introduce a goods and services tax and continue rationalisation of subsidies”. However, given the upcoming election this has not been followed up on for the moment.

Fiscal underperformance has to some extent been offset by a sharp policy focus on improving the labour market and the development of human resources. Government agencies such as Talentcorp Malaysia have begun to address the main structural issue of reaching out to students abroad and expatriates working in Malaysia to reduce the outflow of top talent. The Ministry of Human Resources has also introduced a star rating system to encourage technical education and vocational training to address shortages of specific skills in the private sector.

NATIONAL KEY RESULTS AREAS: Adjustments in the government’s overall relationship with the private sector include an explicit target to reduce crime rates, which ranks among the top of the six National Key Results Areas. In contrast to the NKEAs, these performance targets were derived from surveys conducted with ordinary Malaysian citizens.

A new rehabilitation programme operated by the Prisons Department is one example of implementation in this area. The programme’s central focus has been to allow inmates to serve their sentences outside off prison via a parole system, compulsory attendance orders or community rehabilitation centres. According to official statistics, 7505 prisoners went through the programme and only 0.75% of those who went through the parole system went on to become repeat offenders, while the rate was 0% for those registered under the compulsory attendance order and community rehabilitation centre options. The Prison Department will also implement a release-on-licence scheme that allows prisoners to stay with their families prior to release. The objective is to reduce repeat offenses. Although less tangible in economic value, progress on issues such as crime is considered crucial to achieving the wider aim of reforming Malaysia’s economy.