Penang new wave Part 1: Freeport + services = competitiveness

华商与经济转型系列70：槟城经济新浪潮（上） 自由港+服务业=竞争力

夏伟文 & 陈薛卉

Korean Wave or Hallyu has successfully swept over the world, boosting Korean economy and global image. Penang may think they can take some inspiration from Hallyu to do a Penang Wave to transform its social economic. Service sector and Penang Freeport have been much talk about as best ingredients to trigger this wave. As manufacturing sector in Penang has been well established, focus should now turn to several potential service sub-sectors like “wholesales, retail, accommodation and restaurant” of tourism-related industry, “financial service”, “transport and storage” and “real estate and business service”.

Historically, Penang was born as free port but is the free port status now going to bring benefit to Penang? During Francis Lights colonial era, Penang free port functioned to rival Dutch trading posts mostly located in Indonesia. After independent, free port status is believed to attract foreign investors and tourists. Penang free port status was revoked in 1969. Having many Free Trade Zones (FTZs) around Penang Island may make free port rather abundant, thus being made as one of the reason for revocation of its status.

Recently, more and more calls asking for restoration of free port status to Penang, particularly anchored by political parties. Perhaps, these calls are firstly prompted by Democratic Action Party’s (DAP) objection to the proposed sale of Penang Port to Syed Mokhtar Al-Bukhary, which drew immediate echo from Malaysian Chinese Association (MCA).

Currently, under the Northern Corridor of Economic Region (NCER), Penang Port has been identified as important entrepot besides tapping on feeder services from Thailand and Sumatera. Leveraging on UNESCO heritage status of Georgetown, Penang Port do expected to offer tourism enhancement services from cruise to facilitating import of inputs for tourism-related industry. A Penang Freeport can fulfill Economic Transformation Program (ETP) needs of good infrastructure to support economic growth. The first Entry Point Projects (EPP) for tourism is “positioning Malaysia as a duty-free shopping destination for tourist goods”. Freeport will be nicely compatible to that.

Therefore, combination of free port and service sector in Penang could create a grand Penang Economic Wave like the Korean. Thus, enthusiasm is high but there are several aspects needed to be addressed before Penang Freeport become reality.

Import Duties Revenue

Firstly, Freeport status will see the abolishment of import duties. Thus, how to recoup or compensated the loss of this revenue? It is believed that Freeport can stimulate growth on both manufacturing and service sectors. These could increase tax revenues as well as other positive externalities like job opportunity and good image to attract foreign direct investment. Let’s us do a rough estimation. Table 1 shows the Gross Domestic Product (GDP) of manufacturing sector and service sub-sectors.

Table 1: GDP at Constant 2000 Price (RM million)

	Year 2010	Average 6 years (2005 to 2010)
Manufacturing sector	22,884	22,751
Service sector
Utilities, Transport, Storage & Communication	4,029	3,469
Wholesale & Retail Trade, Accommodation and Restaurants	6,276	5,486
Finance, Insurance, Real Estate and Business Services	6,821	5,933
Other Services	2,168	1,900
Government Services	2,073	1,903

(Source: Malaysia Statistical Department)

Import duties for 2010 is RM385 million while its six years (2005 to 2010) average value is RM321 million. Current corporate tax is 25% while income tax is ranged from 2% to 26%. Assume an appropriation of overall tax rate of 20% and average profit margin to be subjected to tax of 20%. Thus, the loss of import duties could be compensated by increase in both manufacturing and service sector by 21.7% from 2010 or 19.4% from the average level. By the way, ASEAN Economic Community (AEC) by 2015 would request Malaysia (including Penang) to abolish duties on all intra-ASEAN trade. Therefore, Penang Freeport may be better to take advantage as first mover before AEC is fully implemented.

Free Trade and Competing Ports

Secondly, fully implementation of free trade agreements will make free port redundant. Indeed, this is one of the main reasons for hesitation to restore free port status to Penang Port.

World Trade Organization (WTO) required its members include Malaysia to practice free trade under its General Agreement on Trade in Services (GATS) and General Agreement on Tariffs and Trade (GATT). According to Ministry of International Trade and Industry (MITI) website, Malaysia itself or through ASEAN has established Free Trade Agreement (FTA) with countries like Japan, Pakistan, New Zealand, India, Australia, Chile, China and South Korea. Further FTAs are on negotiation process with Turkey, European Union and Organization of Islamic Conference (OIC).

Besides, Penang Freeport may still no match with its competitors, Port Klang in Selangor and Port Tanjung Pelepas in Johor. According to Penang Monthly (dated 12th September 2012), Penang Port may has long lost its glorious days. In 1950, the Penang Port handled 2.5 times as much cargo as Port Klang (Port Swettenham). In 2010, Penang Port was merely handling one-six of the cargo of Port Klang and less than one-third of the cargo of Port Tanjung Pelepas. Singapore cargo is 17 times of Penang Port. Worst, bulk of Penang’s current sea trade is based at the North Butterworth Container Terminal and Prai Bulk Cargo Terminal on the mainland.

On different point of view, Freeport if managed by experts could be catalyst to achieve trade liberalization faster while transforming Penang economy and improving Penang Port efficiency. A success example is Subic Bay in Philippines that was transformed from military base to Freeport. It is now one of Philippines’s main economic engines that house world 4^th largest shipbuilding facility and recorded 700 investment projects and plenty new jobs.

Being positioned to the Northwest, a Penang Freeport could attract shipment or transshipment to/from Malaysia’s trade partners like India, Pakistan, Middle East countries (like Saudi Arabia and UAE) and Myanmar. Geographically, Penang Port has advantage as sea route destination for these countries. Table 2 shows their trade value with Malaysia. With such high value of trade and perhaps some favorable swing of shipping rate over air and land cargo, Penang Freeport stands to get cargo worth billions of dollar.

Table 2: Malaysia’s Export-Import with Selected Northwest Trade Partners in 2011

Trade partners	Export	Import	Total
	(USD billion)	(USD billion)	(USD billion)
India	9.21	3.33	12.54
UAE	4.20	2.68	6.88
Saudi Arabia	1.30	2.77	4.06
Pakistan	2.56	0.25	2.81
Myanmar	0.56	0.23	0.79
Total	17.82	9.26	27.08

The Halal Attraction

Third, having halal certification is clear advantage for Penang Port over its competitors, given increasing global awareness and demand for halal methods in handling halal products. Penang Port is certified with “MS1900:2005 Quality Management System Requirement from Islamic Perspective on Provision of Container Handling Services and Warehouse” by SIRIM. This enables Penang Port to be leading gateway for halal product shipment. With such advantage, attracting shipment from/to Islamic countries could be easier. Add a free port status would be better.

Conclusion

In short, Penang Freeport does more good than harm for future economy of Penang as well as Malaysia. However, those four aspects discussed need to be addressed seriously. Not to be missed is its partners, namely the service sector in Penang, in creating an unprecedented Penang Economic Wave.

[Chinese version published at Nanyang Press, 28th January 2013. Available online at http://www.nanyang.com/node/527239. This English version may be slightly different from the Chinese/ newspaper version]