Identifier
Created
Classification
Origin
07KUALALUMPUR1005
2007-06-08 08:21:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kuala Lumpur
Cable title:  

SURFING IN SINGAPORE'S WAKE: MALAYSIA'S ISKANDAR

Tags:  ECON EINV ETRD EWWT EAIR MY 
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VZCZCXRO9434
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1005/01 1590821
ZNR UUUUU ZZH
R 080821Z JUN 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9430
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RHMFIUU/US CUSTOMS AND BORDER PROTECTION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 05 KUALA LUMPUR 001005 

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR -- WEISEL AND JENSEN
USDOC FOR 4430/MAC/EAP/J.BAKER

E.O. 12958: N/A
TAGS: ECON EINV ETRD EWWT EAIR MY
SUBJECT: SURFING IN SINGAPORE'S WAKE: MALAYSIA'S ISKANDAR
DEVELOPMENT REGION

REF: A. KUALA LUMPUR 61

B. KUALA LUMPUR 787

UNCLAS SECTION 01 OF 05 KUALA LUMPUR 001005

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR -- WEISEL AND JENSEN
USDOC FOR 4430/MAC/EAP/J.BAKER

E.O. 12958: N/A
TAGS: ECON EINV ETRD EWWT EAIR MY
SUBJECT: SURFING IN SINGAPORE'S WAKE: MALAYSIA'S ISKANDAR
DEVELOPMENT REGION

REF: A. KUALA LUMPUR 61

B. KUALA LUMPUR 787


1. (SBU) Summary. Malaysia's government hopes to accelerate
investment in the southern state of Johor with its planned
Iskandar Development Region (IDR). The government's public
statements portray IDR as a new approach that will attract
global firms for "knowledge-based" investment, but econoff's
recent tour of the project area suggests it really is aimed
at further exploiting Johor's proximity to Singapore. Johor
already benefits from its location and also is receiving a
large inflow of money for infrastructure from the GOM's Ninth
Malaysia Plan. New investment incentives under IDR would
provide the main stimulus for any additional new development.
The government's initial list of incentives applies only to
a few sectors of limited interest, but suggested the
possibility of exemptions in certain cases from the
long-standing equity requirements of Malaysia's racial
preference policy. The final list of incentives is scheduled
to be announced this fall, but the government does not appear
to be prepared to
take big political risks to ensure the success of this
development initiative. End summary.

Launching the Iskandar Development Region
--------------


2. (U) Prime Minister Abdullah Badawi launched the Iskandar
Development Region (IDR) in November 2006. Named for the
Sultan of Johor, IDR is more an investment incentive plan
than a development plan. Southern Johor already is well
developed, with a per capita GDP significantly higher than
Malaysia as a whole. The GOM had previously committed
through its Ninth Malaysia Plan to spend 4.3 billion ringgit
(approximately USD 1.3 billion) for infrastructure projects
in Johor up through 2010.


3. (SBU) State investment agency Khazanah has created the
Iskandar Regional Development Authority (IRDA) to oversee the
IDR's activities, and issued a comprehensive development plan
(CDP) to guide the project's activities over the next 20

years. IRDA's Ismail Ibrahim told econoff that a prime role
of IRDA will be to promote foreign investment, in part by
directly assisting foreign firms in meeting foreign
investment requirements within the IDR. Ismail is one of a
handful of Khazanah staff working to get IRDA off the ground,
but he expects the authority to expand exponentially, in
particular once the full IDR investment incentive package is
announced in September. Ismail hinted to econoff that the
September announcement will revolve more around (hopefully)
announcing some high-profile foreign investments than around
a long list of new incentives.


4. (U) A March 2007 announcement of proposed incentives
attracted much attention, mostly due to a possible exemption
from Malaysia's race-based preference program for a limited
range of foreign investments. (Note: Malaysia's
long-standing Bumiputera Policy requires that ethnic Malays
and indigenous peoples be given at least 30% equity interest
in such new business; see ref B). Other incentives announced
in March included a 10-year corporate tax exemption, and the
ability for foreign investors to source capital globally to
employ foreign workers. However, these initial incentives
only apply to business activities within the IDR and/or
outside Malaysia, and only in six services sectors:
education, healthcare, creative industries, financial advice
and consulting, logistics, and tourism.

