MALAYSIA'S PROPOSED GUIDELINES ON FOREIGN

UNCLAS SECTION 01 OF 05 KUALA LUMPUR 000617

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR B. WEISEL AND J. JENSEN
COMMERCE FOR JENNIFER BAKER

E.O. 12958: N/A
TAGS: ETRD MY
SUBJECT: MALAYSIA'S PROPOSED GUIDELINES ON FOREIGN
INVESTMENT IN DISTRIBUTIVE TRADE SERVICES

REF: KUALA LUMPUR 331

Summary and Introduction
--------------


1. (SBU) Summary: The Ministry of Domestic Trade and
Consumer Affairs (MDTCA) - the Malaysian ministry which
regulates all distributive trade - recently proposed sweeping
new regulations which would increase the cost of doing
business in Malaysia for all firms in distributive trade.
The new rules include increases in paid up capital,
requirements to offer 30% equity to ethnic Malays, and, in
some cases, creation of a separate marketing arm for foreign
manufacturers operating in Malaysia. The regulations were
initially announced in December 2004 without any comment from
affected industry or other Malaysian ministries. Due to
public outcry, MDTCA has since allowed for a comment period
and says it will accept some changes. MDTCA intends to
submit the amended rules to the cabinet in April or May for
implementation in mid-2006. The AmCham has declared these
new regulations to be a step back from recent trade
liberalization policies championed by MITI and MIDA which
will send the wrong signal to foreign investors. The new
rules are also likely to become an issue in the upcoming Free
Trade Agreement negotiations. We believe that there may
still be an opportunity to influence GOM thinking, and post
recommends that Deputy Secretary of Commerce Sampson address
these issues with MDTCA during his visit in April. End
Summary.


2. (SBU) The Ministry of Domestic Trade and Consumer Affairs
is finalizing the adoption of regulations to govern foreign
participation in Malaysia's distributive trade services
sector, which includes wholesale and retail operations. The
new guidelines would supersede a previous set of regulations
that date to 1995. The revised guidelines were first
announced in December 2004, apparently without input from the
foreign business community. Since then foreign businesses
have weighed in at various levels with the government,
including the National Economic Action Council in the PM's
office. The MDTCA eventually acquiesced to hearing the views
of the foreign business community as well, which have
criticized the guidelines as being a step backward from
Malaysia's efforts to attract more foreign investment. The
resulting amendments to the 2004 draft have alleviated some
industry concerns, but the current draft retains provisions
that could impact the ability and willingness of some foreign
investors to do business in Malaysia.


3. (U) At a Malaysian Trade Distribution Forum in January
2006, Minister of Domestic Trade and Consumer Affairs Shafie
Apdal emphasized the important role that the retail trade
sector plays in developing Malaysia's economy and Malaysian
entrepreneurship. Shafie noted that in 2005 the distributive
trade sector contributed about 12 percent to Malaysia's GDP,
providing employment for some 1.2 million people. He also
noted that the sector is a key component of the government's
efforts to increase Bumiputera (ethnic Malay) participation
in the Malaysian economy. Shafie explained that the proposed
regulations are aimed in part at protecting the livelihoods
of smaller traditional retail businesses and building up
Malaysia's small and medium enterprises (SMEs),in part by
restricting the activities of large retail operations,
including foreign ones. (Note: Shafie's highlighting both
the importance of the distributive trade sector and the small
entrepreneur is completely in line with current Malaysian
economic policy. Over the past few years, the service sector
has been the major engine for new economic growth and SMEs
are seen as the drivers for that engine. End note.)

Proposed guidelines
--------------


4. (U) The guidelines proposed in December 2004 define
distributive trade as "all linkage activities that channel
goods and services down the supply chain to intermediaries
for resale or to final buyers." They would apply to any
business containing 15 percent or more foreign interest.
Such businesses would need to obtain the approval of the
inter-ministerial Distributive Trade Committee (DTC),chaired
by the MDTCA's Secretary General, in order to begin
operations, or to open new branches of an existing
establishment. The guidelines are divided into the following
categories: hypermarkets, departmental stores, superstores,
specialty store, various other smaller distribution formats,
direct sellers, and franchisors/franchisees. No foreign

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involvement would be permitted in a variety of other
distributive trade sub-sectors, including supermarkets,
mini-markets, convenience stores, gas stations, newsagents,
and medical halls. Under the December 2004 proposal, foreign
manufacturers, even those with existing facilities in
Malaysia, and including those with up to 100 percent foreign
equity, would be required to set up a separate business
entity to engage in any defined distributive trade, and the
new entity would need to adhere to the guidelines as
applicable.


5. (SBU) At all levels of distributive trade, the guidelines
(as initially proposed) would require that all qualifying
foreign direct investments (those exceeding the 15 percent
threshold of total foreign equity) reserve at least 30
percent of equity for Bumiputeras (ethnic Malays). The
guidelines also would impose minimum capital requirements
ranging from RM 50 million (approximately USD 13.4 million)
for hypermarkets down to RM one million (USD 269,000) for
specialty stores and the various other smaller distribution
formats in which foreign direct investment would be
permitted. A distributive trade company with paid up capital
of RM 10 million and above would be automatically allowed
three expatriate key post positions, while those with paid up
capital between RM one and RM ten million would be allowed
one automatic expatriate key post, though exceptions to these
limits would be considered on a case-by-case basis.


