A big push: Several sectors will support growth in the East Coast Economic Region

 

Uniting the states of Terengganu, Pahang, Kelantan and the Johor district of Mersing under its remit, the East Coast Economic Region (ECER) covers the entire eastern half of Peninsular Malaysia. Despite its size, this is a comparatively underpopulated and spread-out region. At 66,000 sq km of territory, the ECER covers some 51% of the land area of Peninsular Malaysia, but the region’s population of 3.9m people comprises only 14.5% of the country’s total.

By 2020, the ECER master plan aims to have transformed this vast area into a major global exporter of resource-based and manufactured products. The plan seeks to establish the east coast as a vibrant trading and tourism centre and a base for infrastructure and logistics. In addition, the plan spells out methods for stamping out poverty in the region by improving workers’ incomes and distributing wealth more equitably.

Achieving this goal will be challenging, as recognised by Mustapa Mohamed, the minister of international trade and industry, when speaking in September 2011. “The east coast is an area we are working very hard to develop,” he said. “There are many developments in west coast states like Selangor and Johor, but the east coast states are still lagging behind.” However, judging from the many projects and investments logged by the region in 2012, things now seem to be changing for the better.

TAKING CHARGE: The ECER was established in 2007, and a year later Parliament decreed the creation of a statutory body, the ECER Development Council (ECERDC), to run the project. Indicative of its importance to the overall growth of the nation, the council is presided over by the prime minister, Najib Razak. Other key stakeholders on the council include the deputy prime minister, Muhyiddin Yassin, the chief ministers of the three states and one district making up the region, as well as two federal ministers. Also included are a representative of the civil service and two private sector representatives: Shamsul Azhar Abbas, the president and CEO of state oil and gas firm Petronas, and Lee Shin Cheng, the executive chairman of IOI Corporation, one of Malaysia’s biggest conglomerates, with major stakes in the palm oil industry and property development.

Given its mandate to implement the projects and key programmes identified in the ECER master plan, the council directs policies and strategies in relation to the region’s development, as well as coordinates between government entities engaged in the promotion of investment, trade, tourism and development activities within the region.

Supporting and acting in an advisory role to the council are various implementation and coordination committees for each of the region’s states. These councils identify strategic development and investment opportunities throughout the region, while also harmonising the roles and responsibilities of government entities and identifying and resolving challenges to the implementation of the plan.

DRIVING GROWTH: The master plan’s ultimate vision is for the ECER to become a developed region by 2020.

Achieving this depends on several key sectors: tourism, manufacturing, agriculture, education, and oil, gas and petrochemicals. These are assisted by the support system enabling manufacturing activities (IT, logistics and financial services) alongside certain institutional support mechanisms (educational, governmental, research and development, as well as trade, social and private associations). In addition, the ECER has also launched a successful empowerment programme that is aimed at producing high-performing students and successful entrepreneurs in 2011.

SPECIAL ZONE: The ECER is also home to a special economic zone (SEZ), a stratagem in the ongoing drive to attract and retain investors to the region as well as increase wealth for the people who live there.

Running from Kertih in Terengganu to Pekan in Pahang, the zone was set up in 2009 to offer investors a wide range of fiscal and logistic incentives to base their businesses there, with innovation zones set in industrial parks. The 25-km by 140-km strip extends along the east coast of the ECER and, when completed, will boast two airports and four ports (Kuantan’s port is being transformed into a deepwater port). There will also be new townships, tourism sites and an innovation zone to support the region’s development of manufacturing, agriculture, tourism, education, and oil, gas and petrochemical activities.

To promote chains between industry clusters that will boost the economy of the ECER, the SEZ will also have the following four free zones: Kuantan Port City-Free Zone, Kuantan Airport-Free Zone, Kemaman Port-Free Zone and Tanjung Agas-Free Zone. By 2020, a total of RM90bn ($29bn) in investments is expected in the SEZ, primarily from Asian countries.

INTERNATIONAL INVESTMENTS: Indeed, the zone is already populated with some big industrial names. For example, Volkswagen, Mercedes-Benz, Suzuki and Isuzu are all present at the Automotive Industrial Park located in Pekan-Peramu.

