A RECENT trip to the Federal Territory of Labuan with the board members of Bank Negara Malaysia accorded the opportunity to reflect on the offshore financial centre that was established in early 1990s, reports News Straits Times.
The island has certainly advanced on many fronts compared with its position before acquiring the status of a tax haven.
However, the issue of its sustainability quickly comes to mind.
Labuan has a duty-free status for retail goods and low-tax regime for industries, such as banking, insurance and finance.
Befitting its position as an offshore financial centre, it is home to many branch offices of overseas financial houses.
There is also a marked presence of several oil and gas industries on the island like the Petronas methanol plant, which is significant in driving the local economy.
However, with the current state of the global oil and gas industry, the low prices of oil, for one, has quite a dampening impact on the island.
But the Petronas methanol plant there is able to supply the region and also meet demand from China, which is growing by leaps and bounds.
The local economy is also supported by the presence of government facilities and services, especially during the island’s early development stage.
However, this now cannot be expected to add to economic growth any more because of the fiscal policy to reduce public expenditure in the medium term, so as to reduce public sector deficit.
Labuan also attracts tourists from Sabah and Sarawak, as well as Brunei, in view of its proximity and relatively low prices. Indeed, Labuan is a weekend and holiday retreat destination for people from those places.
All this is helping with the upkeep of the island’s economy.
Considering the low oil price scenario and progress to date, perhaps it is time to re-examine and review the strategies crafted in the early stages of Labuan’s development, and to put more stimulus for its future growth.
This impetus is certainly essential as Labuan may not have the critical population base to enable the island to move forward sustainably.
A dated study on the relationship between people and economic activities gave a figure of about 250,000 population before the local economy can move forward on a sustained basis, or “on its own steam”, so to speak.
This study was done in the United States. If it holds true for Labuan, certainly its current population of about 90,000 may not be adequate to grow on its own impulse.
Hence, clear policies may be needed to generate opportunities to attract more economic activities as well as bring more workers, settlers and their families to the island.
The initial impetus of finance related activities may have become saturated, and this is perhaps more because of the nature of new financial industries that are highly dependent on information technology and agglomeration of economic activities, for which Labuan may not have the density as yet.
A study to examine the overall achievements of Labuan as the offshore financial centre of the country is worth undertaking now, given the many significant changes in monetary and fiscal development of the country, which may have impacted the attractiveness of Labuan as an offshore financial centre.
The study should also aim to identify the economic constraints of the island.
There certainly is a strong case for encouraging the growth of the real economy and other services, such as tourism, education, sporting events and related government services in Labuan.
These activities will support the island’s financial industry and attract more workers and visitors not only from Sabah, Sarawak and Brunei, but also from Singapore and Peninsular Malaysia.
In fact, one good proposal is to build a bridge to connect Labuan to its nearest point in Sabah. This can encourage greater connectivity and enable freer movement of people and resources between the island and nearby states.
It appears that, in moving forward, the authorities in Labuan may have to be innovative and creative to attract more private investments. This is critical as the island cannot go on relying on government allocations.
As we review the 11th Malaysia Plan and prepare for the next budget, this proposed bridge is worth considering as another source of domestic economic growth and as a strategy to energise the potential for sustained growth in output and employment.
In this calculation, the issue of project financing will take centre stage.
However, with an innovative public-private partnership model supported by an adequate concession period, the idea of the bridge can be explored.