Finance Minister wants to speed up information technology adoption, encourage entrepreneurship.

KUALA LUMPUR - Often criticized for being long on promise but short on delivery, Malaysia unveiled a tech-friendly national budget today aimed at validating its drive for a knowledge-based economy.

"We must accept the realities of the K-economy. We have no other alternative. We shall all become citizens of the K-economy," said Finance Minister Daim Zainuddin in his 2001 Budget proposal presented in parliament today.

He said the Malaysian government would set up a venture capital (VC) fund of RM500 million (US$132m) to assist the growth of new start-ups and was willing to "outsource" the management of the fund to ensure it was utilized.

Daim said that additionally a new one-stop agency to spur the growth of the VC industry locally would be established under his Ministry.

"The government is prepared to assist business angels in investing in start-ups and those providing seed capital and first stage financing could claim tax-deductions equivalent to the amount invested," he said.

However, to prevent abuse of this incentive, Daim said investors be allowed to divest shares in the venture company only after it has been listed.

Daim, who was previously been critical of private sector calls for hand-outs, said the government was aware of the high risk associated with VCs, but could now foresee that "acquiring skills of dynamic entrepreneurship was key to Malaysia's survival."

"Where necessary, the Government is prepared to acquire new technologies through the acquisition of equity in foreign companies," he said.

Daim also held out hope that the strict listing requirements on high-tech exchange Mesdaq will be liberalized. The exchange, which was fashioned after Nasdaq has been severely criticized for attracting only two IPOs in 18 months, mainly because of an inflexible ruling that 70 per cent of listing proceeds be used within the country.

A bouquet of incentives was also dangled to lure back Malaysian knowledge workers working abroad. These included tax exemption on remitted income for up to two years upon returning, exemption of import duty on all personal belongings including two cars that are brought back, and permanent residence status to foreign-born spouses and children of Malaysians within six months of their return.

"We need a pool of the best talents at home and from abroad. Efforts need to be undertaken to hire the best brains regardless of race and nationality, from Bangalore to California," he said.

At school level, Daim promised that 2,200 computer laboratories consisting between 12 and 43 computers would be set up in schools nation-wide, with priority to those in rural areas.

Daim also encouraged mastery of the English language by students, despite previous emphasis on the compulsory Malay language, because "it is the main language of the information and communications technology world".

The government is also allowing Malaysian workers contributing to the Employees Provident Fund (EPF), a private pension fund usually reserved for housing, to make withdrawals for the purchase of computers for their own use.

Previously contributors were only allowed to withdraw the money for PC purchases for their children, although even this was subject to abuse.

Daim said private companies that give their employees new computers will also be allowed to take tax deductions on those purchases, and government employees can apply for a computer loan once every five years. All contributions in cash and in kind to projects promoting computer technology will also be tax-deductible.

Daim also called for a review of the implementation Malaysia's Multimedia Super Corridor (MSC), a 750 sq km area south of Kuala Lumpur.

The high-tech zone despite being touted as visionary has drawn flak from several quarters for being bogged down at execution-level by ignorant bureaucrats and a technology-wary private sector.

"The (MSC developer and promoter) Malaysian Development Corporation must strive to attract world-class technology companies, which will be a pull factor in attracting other technology companies," he said.

On capital controls imposed two years during the height of the Asian financial crisis, Daim said the Malaysia's ringgit peg of 3.8 to US$1 had a stabilizing effect for foreign investors and would remain unchanged.

However, the government will scrap a 10 percent exit levy on profits repatriated by short-term portfolio funds after one year, which will likely bring some cheer to foreign fund managers.

Daim expressed anxiety at the closing of his speech that political consciousness was interfering with the government's stress on acquiring knowledge, and warned that it would marginalize the poor.

"Will our children in the poor villages be able to compete if they are always taught hatred? Those at the universities are being brainwashed. We are concerned that some are sowing seeds of hatred while they should in fact be seeking knowledge…our students are misled by bad examples that prevent society from moving ahead," he said.

Daim promised that the government would still provide opportunities for all citizens to pursue their ambitions, even those that criticized it. "We hope they will repent. We want all Malaysians to be knowledgeable and successful."

Opposition party members interrupted Daim's speech several times with shouts of "liar, liar" but were prevented from halting the proceedings.

The proposed RM91.05 billion (US$24b) budget is up 16.7 per cent from this year, and is expected to register a deficit of 4.9 percent of Gross National Product.

Malaysia's gross domestic product (GDP) has rebounded from a 7.4 percent contraction in 1998 to 5.8 percent in 1999 and is projected to grow at 7.5 per cent this year and 7 percent in 2001.

The full budget speech and latest Economic Report is available at the Finance Ministry Web site