Thursday, May 03, 2007

Iskandar Development Region: Reality or Hype?

I was in Johor Bahru yesterday, accompanying my boss who was visiting branch members in the south of the country. At the request of some members, I was asked to speak at the meeting. I was certainly less than prepared, especially when I had to deliver the same speech interspersed in Mandarin and Malay. Goodness, it must have been the first speech I've delivered in Malay since my 'A' Levels some 17 years ago!

Being an economic advisor to my boss, and speaking at the "centre" of one of the most-hyped economic projects by Datuk Seri Abdullah Ahmad Badawi's administration, it was destined that I had to talk about the Iskandar Development Region (IDR). So, does it deserve the hype?

I spoke of IDR's potential and the topic of human capital as a critical factor in its success, outlining some of the examples highlighted in my previous post on human capital. (Wah, interestingly, the Straits Times Singapore published the entire article today as well - giving it a new title "Singapre's gain, Malaysia's loss". I hadn't expected that).

I have also done some research for my boss, with the key findings outlined below (fairly long!).

Iskandar Development Region (IDR): Reality or Hype?

It is commendable effort by the Malaysian Government to establish the Iskandar Development Region (IDR), which promises great potential for the region. Given Johor's strategic location in the Indonesia-Malaysia-Singapore growth triangle, the proposed development region - an area encompassing 2,217 square kilometres, which is three times the size of Singapore – appears long overdue.

The proposal to create a “Shenzhen” for Malaysia looks good on paper. The city of Shenzhen, next to Hong Kong, offers a glimpse of the vast amounts of investment dollars that could flow into the IDR if it lives up to its potential. The Shenzhen special economic zone (SEZ) of China is 2,020 sq km, slightly smaller than the IDR, and it managed to attract over US$30 billion in the past two decades, helping create GDP of nearly 493 billion renminbi (S$97 billion) in 2005. Shenzhen was declared China's first SEZ in 1980, and the central government ensured the province was governed by special policies. Flexible measures aimed at securing foreign investment involved incentives and relaxed rules on international trade.

It became China's fastest growing city for nearly three decades and, from 2001 to 2005, saw an economic expansion that averaged 16 per cent.

However, it will be overly simplistic to assume guaranteed success purely from a Blueprint created by Atkins, UK's leading town planning consultant and a strategic comparison with Shenzhen. The success of IDR depends critically on several factors, which at this point of time, leaves much to be desired.
1. Foreign Investment

Most importantly, IDR's success is critically dependent on foreign investment, or a projected RM382 billion over the next 20 years. This amount is more than the entire RM245 billion foreign direct investment (FDI) the whole country received over the past 20 years.

Just as Hong Kong became Shenzhen's largest source of investment, the success of IDR will be equally dependent on investment from Singapore. However, Singapore's investment in Johor has dropped to an alarming level. In the first eight months of 2006, Singaporean investment in the state stood at only RM208.9 million.

This is only a mere 11 percent of the total investment from Singapore in 2005, according to statistics given by the Johor State Investment Centre (JSIC). Last year, the Singaporean investment stood at RM1.9 billion.

And it is not just the investment from across the Causeway that has gone down. The FDI into the state too has hit a stumbling block. Until August in 2006, FDI to the state stood at RM2.4 billion - just 44 percent of the total amount which flooded in last year.

Even in 2005, when Johor received record FDI at RM5.9 billion, this amount is a far cry from an average of RM19.1 billion required to make IDR a success.

2. Crime & Safety

JSIC senior manager Mohamed Basir Mohamed Sali when interviewed by Malaysiakini at the end of last year said that "Singaporeans think Johor is not a safe state, but actually this issue was played up by the media in both countries... Yes, we have some security problems, but they do not involve the whole state, they are limited in certain areas, Johor is still as safe as candy."

The continued denial of the existence of one of the most serious problems facing the country at this point of time does not bode well for the economic success of the IDR. The crime index in the country released by the Royal Police Force has worsened from 156,315 cases in 2003 to 226,836 cases in 2006 – a sharp rise of 45.1% in the past three years when the police force had set the target of reducing the crime index by five per cent each year.

