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Malaysia: Easing business practices

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Malaysia has been one of the big movers in the latest World Bank survey on the ease of doing business, moving up six rungs on the international ladder to be ranked 12th overall. However, making it easier to obtain construction permits and start a business, two areas signalled out for improvement, will help the country achieve its goal of breaking into the top 10.

The annual study aims to provide an objective measure of business regulations for local firms and give an indication of the progress in facilitating private sector development. In the 2013 edition, released on October 23, Malaysia further consolidated its reputation for economic reform, building on its performance in 2011 when it moved from 23rd to 18th place. The improvement in the rankings puts Malaysia behind only Singapore, Hong Kong and South Korea in Asia, and ahead of regional heavyweights Japan and China.

The survey, titled “Doing Business 2013”, saw Malaysia improve its competitiveness in a number of areas, including registering property and trading across borders. The country continues to be ranked first globally in terms of gaining access to credit, and it also won accolades for the judicial network protecting investors, where it came in fourth among the 185 countries surveyed.

Recognition of the strong performance will help to further promote development and investment, said Annette Dixon, the country director for Malaysia at the World Bank. “This will help the private sector drive growth, particularly if Malaysia can build on its success by continuing to tackle long-term challenges, such as improving the quality of education,” Dixon said in a statement accompanying the release of the report.

According to Yeah Kim Leng, the group chief economist at RAM Holdings, a financial research firm, the improved business environment will help maintain Malaysia’s high profile as a prime investment destination. “It enhances business sentiment and confidence,” he said on October 24. “If the improvement is sustained, what we will likely see is an increase in business dynamism and a higher level of business activity.”

Mustapa Mohamed, the minister of international trade and industry, said that the findings of the study confirmed Malaysia’s competitiveness as an economy, and reflected the successful implementation by the government to improve the business environment, making it conducive for sustained economic growth. The next step, according to the minister, is putting in place further reforms that should move Malaysia even higher up the rankings. He did acknowledge, however, that the task would be a difficult one, given the competitive nature of the global economy.

“Our objective is to achieve a top-10 position in the World Bank’s rankings. Getting there will strengthen our position as a destination of choice for local and foreign investors,” Mustapa said. “This is with new competitors constantly emerging and economic uncertainties globally. It is apparent that more needs to be done in the shortest time possible if we are to stay ahead.”

While the study very much stressed the positives, it also detailed a few areas of improvement that will have to be dealt with before Malaysia can break into the higher rankings. Despite the government making it easier to obtain construction permits, it still placed only 96th overall in this category. There is also room for improvement in the ease of starting a business, in which was Malaysia ranked 54th this year.

Two state agencies, the Special Taskforce to Facilitate Business (Pemudah) and the Performance Management Delivery Unit (Pemandu), have been tasked with addressing these issues, as well as developing strategies to promote best bureaucratic and administrative practices, with Pemudah in particular working closely with the private sector to cut red tape.

In an opinion piece carried by The Malay Mail on October 26, Ramon Navaratnam, the chairman of the Centre of Public Policy Studies, an independent think tank within the Asian Strategy and Leadership Institute, said the World Bank study did not cover issues such as public services or the non-business sectors of society. Improvements in the provision of services in areas such as health, education and social welfare also need to be addressed when considering the state of the economy.

“The best way forward is for the public sector to adopt further best practices, forced by global competition to perform more competitively all the time or face the prospects of losing its profits and business opportunities for growth,” he said.

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Malaysia: Easing business practices

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Malaysia: Investing in health

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Investment in human capital has been identified as a key driver in boosting the quality of Malaysia’s health care standards while seeing growing economic returns from the industry. However, underinvestment in health services continues to pose a risk.

Under its Economic Transformation Programme (ETP), unveiled in September 2010, the government aims to transform the country into a high-income economy bracket by 2020, with the health sector targeted as central to this plan. As one of the 12 national key economic areas (NKEAs), health care is targeted to become a significant economic enabler by generating revenue through health tourism, as well as manufacturing drugs and equipment. The sector also aims to create 180,000 new positions in health care and attract up to 1m overseas health tourists annually by the beginning of the next decade.

To achieve that goal, however, spending in the sector will need a significant boost. Currently, Malaysia dedicates the equivalent of 4.7% GDP on health services. This is lower than most middle-income nations’ spend, which averages 6.5%, according to the World Health Organisation.

One of the core areas for that increased investment is human capital. The Health Ministry has set a series of targets to increase the ratios of health sciences professionals to the general public. Once the ETP has completed its term by 2020, officials believe Malaysia will have one doctor for every 400 citizens, compared with the present rate of around 1:800, and one nurse for every 200 people, up from the current level of 1:384.

To achieve this, Malaysia is boosting its health education training schemes. In late July, Muhyiddin Yassin, the deputy prime minister, said the government was planning to increase the number of higher education institutions in the field of health science to 150,000 by 2020, up from the present 55,000.