6. (SBU) In September 2005 and again in January 2006 the
MDTCA issued CDT-approved amendments to the December 2004
draft guidelines. Among the changes were the implementation
of a maximum three-year grace period for a defined foreign
investment to meet the designated Bumiputera or local equity
requirements; loosening the paid up capital requirement by
applying it only to the headquarters of a new investment
rather than to every new outlet deriving from the investment;
and changing the 30 percent equity requirements for
activities involving alcohol and non-halal food to apply to
any local investor, not just Bumiputeras. The committee also
reportedly approved an amendment that would exempt existing
manufacturing companies from the requirement to set up a
separate marketing arm if they wished to engage in wholesale
(but not retail) business.

Embassy Discusses Concerns with MDTCA
--------------


7. (SBU) On February 17, econoffs and econ specialist met
with Mohd Talak bin Abu Bakar and Mizool Amir bin Mat Drus,
Assistant Directors in the MDTCA's Domestic Trade Division,
to raise our concerns regarding the proposed guidelines.
Talak has been the Ministry's principal interlocutor with
industry as well. Econoff observed that the government
promulgated guidelines without the input (at least initially)
of the foreign business community that would be so affected
by them. The draft guidelines, even with the recently
reported amendments, still appeared to be potentially
damaging to Malaysia's attractiveness for foreign investment.
Econoff added that U.S. industry had indicated particular
concerns about the new minimum paid-up capital requirements,
and about the requirements for manufacturers to set up
separate entities to market their products in Malaysia.
Industry is also concerned about the proposal to require
hypermarkets to reserve 30 percent of shelf space, and 30
percent of all products sold, for B
umiputera products.


8. (SBU) Talak admitted that the MDTCA had not been
transparent when it first promulgated proposed revisions to
the guidelines, and said the ministry now was keeping
industry better informed and involved in the process,
pointing to the amendments that have been made to the
December 2004 draft as proof. He said the government decided
to issue a new set of guidelines in 2004 primarily to clean
up the much amended 1995 guidelines, not because it saw a
need for a new approach to foreign investment in the sector.
Nevertheless, Talak pointed out that the new guidelines
actually open up much foreign investment possibilities, as
the earlier rules only allowed a maximum of 30 percent
foreign investment in the retail sector, compared to 70
percent in the new guidelines. (Comment: Although the
maximum possible equity may have been increased by 40% in
some subsectors, it is difficult to see where such
possibilities lie since much of the distributive trade sector
is closed to foreign participation. In any case, the new
regulations are not very accommodating to foreign direct

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investment, as they add both cost and complexity to doing
business in Malaysia. End Comment.) He added that in the
last year the MDTCA also has been working more closely with
the Ministry of International Trade and Industry (MITI) to
ensure that the regulations would not impose a significant
impediment to foreign investment.


9. (SBU) Talak noted that Minister Shafie Apdal had
personally proposed several provisions in the draft
guidelines, including the minimum paid up capital figure of
RM one million. Talak explained that the capital
requirements (which for a similar local business with less
than 15 percent foreign equity are only RM 350,000) are
designed to ensure genuine, high-quality foreign investment
that would inhibit unscrupulous investors from making a quick
buck in Malaysia's retail sector. Talak added that Shafie
had decided to exclude restaurants from the guidelines,
though it is unclear whether this exemption will be enshrined
in the final regulations. Talak further pointed out that the
15 percent foreign equity threshold essentially exempted a
significant chunk of foreign investment from the new
guidelines.


10. (SBU) Talak also noted that MITI has proposed to MDTCA
that foreign manufacturers licensed by MITI or the Malaysian
Industrial Development Agency (MIDA) under the Industrial
Coordination Act of 1975 should also be exempt from the
proposed requirement to set up a separate marketing entity to
sell their products in Malaysia. Talak told us Minister
Shafie Apdal has not yet made a decision on MITI's proposal.
We understand another proposal would exempt manufacturers
from this provision if they distribute their products through
local distribution channels rather than through direct
marketing of their products. Talak also told econoffs that
Shafie has already lifted the January 2004 moratorium on
hypermarket construction, anticipating that the new
guidelines would alleviate the concerns of local retailers
that had led to the moratorium in the first place. Another
revision eliminates the proposed requirement that
hypermarkets seek application for new branches at least two
years in advance.


11. (SBU) The MDTCA is in the process of reviewing comments
it has received from industry on the proposed guidelines and
hopes to finish a final draft soon, according to Talak. The
ministry currently plans to submit the guidelines for cabinet
approval in April or May for implementation by mid-2006.

