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

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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,

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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