KUALA LUMPUR (Reuters) - Malaysia's drive to woo investment is losing traction, as efforts to get rid of red tape and inept bureaucrats falter, threatening to put it further behind neighboring Singapore.
A year after the authorities vowed to speed up the business approval process, businessmen are still battling unwieldy procedures and inert government staff.
"Civil servants have become more courteous, they smile more than usual but the bureaucracy, the red tape, is still there," said Mohd Ghouse Mohd Noor, who is setting up a hospital resort in Penang state in northern Malaysia where he hopes to entice visitors for medical treatment.
Ghouse said potential investors from the United Arab Emirates had been scared off by the red tape encountered at government departments.
"They are still passing us from one person to another. Nobody seems to know who is responsible and who should look into matters," he said of the bureaucracy. "Some of our investors say to us 'You go and solve your problem first'."
While Malaysia's record in attracting foreign investment would be the envy of many developing countries, it is still much harder to open a business here than in Singapore.
It takes nine steps and more than a week to register a business in Malaysia compared with five steps in five days for Singapore, according to the World Bank's Doing Business Index 2008.
Many blame Malaysia's civil service for being slow, unresponsive and opaque, and it continues to disappoint despite a state-led revamp aimed at winning more investment.
Perhaps now more than ever, Malaysia needs investors as it seeks private money to help fund several multibillion dollar farming, energy and tourism projects.
Foreign direct investment into Malaysia leapt to a 10-year high in 2006 but many in the business community say that is despite red tape, rather than because of government efforts to reduce it.
"If you compare with other countries, it's nothing," Pankaj Kumar, chief investment officer at Malaysian insurance company Kurnia Insurans, said of foreign investment. "Asia as a whole has been a magnet for investments to come in, especially with the petrodollars."
In response to complaints, the government set up a cabinet committee in September 2006 to fast-track approval for projects involving high-technology, huge capital investment or job growth.
And in February, the authorities created a task force of officials and business leaders to simplify procedures. It expedited approval for expatriate work passes and speeded up the registration of businesses and renewal of business licenses.
Since the drive was launched, businesses have reported improved service from customs and immigration staff. On the whole, however, complaints about sluggish bureaucrats and tardy service are still common.
Malaysia was ranked 24th in the World Bank's 2008 index on ease of doing business, down three places from 2007. It was behind Hong Kong and Thailand but ahead of South Korea, China, Vietnam and India. Singapore topped the list of 178 economies.
Overseas investors helped build Kuala Lumpur's iconic twin towers and the main highway, which spans the length of the peninsula, while global oil majors are developing multimillion dollar energy fields in Malaysia.
But foreign companies have complained that the regulatory authorities sit on applications to set up offices here, and local businessmen allege that government officials have asked for payment in return for state contracts.
The government awards state contracts through open tender but in some instances it has expedited the process by shortlisting only proven contractors and then awarding the job to one of them.
Malaysia wants to attract foreign dollars into its Islamic finance industry to build on its success as the world's largest Islamic bond market.
The authorities are also setting up a $105 billion, electronics, food, health and education hub in Johor state in the south.
It also wants to transform its Malay heartland in the northern states of Kedah, Penang and Terengganu into a farming, tourism, energy and manufacturing powerhouse.
But its plans are at risk of foundering as it struggles to galvanize its roughly one million public servants, despite wielding the stick.
"The government might want one thing but the culture of the civil service might not react to it," said political analyst Ooi Kee Beng of Singapore's Institute of South East Asian Studies.
"That's the tough part to change: you can change the rules and all that but how do you, down the hierarchy, actually get people to work?" Ooi said.
In the Malaysian civil service, rewards are modest, punishments are few and jobs are usually secure for life, which offers little incentive for improvement.
Public servants are almost all ethnic Malays, due to an affirmative action policy which favors the race in jobs, education and business.
In the World Bank's Doing Business Index 2008, Malaysia got good marks for investor protection but scored less well for enforcing contracts, registering property and starting a business.
Pemudah, a panel to facilitate business comprising private and public sector officials, says efforts are being made to rectify Malaysia's weaknesses.
"It is a matter of procedures and how we can shorten them," said Yong Poh Kon, who co-chairs the panel.
Kuala Lumpur is also struggling with perceptions that Prime Minister Abdullah Ahmad Badawi has gone soft on his pledge to stamp out graft in the civil service.
High profile prosecutions of civil servants for corruption have been rare. Former lands minister Kasitah Gaddam, the most senior official prosecuted for graft so far, was charged in 2004, and his case is still wending its way through the courts.
Analysts say the Anti-Corruption Agency's discretion to prosecute is fettered as it reports to the Prime Minister, unlike countries such as Hong Kong where the equivalent body reports to Parliament.
And some critics say there are other pressing issues raised by investors, including a requirement that listed firms be owned 30 percent by "Bumiputras" (sons of the soil) who are Malays or indigenous people under the affirmative action policy.
"If the government is serious about facilitating rather than imposing barriers for foreign investors we must actually address fundamental problems," said opposition politician Lim Guan Eng.
Reporting by Liau Y-Sing; Editing by Eddie Evans