Budget 2012: Malaysian ICT industry's careful welcome

AvantiKumar | Oct. 10, 2011
Malaysian PM continues transformation theme in Budget 2012 proposals, which will cost US$74 billion.

Malaysia Prime Minister Datuk Seri Najib Tun Razak

PHOTO - Malaysian Prime Minister Datuk Seri Najib Tun Razak.

Malaysia's ICT industry has extended a cautious welcome to the latest Budget 2012 proposals, worth RM232.8 billion (US$74 billion), tabled on 7 October by Prime Minister Datuk Seri Najib Tun Razak.

Themed 'National Transformation: Welfare For The People, Well Being For The Nation,' Najib, who is also the Finance Minister, said RM181.6 billion (US$57.54 billion) of the total cost of Budget 2012 would be used for operating expenditure and RM51.2 billion (US$16.22 billion) for development expenditure. 

Of the development expenditure, RM29.8 billion (US$9.44 billion) is provided for the economic sector to support infrastructure needs, industry, agriculture and rural development, he said.

Prime Minister Najib also announced a RM100 million (US$31.69 million) allocation for creativity and innovation of which RM30 million (US$9.5 million) will be used to establish the Market Validation Fund to be managed by the Malaysian Technology Development Corporation together with the Malaysia Innovation Agency

To encourage development of the five 'regional corridors,' Najib said: "In 2012, the government will allocate RM978 million (US$310 million) to accelerate the development in five regional corridors. Among the projects to be implemented are the construction of Johor Bahru-Nusa Jaya coastal highway in Iskandar, Johor; heritage tourism development in Taiping in the Northern Corridor; agropolitan scheme in Besut in the East Coast Economic Region; palm oil industrial cluster project in Lahad Datu in Sabah Development Corridor; and Samalaju water supply in the Sarawak Corridor of Renewable Energy."

"To accelerate the banking, finance and capital market, continuous effort is required to promote the development of a more integrated and comprehensive financial services. This can be achieved with the establishment of the Treasury Management Centre, which will contribute to the development of Malaysia as a competitive financial centre in the region," he said, adding that Malaysia would attract multinational corporations (MNCs) with income tax exemption of 70 percent for five years, withholding tax exemption on interest payments on borrowings and stamp duty exemption on loans and service agreements.

Najib said one of the expected benefits of Budget 2012 would be to reduce the budget deficit to 4.7 percent of gross domestic product (GDP) from 5.4 percent, while helping GDP to grow from five percent to six percent next year after growing as much as 5.5 percent in 2011.

 Talent and Innovation

Government ICT agency Multimedia Development Corporation (MDeC) chief executive officer Dato' Badlisham Ghazali lauded the government’s holistic approach toward stimulating creativity and innovation.  "We welcome the government’s proclamation of 2012 being the year of the National Innovation Movement, with an allocation of RM100 million (US$31.69 million) to encourage innovation in all sectors of society. We believe that this will trigger greater innovations by the rakyat that will continue driving the nation’s shift into a High Income Economy, by complementing current efforts to establish an ecosystem of economy, governance and social interaction driven by ICT."

Early industry comments included a welcome to the proposals, which enhanced the well-being of all Malaysians and set the pace for continued transformation of Malaysia into a developed and high-income economy by the year 2020, from Security solutions provider Symantec Malaysia senior country manager, Alex Ong. "Amidst the challenges of the external market environment, we believe the Budget 2012 will not only enable Malaysia to be resilient but to drive growth in the challenging outlook over the next 12 months."

To the PM's expectation that a Gross National Income of more than RM30 billion (US$9.5 billion) would be generated by 2020 from commercialisation of some 300 intellectual properties, Ong said:  "Human capital development and innovation are the new currencies of the 21st century and there is a significant opportunity for Malaysia to become a high-income economy driven by knowledge, creativity and innovation. 

