Breaking down barriers in the AEC

Thanks to liberalisation programmes, Malaysia is probably the freest economy in Southeast Asia aside from Singapore, helping it punch above its weight in foreign direct investment (FDI) that has shot up 60 per cent since Prime Minister Najib Razak came to power six years ago.

Contributing to the 112 billion ringgit (Bt922 billion) in FDI last year was Scottish oil and gas training school Aberdeen Drilling. It set up shop in Malaysia, where a fifth of GDP comes from this sector, just a stone’s throw from the iconic Twin Towers, which houses a key client and one of Asia’s biggest players, state energy firm Petronas.

But while it runs international certification courses in six Asean countries, serving trainees from all 10 member states, it’s finding it prohibitive to grow the business by opening new offices and bringing in experienced and skilled instructors due to protectionist rules across most of the region.

“Aspirationally, it’s what the region should be doing,” Aberdeen Drilling’s regional manager, Jason Grant, says of the much-vaunted Asean Economic Community (AEC), which comes into effect next month.

“But on the ground, we don’t see a lot of it happening,” he adds.

It has been easy to invest in Malaysia, where the cost of doing business is low relative to developed markets, and infrastructure and connectivity are almost on a par with hubs like Hong Kong and Singapore. But for the roughly 700,000 companies operating here, the same can’t be said about heading out into Asean. 

Herein lies the disconnect between the excitement of seeing 620 million people in economies with a combined GDP worth US$2.5 trillion (Bt90 trillion) being grouped together ostensibly as a single market, and the actual business activity it is supposed to generate. Even the champions of corporate Malaysia, such as regional leaders CIMB Bank and AirAsia, have publicly complained about restrictive rules in expanding their footprints.

The country oft-cited by Malaysian companies for curbing free enterprise is Indonesia – not so much because it is less liberal than some of Asean’s smaller economies, but because it is considered a natural expansion target by Malaysia due to language similarities, proximity and size.

With half of Asean’s population living in the vast archipelago, it could hold the key to unlocking the AEC’s potential.

“Asean is nothing without Indonesia,” CIMB chief Nazir Razak, who also heads the Asean Business Club, has noted.

A sector such as oil and gas, which Asean member states see as directly involving “national resources”, faces high hurdles.

One element of Malaysia’s Bumiputera rights affirmative action that survived Najib’s liberalisation scheme is that only companies with 30 per cent ownership and staffing from these ethnicities can tender for projects from Petronas. (Bumiputera is a term used to denote the Malay majority as well as indigenous tribes). Petronas oversees rights to all oil and gas fields.

Companies like Aberdeen Drilling can only gain “retail” business from Petronas – in this case, when employees of the energy giant are enrolled for classes.

Aberdeen’s situation is even tougher further afield. Majority local ownership is required to even start a company in Indonesia, so the school instead sends trainers and equipment for short courses there but sometimes runs into delays at Customs.

“We would have to go in with a partner and train up the partner to do the business, which limits the profits we can take out of it,” said Grant. “On top of all this, there is a withholding tax of 10 per cent of whatever you make when you try to take it out of Indonesia.” He said the downsides made it hard to justify the effort, despite the country being “an immense market” for oil and gas training.

The trade minister of Malaysia – Asean chair for this crucial year – Mustapa Mohamed, says these non-tariff barriers are one reason the AEC is a work in progress. A blueprint is being drawn up by Asean to push for further integration by 2020 “because the journey is not over”, he said.

Those in political leadership like him say the removal of tariffs and encouraging investment flows are major achievements for the AEC, which has seen its “fair share of successes and a fair share of problems”.

These tariff breaks are crucial for Malaysian small- and medium-sized enterprises, which make up about 99 per cent of all companies in the country. The SMEs are not quite as savvy or financially able as big corporations and multinationals to tap into foreign markets.

But there’s only so far tax cuts can go – that is, to zero. Joseph Wu has been selling processed food to Indonesia and Thailand for a several years and says the Asean tariff cuts help, but should not be seen in isolation. “For instance, Thailand imports goods from China at low taxation as well, so we in Asean still need to compete with them,” he said.

Clearly, other levers are needed to give partners a leg-up. Besides local ownership rules, the hiring of skilled labour is impeded by tough regulations and bureaucracy. In Malaysia, getting an expatriate licence for a firm can take up to two months, and the delay doubles to approve an individual work permit. And despite talk of free movement of skilled workers across Asean, each country will require another work permit, despite approval from a fellow member state.

Under the AEC blueprint, eight professions will see free movement of labour, with engineering leading the way after the establishment of the Asean Engineering Register, according to the chairman of the Asean Business Advisory Council, Munir Majid.

“But Malaysia will ask, ‘Can a Malaysian not do the same job?’ It screws up the achievement,” he said.

Until these things change, the likes of Wu are looking at opportunities elsewhere. This year, he visited the Maldives, where 100 per cent foreign ownership and zero restrictions or fees on repatriation of earnings apply, with a view to expand into tourism.

“I’m starting with a small resort first, but I’m also looking at a bigger place already because the Maldives is flexible enough to allow me to develop the hotel and then sell either a stake or all of it,” he said.