Introduction
A project by the Australian rare earths mining company Lynas Corporation Ltd was recently brought to the attention of Economists at Large. Lynas are constructing a processing plant for rare earths in Malaysia. Lynas refers to this plant as the Lynas Advanced Materials Plant or LAMP.
The project has come up against opposition from local groups who accuse Lynas of cost cutting practices in building the refinery. The accusations are predominantly based on a report by the New York Times which claims that there are cracks in the containment tanks and Lynas is using lesser quality materials such as plain steel instead of stainless for its piping, (Bradsher, 2011).
Local residents are concerned that radioactive waste from the facility will put them at risk and potentially leave a costly legacy. Locals fear a repeat of the toxic wasteland left behind by the Mitsubishi Chemical plant in Bukit Mesah which is now blamed for birth defects and cancers such as leukaemia. Lynas claims that the radioactive thorium content of their rare earths oxide (REO) is very low and that the plant won’t pose a risk. Despite this, a recent review by the International Atomic Energy Agency recommended that Lynas develop a more thorough waste management plan. The plan was due by August 2011 and as far as we’re aware, has not yet been released.
Lynas will export the rare earths material from its mine at Mt Weld in Western Australia. The mine is situated 35 km from Laverton in WA and it will be the first new source of supply of RE outside China in more that two decades, supplying 8% of the world’s rare earth market, (Latimer, 2011). The Mt Weld project is estimated to have a life span of 20 years producing 33 000 tonnes per annum of RE concentrates, (Latimer, 2011).
Economic assessment of LAMP
When Economists at Large first read about community concerns, we figured that Malaysians should at least be getting some significant economic benefits from the project. We went looking for an economic assessment of the project. For a project of this scale and with such community and environmental concern, a company in Australia would nearly always have to include economic assessment, typically as part of an environmental impact assessment (EIA).
Socio-economic impacts section of preliminary environmental impact assessment for LAMP
The only formal assessment we could find was released back in 2008, as part of a “Preliminary Environmental Impact Assessment and Quantitative Risk Assessment”. Section 8.8 of this report looked at the socio-economic impacts of the plant. The report included just four paragraphs discussing economic impacts of the project and can essentially be summarised as follows:
- Construction impacts: Jobs will be created for locals where possible. Foreign workers will be used if a local workforce is not available or sufficient.
- Operational impacts: The project will have positive socio-economic impacts at a regional and national level.
For those interested in how not to do a socio-economic impact assessment, the relevant section (above) from the original report makes for instructional viewing.
No quantification of the impacts at either construction or operational stages was given. Since 2008, media sources and company documents have shed some light on more specific economic impacts.
The table below is a list of figures relevant at each stage of the project:
CONSTRUCTION IMPACTS
| Value | Unit | Area | Source |
| $237.32 | AUD millions | Phase 1 – capital costs for LAMP | (Lynas, 2011a) |
| $65.24* | AUD millions | Phase 1 – other capex including land in Malaysia | (Lynas, 2011a) |
| $148.0 | AUD millions | Phase 2 – plant & equipment for the LAMP | (Lynas, 2011a) |
| $63.9 | AUD millions | Phase 2 – LAMP operational, working capital and production ramp-up from Phase 1 | (Lynas, 2011a) |
| 50+ | Jobs | Phase 1 – jobs in “Malaysian Operations” team | (Lynas, 2010) |
| 2500 | Jobs | Construction employment |
* (Lynas, 2010) (p.56) states that AUD $62.154 million was spent across 2009 and 2010 on leasehold land and for Malaysia, it includes two leases expiring in 2099 and 2106 respectively. It is unclear how much of the AUD $62.154 million is for land purchased in Australia or whether this is all for the site in Gebang, Malaysia.
OPERATIONAL IMPACTS
| $130 | AUD millions | Ongoing annual operating costs | (Lynas, 2011b) |
| 350 | Jobs | Ongoing employment | (Lynas, 2011b) |
Tax concession for LAMP
Perhaps the biggest surprise to us when we looked at this project was the 12 year tax exemption granted to Lynas in Malaysia. Corporate tax revenue is one of the clear benefits of increased private sector activity in a country. By granting a tax holiday to Lynas, the Malaysian government has given up significant revenue.