"With increasing investment potential and confidence shifting to Asia, human capital development and innovation are the necessary factors that will give Malaysia a competitive edge," he said. "Symantec looks forward to a long term initiative in this area beyond the year 2012 to cultivate and retain Malaysia's best talents in the country and in building an innovative culture which will spur technology innovation in the local market."

"A knowledge-based economy is dependent on cultivating a highly-skilled workforce to be innovative, creative, and resourceful," said Ong. "Institutions of Higher Learning (IHL) could work together and partner with the private sectors to find out what skills are lacking and required in the industry, therefore developing plans to bridge the skill gaps. This is an important initiative that would contribute towards nurturing a pool of skilled and knowledge workers to meet the local needs especially in the ICT industry."

Technology solutions firm Intel Malaysia country sales manager, sales and marketing, Prakash Mallya said the budget included a commitment to transform Malaysia's education and innovation landscape.

"Intel advocates education transformation because we believe it is crucial to nurture critical thinking Malaysians," said Mallya . "Hence, Intel lauds the Malaysian government's decision to allocate funds to the education sector so that it can continue to develop talented, creative and innovative people. Additionally, allocation made available to support the 1Malaysia Award (C1PTA) for innovative student inventions is definitely a step in the right direction to promote a culture of innovation and creative thinking among the younger generation."

"To cultivate the next generation of innovators who can support Malaysia's national agenda of developing a knowledge-driven and high-income nation, Intel would like to see a portion of the allocation channelled towards integrating technology in the entire education process," added Mallya.  "Through our various education initiatives in Malaysia, Intel has remained committed in supporting the government's efforts to integrate technology into the teaching and learning of subjects that promote innovation such as math, science and engineering."

"It is imperative that the nation creates a local talent pipeline that has the knowledge and skills that are industry- and market-relevant," said technology firm Dell's Global Business Centre, Cyberjaya, managing director & executive director, advanced systems group, APJ CSMB, Pang Yee Beng. "The allocation of RM50.2 billion [US$15.9 billion] for the education sector is a positive step that will hopefully be channelled towards developing the necessary foundation to produce a workforce that is ready to compete, with a mindset geared towards creativity and innovation."

Commenting on the gap between the ICT industry's talent requirements, Pang said: "We believe the government's move to encourage private sector participation in the form of tax incentives for company-funded internship and scholarship programmes is a favourable one towards achieving the objective for a skilled talent pool."

Hitachi Data Systems Malaysia managing director Johnson Khoo said that the prime minister had made moves in the right direction and that further initiatives would be welcome in the future,  "Innovation is the critical factor that will enable us to compete and stay ahead of our competitors in the region. Countries such as Singapore are investing in R&D and innovation (US$16.1 billion for 2011-2015), while South Korea's ratio of research and development (R&D) spending to gross domestic product (GDP) was the third-highest in the world in 2010."

"Additionally, the focus on instilling and developing innovation in schools and public institutions of higher learning is crucial to create a creative and knowledgeable workforce," said Khoo, who welcomed the fund allocation to the education sector.  "We believe that innovation needs to be inculcated right from the onset in our education system. This will provide a solid foundation to build quality human capital that is capable of achieving the nation’s aspirations of a high value and high income economy by 2020."

"[In addition] the various initiatives including the government’s proposal to award Pioneer Status to industrial design services and giving them income tax exemption of 70 per cent for five years will definitely promote creativity and innovation through modern technology for local designers," said MDeC's Badlisham.

The importance of SMEs

Najib said: "Small and medium enterprises (SMEs) contribute about 31 percent to GDP, 56 percent to the workforce and account for 19 percent of total export. To further strengthen SMEs' contribution to economic growth, a shariah-compliant SME Financing Fund totalling RM2 billion (US$638 million) to be managed by selected Islamic banks will be established in 2012."

