THE DEVELOPMENT OF MALAYSIAN PETROCHEMICAL COMPLEXES OF THE EAST-COAST INDUSTRIAL CORRIDOR SALLEHUDDIN ISHAK M.Phil (Aberdeen) B.A. Hons (Malaya) A thesis submitted in fulfilment of the requirements for the Degree of Doctor of Philosophy University of Glasgow Department of Urban Studies June 2008 ABSTRACT Petrochemical industrial (PTCI) sites may be considered a niche in the property market. Mainstream economics, industrial development and real estate studies related literatures treat it as the same as others. By prescribing the New Institutional Economics (NIE) approach, this research seeks to find a definitive line to divide between this sub-sector with other industrial activities. In particular, from the real estate perspective. The key research question is on the effect of formal institutions on industrial land supply. The empirical research was carried out in Kerteh and Gebeng in the Malaysian East Coast region. Despite being isolated from nation’s mainstream economic activities as well as politically distinctive, the tiny townships managed to be host to global petroleum, gas and chemical giants, believed to have received the highest concentration of foreign direct investment (FDI) in Malaysia. Data were gathered on the physical development on the industrial sites, through official records investigation at the government offices as well as interviews with key figures both in the government and firms. Qualitative and descriptive quantitative data analyses were applied. Within the studied area, it was found that the two State Governments, Terengganu and Pahang are the only land suppliers for PTCI use. Results from the analyses indicate that formal institutions have a substantial influence on supply-side behavior. The key findings suggest that due to the complexity of the government decision making process, government supply of industrial sites for PTCI use is timely, uncertain, and not flexible according to demand. To arrive at a decision, on land in particular, the authorities have to consult a massive set of information, dozens of public offices, hundreds of standards and a wide range of expertises. In addition, a structured decision making process is strictly observed. The findings indicate that in the PTCI sector, where the investment is vulnerable to various forms of risks, the property transaction mode is slightly distinctive. The deadliest threat is unexpected changes in prices and supply of the chemical feedstock. As natural gas derivatives, especially butane, ethane and propane, the supply is dictated by the global market. Anticipating a threat, new sites must be sought. The authority’s inability to respond to the immediate firms’ needs invites additional risks. In addition, where the risk is very high, land prices are not imperative in industrial locating. The findings also signify that the government decision making process which is framed out by the social institutions which has been inherited since generations has hardly changed. The firms however, without touching the institutional arrangements, through a unique clustering process find ways on how to beat the red tape to secure a site together with the chemical feedstock. ii TABLE OF CONTENTS Table of Contents …………….………………………………………………….. iii List of Tables ……………………………………………………………………. viii Table of Figures ……………………….. ……………………………………….. xi Acknowledgements ………………………………………………………….….. xiii Glossary of Acronyms …………………………………………………………… xv Glossary of Technical Terms………………………………………....…………... xvii CHAPTER ONE – INTRODUCTION............................................................................. 1 1.1 INTRODUCTION ...........................................................................................................1 1.2 KERTEH AND GEBENG INTEGRATED PETROCHEMICAL COMPLEX.........1 1.2.1 Background 1 1.2.2 Development of Kerteh and Gebeng Petrochemical Complexes 3 1.2.3 Reasons for Choosing Kerteh and Gebeng Integrated Petrochemical Complexes as a Case Study 5 1.3 RESEARCH FRAMEWORK ........................................................................................6 1.3.1 Overview 6 1.3.2 Aim and Objectives of the Research 6 1.3.3 The Research Problem 9 1.4 THESIS CHAPTERS ....................................................................................................10 1.4.1 Chapter One 10 1.4.2 Chapter Two 11 1.4.3 Chapter Three 11 1.4.4 Chapter Four 11 1.4.5 Chapter Five 11 1.4.6 Chapter Six 12 1.4.7 Chapter Seven 12 1.4.8 Chapter Eight 12 1.4.9 Chapter Nine 13 1.4.10 Final Chapter 13 1.5 CONCLUSIONS............................................................................................................13 CHAPTER TWO – INSTITUTIONAL ECONOMICS ............................................... 