Paradigm Shift Needed to Ensure JS-SEZ’s Success

In his royal address to the Johor State Assembly on 9 May, His Royal Highness Tunku Ismail, the Regent of Johor expressed his hope:

“Adalah menjadi keutamaan saya untuk memastikan semua Bangsa Johor mempunyai makanan di atas meja mereka, tempat tinggal, akses pendidikan berkualiti untuk anak-anak Johor serta akses kepada kemudahan asas dan kemudahan kesihatan yang baik.”

(Translation: It is my priority to ensure Bangsa Johor has food on their tables, shelter, access to quality education as well as to basic facilities, and quality healthcare.)

As State Assemblypersons, we should heed His Highness’ call, and it should be our basic goal to uplift the living standard of all Johoreans. 

At the Johor State Assembly session today (12 May 2024), the Johor-Singapore Special Economic Zone (JS-SEZ) has become the main focus of debate. Many questions were raised by State Assemblypersons, and Menteri Besar YAB Dato’ Onn Hafiz Ghazi took an hour in the morning to enlighten the House on the subject.

What can we learn from Shenzhen?

To understand the idea of the SEZ, we need to know about China’s Shenzhen.

Johor State Government and the Menteri Besar have selected Shenzhen as the reference when crafting policies and frameworks with regard to the SEZ. This is a very apt example, and I am glad that both Menteri Besar and I each led a study tour to Shenzhen in March and April respectively to understand how the city transformed itself from a fishing village to a global high-tech powerhouse within the span of 45 years.

There are two distinct phases of Shenzhen’s development story. From 1980 when Shenzhen was made a special economic zone to around the mid-1990s, the city was clearly playing a secondary role in servicing the Hong Kong economy. But after a major planning reshuffle in 1996, the Chinese government made a major decision to depart from Hong Kong’s economic model to pursue a different path.

Until today, Hong Kong is still a financial hub with a lopsided weightage on financial services and its economy is very much influenced by the interests of several major real estate companies. Financial service is at 23.4% of Hong Kong’s Gross Domestic Product (GDP) while hiring only 7.5% of the labour force. The mismatch is at the heart of Hong Kong’s current economic challenges.

Shenzhen in its second phase pivoted to put innovation and technology at the centre of its strategies. Shenzhen’s GDP size is now bigger than that of Hong Kong and Malaysia.

In the Iskandar Region, launched in 2006, there were too many property plays. We should learn the lesson to avoid the JS-SEZ from becoming another real estate speculation frenzy. I congratulate the Menteri Besar for his commitment to curb property speculations in the JS-SEZ.

The aim of the JS-SEZ or Greater Johor Bahru is to become Busan to South Korea, Osaka to Japan, or Melbourne to Australia. In other words, Greater Johor Bahru has a huge potential to become Malaysia’s second economic capital outside the Klang Valley.

We would like to see that one day many local and foreign corporations would make Greater Johor Bahru their headquarters and decide on important economic decisions here.

Special zone, how special?

When the Menteri Besar explained what inspired him most of the Shenzhen experience, he cited the Chinese expression of “特事特办”, meaning “special arrangements for the special area”. The gist of this is that the special economic zone must be given some special treatment.

In HRH Regent of Johor’s speech, he mentioned that:

“Jika tidak dapat dilaksanakan di peringkat nasional, biarlah negeri Johor menjadi negeri yang pertama untuk mengubah silibus-silibus di sekolah-sekolah di Johor.”

(Translation: If it can’t be implemented at the national level, let us make Johor to be the first state to change the syllabus for schools in Johor.)

 “Setiap rakyat Johor berhak menikmati kemudahan kesihatan yang baik tanpa mengira latar belakang sosio ekonomi mereka.”

(Translation: Every single Johorean has the right to good healthcare regardless of their socioeconomic background.)

In other words, HRH Regent of Johor is supportive in taking a more devolved approach towards dealing with key societal problems and a more experimental method to find solutions in the interests of Johoreans.

Healthcare is a good place to start. Typically, in Malaysia’s healthcare dualism, based on a rule of thumb, a public hospital has 30% of medical resources including doctors, medical officers, and nurses, with 70% of patient load. Conversely, a private hospital would have the reverse: 30% patient load and 70% medical resources.

It is important to note that Greater Johor Bahru is the second largest metropolitan in the country after the Klang Valley. Malaysians from everywhere congregate in Greater Johor Bahru to seek better lives for themselves and their families.

