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Monday, November 12, 2007

Potential snag in IDR?

When it was first reported that Middle East parties were looking to pour money into the Iskandar Development Region (IDR), it was seen as a major coup for the government's south corridor project.

However, it may be too early for the regional authorities overseeing the IDR to consider it a done deal. According to sources, the recently announced RM4.1 billion investment by certain Middle East parties is conditional on certain developments taking place within a year. Part of that includes the implementation of various infrastructure projects as well as a certain amount of interest from other investors in this part of the IDR.

The exact details are not known at this time, but if the stipulated conditions are not met, there is a possibility the Middle East investors may not come up with the amount promised. And that, in turn, could be a roadblock to the IDR's progress.

The Iskandar Region Development Authority (IRDA) — the Federal statutory body responsible for realising the vision and objective of the IDR — did not reply to emailed questions from The Edge. It was reported in August that three Middle East consortiums — Mubadala Development Company, Millennium International Company and Kuwait Finance House — had signed agreements to invest some RM4.1 billion into the IDR.

The report stated that the funds would be spent on land and infrastructure for three investment clusters in the IDR, which will include a financial centre, lifestyle and entertainment zone and cultural zone. All will be located in a sector earmarked as Node 1 that is wedged in between the Johor State New Administrative Centre and the Second Crossing to Singapore covering of 96 million sq ft.

KFH has already stated that it is looking for partners for its project in the IDR. However, the source says, the big money from the Middle East would only start to flow in once the infrastructure within the IDR is more mature, as per the conditions in its agreement.

"Among the infrastructure works they are waiting for are the coastal highway and plans to turn Senai Airport into a low-cost hub," says the source. But despite the fanfare surrounding the IDR, sources in Johor say nothing substantial in terms of infrastructure has appeared yet.

To be fair, given the magnitude of the project, it would be unrealistic to assume visible results in such a short time. The biggest fear is that what happened at the Port Klang Free Trade Zone could happen within the IDR.

To recap, eight years ago, when the concept of the Port Klang FTZ was first mooted, Jafza International was given the concession to manage and operate the project. Jafza was credited with turning Dubai's Jebel Ali Free Zone into a commercial success. But in July this year, Jafza walked out of the project, frustrated by red tape and various political obstacles it encountered, according to foreign reports. Among the controversies was the sale of land within Port Klang. According to reports, the land was purchased by the port authority from a private company, Kuala Dimensi, at RM25 per sq ft. This was at a steep premium to Kuala Dimensi's original purchase price of only RM3 per sq ft.

Costs for the project had also ballooned from an estimated RM1.08 billion to RM4.6 billion. Jafza, fearing that its reputation would be tarnished, exited the project leaving the government with debts totalling more than RM4.6 billion.
There had been fears that the fallout from the Port Klang FTZ could affect other growth areas in Malaysia, particularly the IDR. Recently, it was reported that Walt Disney Co had been offered 500 acres in the middle of Nusajaya to build a theme park.

"The bright spot amid the troubles is that given the fiasco surrounding the Port Klang FTZ, the government would make sure the same does not happen in the IDR," says a Johor-based property consultant.

According to a source, some parties with interests in the IDR are not happy with the high level of incentives being offered to the Middle East investors.

"Although the tax incentives are nothing new, one sore spot is that the land where the investment is located has been converted from leasehold to freehold. It has inspired a small backlash from certain parties, who have not been offered the same treatment," says the source.

However, one party close to the matter explains that "this matter of converting leasehold to freehold land is done on a case-by-case basis. It depends on how much you are planning to invest in the IDR and what exactly your investment is. It is fair in that sense because the bigger your investment, the more willing the government is to give you incentives".

Regardless, the entry of investments from the Middle East would be a substantial shot in the arm for the IDR. So it does make sense that the government would do what is necessary to keep the investors happy.

By The EDGE (By Nadia S Hassan)

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