The newly signed Johor-Singapore Special Economic Zone (JS-SEZ) agreement is set to reshape cross-border operations between Malaysia and Singapore, promising to bring significant advantages to businesses aiming to expand their reach. Signed on January 6, 2024, after months of negotiations, the agreement highlights strong economic cooperation between the two neighboring countries.
Kirsty McMillan, Partner for Tax at Forvis Mazars, states, "The intention behind this agreement is really to attract more foreign direct investment..." This sentiment reflects the broader goals of the JS-SEZ, which spans key sectors such as manufacturing, logistics, tourism, clean energy, and the burgeoning digital economy. By focusing on these areas, both nations seek to bolster their standing within global supply chains, particularly for semiconductors and clean energy, which Malaysia aims to promote.
One primary advantage of the JS-SEZ is the economic benefits it provides to businesses. Companies stand to gain significantly through various tax incentives, noted McMillan, who elaborated on the agreement's provisions: "There's a 5% incentivized corporate tax rate for qualifying activities." This exceptional rate presents considerable savings for companies operating within the zone. Alongside corporate tax breaks, McMillan emphasized the opportunity to attract skilled labor by offering reduced personal tax rates.
Alvin Lee, Country CEO of Maybank Singapore, reinforced the advantages offered by this agreement, asserting, "Having access to Johor with more abundant land, cheaper labor, and even cheaper utilities is going to really help Singapore businesses." The costs associated with labor and utilities are frequently cited as deterrents to establishing operations across borders. Hence, significant savings from the JS-SEZ can make investment incredibly attractive for Singaporean firms.
Beyond tax incentives, the JS-SEZ aims to streamline processes for businesses. Forinstance, it will ease foreign worker policies, allowing seamless labor mobility across borders. McMillan mentioned how "the introduction of a single transshipment permit and digital clearance process will help goods move faster and at lower costs." The easements afforded by this agreement may also benefit logistics companies and other enterprises seeking efficient cross-border trade.
Engagement with governmental support facilities will play a pivotal role for businesses utilizing the JS-SEZ, according to Lee. He encouraged firms to connect with the JS-SEZ Knowledge Center and other facilitation centers, stating, "A lot of thought has gone to designing this agreement, and firms should take full advantage of the assistance available." This support can help businesses align their operations with the incentives offered by the SEZ.
The geographic and economic integration offered by the JS-SEZ has raised interest and expectations among businesses on both sides of the Causeway. The Singapore Manufacturing Federation has already reported about 20 member companies setting up operations in Johor prior to the agreement being signed. More developments are anticipated, as the Singapore Business Federation is planning for over 100 companies to engage with Johor, over 80% of which are small and medium-sized enterprises.
On the geopolitical front, the JS-SEZ is set against the backdrop of regional competition for investment, especially with Indonesia also vying for similar foreign investments. Following the announcement of the SEZ, Airlangga Hartarto, Indonesia’s Coordinated Minister for Economic Affairs, acknowledged the concern it poses by saying, "We cannot bar other countries from copying us. What we can do is compete against them." His comments signal Indonesia's intent to maintain its attractiveness as an investment destination amid increasing collaboration between Malaysia and Singapore.
While the JS-SEZ has generated optimism and strategic potential, it also emerges from lessons learned from previous regional economic initiatives. The framework echoes the improvements seen with the Batam Industrial Development Zone, which leveraged Singaporean investments for growth. The region witnessed the establishment of successful partnerships, yielding significant foreign investment. Since the formation of Iskandar Malaysia, which manages these developments, $34 billion cumulative investment has been recorded since 2006, illustrating the long-term impact of such economic partnerships.
Yet, not all past initiatives have been smooth sailing. The existence of projects like the controversial Forest City, dubbed by the BBC as a 'Chinese-built ghost city', reminds stakeholders of the challenges associated with ambitious economic plans. A closer examination of how the JS-SEZ navigates these hurdles will be telling.
Nevertheless, preliminary reports are promising, with $13.5 billion worth of new foreign investment commitments recorded from January 2023 to June 2024, mostly from Singapore and China, demonstrating interest and confidence from businesses. While the agreement is set to be officially ratified later this year, positive reactions from major stakeholders suggest high expectations as this economic synergy evolves.
The interplay between Malaysia and Singapore, compounded by the drivers of investment and trade, sets the stage for what could be one of the most transformative initiatives for the region. With all the arrangements now set forth within the JS-SEZ framework, businesses are poised to respond decisively to these developments. The benefits of collaboration and strategic investment might well characterize the economic future of this region.
With excitement continuing to mount, the official launch of the JS-SEZ will be closely monitored as its impacts begin to take concrete shape. If handled adeptly, the SEZ could serve as the benchmark for future regional agreements, heralding a new era of economic cooperation across Southeast Asia.