Iskandar Malaysia fails to shine even with significant investments from Singapore

Even after Singapore’s S$6 billion investment into Iskandar Malaysia, the development has yet to take off.

By John Pennington, edited by Francesca Ross

Singaporean investment of RM19 billion (US$4.4 billion) has been poured into the Iskandar Malaysia project since its launch in 2006. The developers behind the huge manufacturing and services complex hope it will be “Malaysia’s Shenzhen” by 2025.

Batam in Indonesia is another Singaporean investment hotspot. Singapore beat Hong Kong and Japan to become Batam’s top foreign investor in 2015 with a total of SG$181.1 million (US$125 million) in investments. The Indonesian government has been pushing the island to be the country’s digital powerhouse.

Mobile app development and other IT industries have been growing rapidly on the island. Batam’s total export value was US$8.4 billion in 2016 of which US$3.9 billion is attributed to Singapore.

These examples show how Singapore’s money has fuelled innovation and growth in Malaysia and Indonesia.

 

Source: Iskandar Malaysia

Iskandar Malaysia’s development should benefit both Malaysia and Singapore

Ravi Menon, Head of the Monetary Authority of Singapore (MAS), raised the idea of a single economic zone covering Iskandar Malaysia and Singapore to offer investors an “integrated production and services base” in Southeast Asia.

Eugene Tan, Singapore Management University professor, added, “Policymakers see the possibility of businesses being co-located in Iskandar [Malaysia] and Singapore. We just do not have the land here and Iskandar [Malaysia] is close enough for companies to have manufacturing there but the finance and research and development in Singapore.”

Iskandar Malaysia is still not delivering on its promise

Iskandar Malaysia’s progress has been slow. Property investments in Iskandar Malaysia are down. Domestic manufacturing fell by 41% in 2016. The population has grown by just 350,000 people in 12 years. This means the domestic labour force has not been big enough to cope with any shortages.

Housing prices have also been driven down by an oversupply of property. Ismail Ibrahim, Iskandar Malaysia Regional Development Authority (IRDA) CEO, claimed this was a “temporary glut”, and the extra 50,000 homes will “easily be taken up by future demand.”

It will be a long time before Iskandar Malaysia truly competes with Singapore

Rental costs in Iskandar Malaysia have been lower than in Singapore. There has also been plenty of space available. Slow population growth, tardy property development and oversupply have all been holding the project back. Some businesses have shifted from Singapore to the new site but the impact has been minimal in the short term.

Experts paint a pessimistic picture of the complex’s future. “More so than Shenzhen, I wonder if Iskandar [Malaysia] will go the way of Batam. It was once touted as the next big thing as land and labour costs were so low,” argued Nicholas Mak, Singaporean real estate agency ZACD Group’s head of research and consultancy.

Batam has not fared well, despite trade privileges

The island of Batam became part of a Special Economic Zone with Singapore in 2007. This means that the Indonesian and Singaporean governments cooperated to ensure that business, labour, and regulatory conditions in the area are favourable to investors. Batam – along with Bintan and Karimun – later became a free trade zone. This allowed customs duties and other taxes to be abolished. However, this did not stop Batam’s economy from falling into a state of emergency as growth stagnated earlier this year.

Local authorities continue to battle against inadequate infrastructure and bureaucratic challenges. High labour costs and strikes have crippled the area’s productivity. “Batam’s minimum wage is the third highest in ASEAN, after Singapore and Brunei Darussalam. The government ignores this,” lamented Abidon Hasibuhan, Riau Islands chairman of the Indonesian Employer’s Association supervisory council.

Companies were taking their businesses away from Batam due to these costs, he said. He was concerned that investors will look elsewhere.

Source: Wage Indicator

Batam has not developed into the industrial powerhouse that Indonesia intended it to be. As an export-only area, Batam could not be a key supplier of goods and services for the Indonesian domestic market. This combination of issues means the economy is severely hamstrung and cannot compete with other regional hubs like Singapore.

Licensing and diversification should fuel the next wave of growth

A more efficient licensing system was put in place last September for investors in Batam. The government has also made efforts to improve infrastructure and boost investor confidence. The new plan is for Batam to become an eco-friendly digital hub. Singaporean Prime Minister Lee Hsien Loong and Indonesian President Joko Widodo met last year and discussed the digital economy as one way of expanding bilateral cooperation.

There has also been a shift away from electronics and heavy industry in the local economy. Software development has become the new vogue. This new landscape will soon include the SG$700 million (US$506.5 million) Nongsa tech park.

These changes are still happening too slowly. Connectivity has been improving but Batam’s poor economic position is giving competitors a huge head start. Infrastructure, red tape, and poor English skills have held the island back, despite its trade privileges and investment.

Singapore must choose collaboration over competition

New projects such as Malaysia’s proposed East Coast rail line will move ASEAN nations further into China’s orbit. This means that Singapore and its neighbours must focus on collaboration over competition.

It might be time to take another look at reviving the Growth Triangle, with Singapore taking the lead. More investment in Malaysia and Indonesia could be the way forward.

Threats to Singapore’s position do not come from Iskandar Malaysia or Batam. Policy-makers and investors need to respond to more serious pressures. These include projects under China’s Belt and Road Initiative or Thailand’s ambitions to build its own aircraft maintenance hub.

Manu Bhaskaran, Centennial Group Inc partner, argued, “Singapore needs to consider bolder and potentially riskier res­ponses that will create a hinterland, encompassing southern Malaysia and the Riau ­Islands, one that can compete with the ­other ­emerging clusters of econo­mic ­vibrancy elsewhere in Asia.”

Singapore already benefits from being well-established and well-positioned in the Southeast Asian region. Its infrastructure and regulatory bodies set it apart from its would-be competitors. It can prosper further by working together with neighbouring states.

This will require innovation and smart reactions from authorities and businesses to a fast-changing world. If they do not, the threats that will materialise may be much more difficult to dismiss.