According to Muhyiddin, who is also Malaysia’s education minister, “I believe Malaysia can play a central role in answering the need for more health professionals in the region. As such, health sciences students, who are considered highly skilled and employable, can expect a brighter future in this field.”

On July 14, in a speech delivered on her behalf at a graduation ceremony at a health training institute in Sabah, Rosnah Abdul Rashid Shirlin, the deputy health minister, said the government was moving to accelerate the pace of improvements in sectoral education. The ministry was committed to ensuring that graduates have the knowledge and skills required, as well as providing training institutions equipped with modern facilities and qualified teaching staff.

“If we see the development of global health at present, the world needs specialists to develop public health,” Rosnah said.

The minister of health, Liow Tiong Lai, recently acknowledged that the task of increasing the number of specialists was a difficult one. Health education is a rapidly evolving segment, meaning the health sector and educators must move quickly to keep pace with needs of the industry.

“Although the system has been quite successful, we must not rest on our laurels but work tirelessly to ensure that our medical staff will be able to meet the demands of the market, which can change quite rapidly,” Liow said at an international health care conference in Kuala Lumpur on July 17. “However, quantity alone is no longer sufficient because quality also matters in the industry to achieve the excellence in not only curing but also caring.”

There are many challenges that Malaysia’s heath sector faces, including rising costs and more demanding and knowledgeable consumers, Liow said. One of the answers to these challenges will be the industry’s ability to train, attract and retain qualified personnel.

The issue of retention is a vital one, according to Dr Ismail Merican, the former director-general of health, as is the ongoing process of improving the skills base of those already in the system. In particular, Merican told local media, the government needs to step up investments in the public health care sector, strengthen its teaching role and ensure professionals are better compensated to keep them within the local system.

If Malaysia is to achieve its goals, it will need a strong health sector to underpin growth, both to ensure the wellness of society but also as a foundation for sectoral expansion. Increased spending, as well as further encouraging the already active private health services sector to ramp up investments along the training and development chain, will be required.

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Malaysia: Forecasting growth in insurance

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The insurance sector is forecast to see substantial growth in the next few years as continued diversification, consolidation and international activity spur rising premiums and uptake of new services. Moderate GDP growth for the rest of the year, however, could pose a challenge to growth as the effects of a weakening global economy trickle down to private consumers.

Gross direct premiums are expected to reach RM14.3bn ($4.48bn) in 2012 and rise to RM17.5bn ($5.49bn) in 2015, according to the Malaysia Rating Corporation (MARC), a full-service ratings agency, which released its forecasts in a research note in June. This represents a compound annual growth rate (CAGR) of 7%, which is likely to outstrip broader economic growth.

MARC expects new business premiums in the life insurance segment to reach RM10.2bn ($3.19bn) this year, rising to RM13bn ($4.08bn) by 2015. The non-life (general) segment is also forecast to grow from RM4.1bn ($1.29bn) in 2012 to RM4.5bn ($1.41bn) in five years’ time.

The agency said that the life insurance market would benefit from rising incomes, as well as increased deployment of “new and innovative products”. General insurance would see growth stimulated by the implementation of mega-projects, leading to greater demand in a number of segments, including workers’ compensation, employer liability, contractor risk and engineering. The medical and personal accident segments will also continue to perform well, MARC said.

Other observers are even more upbeat about the sector’s outlook. In May, the local press reported that the Life Insurance Association of Malaysia (LIAM) said the life sector could grow by 10% in 2012. Growth would be driven by “the large and growing middle-income population in the region with higher levels of disposable income and who are also financially literate,” Donald Joshua Jaganathan, the assistant governor of Bank Negara Malaysia, the central bank, has said.

The market’s recent growth and promising outlook have led several major international players enter the market. In 2009, the government lifted the ceiling on foreign ownership of insurers to 70% from 49%, allowing greater participation from international firms, which have brought an increased level of dynamism to the industry.

Competition is expected to rise further following the pending auction of the insurance joint venture between the UK’s Aviva and Malaysia’s CIMB Bank. Aviva is selling its 49% share in the local firm as it withdraws from non-core markets, partly to raise cash to offset its exposure to the eurozone crisis. CIMB may also sell a substantial portion of its 51% stake in the venture.

Competition, greater international participation and a new risk-based capital (RBC) framework are also driving consolidation in the industry, as players look to pool resources and capitalise on economies of scale and strategic fits. The RBC regulations require firms to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

According to Matt Harris, the CEO of Chartis Malaysia, the local branch of the international insurer, “RBC implementation helped accelerate the pace of consolidation, with seven mergers and acquisitions taking place in 2011. Many of the local conglomerates took RBC as an opportunity to consolidate. It is widely known that other existing players in the market would entertain potential suitors if approached, so more consolidation is expected.”

