The incentives for “KLIFD status” companies announced by the Prime Minister, Datuk Seri Najib Razak include:
- Income tax exemption of 100% for a period of 10 years
- Stamp duty exemption on loan and service agreements
- Industrial Building Allowance and Accelerated Capital Allowance
- Income tax exemption of 70% for a period of 5 years for property developers
The incentives are generous to say the least and replicate the models utilized for earlier mega-projects which were unmitigated disasters such as the Bio-Valley and the E-Village, or the fluttering Multimedia Super Corridor (MSC).
The Government has described the role of KLIFD is to turn Kuala Lumpur into a “new icon for the financial world”, “the global financial city of choice” and “bring together world-class names to operate closely in a physical location.” Similarly, the Bio-Valley, E-Village and MSC were all sold to Malaysians as transformative projects in their respective sectors and launched with much fanfare.
In the 2001 budget speech, Tun Daim Zainuddin said the 1,200 acres E-Village was to “offer state-of-the-art facilities” to “attract international film producers to Malaysia”. The project was launched in the September 2000 in the presence of Jackie Chan. Dr Mahathir had said then that we “will witness a growth of opportunities” and “the transforming of society”. Today, the site of E-Village looks like an abandoned ghost town.
The 1,200 acres BioValley project sited at Dengkil on the other hand, was primed as the transformative project in the 2003 Budget to drive Malaysia’s “knowledge economy”. Despite receiving generous incentives like all the other projects cited, the Bio-Valley was unceremoniously buried two years later. The authoritative Nature scientific journal had labelled the project “the valley of ghosts”.
While the MSC had fared better than the rest, it is a far cry from the lofty goals that the project had sought to achieve. The MSC had kicked off with luminaries such as Microsoft’s Bill Gates, Oracle’s Larry Ellison and Acer’s Stan Shih constituting its International Advisory Panel, but their names have since been replaced with lower ranking corporate managers. In fact, the name of the panelists could not even be found on the MSC website today.
The failure of these projects lies in the common factor that these projects were schemed as property development projects and real estate plays, with the Government providing financial incentives for companies to be sited at a particular venue for the purported objective of boosting the industry. There is in reality no practical need for these companies to be sited physically next to one another for the industry to succeed.
We fear that the KLIFD will suffer a similar fate as there is no physical need for financial institutions and related professional services to be sited a stone’s throw away from one another. There will be little synergy generated as telecommunications technology, video-conferencing facilities as well as secure and instantaneous electronic transactions obliterates the need for physical proximity. There is little or no added business advantage for example, for the Maybank headquarters to be shifted to the KLIFD compared to its current venue, with the exception of potential tax benefits.
Hence, instead of actually promoting the financial services industry in the country directly, the Government, having already provided the prime land to 1MDB without any open bidding, is further providing unfair crutches for the latter to succeed in the KLIFD real estate play. Such incentives however, given the experience with the MSC, Bio-Valley and E-Village however, may not be sufficient to ensure its success.
The Government must learn from its failures of the past. The decision of global financial institutions to site their offices in Malaysia will not be based on short term benefits as a result of the choice of real estate. It will instead be based on the demand for its services and funds, the sophistication of the market instruments and the openness of the economy.