Mar 23, 2007

Malaysia scraps bumi policy to attract foreign investment

(CNA) In its biggest and boldest move to attract more foreign investment, Malaysia is scrapping, in Johor's new economic zone at least, policies that have favoured bumiputeras — the ethnic Malay majority — since the 1970s.

While the details have yet to be spelt out, foreign investors in Johor's Iskandar Development Region (IDR) will not be encumbered with providing 30 per cent equity to a bumiputera partner. The move is aimed at creating a new engine of growth in Johor's southern part so that over the next five to 20 years, it will grow into a major regional financial and manufacturing hub, providing jobs for 800,000 workers. Separately, the Government is abolishing property gains tax in Malaysia to boost the flagging property market and lure foreign investment.

While lauded in the early years, the pro-bumiputera policies — which seek to raise the Malay share of the economic pie to 30 per cent — have since been criticised for having been abused. Hence, analysts say their abolition in the IDR is a crucial step forward towards attracting foreign investment.

Development of the vast 2,200 sq km IDR, more than three times the size of Singapore — and packed with infrastructure, homes, offices, theme parks, hotels, factories and hospitals — will require a massive injection of funds. Estimates are 50 billion ringgit ($20 billion) over the next five years, rising to $160 billion over 20 years.

Luring investment over, when it is being sucked into countries like China and Vietnam, is not going to be easy. "Competition for global investment will become increasingly intense," said Prime Minister Abdullah Ahmad Badawi at an investment conference in Kuala Lumpur yesterday.

Malaysia, South-east Asia's third largest economy, saw foreign direct investment in 2005 falling to 15 billion ringgit from 17.6 billion ringgit in 2004. Figures for 2006 are not available yet but Mr Abdullah is not waiting for them to confirm the falling trend. He announced tax incentives — exemptions from corporate income tax and the withholding of tax on certain payments for 10 years — to draw investors to the IDR.

Will there be rumblings within the bumiputera ranks since the group has long enjoyed privileged access to government contracts? Johor's Chief Minister, Mr Abdul Ghani Othman, speaking on the sidelines of the conference, insisted he did not fear any political fallout, saying that foreign investment rules favouring bumiputeras will be relaxed in the IDR "in defined areas of certain kind of activities". Mr Abdullah said fiscal incentives would cover six key sectors — creative industries, educational services, financial advisory, healthcare, logistics and tourism.

"It shows that at the top ranks of the system, there are people thinking well," said Singapore economic analyst Manu Bhaskaran, according to Bloomberg. The bumiputera policies and all the related problems, he said, do turn off foreign investors.

Hints that Malaysia would scrap its policies favouring bumiputeras surfaced early in the week when IDR adviser, former Deputy Prime Minister Musa Hitam, said such a move was necessary to attract foreign investors to the project. Contract awards "will have to be on merit," Mr Musa, the deputy leader from 1981 to 1986, told Bloomberg on Monday. "The Malays will have to face competition."

But the modern bumiputera businessmen were no longer inept, he told Today. To help foreign investors pick the right bumiputera companies to be their partners or subcontractors, the Government was in the process of preparing a register of companies, detailing their past projects, and grading them according to the level of proficiency with which they handled the projects, he said.

Six companies from Singapore — two of them major ones — are also interested in Johor, Malaysia's High Commissioner to Singapore N Parameswaran told Today.

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