More often than not, cross-border special economic zones (SEZs) struggle to live up to expectations. 

Local authorities hype them as harbingers of cooperation. They give in to the temptations of ‘win–win’ narratives and generous incentive packages. A few years down the line, everyone wakes up to the fact that borders are hardly fertile ground for cooperation. 

Will the new Johor–Singapore SEZ (JS-SEZ) be any different?

Bigger than Shenzhen

So far the script is familiar.

“There are many strengths we can harness from both sides that will allow us to enhance our value proposition,” Singapore’s prime minister Lawrence Wong said on January 7. “Very rarely, you find two countries working together as a team,” his Malaysian counterpart Anwar Ibrahim echoed. 

The JS-SEZ will extend over the Iskandar development region and Pengerang in south Johor, Malaysia, that share a maritime border with Singapore. It is a sizeable development by any means. At more than 3,500 square kilometres, the new SEZ is about five times bigger than Singapore; 1.5 times bigger than Shenzhen, China’s first SEZ; and just shy of the whole of Dubai. 

Although technically not a cross-border SEZ — its whole area remains confined to Johor — its success is anchored to the development of a cross-border ecosystem. 

The two countries will jointly promote investment into the zone and make it a destination for multinational enterprises (MNEs) to expand beyond the saturated Singaporean market. They will do so by enhancing cross-border movement of goods and people. They will share financial duties too: Malaysia will fund its infrastructure development on a build-as-they-invest basis; Singapore will contribute by financing investment facilitation. 

Overall, they aim to promote and facilitate expansion of 50 projects within the first five years and a cumulative 100 projects within the first ten years and create 20,000 skilled jobs along the way. 

Challenging the win–win mantra

Win–win is the mantra of cross-border SEZs, with the JS-SEZ being no exception. Singapore’s tremendous economic success has come at the cost of saturation. Doing business in the city state is notoriously expensive and industrial land availability is limited. On the other hand, Malaysia has tried for years to attract investment and foster development in south Johor, with mixed results. 

The new set-up would facilitate a Singapore+1 set-up, whereby “companies set up headquarters in Singapore and do manufacturing in the JS-SEZ”, argues Udai Panicker, Singapore country manager of management consulting company Tractus. 

“Businesses will be in a better position to do manufacturing in the JS-SEZ and export their production from Singapore,” adds Lawrence Yeo, managing director at Singapore-based consultancy firm AsiaBIZ Strategy. “For most companies this will be the way to go.”  

However, both experts also agree that implementation poses more than a challenge. 

Although improving, Malaysia–Singapore relations have been very troubled at times. Besides, the two countries come at the table from very different governance perspectives. Singapore is a beacon of stable, good governance; Malaysia hardly so, with prime ministers coming and going in the most spectacular way and with the spectre of the 1Malaysia Development Berhad scandal still taking a toll on the reputation of the country’s highest echelons of government. 

If the Johor Bahru–Singapore rapid transport system is anything to go by when gauging the potential of economic cooperation between the two countries, the precedent it sets is not promising. Officially launched with great pomp in 2010, the project has been marred with mutual controversy and delays. Completion is expected by the end of 2026 — eight years behind schedule. 

Global minimum tax

The usual promise of generous incentives is another major selling point of the new JS-SEZ. Notably, the JS-SEZ will offer a 5% corporate income tax for 15 years to investors in high value added sectors. While not surprising per se, in the context of SEZ incentives, it is to be noted that both countries are implementing the 15% global minimum tax (GMT) reform. That will limit the reach of such incentives. 

“If a company is part of a group which is within the scope of GMT [MNEs with revenues of more than €750m based or operating in countries implementing the reform], it is the understanding of market players within the Malaysian taxation industry that the group will then need to calculate its effective tax rate (ETR) in Malaysia, based on GMT principles,” says Jennifer Lee, a partner with law firm Christopher & Lee Ong based in Kuala Lumpur. “If the jurisdiction’s ETR is below 15%, a top-up tax will be payable.”

It’s still very early days for the JS-SEZ. In the first place, both countries will have to ratify the January 7 memorandum of understanding (MoU). After that, regulations will have to be jointly designed and approved. Finally, business will have to buy in. The JS-SEZ has a chance to prove the sceptics of cross-border SEZs wrong. But it’s a long and winding road ahead, fraught with obstacles. Living up to the hype generated by the MoU will be a real cross-border achievement. 

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