To enable SMEs to commercialise research products, the government will establish a shariah-compliant Commercialisation Innovation Fund totalling RM500 million (US$158 million), he said. "Effective 2012, this fund will be available at selected Islamic banks with the government financing two per cent of the profit rate. Bank Simpanan Nasional (BSN) will provide RM100 million (US$31.69 million) for soft loans with four percent interest including stamp duty exemption to encourage professionals such as lawyers, doctors and accountants to set up firms in small towns as part of the government's Rural Transformation Programme."

"An important factor in promoting innovation is to bring the product or research idea to market, which the government has aptly addressed through the Commercialisation Innovation Fund which enables SMEs to commercialise research products," said Symantec's Ong. "The collaboration between the public-private sectors will be important in assisting local research and innovation in going to market. The government could leverage the large force of private sector experiences and best practices in product commercialisation. "

"In addition, Symantec welcomes the RM100 million (US$31.69 million) SME Revitalisation Fund offering soft loans up to RM1 million (US$316, 857) for entrepreneurs," he said.

"We have seen SMEs investing in technology in the last two to three years to drive greater efficiency and productivity, and ultimately enhance their competitiveness and potential for growth," said Dell's Pang. "The SME Revitalisation Fund would provide the platform for SMEs to be able to continue investing in technologies needed to compete in a challenging local and global economic environment."

"Intel believes that this funding (SME Revitalisation Fund) will help SMEs become more competitive in the local sector as they will be able to invest in relevant technologies that can help them innovate, transform their business processes and accelerate their productivity," said Intel's Mallya. "Given that SMEs represent 99 percent of business establishments in Malaysia, it is incumbent upon SMEs to contribute more towards the country's GDP since they are clearly the catalyst for domestic economic growth. As of 2010, SMEs only contribute 31 percent of Malaysia's GDP."

Entrepreneurship funding provider Cradle Fund chief executive officer Nazrin Hassan said, "Cradle is pleased that the Prime Minister has announced the Asian Business Angels Forum (ABAF), as one of the two key events in the National Innovation Movement Year 2012. Cradle together with the Virtuous Investment Circle (ViC), had made a bid for the forum for Malaysia and we won the rights to host it, going up against formidable competitors like India and Hong Kong."

"On the funding and financing side, the RM500million (US$160 million) Syariah-compliant Commercialisation of Innovation Fund is a welcome development, as it is a thrust that will get the banking industry to start providing better access to financing for technology companies," said Nazrin. "Many of our local technology companies are restrained from growing at a more accelerated pace due to lack of access to financing (despite being able to secure contracts and purchase orders) and given the financing gap, most have resorted to “grant-hunting” to fill up that void, which makes them even more dependent, in the long-term, on government grants for growth. This is not just a problem for start-ups, but happens to technology companies of all sizes and ages."

He recommended that the government also takes a longer view to funding in future budgets. "We believe that in line with the Government’s wishes to be less reliant on government funding in the medium-term, that the Budget 2012 had missed a key opportunity to insert a tax incentive for angel investors to increase private sector funding. We have to start the efforts today – so that within five years, the source of funding (regardless of the market-oriented mechanism and agencies used) will actually come from the private sector and not be reliant fully on government funding and on government agencies for commercial value-add." 

Looking Ahead

To promote green technology and ensure sustainable development of the nation, full exemption of import and excise duty on hybrid and electric cars to franchise holders until 31 December 2012, said the prime minister. However, energy management specialist Schneider Electric Malaysia's country president Peter Cave said Malaysia should widen the use  of better energy management practices as more green incentives would help to curb the country's energy dilemma and stir economic growth.

"Twenty percent of energy is wasted in buildings due to inefficiency of the traditional infrastructure," said Cave. "Heating, ventilation, air conditioning and lighting consume over 70 percent of energy and energy costs can comprise up to 30 percent of an operating budget. If one looks at the development period of a building, up to 25 percent of a building's life cycle costs are from financing and construction. However, in the next 25 to 30 years of a building life, up to 75 percent of the overall costs are operational. Hence, active energy management through measurement, monitoring, and control of energy usage is critical."