Location, Location, Location
--------------


5. (U) The CDP acknowledges that the IDR's success will
depend heavily on its geographic proximity to Singapore and,
to a much lesser extent, Indonesia. The IDR extends almost
the full length of Malaysia's border with Singapore along the
Straits of Johor, incorporating the city of Johor Bahru
(Malaysia's second largest city) in the center, extending to
the major seaports in the east (Pasir Gudang/Tanjung Langsat)
and west (Tanjung Pelepas) and north of Johor Bahru to
incorporate the Senai airport area. Nearly 60 percent of the
IDR's 2217 square kilometers currently is agricultural land,
providing a large reserve for long term development.
However, the CDP envisions most of the development in the
early years concentrating in five "flagship zones" consisting

KUALA LUMP 00001005 002 OF 005


of the city of Johor Bahru, the two seaports, Senai airport,
and the Nusajaya development west of Johor Bahru. Since
these areas already have adequate infrastructure in place
(or, in the case of Nusajaya are being constructed already),
IRDA foresees IDR
projects starting there and eventually expanding into
outlying areas.


6. (U) The CDP acknowledges that "development within
(Singapore and Indonesia) will have significant impact on the
development of the (IDR)." The CDP assumes Singapore will
reach the limits of its ability to develop its land and sea
space and will be forced to encourage its labor- and
land-intensive and lower value added industries to move to
Johor, as well as Batam, Indonesia to the south. The CDP
notes with admiration Batam's vibrant offshore manufacturing
activity due to its proximity to Singapore, and suggests that
IDR will be poised to benefit in a similar way.


7. (SBU) Indonesia currently is a significant source of labor
for Johor's manufacturing and services sector, but the CDP
foresees Indonesia, in particular Sumatra, establishing
stronger investment links with Johor to take advantage of
improved transportation linkages. The plan envisions
enhanced bilateral cooperation in such sectors as tourism,
agro-processing, construction and port services. Comment:
The CDP understandably makes no mention about the future role
of Indonesian laborers as IDR is implemented. Indonesian
laborers will undoubtedly remain in strong demand, in
particular during the early years of development with the
construction of large-scale infrastructure projects. End
comment.

A Delicate Dance with Singapore
--------------


8. (U) The CDP calls for the IDR to be planned and created as
an integrated development together with Singapore and
Indonesia. To that end, Malaysian Prime Minister Abdullah
Badawi and Singapore Prime Minister Lee Hsien Loong announced
on May 15 the creation of a ministerial-level joint committee
to oversee certain areas of cooperation in the IDR. Abdullah
hinted that easier access by Singaporeans to the IDR would be
one such issue tackled by the committee. Although the CDP
initially envisioned that certain parts of the IDR would
provide free access to Singaporeans, subsequent criticism in
Malaysia caused the GOM to rescind the proposal (which
presumably would have allowed any Singaporean citizen to
freely enter the IDR) in favor of more limited rules to ease
access to pre-approved Singaporeans. In an effort to placate
public criticism that the joint committee would impinge on
Malaysia's sovereignty, Abdullah stressed that it would not
have authority over the IRDA's investment decisions,
including investm
ents from Singapore.


9. (SBU) On a visit to Johor in late May, econoff found
little reluctance among local developers about touting
Johor's advantage of being situated next to Singapore.
Unlike the politicians in KL, Malaysians directly involved in
the development of the IDR flagship zones were much more
sanguine and realistic about Johor's dependence on Singapore
for its prosperity, both past and future. The general
attitude expressed to econoff in a variety of meetings was
that Johor's future economic development was not tied to the
IDR (and in fact was a given, since Singapore was right next
door),but that the IDR would provide incentives for
additional investment that might have gone elsewhere. Our
interlocutors generally expressed interest in attracting more
manufacturing and infrastructure projects. However; there was
little mention of transforming Johor into a hub of
"knowledge-based" economic activity as some Malaysian leaders
have suggested.

Nusajaya -- City of the Future?
--------------


10. (SBU) Of the five IDR flagship projects, Nusajaya best
exemplifies the type of new economic activity that the IDR is
designed to encourage. Like the other flagship projects,
Nusajaya predates the IDR itself. Unlike the other four,
however, Nusajaya is still largely in the initial development
stage. The Johor State New Administrative Center in Nusajaya
should open its first buildings by the end of 2007 and

KUALA LUMP 00001005 003 OF 005


eventually will house all state government offices, as well
as the Johor branches of federal government offices. Zamry
Ibrahim, General Manager for the Nusajaya project, told
econoff that project developer UEM Land is satisfied with the
pace of development, which he expects will accelerate once
the Johor State government buildings (which include the Chief
Minister's offices and the state parliament) are open. On a
tour of Nusajaya's 24,000 acres, Zamry pointed out the
significant infrastructure improvements that UEM Land already
has made. For example, the new government offices are being
constructe
d far inland from the feeder highway, necessitating
significant road construction to allow access. A few
residential subdivisions have opened, though with few
occupants so far. Zamry noted that many of the half-acre
plots in the initial subdivisions have been sold, mostly to
Singaporeans. In addition, UEM Land has undertaken a massive
excavation project on a large tract of land between the new
government buildings and the Straits of Johor, which will
form a large marina and waterfront project, blending housing,
retail and tourist facilities.


