This article first appeared in The Edge Malaysia Weekly on September 12, 2022 - September 18, 2022
WITH the right policies in place, Malaysia has the potential to be the preferred destination in the Asean region for greenfield foreign direct investment (FDI) in the energy sector, according to US-based think tank Foresight Economics.
This is particularly so given the energy security issue faced by many countries due to the war in Ukraine, the pandemic’s lingering impact, inflation, and the consequent higher interest rate environment that will affect investment decisions across the world. As such, there is a need for Malaysia to review its strategies to attract energy FDI into the country.
“I won’t say Malaysia is losing out. I think a lot of capital flow is not necessarily aligned to the historical advantages of the country. That being said though, when you look at greenfield FDI specifically, which is focused on the creation of new assets versus investment in brownfield that involves merger and acquisition of existing assets, Malaysia has not performed very well relative to some of its Asian peers,” Foresight Economics’ founder Kavilash Chawla tells The Edge.
Malaysia ranked sixth among the Asean+3 countries (Asean members plus China, Japan and South Korea) in the Foresight Economics Energy Sector FDI Attractiveness Index (FE Energy Index), which ranks markets’ attractiveness to greenfield FDI in the energy sector, which includes renewables and green energy.
Hong Kong and Singapore were the overall leaders in Asean+3, followed by Vietnam, Brunei and Cambodia.
Using publicly available and subscription-based databases, the FE Energy Index ranked 135 countries, evaluating them across four composite indicators of governance and diversification, openness, economic growth and natural resources endowment.
Globally, Singapore was ranked third behind Luxembourg and Hong Kong.
Interestingly, major oil producers dominate the bottom 10 on the FE Energy Index, with China and the US being the last two on the list.
According to Foresight Economics, the poor performance of top energy producers is related to four factors. Firstly, investment flows in energy were dominated by internal investors, not FDI. Second, the FE Energy Index captures investment flows into renewables and green energy but greenfield FDI flows into these areas among the top ten energy-producing countries was negligible. Third, the 2018 trade war between US and China had a significant impact on their performance in the index. And fourth, the “Openness” composite indicator is especially relevant in driving country-level attractiveness for greenfield FDI in the energy sector.
According to Kavilash, the index aims to guide FDI decision makers and highlight markets that have higher degrees of openness and political stability.
He notes that while Malaysia has largely benefitted from stronger FDI inflows since the transition to the endemic phase, it still has not performed as well compared to her Asean peers in the energy sector.
He points out that Malaysia is an attractive FDI destination for chipmakers, with large greenfield projects focused on the semiconductor sector.
One of the main factors that attract investors is the openness and the application of a fair legal system for domestic and local investors, he adds.
“Very relevant policies tend to allow the free flow of productive assets. Countries have to have reputable, easy, transparent regulations and by extension, those regulations have to be applied equally.
“In particular, are they applied equally to both domestic investors as well as to foreign investors?
“If there is asymmetry in either the rules or in the application of those rules between domestic and foreign investors, that again creates an unattractive environment because you are privileging one group, and it is usually the domestic group. You are therefore picking one group over another,” he says.
“Malaysia, relative to its peers, is still performing quite well. But again, as we look further deeply at the data, you know, the elements that come out are areas where Malaysia could help improve its performance [and these] tend to be focused around governance and diversification. It also includes institutional structures, policies, regulations,” says Kavilash.
Under Budget 2020, the share of renewable energy in the electricity generation capacity mix will increase to 31% (including large hydro projects of more than 100mw) by 2025. This is also in line the Malaysia’s commitment to reduce 45% of greenhouse gas (GHG) emissions intensity by 2030.
In 2021, the country attracted FDI worth RM700 million in the RE sector — in biomass, solar and biogas projects — while domestic investment accounted for RM2.3 billion, according to statistics provided by the Malaysia Investment Development Authority (Mida).
To recap, Malaysia attracted a total of RM42.8 billion (US$10.2 billion) approved investments in the manufacturing, services and primary sectors, involving 910 projects, in January to March 2022. FDI remained the major contributor at 65% or RM27.8 billion (US$6.6 billion). However, this is lower than the RM54.9 billion of FDI in the same period last year.
A local industry observer notes that more targeted fiscal incentives, such as tax relief and tax breaks for the importation of clean energy technologies, subsidies and favourable loan structure for players, will bode well in attracting stronger energy FDI. He adds that with intense competition for FDI in the Asean region, with more aggressive incentives offered to lure investors, Malaysia has to step up.
“If you look at the Indonesian government, it usually offers a flat rate for electricity for a few years to retain investors. Utility costs usually take up a huge portion of investors’ operational cost. Thus, such favourable incentives would attract them,” he adds.
Kavilash shares the same views. A keen understanding on how FDI investors make decisions would help policymakers come up with suitable policies, he says.
“Anything that’s going to help mitigate or subsidise risk or costs is beneficial. From an industry perspective, if energy investors are involved in a high energy utilisation industry — where the cost of energy is a significant portion of their operating costs — the impact of tax incentives, and the predictability of energy prices and of energy supply, are extremely relevant. So being able to model those out and understanding them will have a much larger impact on high flows of FDI,” he adds.
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