"With the Malaysian power demand expected to rise five percent annually from 2011 to 2015, operating cost pressures are bound to weigh heavily on business bottom line profitability," he said. "Implementing energy efficient solutions can produce savings of up to 30 percent that can help companies hedge against future electricity tariff hikes and significantly reduce carbon emissions and costs."

Malaysian ICT services provider HeiTech Padu Berhad's group chief executive officer Harris bin Ismail said 2012 budget was aimed to broadly improve the well being of every Malaysian. "ICT growth will be driven by the private sector,  PEMANDU and the ETP will play a major role in facilitating this growth. We also expect to see consolidation of spending but with a high expectancy of service levels. There will also be a higher demand for data management related products and services, for example data centre-related services, business intelligent, virtualisation, security and the like."

"I believe it was not an easy task for the Prime Minister to strike a balance between managing the economic 'roller coaster' and the need to spend for continuous growth towards achieving high income nation status by 2020," said internet service provider JARING's chief executive officer, Nik Abdul Aziz Nik Yaacob.  "Earlier, the government has chartered four economic pillars of national transformation plans such as the 10MP [10th Malaysia Plan], NKEA [National Key Economic Area], GTP [Government Transformation Programme], and ETP [Economic Transformation Programme]-  all intended to catapult the Malaysian economy and maintaining Malaysia’s competitiveness level. The 2012 Budget will of course help to navigate Malaysia on sustaining domestic growth and to accelerate the nation’s transformation into an advanced economy."

Though unified communications provider Interactive Intelligence's regional general manager for Asia Simon Lee commented that the budget 2012 proposals were welcome and augured well for the services sector, he added, "We were however, disappointed that broadband and ICT related tools were not given further tax exemption especially in the era of digital communications. We were expecting the government to push for lower broadband rates to encourage the use of the internet.   The proliferation of Internet today has without doubt allowed people into a borderless world with information almost at its finder tips and services conducted at a faster pace."

Malaysia's economic expansion will be about 5.5 percent this year, according to the government's latest economic report, lower than an earlier target of as much as six percent growth in 2011. The economy grew at the slowest pace since 2009 in the second quarter, climbing four percent from a year earlier.

"The growth momentum is expected to pick up in the second half of the year on the back of resilient private consumption and strong private investment," continued the report. "For 2012, GDP growth in Malaysia will remain largely domestic driven, due to heightened uncertainties in the global economy."

However, The Malaysian Institute of Economic Research (MIER) has revised the country's GDP growth to 4.6 percent for 2011 compared with an earlier forecast of 5.2 percent, due to the impact of a fragile global economy on reduced exports and domestic demand, with 2012's GDP growth reduced from 5.5  to 5 percent.

In his Budget speech, Najib also said foreign direct investment (FDI) has increased six-fold to RM29 billion in 2010, the highest growth in Asia, and is expected to expand by15.9 percent in 2012.

Analyst firm Frost & Sullivan head of public sector consulting (Malaysia) Karthik Rajan said the 2012 budget announcements focused on strategies and programmed to enhance the nation's potential growth its comparative areas as well as improve the well being of the people. "The main focus is on improving nation’s potential growth amidst global economic slowdown due to structural weaknesses in advanced economies. Despite the uncertainties in the external sector, the economy is envisaged to register between 5 percent to 6 percent growth in 2012, underpinned by resilience domestic demand. Private consumption and investment activities will support growth on the demand side while on the supply side the improvement in innovation, labor productivity and efficient use of capital will support the growth."

"Measures to prepare and tackle the possible global recession are on-the-money: accelerated liberalisation of the services sector, continued investments in the five regional corridors, continued focus on capacity building and enhancing delivery system in the public sector are among others," said Rajan. "Equally important was the ample focus on innovation, SME development, education, healthcare which are likely to benefit people across all segments."