14 2.1 INTRODUCTION .........................................................................................................14 2.2 HISTORY OF INSTITUTIONAL ECONOMICS .....................................................14 2.3 THE MAIN THRUSTS OF NIE...................................................................................16 2.3.1 Institutions 16 2.3.2 Organisations 21 2.3.3 Transaction Costs 22 2.3.4 The Problem of Information 24 2.3.5 Institutional Change 25 2.4 APPLICATION OF THE NIE IN EMPIRICAL RESEARCH .................................26 2.4.1 Identification of Microanalytic Factors 27 2.4.2 Analysis of Types of Transactions 27 2.4.3 Process Analysis 27 2.5 LIMITATIONS OF NIE ...............................................................................................28 2.6 CONCLUSION..............................................................................................................29 iii CHAPTER THREE – INSTITUTIONAL PROBLEMS IN INDUSTRIAL LAND DEVELOPMENT ........................................................................................................... 31 3.1 INTRODUCTION .........................................................................................................31 3.2 THE CONCEPT OF GOVERNMENT........................................................................31 3.2.1 Definitions of Government 32 3.2.2 Functions of Government and Motives Underlying Government Actions 32 3.2.3 Government and Bureaucracy 33 3.3 THE PETROCHEMICAL INDUSTRY – AN OVERVIEW .....................................36 3.4 INDUSTRIAL LAND DEVELOPMENT AND SOCIAL INSTITUTIONS.............40 3.4.1 Industrial Land Development and Informal Institutions 40 3.4.2 Industrial Land Development and the Institutional Environment 42 3.4.3 Industrial Land Development and Governance 46 3.4.4 Industrial Land Development and the Market Allocation of Resources 50 3.5 CONCLUSION..............................................................................................................60 CHAPTER FOUR – THE ADMINISTRATIVE FRAMEWORK UNDERLYING MALAYSIAN INDUSTRIAL DEVELOPMENT ....................................................... 62 4.1 INTRODUCTION .........................................................................................................62 4.2 MALAYSIAN INDUSTRIAL DEVELOPMENT.......................................................62 4.2.1 The Economic Policy 63 4.2.2 Industrial Master Plan 66 4.2.3 Implementation of the Industrial Master Plan – At the Macro Level 67 4.2.4 Implementation of the Industrial Master Plan in Terengganu and Pahang 67 4.3 MECHANISM REGULATING THE SUPPLY OF INDUSTRIAL LAND .............70 4.3.1 The Power Structure 71 4.3.2 The Administrative System 79 4.4 SUMMARY – THE LAND SUPPLY, LAND OFFICE AND INSTITUTIONAL FACTORS......................................................................................................................89 CHAPTER FIVE – RESEARCH METHODOTHOLOGY......................................... 90 5.1 INTRODUCTION .........................................................................................................90 5.2 THE CONCEPT OF RESEARCH METHODOLOGY .............................................90 5.3 RESEARCH METHODOLOGY AND EPISTEMOLOGY......................................91 5.3.1 Debates on the Concept of Knowledge 91 5.3.2 Issues and Problems in Petrochemical Industrial Land Development – An Epistemological Perspective 94 5.4 QUALITATIVE VERSUS QUANTITATIVE RESEARCH METHOD ..................95 5.4.1 Data Collection 98 5.4.2 Data Analysis 102 5.4.3 Validity, Credibility And Reliability 110 5.5 LIMITATIONS IN THE NIE AND QUALITATIVE RESEARCH APPROACH 113 5.6 CONCLUSION............................................................................................................115 iv CHAPTER SIX – RESEARCH METHOD AND DATA COLLECTION ............... 116 6.1 INTRODUCTION .......................................................................................................116 6.2 EMPIRICAL RESEARCH FRAMEWORK ............................................................116 6.2.1 Research Aims and Objectives 116 6.2.2 The Research Questions 117 6.3 THE INQUIRY PROCESS.........................................................................................120 6.3.1 Area of Study 120 6.3.2 Scope of the Empirical Research 123 6.4 DATA COLLECTION................................................................................................124 6.4.1 The Official Record Investigation 125 6.4.2 Government and Firms’ Official Documents and Publications 136 6.4.3 Data from International Bodies 136 6.4.4 Élite Interviews 138 6.4.5 Summary of the Empirical Inquiry 147 6.5 THE DATA ..................................................................................................................147