The leaders of Malaysia and Singapore are scheduled to formally sign an agreement to create a special economic zone that will connect the border region of their two countries. However, the deal's execution, which has been repeatedly delayed since negotiations started in 2023, may determine whether or not there will be immediate economic benefits.

On Tuesday, Singapore Prime Minister Lawrence Wong and Malaysia Prime Minister Anwar Ibrahim will preside over a ceremony for the economic zone in Johor, a southern state of Malaysia that shares one of the busiest border crossings with Singapore. Following Wong's contract with Covid, the signing was delayed until January.

Although the agreement's specifics are limited, Johor officials have previously stated that they anticipate the zone to boost the Malaysian economy by $26 billion annually and provide up to 100,000 new jobs by 2030. Since Johor has more space and a larger labor pool than the city-state, a major portion of that would probably come from new investment and Singaporean companies moving their operations or expanding to Johor.

Asrul Hadi Abdullah Sani, a partner at the strategic advisory firm ADA Southeast Asia, stated that if the deal is implemented successfully, it should include a wide range of tax benefits, guarantee transparent decision-making, and expedite regulatory procedures for permits and approvals.

Elusive objective

The special economic zone, which would cover more than 3,500 square kilometers (1,350 square miles), is anticipated to be more than four times larger than Singapore and almost twice as large as Shenzhen, a city in China that borders Hong Kong and whose success Malaysia hopes to imitate with the SEZ.

However, fostering closer relations between Singapore and Johor has hitherto proven difficult. The majority of the 300,000 individuals who cross the land border between Johor and Singapore each day do so for work, and traffic on the two causeways that connect the two countries frequently results in delays of several hours.

A prior attempt to unite the area, which included a high-speed rail project worth over $20 billion, failed due to cost disputes and other obstacles.

In an interview conducted prior to the signing ceremony, Asrul Hadi stated, "There are concerns regarding bureaucratic capacity and the management of expectations for businesses crossing the border into Johor."

One of Johor's greatest advantages has always been its closeness to Singapore. The most recent example of this was the explosion of data centers in the Malaysian state, which was brought on by Singapore's 2019–2022 ban on new data center building, partly due to energy supply concerns.

Only well-defined objectives for promoting cross-border travel, such as passport-free travel and QR-code-based clearing systems, were included in a memorandum of understanding agreed in January 2024. However, Malaysia has had difficulty implementing a digital vehicle entrance permit system and has only begun testing QR-code approvals at its checkpoints, which Singapore has already done extensively.

Additionally, according to some analysts, it's uncertain if both nations have advanced far enough in simplifying their tax and investment laws to actually spur new investment. At 17%, Singapore has the lowest corporate income tax rate in the area, while Malaysia's rate is 24%.

Tax benefits would probably be the special economic zone's main attraction, according to Yvonne Beh, a lawyer at the law firm Wong & Partners in Kuala Lumpur. "Customs duties and sales tax exemptions would be the least that would be expected before companies looking to use Johor as a supply chain hub for the region consider setting up a hub in Johor."