Lynas Malaysia Sdn Bhd has been granted a 12-year tax exemption for ‘pioneer status’, (Lynas, 2011a). The Ministry of Finance Malaysia lists five different categories for Pioneer Status (PS):
a) Promoted product/activity
b) Promoted product/activity in promoted area (Pahang is listed as a promoted area)
c) Promoted product/activity for high technology companies
d) Promoted product in an approved industrial linkage scheme (SMIs producing intermediate goods)
e) Promoted product/activity of national and strategic importance including the MSC status companies and product/activity in the approved linkage programme which achieve world class status.
f) Contract Research and Development company (R&D)
Source: (Ministry of Finance Malaysia, 2011)
Based on the list above, the closest category we can identify that explains a 12-year tax exemption for Lynas is category e). This category allows for a maximum 10 years tax exemption and states that:
Company will be granted full tax exemption on 100% of the statutory income for 5 years and is eligible for extension for another 5 years.
Source: (Ministry of Finance Malaysia, 2011)
This indicates that the Malaysian Government views the Lynas project as one of national and strategic importance. Another reason for the tax exemption may be due to the creation in 2009 of a Special Economic Zone (SEZ) in the East Coast Economic Region (ECER) of Malaysia. Pahang is included in this region and “resource-based downstream manufacturing” is a focus area for the State, along with Infrastructure & Transport, Tourism, Agriculture and Education, (East Cost Economic Region Development Council, 2011). It is unclear where the two additional years of tax exemption (above and beyond the 10 year maximum for the pioneer status) come from but it may be related to the plant being in the SEZ.
Recommendations
To properly understand the benefits – not just the impact – of the LAMP on the Malaysian economy, a more rigorous analysis of the economics of foreign direct investment and special economic zones, as well as more detailed plans for waste management, are required. We have not carried out such analysis yet, nor are we aware of such analysis by the Malaysian government or Lynas Corporation. Despite this, some lessons can be learnt from this project.
For the Malaysian government, we recommend that:
- the process for granting tax exemptions be made more transparent, with more thorough cost benefit analysis of a particular project required to justify any tax exemption.
- projects with potentially significant environmental risks, or of high community sensitivity, should be subject to more thorough economic cost benefit analysis.
For Lynas, if they are serious about community engagement, they should start by publishing a more thorough report on the economic impacts of the project. This would not be a substitute for more useful cost benefit analysis of the project, but would at least serve to provide a starting point for assessment.
Conclusions
In a global market for rare earths, there seems little reason why locating the LAMP in Malaysia confers any benefits to downstream industries. Industry agglomeration could be achieved through supporting policy measures or through government investment in rare earths projects, in return for guaranteed supply. The latter strategy is exactly what Japan has chosen to do, (Winning, 2011).
As Malaysia strives to escape the “middle income trap”, (Schuman, 2010), it needs to reduce it’s reliance on investment and job creation based on ‘low cost’ and ‘low regulation’ advantages. Malaysia also needs to increase the economic scrutiny of projects that are simply assumed to have economic benefits, when actual benefits may be more rare.
References
Bradsher, K. (2011, March 8). Taking a Risk for Rare Earths. The New York Times. Retrieved from http://www.nytimes.com/2011/03/09/business/energy-environment/09rare.html?pagewanted=all
East Cost Economic Region Development Council. (2011). East Coast Economic Region : Master Plan : Overview – Project Focus By State (Pahang). Retrieved August 26, 2011, from http://ecerdc.com/ecerdc/masterplan7c.htm
Latimer, C. (2011, August 5). Mt Weld Rare Earths Mine Officially Opens. Australian Mining. Retrieved from http://www.miningaustralia.com.au/news/mt-weld-rare-earths-mine-officially-open
Lynas. (2010). Lynas Annual Report 2010.
Lynas. (2011a). Investor Presentation. Journal of Rare Earths (Vol. 24). May 2011. doi:10.1016/S1002-0721(07)60001-5
Lynas. (2011b). Lynas Malaysia – How the building of the LAMP in Malaysia would benefit Malaysians? Retrieved from http://www.youtube.com/watch?v=rhPcekFzp1c
Ministry of Finance Malaysia. (2011). Pioneer Status (PS). Retrieved from http://www.treasury.gov.my/index.php?option=com_content&view=article&id=704&Itemid=201&lang=en
Schuman, M. (2010, August 10). Escaping the middle-income trap. TIME. Retrieved from http://curiouscapitalist.blogs.time.com/2010/08/10/escaping-the-middle-income-trap/
Winning, D. (2011, September 2). Lynas locks in supply deal with BASF. The Australian. Retrieved from http://www.theaustralian.com.au/business/mining-energy/lynas-locks-in-supply-deal-with-basf/story-e6frg9df-1226127896922
Links and more info
http://www.badarstoplynas.com/
Note on this research
Figures contained in this analysis came from a variety of sources. If any stakeholders read this blog post and wish to correct any figure or statement above, please comment on this blog directly or contact us.
Post edits
- Edited on 12 September: Updated details about tax concession to highlight that the maximum under the pioneer status is only 10 years.