The medical need and care work required are massive, and conventionally thinking of treating Johor Bahru as just another state capital is not sufficient.

Johor is unique as the State Government owns KPJ Hospitals. There should be a way to turn KPJ into a social hospital of sorts with guaranteed patient load from the government side to achieve a win-win situation.

Health is just one of the many possibilities in which Greater Johor Bahru can be the testbed for new ideas.

JS-SEZ, what kind of incentives?

There were three major issues pertaining to the JS-SEZ: the movement of people, goods and data, location of the JS-SEZ, and incentives. And we should be focusing on the issue of incentives, especially to ensure adoption of a new paradigm as well as not to repeat past mistakes.

On the movement of people, goods and data, Andrew Chen, Opposition Leader and Stulang State Assemblyman, has articulated our proposals quite well.

As for the location, I congratulate the Menteri Besar for his announcement in the State Assembly today that it will be in the entire Iskandar Region and Pengerang.

This is the right decision which deserves our support. Casting a wider net to include the entire Iskandar Region and Pengerang would allow for scale and agglomeration.

Of course, with such a huge size, incentives to investors cannot be showered liberally. In fact, the JS-SEZ should be where Malaysia rethinks and reorganizes the incentives for investors altogether. A paradigm shift is needed and JS-SEZ is the best experiment site.

Let’s put it this way: for most businesses and industries, the moment the movement of people and goods between Johor and Singapore is smooth and seamless, it is already a great incentive. There is no need for too many incentives, especially given the background of global supply chain reorganisation.

As corporations reorganise their supply chain, they are trying to achieve two major objectives.

First, it is about keeping “China for China” but China is no longer seen as the factory for the world. A second supply chain outside China is to be established, and Southeast Asia is one of the best choices.

Second, taking lessons from geopolitical crises, the pandemic, and climate disruption, corporations are now aspiring to create shorter and more secured supply chains. Gone are the days when “Just-In-Time” was the rule of the game when corporations did not stock much and assumed that goods would travel freely and speedily. The motto of this new era is “Just-in-Case”, or formally known as “de-risking.”

What JS-SEZ needs to do is not offer incentives for investors but to ensure a secure supply chain for them. Security in every sense: political stability, societal stability, a just and fair legal environment, a well-educated workforce, water security, energy security, climate change mitigation etc.

In this case, corporations will have to pay for security with a premium. This paradigm shift is important so that we don’t sell ourselves cheap.

Incentives – the paradigm shifts

There are four outside-the-box thinking we should consider:

First, worker-based incentives. The Johor labour market is essentially linked to the Singapore labour market. A worker would literally walk to Singapore if they feel that pay is too low in Johor. Therefore, to ensure the JS-SEZ would be vibrant, tax and other incentives should be given to Malaysian engineers and workers who would return to the SEZ to work in industries identified by the New Industrial Master Plan 2030 and any other sectors that would make the Greater Johor Bahru a successful region.

Second, supply-chain based incentives. The Government will have to understand deeply what is needed to build a secure and robust supply chain for critical industries to thrive. And to do so, incentives can be given out to firms, especially Malaysian firms, who are part of the supply chain. This will help many mid-sized Malaysian companies to scale up and be global champions.

Third, incentives for control towers. Malaysia doesn’t just want to be manufacturing hubs. Malaysia is also a very strong contender to be the control towers for global businesses. We would like to see more regional headquarters, centres of excellence, and R&D centres to be set up in the JS-SEZ.

Fourth, incentives for the Johor State Government. In Malaysian federalism, all income taxes – personal and corporate – go to the federal coffer. State governments do not enjoy the direct fruits of economic growth apart from collections from land and buildings.

The Federal Government could work out a deal with the Johor State Government in which the current level of corporate taxes collected from Johor would still go to the federal coffer but the Johor State Government would have a share, say 20% of extra corporate taxes above the baseline collected from the SEZ. In exchange, the Johor State Government would have to commit to reinvest all the extra income into building and maintaining the infrastructure, environment and the welfare of the people in Greater Johor Bahru. Such incentives would help ensure Greater Johor Bahru emerging as Malaysia’s second economic capital with a happy people. If we could make the above paradigm shifts, I am confident that the people of Johor and Malaysia would greatly benefit from the JS-SEZ experiment.

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