MALAYSIAN PM LIBERALIZES SOME SERVICES SUBSECTORS

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000303

SENSITIVE
SIPDIS

STATE PASS USTR -- WEISEL AND BELL
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
SINGAPORE FOR SUSAN BAKER
USDOC FOR 4430/MAC/EAP/M.HOGGE
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: ECON EINV PREL EFIN ETRD MY
SUBJECT: MALAYSIAN PM LIBERALIZES SOME SERVICES SUBSECTORS

REF: KUALA LUMPUR 297


1. (U) SUMMARY: Malaysian Prime Minister Najib Razak today
announced a services sector reform package exempting firms in
27 subsectors from a government requirement that each firm
maintain a minimum 30 percent ownership stake by ethnic
Malays and indigenous groups ("bumiputera"). Najib said this
was being done to improve Malaysia's competitiveness in the
"softening" global economy and to attract more foreign
investment. (Note: Foreign direct investment in 2009 is
projected to be half the amount of 2008 inflows, and
economists have been calling for liberalization, especially
of the services sector, as Malaysia's best hope of surviving
the global economic crisis (reftel). End note.) Najib said
these liberalizations were in line with what ASEAN countries
were doing, according to press reports. He also promised
more liberalization to come in the financial services sector,
with details to be announced next week. One professor of
economics at a local university told Econoff that, although
the impact on the economy might not be significant, the move
breaches an important psychological barrier as a concession
to non-bumiputera.



2. (SBU) Comment: PM Najib's long-awaited announcement on
services covers only 27 relatively insignificant subsectors
in terms of the greater Malaysian economy, and of little
import to most U.S. businesses currently operating in
Malaysia. However, the announcement is important because it
sets a precedent for cutting back on Malay preferences in the
interests of improving Malaysia's competitiveness. If Najib
can carry out this reform without creating a backlash from
the Malay majority, he will have set the stage for greater
reforms down the road. If successful, this measure also
could undermine the political opposition, who have long
called for the removal of pro-Malay policies and have used
this issue as one of their key platforms. At the same time,
by keeping the scope of the reforms small Najib hopes to
assure the bumiputera that any steps taken to liberalize the
economy by his government will be gradual. If these
measures do not generate a substantial backlash, Najib is
likely to continue testing the waters to see how far and how
fast to go on future economic liberalizations. The degree of
movement is small, and far from the broad-based opening of
services that we have sought in the FTA negotiations, but it
is a start. Next week's anticipated announcement on
financial sector reform would be another incremental step in
this economic opening process. End summary and comment.


3. (SBU) On April 23 Prime Minister Najib Razak outlined 27
sub-sectors of the computer, health, social services,
tourism, transportation, recreation, business, and shipping
services industries which would no longer be subject to a 30
percent bumiputera ownership requirement (see list below).
Dr. Suresh Narayanan, Professor of Economics at University
Sains Malaysia in Penang and a renowned expert in political
economy, told Econoff that the move "breached an important
psychological barrier" as a "concession to non-Malays." He
did not doubt that the subsectors likely represented only a
small piece of the Malaysian economy, but said Najib's
willingness to take such a bold step in beginning the process
of dismantling preferences for Muslim Malays was important.
Pointing out that the services sector was the fastest-growing
part of the Malaysian economy, he said liberalization was the
only way to maintain Malaysian competitiveness in the "global
value chain." Najib likely was just testing the waters, he
explained, to see what the response would be by "pro-quota
Malays" whose reaction would be an indicator of Najib's level
of influence. "The immediate economic impact is beside the
point," Dr. Narayanan said, describing liberalization as "the
only way to go." The only thing up for debate was "the speed
and manner of liberalization, not the question of yes or no."
Fortunately, Najib appears to realize that and has begun to
act on it.

--------------
THE LIST

KUALA LUMP 00000303 002 OF 002


--------------


4. (U) Following are the sub-sectors no longer subject to
the the 30 percent bumiputera ownership requirement:

COMPUTER AND RELATED SERVICES:
-- Consultancy services related to the installation of
computer hardware.
-- Software implementation services: systems and software
consulting services, systems analysis services, systems
design services, programming services, and systems
maintenance services.
-- Data processing services: input preparation services,
data processing and tabulation services, time sharing
services, and other data processing services.
-- Database services.
-- Maintenance and repair services of computers.
-- Other services: data preparation services, training
services, data recovery services, and development of creative
content.

HEALTH AND SOCIAL SERVICES
-- All veterinary services.
-- Welfare services delivered through residential
institutions to the elderly, the handicapped, and children.
-- Child day-care services, including day-care services for
the handicapped.
-- Vocational rehabilitation services for the handicapped.

TOURISM SERVICES
-- Theme parks.
-- Convention and exhibition centers with a seating capacity
of more than 5000.
-- Travel agencies and tour operators.
-- Hotel and restaurant services, including other food and
on-site beverage services, for four- and five-star hotels.

TRANSPORT SERVICES
-- Class C freight transportation (private carrier license to
transport own goods).

SPORTING AND RECREATIONAL SERVICES
-- Sporting services (defined as sports event promotion and
organization services).

BUSINESS SERVICES
-- Regional distribution centers.
-- International procurement centers.
-- Technical testing and analysis services: composition and
purity testing and analysis; testing an analysis of physical
properties, integrated mechanical and electrical systems, and
technical inspection services.
-- Management consulting services: general, financial
(excluding business tax),marketing, human resources,
production and public relations services.

RENTAL/LEASING SERVICES WITHOUT OPERATORS
-- Rental/leasing services of ships that excludes cabotage
and offshore trades.
-- Rental of cargo vessels without crew (&bareboat
charter8) for international shipping.

SUPPORTING AND AUXILIARY TRANSPORT SERVICES
-- Marine agency services.
-- Vessel salvage and refloating services.

LEGAL SERVICES FOR ISLAMIC FINANCE
-- Najib also announced that up to five foreign legal firms
would be authorized to practice in Malaysia, but only to
offer legal services related to Islamic finance. This would
be part of Malaysia,s push to make the country a global hub
for Islamic financial services.
KEITH