Embassy Actions and Proposal for Commerce
--------------


12. (SBU) The Ambassador also weighed in with MDTCA in a
February 24 meeting with Minister Shafie Apdal, emphasizing
that many of the measures that reportedly would be covered
under MDTCA's new distributive trade regulations would run
counter to what the U.S. would like to see in an FTA. The
Ambassador suggested that MDTCA defer implementation of the
new regulations pending a decision on the FTA negotiations.
Shafie said he realized that the distributive trade
regulations caused issues for some parties, but stressed that
he is under considerable political pressure, including from
other Cabinet members, to release them soon (see reftel for
further detail on their meeting). As the guidelines have yet
to be released, post recommends that Deputy Secretary of
Commerce Sampson address these issues with MDTCA during his
visit to Malaysia in late April. The Commercial Service has
agreed to this suggestion and is waiting for confirmation of
a meeting with Shafie Apdal.

AmCham's Position
--------------


13. (SBU) In a memo to the National Economic Action
Committee at the end of October 2005, the AmCham stated their
concerns with the proposed distributive trade rules,
specifically: the requirement for manufacturing companies to
establish a separate marketing arm with 30 percent bumiputera
equity; the requirements on hypermarkets mandating that 30
percent of the products on the shelves must be bumiputera
products and that 30 percent of total sales must be from
bumiputera products; the lack of coordination between
government ministries such as MITI and MDTCA that might
produce overlapping and conflicting regulations; the lack of
transparency in the process; and the lack of public comment
prior to the unveiling of the new guidelines. AmCham was
unequivocal in its declaration that the proposed guidelines

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would have a negative impact on the foreign direct investment
in Malaysia. AmCham was particularly alarmed by the
retrospective rules which they believe would send unfavorable
signals to the international investment community and call
the credibility of Malaysia's policies into question.


14. (SBU) AmCham later presented these comments to MDTCA in
a February 2006 meeting with a number of other international
chambers. AmCham believes that this meeting was held so that
MDTCA could say that it had coordinated with the
international business community. AmCham was not heartened
by its inability to get a private meeting with MDTCA
Secretary General Talaat; in the past 8 months, he has

SIPDIS
canceled 4 or 5 scheduled meetings with the AmCham and
provided no explanation. Still, some industry sources are
reporting that MDTCA has accepted some of the private
sector's recommendations. For example, AmCham is cautiously
optimistic that MDTCA will lift the proposed requirements for
companies that entered under MITI or MIDA special incentives.

Unanswered Questions
--------------


15. (SBU) The draft guidelines raise several key questions
that MDTCA officials were unable to answer. Talak did not
express concern about whether the new guidelines might
conflict with Malaysia's WTO TRIM obligations, noting that
this was an issue for MITI to determine (inferring that MITI
had not previously expressed any concerns in this regard).
Some industry groups speculate that the government would have
to impose identical guidelines on all Malaysian companies,
not just those with 15 percent or greater foreign
participation, in order to be WTO compliant. Many of the
provisions that previously referred to thresholds for
"Bumiputera" investors now just refer to "local" investors,
which may be an attempt to address TRIM concerns.


16. (SBU) Another unanswered question is whether the
guidelines would be enacted retroactively to cover existing
foreign investments in the sector. MITI's proposal to exempt
MITI- or MIDA-licensed companies apparently does not address
whether new companies receiving such licenses from MITI or
MIDA would also be exempt from the guidelines (should this
proposal be approved by the MDTCA).

Comment
--------------


17. (SBU) Malaysia's efforts to implement guidelines on
distributive trade exemplify the government's halting efforts
to seek and utilize public input in implementing policy
changes. To a certain extent the MDTCA has responded
favorably when industry has complained about the guidelines'
potentially negative effects on foreign investment. MDTCA
also has been mindful of the prerogatives of other
ministries, such as MITI's insistence that the new guidelines
not inhibit those foreign investments that have been licensed
by MITI or MIDA. Although the Ministry would probably point
to these actions as evidence of its transparency, these
changes clearly were not made through a transparent process
that allows for the regular, predictable input of interested
parties, both in and, especially, out of the government.


18. (SBU) MDTCA's proposed regulations likely would add to
both the complexity and cost of doing business in Malaysia,
for foreign and local companies alike. It is a step back
from MITI and MIDA's more relaxed posture of recent years.
Some of its provisions appear to contradict the GOM's goal of
attracting increased foreign direct investment to Malaysia.
Certainly, the rather arbitrary increases in paid up capital
for current and prospective business send the wrong signal to
foreign investors. While MITI may have convinced MDTCA to
allow a grandfather clause for existing companies, new
business ventures may still be obliged to operate under the
new regulations and, therefore, would be required to apply to
both the Foreign Investment Committee and the Distributive
Trade Committee to obtain licenses and to offer 30% equity to
ethnic Malays, with the resulting increase in overall
business costs.


19. (SBU) The new regulations could raise issues that would
need to be addressed as we prepare to negotiate the
U.S.-Malaysia Free Trade Agreement (FTA). MDTCA has drawn a
fairly firm line in the sand for allowable participation in a
wide variety of distributive ventures. Furthermore, the
ministry appears unwilling or unable to delay final approval

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of the guidelines while we negotiate an FTA. Given the
prevalence of socioeconomic preferences in this sector, such
negotiations could prove especially challenging.
LAFLEUR