MALAYSIA'S NORTHERN CORRIDOR ECONOMIC PLAN -- LONG ON

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001546 SIPDIS SENSITIVE SIPDIS STATE PASS USTR - WEISEL AND BELL USDOC FOR 4430/MAC/EAP/J.BAKER E.O. 12958: N/A TAGS: ECON EINV ETRD EAGR MY SUBJECT: MALAYSIA'S NORTHERN CORRIDOR ECONOMIC PLAN -- LONG ON PROMISES, SHORT ON PRAGMATISM REF: KUALA LUMPUR 1005 ¶1. (U) Summary: Malaysia has launched another high-profile economic incentive program, the Northern Corridor Economic Region (NCER),as part of the government's efforts to enhance economic growth and development in outlying parts of Malaysia. Prime Minister Abdullah's July launch of the NCER followed the 2006 advent of the Iskandar Development Region (IDR) in the southern state of Johor, directly north of Singapore (reftel). NCER incorporates the three northwestern states of peninsular Malaysia - Perlis, Kedah, and Penang - along with the northern half of the state of Perak. Unlike the IDR, the NCER lags behind the national average in development, with per capita income reaching just 76% of the national average. Those parts of the plan that are tied most closely to the economic hub of Penang have a certain inherent logic to them, but isolated development zones are more driven by political ends and are likely to be dependant on government support for some time to come. End summary. ¶2. (U) The GOM awarded prominent government-linked company Sime Darby the task of devising a blueprint to kick-start the initiative. The company will retain overall coordination of the project until the establishment of the Northern Corridor Implementation Agency (NCIA) in late 2007 or early 2008. According to the blueprint, the GOM aims for some RM 177 billion (USD 50.5 billion) in investment on NCER-related projects through 2025, with around one-third being government-funded projects. The blueprint specifically notes that the initiative's overall theme is "increasing value-added from existing industries," and is focused on "transforming" the agricultural, manufacturing, logistics, and tourism sectors in the region. ¶3. (U) In a recent tour of a variety of sites in the state of Kedah, the heart of northwestern Malaysia, econoff observed an effort that is just barely getting started. The Kuala Lumpur based Sime Darby reps that accompanied econoff were making their initial contacts with many of the same local entities, including the Kedah State Planning Unit, the Muda Agricultural Development Authority, the Kulim Hi Tech Park, and the Universiti Utara Malaysia. Kedah State Economic Planning Unit -------------- ¶4. (U) Dato' Haji Bashirudin bin Haji Abdul Jamil, Deputy Secretary for Development for Kedah, told econoff that the state has been somewhat successful in the last 15 years in expanding Kedah's economy away from its overwhelming reliance on agriculture. Although the state is determined to keep agriculture as a key element of the economy, it had also encouraged the development of four economic hubs. These included the Kulim Hi Tech Park in southern Kedah (close to Penang),an auto manufacturing hub in the central area of Gurun, a manufacturing and logistics hub in Bukit Kayu Hitam on the Thai border, and an oil refinery in the coastal town of Gan. Of these four centers, only the oil refinery in Gan has yet to be developed. Bashirudin emphasized that all four centers purposely avoided encroachment on the state's rice paddy cultivation areas. ¶5. (U) Bashiruddin and his colleagues told econoff they welcomed Sime Darby's expertise as the state seeks to further develop its four economic hubs, as well as the state capital of Alor Setar (the most populous single area of the state). Noting that Kedah is a source for both goods and workers that eventually end up in Penang, they are seeking ways to leverage the state's proximity to Penang to improve Kedah's economy, in part to keep such workers in the state. A More Productive Agricultural Heartland -------------- ¶6. (U) Though NCER emphasizes increased industrialization of much of northwestern Malaysia, preservation and development of the region's role as Malaysia's agricultural heartland is also a significant component of NCER. The current blueprint actually calls for agriculture to comprise an increasing share of the region's GDP (from 12% now to 15% in 2012). The plan calls for increased large-scale farming and productivity improvements, particularly for fresh and processed fruit and meat production, to encourage substantial increases in the region's agricultural exports. The plan calls for Sime Darby to establish a seeds research and development center in Perlis state, which will focus in particular on using biotechnology to produce improved seed varieties. ¶7. (U) Rice plays a particularly strong historic role in Kedah's agricultural sector. The Muda plains of central Kedah produce 38% of KUALA LUMP 00001546 002 OF 003 Malaysia's rice, and the Muda Agricultural Development Authority (MADA) has since 1970 been seeking ways to improve production. Approximately 100,000 hectares of rice are under cultivation, and while MADA has been instrumental in increasing production in some cases to nearly eight tons per hectare (though the average yield is three to five tons per hectare),they are pushing for further yield improvement to nine or ten tons per hectare by 2020. Despite improving production over the years, MADA officials told econoff that Muda rice farmers still need significant assistance, as their holdings are primarily small scale (just over 2 hectares per farmer) and their average age is 60 years. Poor irrigation infrastructure is another impediment to increasing rice productivity. In addition to encouraging infrastructure improvements, MADA is encouraging farmers to improve their yields by using better seeds. MADA also promotes expanded markets for rice-based products, such as cosmetics, animal feed, and handicrafts). Kulim Hi Tech