In the past three years, violent crime had skyrocketed by 85.8 per cent from 22,790 cases in 2003 to 42,343 cases in 2006, with rape cases registering the highest increase of 65.5 per cent – reaching an average of 6.7 women raped daily in 2006 compared to an average of four women raped daily in 2003. In 2003, an average of 1.5 persons were murdered daily; but in 2006, this has increased to an average of 1.65 persons murdered daily.

On 10th April, a six-month pregnant woman lost her baby after she was attacked by four robbers in the toilet of a petrol station in Jalan Tebrau. Just last week, a 21-year-old clerk was robbed and brutally stabbed to death as her father slept in another room at their double-storey house in Taman Skudai Baru. And just 2 days ago, a 14-year-old girl who befriended a stranger at a telephone booth was raped by him in Tanjung Langsat.

Hence it is unsurprising that both investors and tourists, particularly from Singapore has been dissuaded or at best, lukewarm towards investing and spending their dollars in Johor. Letters in the Singapore Straits Times for example, as recently as 4th April, have called Johor Bahru as a “cowboy town”.

3. A Mega-Property Development Project?

Many sceptics who fear the plan could degenerate into just another exercise in grandiose real estate development. At this point of time, the entire project appears focused almost entirely on real estate development. The recent abolishment of the real property gains tax points was directed at increased property purchase and transactions for land in the IDR.

One of the leading developers in IDR, UMNO-linked UEM Land's plans this time around are nothing if not grand. Besides a theme park, edu-city and medical hub - all three Khazanah-owned and driven - UEM Land's main developments include a logistics cluster, an international destination resort with an eco-based theme park, state administrative centre and a waterfront project at Puteri Harbour.

Mr Talhar, who is also group chairman of CH Williams, Talhar & Wong, cautioned against too much emphasis on property. “Real estate accommodates meaningful economic activities. Economic activities have to come first. Land per se doesn't produce economic activities,” he rightfully argued.

The Government must learn from the lack of success at Cyberjaya, which was a special economic zone dedicated to high-technology related activities such as software development. Similarly, we must learn from the total failures of BioValley and E-Village which were dedicated to biotechnology and multimedia content creation respectively. Despite having investment millions in these projects, their emphasis on construction and property development without a properly thought out strategies for the actual projects have resulted in their failures.

Otherwise, some of the IDR plans for another dedicated ICT-hub, theme park and medical hub might just end up as ghost towns.

4. Government Policy Consistency

The decision by Malaysia's Foreign Investment Committee (FIC) to deny the sale of a building to Singapore's Great Eastern is only an example of policy inconsistency and the lack of transparency. Great Eastern had proposed to acquire Wisma Denmark from bumiputera businessman Ibrahim Mohamed for RM150 million and believed it had the deal in the bag. But after months of waiting for FIC approval, the parties were finally informed the proposed acquisition was rejected, with no reasons given.

In Johor for example, the existing massive property glut is a result of state policy requiring at least 40 per cent of all development projects be sold to bumiputeras, and the subsequent stamping of those titles as such.

Hence unless the state gives its approval, a bumiputera wanting to dispose of his property can only sell it to a fellow bumiputera, and these secondary titles and conditions have depressed market demand. The question then is whether the continuation of such a policy will result in more project failures within the IDR.

5. Unequal Treatment of Foreign vs Local Investors

While the Government has recently trumpeted its move to remove the 30% bumiputera quota requirement for investments in the IDR, closer scrutiny leaves much to be desired. The proposed waiver of the NEP's 30% equity requirement would only involve investments in two specified areas in the IDR, encompassing a small area of 1,780 hectares and with the caveat that foreign investors there must have business dealings outside the country.

This means that such a policy is not applicable to local investors, and by definition, local non-bumiputera investors. The policy is perplexing because domestic investments can bring equal amounts of economic returns and contributions to the region and country when compared with foreign investors. Hence the discriminatory policies practiced by the Government clearly marginalises local non-bumiputera businessmen.
The 5 five points highlighted above are not the only challenges and issues facing our government's plan to make IDR a success. However, they clearly demonstrate the uphill battle which the government face and the lack of political will which is necessary to make the project a success. Barisan Nasional NEP-guided government has been obsessed with the hardware of development – property, heavy industry, mega-infrastructure projects, ports, bridges and airports - but neglected the human software needed to compete in a modern global economy. And to quote the man-on-the-street, “a part-liberalized, part-restricted IDR is unlikely to bridge that yawning gap”.

Key Sources:
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