11. (SBU) Zamry indicated that Nusajaya's traditional
development projects are progressing well, but one ambitious
goal -- a "creative and entertainment hub" -- remains
somewhat undefined. The CDP calls for a hub dedicated to the
digital content industry, but Nusajaya officials seem
perplexed about what sorts of business this would involve.
On the entertainment side, however, Zamry said UEM Land has
held talks with several theme park operators and is
optimistic about announcing a deal by the end of 2007.
Comment: Although the creative industries sector is targeted
by the IRDA as one of six sectors to receive special
investment incentives to promote its development, the CDP is
unclear about the particular types of creative industries
that should be targeted. The plan makes no mention of
Malaysia's continued difficulty in enforcing intellectual
property protection, nor of its reluctance to adhere to many
multilateral IP treaties -- actions that would be key to
enticing IP-dependent firms to Malaysia. End
comment.

Johor's Sea and Air Ports -- Alternatives to Singapore
-------------- --------------


12. (U) Since opening in 1999, Johor's Port of Tanjung
Pelepas (PTP) has expanded rapidly and now handles
approximately the same amount of containerized cargo as Kuala
Lumpur's Port Klang (which incorporates two port complexes,
West Port and North Port). Khairul Anuar Othman of PTP told
econoff the port expects to handle approximately 5.3 million
TEUs (twenty-foot equivalent units, a measurement of
containerized cargo) in 2007. This places PTP among the top
20 containerized ports in the world, although it still pales
in volume compared to nearby Singapore, which handles about
23 million TEU annually.


13. (U) Unlike Port Klang, some 95% of PTP's business
consists of transshipment between other ports, though Khairul
noted that PTP is planning for expanded domestic-origin
container traffic as Johor develops further. PTP is a
regional hub for both Maersk and Evergreen, and those two
companies' operations form the bulk of the workload of the
two U.S. Container Security Initiative officers stationed at
PTP. Like Port Klang, PTP has a free zone that permits duty
free operations as well as 100% foreign ownership of equity.
The existing free zone includes a variety of logistics firms
in a 400 acre "free commercial zone", as well as some high
profile new manufacturing firms in the 600 acre "free
manufacturing zone", including U.S. electronics manufacturer
Flextronics, contact lens firm CIBA Vision, and a BMW parts
distribution center. PTP recently began making preparations
to more than double the size of the port's free zone, which
is also a key component of the IDR.


14. (SBU) Johor's two other ports to the east of Johor Bahru
handle alternate types of shipments. Johor Port in Pasir
Gudang is the state's former leading port, and now handles
multi-purpose goods, including liquid bulk (mainly palm oil),
plus a small amount of containerized traffic. A third port,
Tanjung Langsat (TL),is being constructed further east of
Pasir Gudang by Johor Corporation, the state-owned
development conglomerate which had earlier developed Pasir
Gudang. Tanjung Langsat will be a major shipper of both

KUALA LUMP 00001005 004 OF 005


petrochemicals and oleo chemicals upon its completion, and
the port is developing a "biofuel park" that aims to become a
major processor for palm oil (Pasir Gudang currently contains
the largest percentage of such refineries in Malaysia -- the
Biofuel Park at TL would supplement the existing facilities).
Fuad Omar of Johor Corporation told econoff that TL will
provide more efficient shipping than Johor Port for the
increasing volume of palm oil exports from Johor State. TL
is located at the
eastern end of the Straits of Johor, near the shipping lanes
that run offshore Singapore (PTP takes advantage of a similar
position on the western end of the Straits). Fuad noted,
however, that Singapore's reclamation of land directly across
from the TL development, off the largely uninhabited
Singaporean island of Tekong, has the potential to inhibit
the port's future development by restricting the ability of
ships to maneuver into and out of the port (Fuad implied that
Singapore was deliberately trying to impede the port's
development).


