1MALAYSIA Development Bhd's plans to build a financial centre on a 70-acre parcel of land in the heart of Kuala Lumpur will be a tall order. Financial centres are not purpose-built. They are creations of a free market regulatory environment that evolve over time.

Hong Kong, Singapore and London became financial centres over a long period of time, largely due to government initiatives to establish these places as free market bastions. Purpose-built financial centres, just like purpose-built administrative centres, rarely turn out to be successful. They just become places for people to undertake some business activities. It takes a long time to create vibrant centres for business.

For instance, Labuan was established as an offshore financial centre to take away some business from Singapore, but has failed to make much of a dent. For a financial centre to take off, it needs an environment and all the structures in place — from bankers to businessmen — to facilitate large cross-border transactions.

With electronic banking these days, people can undertake big deals from anywhere in the world. Hence, there must be a compelling reason for financial institutions or businesses to relocate to the Tun Razak Exchange (TRX).

Towards this end, it is easy to fathom why 1MDB is seeking incentives from the government to make TRX a success. The incentives are not for itself but for the institutions that may potentially want to relocate to TRX.

But is that a healthy route towards seeing the implementation of TRX?

Why must incentives be given to TRX's prospective clients? If at all the government decides to do so, incentives should be extended to all property development projects in Kuala Lumpur. Otherwise, there would be an imbalance in terms of incentives for the sector.

Those outside the city will also start asking for such benefits. Ultimately, where will it all end? As it is, the fact that the government transferred the land to 1MDB to carry out the development already gives the sovereign wealth fund a big advantage.

No doubt 1MDB paid RM230 million to lift all encumbrances on the 70-acre plot to shape its development. But it is a small cost to incur considering the huge development potential. The price works out to RM75 psf, which is cheap going by some large transactions involving government-related funds announced last week.

The Employees Provident Fund (EPF) paid RM2.28 billion for 2,330 acres in the Rubber Research Institute in Sungai Buloh. It works out to about RM22 psf and comes without approvals. The EPF's price is three times lower than the cost incurred by 1MDB. But the development potential in the TRX is many times higher than the RRI land.

To give an idea of the potential, the Malaysia Rubber Board (MRB) in April this year tendered out 2.2ha of land along Jalan Ampang to a be developed by a joint venture between Crest Builder Bhd and a private company, Detik Utuh Sdn Bhd.

As the land owner, MRB gets RM300million as its share of the profit from the project, which works out to RM1,267 psf. That is clean profit because the entire construction and development is undertaken by Crest Builder and its partner.

So, considering the upside, the RM75 psf incurred by 1MDB in securing the land is a small price to pay, and already a big enough incentive for it to ensure the success of TRX. Like most other developers undertaking high-profile government projects, 1MDB probably wants to see the TRX project do well.

Given its locality, however, it is highly unlikely there would be empty buildings there or vacant land waiting to be developed. At most, it will take a longer time to develop if the economy softens.But even if there are vacant buildings or parcels of undeveloped land, there is no reason to give the project incentives.

So what if it does not take off immediately? After all it's a property development, with the concept of being a financial centre. It's a long-term development.

Given time, there will be someone willing to pay a price to be located there.

For instance, the government did not intervene when the Battersea project in England got into financial trouble. After some 30 years and having changed hands several times, a consortium comprising S P Setia, Sime Darby and the EPF took over the project.

During the final lap of bidding, no companies from England were involved because they had all lost money on the project. But foreign investors — from Malaysia — were prepared to fork out the funds for the project. That ideally should be the scenario for TRX. It should be purely commercially driven.

Already, the people and the government have lost out by the land not being tendered out. Giving incentives to ensure the success of TRX will be another costly exercise because all these measures have a cost element to it.

There is an argument that the foreign companies setting up offices here will create a multiplier effect for the economy in terms of job creation and add-on to the services sector.

But it should not be at too heavy a cost to the people or the property sector.

M Shanmugam is deputy editor-in-chief at The Edge. This story appeared in The Edge on Sept 3, 2012.