Malaysia: Will the Planned Iskandar Development Region complement the role of Singapore...

Malaysia: Will the Planned Iskandar Development Region complement the role of Singapore or mimic and compete with it?

The plans for the Iskandar Development Region (IDR) were unveiled as part of Malaysia’s 2006-2010 development plan. Commentators (and investors) are still trying to gauge how much of the enormous scope of this development will come to fruition. Given its proximity to Singapore, the state of Johor at the southernmost tip of the Malay Peninsula is surprisingly undeveloped. The IDR is designed to address Johor’s under-development relative to Malaysia as a whole and to reverse the recent downward trend in Malaysia’s inward investment.

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The development is really only at an early stage at present. However, it is hoped that in the course of the current 5-year plan it will attract RM 50bn of investment (approx. $15bn). The 5-year plan itself allows for an investment in infrastructure of RM 4.3bn with another RM 3.4bn being provided by development funds. Khazanah Nasional, Malaysia’s national development fund is the IDR’s sponsoring body and will be supplying a significant proportion of this element. Finally, it is hoped that the private sector will provide about RM 10bn’s worth of investment in the initial phase of the programme.

The level of interest from abroad is difficult to predict at present. Up until now overseas interest has focused on the port of Tanjung Pelepas (established in 1999 and owned by MMC Corp.) to which the Danish company Maersk and Evergreen Marine of Taiwan have relocated their operations from Singapore. The port facilities and the causeway link to Singapore are two of the IDR’s chief inherited advantages. Incidentally, Tanjung Pelepas was the 2006 winner of the Lloyd’s List Maritime Asia Container Terminal Of The Year Award on the basis of its costs, speed, facilities and volume of traffic. Interest in the region has also been expressed by companies such as OSI Systems of the US and JST Connectors, part of the Japanese steel company.

The vision of Malaysia’s Prime Minister, Abdullah Badawi, is for the IDR to mirror the economic success of Shenzhen in Hong Kong’s hinterland. Writing for the Financial Times in late March John Burton pointed up some of the difficult choices facing the government. Firstly, there is the question of whether the government will be able to follow through on limiting the current affirmative action rules that favour ethnic Malays. The IDR is supposed to focus heavily on service industries and administration (it will include a new administrative area for the State of Johor), two sectors where affirmative action has been strong in the past.

The IDR plans have triggered targeted changes to Malaysia’s exchange controls and taxes on property gains to encourage inward investment in Johor. However, plans to allow passport-free access to the region have been dropped for the time being.

Commentators are seeing potential contradictions in the emphasis being placed on service industries in that these would appear to put the IDR into competition with Singapore. Singaporean investors are likely to look to Johor as a location for industrial and logistical developments benefiting from cheaper property prices and cost of labour that will complement the island state’s own economy. However, looking at the scale of the IDR plans one can see that they encompass investment in all economic sectors, including health and education. Stephanie Phang of Bloombergs quotes Chris Eng of the consultancy OSK Research as saying the scale of the projects was staggering and it was attended by risks.

Although it is early days for individual investors to be making financial commitments to the IDR area the Star newspaper says that those areas closest to the links to Singapore will be the most favourable for investment. Under Malaysia’s land code foreigners and foreign-owned companies have only been able to buy industrial property but last November it became possible for non-nationals to purchase residential property. However, the relevant section of the IDR’s own website (see above) says that this is only for own-residence and not for rental or investment purposes. Clearly, more light needs to be shed on the legal framework before investing will be safe; can any readers comment on the legal situation?