15. (U) The third point of the IDR "logistical triangle" is
Senai Airport to the north of Johor Bahru. Hariss Abdullah
of Senai Airport Terminal Services told econoff that the
airport's 10 year development plan includes an upgrading of
its cargo facilities to make the airport a realistic
alternative to Singapore's Changi airport. Much air cargo
originating in Johor now departs via Changi (even from some
of the technology firms situated close to Senai),and Senai
wants to capture a share of the business. The airport soon
will launch a free zone within its boundaries to encourage
further development of both logistics and manufacturing
operations. Hariss told econoff the airport would welcome
direct flights by U.S. cargo carriers, and believes its
location provides all the advantages of Changi at lower cost,
though so far U.S. carriers have not expressed interest.
Hariss added that the airport also hopes to capture an
increasing share of the region's passenger market, and has
embarked on a major refurbishme
nt and expansion of its passenger facilities. Senai is
benefiting from its position as an expanding regional hub for
Air Asia, Malaysia's discount air carrier.

IDR Beneficiaries -- The Usual Suspects are First in Line
-------------- --------------


16. (SBU) The IDR "flagship zones" slated for the bulk of
activity in the development's early phases are dominated by
several well-known (and well-connected) Malaysian firms. UEM
Group, which is developing Nusajaya, is a prominent
construction and engineering firm, and a wholly-owned
subsidiary of Khazanah, the government's state-owned
investment arm that is the driving force behind the IDR.
Johor Corporation, which developed Pasir Gudang and is now
developing Tanjung Langsat, was set up in the early 1970s to
push development projects to benefit the state's Bumiputera.
MMC, owned by Syed Mokhtar Al-Bukhary (Malaysia's richest
ethnic Malay),has a 70% controlling interest in PTP, owns
100 % of Johor Port, and its wholly-owned subsidiary Senai
Airport Terminal Services runs Senai Airport (the only major
Malaysian airport that is privately run). Note: Another firm
owned by Syed , SKS Ventures, reportedly signed a contract in
late 2006 with the National Iranian Oil Company to develop
gas fields in Iran, an ac
tion that has raised concerns under the Iran Sanctions Act
(see ref A). End note.

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


17. (SBU) While the IRDA has published slick brochures with
somewhat detailed implementation plans, it remains to be seen
whether the IDR can attract significant investment in the
type of knowledge-based industry that Malaysian officials
most desire. Other similar initiatives, such as the
Cyberjaya Multimedia Super Corridor outside Kuala Lumpur, so
far have failed to live up to expectations. It appears more
likely that IDR incentives will, in the initial years, foster
Johor's continued development as a manufacturing outsource
center for foreign firms, in particular from Singapore as
well as Japan and the United States. The CDP itself
encourages such activity, at least in the early years of the
IDR project.


18. (SBU) All the current major projects underway in southern

KUALA LUMP 00001005 005 OF 005


Johor predate the advent of the IDR. Moreover, most of the
current activity involves traditional Malaysian economic
development -- heavy on infrastructure projects like roads,
ports, buildings, in addition to manufacturing. So far the
usual crowd of powerful business interests, like MMC, UEM and
Johor Corporation, are poised to be the principal
beneficiaries of the nascent IPR. Such favoritism may be
excused if IPR really does take off and become a major source
of foreign investment, especially if such investment takes
place in more innovative sectors. There is little evidence
that suggests this will happen in the near term.


19. (SBU) Political constraints, in particular the GOM's
longstanding Bumiputera preference program, will certainly
give pause to potential foreign investors. Even the
suggestion that the government might relax preference
requirements in a few sectors has generated widespread public
criticism. It seems unlikely the GOM will offer
significantly broader liberalization when the full IDR
incentive and support package is announced in the fall. The
government's hasty abandonment of proposed free access for
Singaporeans in certain parts of the IDR showed its
reluctance to take politically risky moves, despite the fact
that the IDR's success could depend on its attractiveness to
Singaporean investors.

The Demographic and Economic Contexts - Somewhere between KL
and Singapore
-------------- --------------


20. (U) The Iskandar Development Region (IDR) has a
population of 1.35 million, about 43% of the total population
of Johor. Malays constitute about 48% of the population,
with the Chinese as the next largest ethnic group at 36%,
followed by Indians at 9.4%. Chinese in Johor thus have a
higher profile than in Malaysia as a whole, where they
constitute 24% of the population compared to the Malays 61%.
The IDR's per capita GDP (at purchasing power parity) was USD
14,790 in 2005, significantly higher than the Malaysian
average of USD 10,318, but less than half that of Singapore's
per capita GDP of USD 29,937. The services sector
contributes more to the GDP of the IDR than does the
manufacturing sector (50% versus 47%, with agriculture taking
the remaining 3%). Wholesale and retail trade makes up 47%
of the services sector, followed by tourism and hospitality
at 17% and professional and business services at 15%. The
manufacturing sector is dominated by the electrical and
electronics industries (32%) followed
by chemical and chemical products (12%) and food and
beverages (11%).
SHEAR