At the Gambang Halal Park, Gelnas has committed to invest RM130m ($41.94m) to build the first halal gelatine processing plant in the country. Meanwhile, Eastern Steel has already broken ground to construct a major integrated steel mill at the Kemaman Heavy Industrial Park, and construction is expected to be completed by second-half 2013. This RM1.8bn ($580.68m) investment by Malaysia’s Hiap Teck Venture and China’s Shougang Group is the largest Chinese foreign direct investment in ECER to date.

Added to this array of industrial parks are the Kertih Biopolymer Park and the soon-to-be-opened Kuantan Integrated Biopark in Gebeng, where, according to plans, catalytic investments are aimed at positioning ECER as a centre of new technologies and a regional leader in biorefining. Major biochemical firms that have committed to investing in Kertih Biopolymer Park include US-based Gevo, which will invest up to RM1.65bn ($532.29m) to build the world’s largest bio-isobutanol plant. In addition, a joint venture between South Korea’s CJ CheilJedang Corporation and Arkema of France has recently started construction work to build the world’s first green fermentation-based bio L-methionine plant in the park.

CRUCIAL INCENTIVES: Like the infrastructure projects, an attractive package of fiscal and non-fiscal incentives are already in place. Fiscal incentives include 10 years’ exemption on corporate income taxes from the year the company derives statutory income or income tax exemption equivalent to 100% of qualifying capital expenditure (investment tax allowance) for a period of five years. Non-fiscal incentives are also available for qualified investors, such as facilitation funds to build basic infrastructure, competitive land prices, flexibility in employment of expatriates and facilitation of human capital training.

As these competitive incentives illustrate, the SEZ is a key component of the ECER’s economic development goals and is expected to contribute up to 80% of the region’s GDP. However, the zone is not just about garnering investment. Because income disparity in the ECER is high compared to the west coast, the SEZ has as one of its goals the alleviation of poverty in the region. It aims to do this by increasing income levels through employment and training the local workforce. Job creation will also ensure a significant contribution to GNI. Foreign investors in the zone will need to source local skilled workers to provide the manpower for their projects.

INFLOWS ON THE INCREASE: The ECER started 2012 with a bump in investments and significant inflows to the manufacturing, tourism, aquaculture and education sectors. In the first half of 2012, the region attracted investments worth more than RM12bn ($3.9bn), according to the ECERDC. The council announced in February 2012 that it intended to raise the ECER’s investment target for the year to RM15bn ($4.8bn), up from the previously set target of RM10bn ($3.2bn) because investments in the first quarter had already closed in on the entire year’s total target.

Of the first quarter investments, RM2.1bn ($677m) was for Pahang, RM5bn ($1.6bn) for Johor, RM1bn ($322.6m) for Terengganu and RM500m ($161m) for Kelantan. According to the ECERDC, more than 80% of these investments came from domestic sources.

Broken down by sector, during first-half 2012, tourism brought in around 55% of investments, followed by manufacturing (31%), agriculture (8%), education (5%) and the services sector (1%), according to the ECERDC. Looking ahead in terms of foreign investors, the ECERDC is now hoping for more partnerships with China, Japan and Korea in particular.

At the same time, the region benefitted from federal government spending of nearly RM3bn ($967.8m) on infrastructure development over the past three years. The federal government has also allocated another RM100m ($32.3m) through a facilitation fund under the Bumiputera Agenda Steering Unit for the development of companies owned by bumiputera (indigenous people) in the ECER to enhance their participation in the region’s expanding economy.

This comes on the back of some already significant growth for the region; according to the most recent data available from the Department of Statistics, at year 2000 prices Kelantan’s GDP grew by 4.1% year-on-year in 2010, Terengganu’s by 4.3% and Pahang’s by 4.5%. Data for Mersing was not available.

