Federal-state relationship from the investment perspective

The Edge Online | Federal-state relationship from the investment perspective               
Written by Lee Kah Choon   
Monday, 21 February 2011 12:04

The often-asked question by investors has been: How does the federal/state relationship affect their investment here?

The simple answer to that has always been: The relationship is good and it will not affect their investment here.

Look at the investment figures. In 2008, the state broke its record, attracting RM10.16 billion. And in 2010, it broke its own record again by being placed first in the national league table, surpassing Selangor for the first time by attracting RM12.24 billion in investments.

Look at the property sector and we will find that all major developers in the country are in Penang, and that the average property prices in the state have doubled in the past 12 months.

The services sector is doing just as well. For example, passenger arrivals at the Penang International Airport and the cargo handled saw an increase of 30% and 18% respectively in 2010 from 2009. Figures for foreign patients seeking treatment at Penang’s private hospitals are just as encouraging. In 2010, the number of foreign patients jumped 24% from 2009!

In short, business is thriving and it is business as usual, if not better.

However, if we look seriously beneath the surface, all is not well under the present arrangement.

The present situation is not ideal and there is plenty of room for improvement. We need to look at the statistics in order to understand why.

First, there is misalignment between what Penang generates for the country and what she gets in return. Historically, Penang has been sidelined in terms of allocation given by the federal government. For example, under the 8th and 9th Malaysia Plans (2001 to 2010), Penang state received only 3.1% of the total allocation. This ranked Penang at No 10 out of the 14 states, way behind the Federal Territory of Kuala Lumpur and Selangor. For the record, Kuala Lumpur received 11.5% under the 8th Malaysia Plan (MP) and 15.5% under the 9MP. Selangor received 9.6% under the 8MP and 7.8% under the 9MP.

The situation is the same for grants received from the federal government. For the eight-year period from 2001-2008, Penang state received just 3.8% of the total national allocation, ranking 11th in the national league table.

The situation is even more unfair when we consider that Penang, with her 1.6 million population (6% of Malaysia’s total population) contributes 30% of the nation’s total manufactured goods exported; more than 50% of electrical/electronics goods exported; two-thirds of medical tourism receipts; and nearly 9% of the country’s GDP. The list goes on.

This situation is unhealthy and is tantamount to stunting the growth of the goose that lays the golden egg for the country. What Penang needs is to be given a fair share of its contribution to the federal coffers so that she will be able to create more wealth for the nation. To do that, Penang needs investment in its infrastructure to turn her into an international city and the regional hub for Sumatera-northern Malaysia-southern Thailand.

While the allocation to deepen the seaport channel and upgrade the airport is welcomed, more needs to be done. For example, the state needs RM1.2 billion to upgrade the airport comprehensively, instead of the RM0.25 billion that it has been given for some ad hoc upgrading.

Another case that comes to mind is the RM50 million Heritage Conservation Fund that is to be shared by Melaka and Penang. While RM30 million was allocated to the Melaka government directly, not a single sen has been given to the Penang government to this day.

While we may not find good governance and fair play being stated in the investors’ applications for incentives, these attributes are of intrinsic value and are high on their demand list. And they are watching!

Apart from financial allocations, more say should also be given to the state in terms of choice of projects and implementation, execution and participation.

At the moment, most projects are conceptualised in Putrajaya, contractors appointed by Putrajaya and work carried out with minimum or no participation from the state government.

Until and unless these anomalies are recognised and resolved quickly, nation-building will be out of step and moving in different directions.

Datuk Lee Kah Choon is chairman of the executive committee of InvestPenang.

This article appeared in The Edge Financial Daily, February 21, 2011.