To back up your recommendation that the Malaysian government makes its process for granting tax exemptions more transparent would be for the Australian Securities Exchange, on which Lynas is listed and raises capital, to require extractive industry companies to disclose all payments to government as part of its listing rules as US and EU exchanges are going to do, see: http://publishwhatyoupay.org/activities/advocacy/stock-market-rules. This would help the Malaysian public establish whether they are getting a good deal or not.
What Benefit Do Malaysia Get From The Lynas Plant? And why 12 yrs tax free incentive?
Even a primary school child should know that the construction of a multi-billion dollar industrial plant would bring enormous financial benefits to the local community as well as to the country.
Construction of the plant had provided a substantial boost to suppliers of commodities like concrete and steel and manufacturers of hundreds of other components. For example, the plant had used thousands of cubic metres of concrete—as well as
Thousands of tons of steel and miles of piping
Hundreds of miles of electric wiring and hundreds of electrical components and all these are supplied by our local contractors.
The construction of the plant itself would had added hundreds of millions to the gross domestic product.
Each year, the plant will generate billions in sales of the rare earth (economic output) and millions more in total labour income. These figures include both direct and secondary effects.
The direct effects reflect the plant’s expenditures for goods, services and labour. The secondary effects include subsequent spending attributable to the presence of the plant and its employees as plant expenditures filter through the local economy (e.g., restaurants and shops buying goods and hiring employees).
And the subsequent production of the plant is expected to be in the billions of ringgit and this is considered to be part of the country’s gross domestic product (GDP) in the form of sales and export earnings.
Billions more would be added to the GDP as a result of the spin-off effect.
And when our GDP is increased by the billions, the government will be allowed to print more billions of ringgit (CREATING MONEY OUT OF THIN AIR ) to pay for the schools, hospitals, subsidies and scholarships etc for the people, without any devaluation of our ringgit by the foreigners.
Key Facts
Each year, the plant will generate millions to billions of ringgit as a spin-off effect in sales of goods and services in the local community and millions more in total labour income.
Operation of the plant creates more than 350 highly paid permanent jobs.
These jobs pay much more than those working the super markets or places like Kentucky Fried Chicken.
The permanent jobs at the plant create an equivalent number of additional jobs in the local area to provide the goods and services necessary to support the plant work force (e.g., grocery stores, dry cleaners, car dealers). Even the sex workers in Kuantan would benefit!
Construction of the new plant had created up to thousands of jobs at peak construction.
Local contractors had benefited enormously from the construction of the plant, in terms of hundreds of millions of ringgit
The yearly production of billions of ringgit of rare earth will add billions to our GDP and produce billions in export earnings (even though the money belongs to Lynas share holders, the national statistics will show up as our own in terms of GDP growth and export growth).
The economic job multiplier effect of any industrial plant is 4 to 5. So although the Lynas plant gives direct employment to 350 high paying jobs to the Kampong folks, the actual number of jobs created is more in the region of 1,750 !
Why do we have to give Lynas the 12 yrs tax free incentive?
Quote Optiplex330:
“Giving tax break is very common to entice people to set up business. If you are an Indian or Chinese your forebear coming from India or China know that very well. They were enticed to come to Malaysia to open up the country, and land were practically given free. Old people told me their land rental is a single pepper corn. Those who don’t know about tax break know zero about businesses. Having said that, I think the maximum is 10 yrs so Lynas is unusual in that it is given 12 years.
A classic example: Businesses have to give Bumi 30% share but when Intel came to Penang, they were allowed SPECIAL treatment and don’t have to give a single share to Bumi (may be this explain the extra 2 yrs tax break?). Why? This is because the government badly wanted Intel because when they come, they will bring along an entire electronic industry to Malaysia. So while government do not directly benefited from Intel, the follow on industry created by Intel greatly benefited Malaysia.
And also for this reason, those who think Lynas produces only about 300 jobs and no tax revenue for Malaysia are just being short sighted. They don’t know that because of Lynas, a Green Technology industry could be born and Siemens is the 1st to announce coming precisely because of Lynas. But because of Anti-Lynas, Siemens may pull out so there go more jobs and tax revenue for Malaysia.”
In Other Words, The Plant WILL Boost Local and Country’s Economy.
The Lynas plant WILL provide substantial economic benefits during the decades of operation. The jobs, employee’s taxes, and direct and secondary spending WILL strengthen the economy.
SO DO NOT ASK THE NON-PHYSICAL and RATHER CHILDISH QUESTION OF WHAT BENEFIT DO MALAYSIA GET FROM THE LYNAS PLANT!
Dato’ Dr Looi
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