KEY DRIVERS: Each of ECER’s key growth drivers has received investment in 2012, with several high-profile projects set to steer major new expansion. One of the most important recent projects will be Asia’s largest biorefinery complex at the Kertih Biopolymer Park. A collaboration between the ECERDC, the government of the state of Terengganu and the Malaysian Biotechnology Corporation – the lead development agency for biotechnology in the country – the venture will involve the development of a 1000-ha complex. This is scheduled to commence operations by end-2013 and to be occupied by eight global industrial biotechnology players by 2015.

The biorefinery complex is set to use cellulosic feedstock to produce around 800,000 tonnes per annum of bio derivatives, including biochemicals, biomaterials, biofertilisers, advanced carbohydrates and active feed ingredients. The project is projected to generate a cumulative GNI of RM20.4bn ($6.6bn) by 2020, create 2500 green jobs and bring in foreign direct investment of around RM7bn ($2.26bn).

Looking at progress related to the manufacturing key driver, the region has already made great strides in terms of attracting, among others, major automobile makers from around the world. Meanwhile, in the Automotive Industrial Park in Pekan, Nilai Mahir and Johnson Controls Automotive Holdings have announced investments in projects worth a total of RM90m ($29m). In Kelantan, Hongkew Holdings is investing RM500m ($161.3m) to establish an integrated cement plant in Gua Musang.

Developments under the education key driver include the announcement that HICOM University College is investing a total of some RM592.5m ($191m) to establish an automotive university college within the Pekan Automotive Park.

TRAVEL IN STYLE: The tourism key driver has seen many investments, with these expected to transform areas within the ECER into vibrant tourism attractions thanks to upgraded amenities and facilities.

In line with this push, Damansara Assets will develop a resort town known as the Tanjung Leman Integrated Resort and Coastal Township in Mersing, with a total investment value of around RM1bn ($323m). In Pahang, Encorp is set to develop an integrated tourism resort and international golf course with a gross development value of RM1.3bn ($419m). Lastly, work on the RM5bn ($1.6bn) Kuala Terengganu City Centre, which will integrate residential, educational and health and recreational opportunities, as well as be a magnet for tourism, is ongoing.

FOOD CHAIN: With regards to the agriculture key driver, the region’s vast tracks of fertile land hold great potential for agricultural development, not only in terms of crops but also with regards to livestock, aquaculture and halal foods. The ECER’s Halal Gambang Park is a resource-based park with linkages to other ECER initiatives in the agriculture and palm oil manufacturing sectors. Focusing on both food and non-food, it will capitalise on the growing global halal market and rising awareness of and demand for food security, safety and hygiene.

Meanwhile, developments in aquaculture include Andaman Sea Foods’ announcement of investments totalling some RM225m ($72.6m) in an integrated shrimp farm in Pahang. Another shrimp farm, this one in Terengganu, is planned by Ocean Aquatic Marine, which will invest around RM1bn ($323m) over a five-year period in a joint venture with China’s Zhanjiang Guolian Aquatic Products.

THE CHINA CONNECTION: As in many other regions across the globe, China has emerged as one of the ECER’s leading financial partners to date. Bilateral trade relations between Malaysia and the People’s Republic are expected to be further enhanced when the ECER’s Malaysia-China Kuantan Industrial Park (MCKIP) at Gebeng town in Kuantan, Pahang, commences operations. MCKIP is the first bilateral project between the two Asian countries that will be accorded national-level status.

The MCKIP project is expected to be officially launched in January 2013 and will be carried out by a master developer, an entity which will be formed through a joint venture between Malaysian and Chinese companies. Upon its completion in 2020, the MCKIP is expected to attract nearly RM7bn ($2.26bn) in investment and create as many as 5500 new jobs.

ATTRACTING FOREIGN INTEREST: With investment targets being raised to keep up with inflows, the ECER is clearly showing strong promise. The challenge now is to maintain the sustainable GDP growth that the region requires. While China is expected to remain a key player in this region’s growth, the ECER is also likely to look to other investors, foreign as well as domestic, to diversify its portfolio in the years ahead.

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The Report: Malaysia 2012

Regions chapter from The Report: Malaysia 2012

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