Park -------------- ¶8. (U) Kedah officials point to the success of the Kulim Hi Tech Park (KHTP) near Penang as the type of development within Kedah that can leverage Penang's stellar economic reputation. KHTP was Malaysia's first dedicated high technology industrial park, and since its dedication in 1996 has attracted over RM 20 billion (USD 5.9 billion) in investment, mostly from overseas. Most of that investment has been in technology manufacturing facilities that are integrated with the much larger electronics sector in Penang, just 15 miles away. Intel has been a big presence at KHTP from the beginning and remains the largest single investor in the park, and has since been joined by some 20 other firms that now employ about 15,000 workers. Although close to the Penang metropolitan area, KHTP is being developed as a self-contained, mixed-use community which can house, feed, entertain, and educate its workforce and their families - it even generates its own electricity. ¶9. (U) The NCER blueprint calls for the development of an electronics cluster stretching from Taiping in Perak to Gurun in Kedah, with Penang and KHTP at the sector's heart. KHTP officials noted to econoff that the development's success has led it to run out of space sooner than anticipated; the U.S.-German firm First Solar recently broke ground on a photovoltaic module plant (used for solar energy plants) that takes up much of KHTP's planned third development zone. KHTP is considering potential future expansion into neighboring parcels, some of which are owned by Sime Darby. Bukit Kayu Hitam - Asian Composites Manufacturing -------------- -------------- ¶10. (U) Although KHTP owes its location to its proximity to Penang, another manufacturing node, at Bukit Kayu Hitam (BKH) in northern Kedah, is less dependent for its success on its proximity to an existing economic success story. However, its location at the northern end of Malaysia's North-South Expressway provides relatively easy access to ports, and its location on the Thai border has encouraged the government to promote it as a logistical hub as well. BKH was developed with a significant influx of government support, including by former PM (and native son) Mahathir (who was also instrumental in promoting Langkawi, offshore Kedah, as a major tourist destination in southeast Asia). ¶11. (U) Asian Composites Manufacturing (ACM) in BKH exemplifies the type of advanced technology manufacturing that the GOM seeks in Malaysia. In this relatively remote corner of Malaysia, ACM fabricates cutting-edge aircraft components that make their way into every one of Boeing's commercial aircraft lines. ACM is a joint venture among Boeing, Sime Darby, and the U.S. firm Hexcel, each of which owns one-third of the company. Nearly RM 140 million (USD 41 million) has been invested in the plant since its inception in ¶2001. Universiti Utara Malaysia (UUM) -------------- ¶12. (U) Just a few miles from BKH, but in an even more remote area along the Thai border, Universiti Utara Malaysia (University of Northern Malaysia) is well positioned to play a leading role as the NCER is developed and implemented. UUM Vice Chancellor Tan Sri Dr. Nordin Kardi told econoff that the university, which was founded in 1990 and now boasts some 25,000 students, aspires to be Malaysia's premier management school. UUM hopes to participate in the drafting of impact studies for various NCER proposals, and also has proposed that the GOM allow the university to open an official NCER Research Center. UUM is particularly interested in developing management techniques to foster NCER's agricultural development projects, KUALA LUMP 00001546 003 OF 003 although the university has not previously been very active on agriculture issues. Comment -------------- ¶13. (SBU) With the NCER the GOM is attempting in part to leverage Penang's prosperity to bolster the economy of the states which comprise its hinterlands, not unlike the government's efforts to use Singapore's prosperity to improve Johor's economy under the Iskandar Development Region. One key difference is that Penang is in Malaysia, and thus is being touted by the government as an integral part of NCER. Econoff's various interlocutors in Kedah admitted that proximity to Penang will continue to help development of sectors with existing ties to Penang, especially Kulim's Hi Tech Park, as well as BKH and Gurun (both of which are heavily dependent on access to Penang's port). However, the initial plan indicates that a good percentage of the proposed NCER projects may have limited links to Penang. ¶14. (SBU) Prime Minister Abdullah Badawi (who hails from Kedah) has long pushed a modernized agriculture sector as a pillar of Malaysia's future prosperity. Thus the NCER's emphasis on maintaining and improving the area's reliance on agriculture is not surprising. This emphasis reflects the political importance of the sector to ruling party UMNO; rice farmers in particular are overwhelmingly Malay and strong supporters of UMNO. They have also expressed occasional concerns (egged on by anti-FTA NGOs) that a U.S.-Malaysia FTA would bring a flood of cheap U.S. rice that would threaten their livelihoods. ¶15. (SBU) Even more so than the IDR in Johor, the NCER does not initially appear to be much more than a public relations exercise. In the short term the government undoubtedly hopes the program will generate political support in advance of anticipated national elections. NCER does not contain the types of investment incentives seen in IDR (which exempt certain investment from adherence to the government's bumiputera preference policy),which is not surprising given that NCER is not aimed primarily at attracting foreign investment. In the medium-term the government is budgeting funds to support NCER infrastructure projects, and will likely remain the principle source of funding as the program moves forward. KEITH