Harris told OBG that he expects the sharia-compliant Islamic insurance segment – known as takaful – to continue to grow strongly. In June, the local press reported that Etiqua Insurance & Takaful, the insurance branch of Maybank, the country’s largest bank, has forecast that the family takaful market, which accounted for 80% of the Malaysian takaful segment in 2010, could grow to RM7.2bn ($2.26bn) in two to three years from the current RM4.2bn ($1.32bn).

CAR regulations for the takaful segment similar to those rolled out for conventional insurance are being introduced and are expected to be in effect by the beginning of 2013. While the Malaysian Takaful Association is confident that existing industry players will be able to meet the new requirements, Tunku Dato’ Ya’acob Bin Tunku Tan Sri Abdullah, the CEO of MAA Group (MAAG), which has interests in the takaful sector, told OBG that he expected the new legislation to catalyse mergers and acquisitions in the segment.

According to Abdullah, conventional insurance firms owned by banks have survived better since the CAR regulations were tightened, as the high profits of the banking divisions have funded the increased capital requirements of the insurance business. The insurance divisions, which tend to make a smaller contribution to profits, are not able to meet the significant increase in CAR themselves.

With the insurance market in the process of dynamic change, due to rising demand and regulatory changes that aim both to increase solidity and allow greater international participation, consolidation, diversification and the rise of the takaful segment look set to transform the sector over the coming years.

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Malaysia: Going for green

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Malaysia has announced plans to boost its automotive sector through the production of electric cars, hoping to both develop a lucrative export trade while actively combating carbon emissions at home. The industry will face competition, however, from other countries in the region whose green automotive initiatives are more developed.

At present, there are 11 completely electric vehicles on Malaysia’s roads, according to government figures. Hybrid cars – which use both conventional fuel and an alternative power source for their engines – are more popular, with around 8000 hybrid vehicles currently on the roads.

This is set to change, however, with the government planning to announce a major policy shift that will promote the production and domestic use of electric vehicles. The highly anticipated revision of the National Automotive Policy (NAP), the government’s long-term plan for the industry, will introduce several new reforms and regulations.

Since late 2011, the Malaysian government has been promoting the establishment of a local electric vehicle manufacturing capacity. Both the government and industry lobby groups believe such a move will help broaden the base of the sector.

According to projections from the Malaysia Automotive Institute (MAI), reforms to the industry, coupled with higher local and international demand, will see the sector’s contribution to the economy triple by 2020. In a statement issued in early May, the MAI said it expected the industry’s share of GDP to rise from the present rate of 2.4% to 6.8%, largely due to an increased focus on the production of electric and other energy-efficient vehicles. This growth would be underpinned by a higher level of foreign direct investment and government efforts to encourage original equipment manufacturers (OEMs) to set up operations in Malaysia.

“Meeting vehicle standards for energy-efficient vehicles in Malaysia means bringing new technologies into the country,” Madani Sahari, the CEO of the MAI, told OBG. “As a result, OEMs are being targeted. Before this happens, however, the sector must be liberalised by allowing both local and foreign OEMs to qualify for manufacturing licences, which is expected to happen with the pending second revision of the NAP.”

While there is the potential for Malaysia to break into the regional and international market with a locally produced electric car, it will face stiff competition from both China and Thailand, which have established automotive sectors that include electric car production plants.

With this in mind, Malaysian officials are aware of the need to develop a domestic market for electric cars and their hybrid counterparts. In early May, Mustapa Mohamed, the minister of international trade and industry, announced that the government would offer incentives to Malaysians to buy electric or hybrid vehicles. While there is already a 100% import duty exemption for electric or hybrid cars below 2200 cu centimetres, the minister said additional measures would be enacted to promote the use of electric vehicles.

“We will continue to introduce incentives to accelerate the move towards zero-emission mobility,” Mustapa said. “Our goal is to increase the number of hybrid and electric cars on our roads by 10% by 2020. By then, we hope to be living in a much cleaner and greener environment.”

The government is also encouraging private firms to put in place the necessary infrastructure for these vehicles to operate. On May 29, Peter Chin, the minister of energy, green technology and water, said his department was developing regulations and standards for firms that plan to set up charging stations for electric vehicles. Such measures are needed to create an environment that would generate an interest in the use of alternatively powered cars.

“Until we have charging stations, we are not ready. Once the infrastructure is up, then people will be tempted to buy electric vehicles,” Chin said. “If we want to make it commercial, certain infrastructure must be in place, such as credit card facilities for consumers to pay for charging services.”

The minister also said that an electric vehicle infrastructure plan to enable pilot demonstration projects would be a part of the new NAP.

Local and international manufacturers are likely to wait until the latest version of the NAP is released before making any decisions on whether or not to tap into the electric vehicle sector. However, Malaysia-based vehicle producer Proton and Japan-based Nissan and Mitsubishi are all running trials of battery-powered cars in the country to raise awareness of the plug-in option and test their viability.

If Malaysia is to achieve its ambitious target of cutting emissions by 40%, it will need to move quickly to generate industry interest and acceptance of the new product among the public.

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Malaysia: Going for green

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