New horizons: Attracting substantial domestic and international investment is a major priority

Known as the “Land Beneath the Wind”, Sabah is undergoing some important changes these days, with its economy gearing up for a major stride forwards. Previously one of Malaysia’s poorest states, it is now a dynamic area for growth with new discoveries and investments in oil and gas, the development of a downstream industry for palm oil, and a range of new agricultural and manufacturing projects in everything from shrimp farming to petrochemicals.

One of five regional development corridors, Sabah falls under several of the federal government’s National Key Economic Areas (NKEAs) under the Economic Transformation Programme (ETP), such as oil palm and rubber, agriculture, oil, gas and energy. The state is also likely to receive a boon from the upcoming 11th Malaysia Plan for 2016-20, as it did under the 10th Malaysia Plan. In addition to this, Sabah directly benefits from other federal initiatives, such as the Bioeconomy Transformation Programme, which helps to channel private sector investment into areas of agriculture and industry that utilise biotechnologies.

The Sabah Development Corridor’s (SDC) first phase started in 2008 and focused on infrastructure development, with the state well ahead of its neighbours, Indonesia and the Philippines, even if many challenges remain. Now, SDC planners at the Sabah Economic Development and Investment Authority (SEDIA), the corridor’s lead agency, are anxious to push on to the next phase: attracting major Malaysian and international investment, which is now possible given the progress made in terms of infrastructure.

Facts & Figures

Covering the northern part of the island of Borneo, Sabah has a land area of 73,902 sq km, an estimated population of 3.5m in 2013 and an average annual population growth rate of 2.3%, according to the latest data from the Department of Statistics (DoS). The latest DoS figures on GDP for 2012 show Sabah experienced 4.1% GDP growth in that year, up from 1.3% in 2011. The DoS attributed the increase to mining and quarrying sector activity, reflecting the oil and gas sector’s recent expansion (see Energy analysis). At constant 2005 prices the state’s 2012 GDP stood at RM44.43bn ($13.86bn), up from RM42.66bn ($13.31bn) in 2011. This gave Sabah a 5.9% share of Malaysia’s total GDP for 2012. The 2012 per capita GDP figure, at current prices, was RM18,758 ($5854).

The state’s GDP by economic activity that year broke down into services with 47.4%, agriculture with 20.8%, mining and quarrying at 20.7%, manufacturing with 7.9% and construction at 2.9%. This gave Sabah a 5.1% share of Malaysia’s total services sector, a 16.9% share of national agriculture and a 4.8% share of total construction. The employed population stood at around 1.58m out of a workforce of 1.67m in 2013, according to the DoS, giving the state a 5.2% unemployment rate. The labour market is not without its controversies, however, with the issue of undocumented overseas workers, in the plantations sector in particular, being a source of political contention.

Since the initiation of the SDC in 2008 up to the end of 2013, Sabah had also brought in RM127bn ($39.64bn) of committed investments, RM25.7bn ($8.02bn) of which has been realised, according to data from the Malaysian Investment Development Authority. In 2013 Sabah was also counted among the top five states in Malaysia in terms of investment, with RM3.4bn ($1.06bn). Historically, Sabah was a major centre for the timber trade, although in recent years this has lost ground to plantation crops such as rubber and oil palm. Indeed, in May 2014 Sabah produced nearly 32% of Malaysia’s entire output of crude palm oil and 29.3% of all its processed palm oil. Significant oil and gas finds offshore in the South China Sea have also made the state a major hydrocarbons producer.

Institutions & Agencies

Under Malaysia’s federal system, the head of state in Sabah is the governor, or Yang Di-Pertua Negeri. Fulfilling a largely ceremonial role, the position is currently occupied by Juhar Mahiruddin, who took office at the start of 2011 for a four-year term. The chief executive officer is the chief minister, who is usually the head of the largest party or coalition of parties in the legislature, the Sabah State Legislative Assembly, which is located in the state capital Kota Kinabalu. The unicameral assembly consists of 60 lawmakers, each elected for a five-year term. The last state election was in 2013, when the Barisan Nasional (BN) party won 48 seats, the Pakatan Rakyat coalition 11 seats and the State Reform Party took one seat.

Since 2003 the chief minister has been Musa Haji Aman, who is also head of the BN in Sabah. While the SDC is being implemented by SEDIA, the Sabah Economic Development Corporation (SEDCO) has the wider role of supporting and facilitating industrial, commercial and socio-economic development in the state. SEDCO comes under the Ministry of Industrial Development, which also overseas some of the most important projects in the state, such as the Kota Kinabalu Industrial Park (KKIP). Another important player is the Sabah Development Bank (SDB), which has had a key role in the financing of many state-based projects.

Industrial Parks

A key part of the state’s development strategy is a series of parks aiming to leverage local resources and benefit from economies of scale. The KKIP is one of the most established of these, having attracted some RM2bn ($624.2m) in investments by mid-2013, while the Palm Oil Industry Clusters at Lahad Datu and Sandakan are two other such projects. There is also the Sipitang Oil and Gas Industrial Park (SOGIP), which contains within it the $1.5bn Sabah Ammonia and Urea Project. This will be Malaysia’s largest, with a planned capacity of 1.2m tonnes per year when it comes on-stream. In addition, the Sapangar Bay Container Port is being developed as a major trans-shipment hub, leveraging the state’s location within the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area.

Under the NKEAs a number of project-specific parks are also under way, such as the Keningau Integrated Livestock Centre, the Sabah Agro-Industrial Precinct and an integrated lobster aquaculture park. All are aimed at the same strategy of developing locally based, high-value-added industries to process Sabah’s natural resources. The goal is to then export these products, earning more for local businesses and communities. The development of good transport infrastructure is therefore key. In this regard, there are a number of projects under way, including an upgrade of the rail link between Kota Kinabalu and Tenom, while major road projects, such as the Pan-Borneo Highway, offer more rapid links to Brunei Darussalam, Sarawak and Indonesia.

Perhaps most important of all though is the port upgrade and expansion programme. Following the privatisation of ports, Suria Capital became the central outfit in this, working with the SDB through Sabah Ports to manage the upgrade. Jesselton Quay is to become a new cruise terminal and Sepanggar Bay the main port for Kota Kinabalu, with work under way there to extend the jetty and establish a new logistics centre. SOGIP is also preparing its own port facilities, while at Sandakan a new oil terminal is being developed to meet increasing oil import demand.

However, ports are reported to be facing some challenges due to the existing cabotage policy. Under the current rules, only Malaysian-flagged vessels can deliver cargo to Sabah’s ports, meaning international shipping tends to go via the major peninsula ports first. This leads to a double charge on shipping to and from Sabah because export containers leaving the state are largely empty. The cabotage issue is frequently brought up by local businesses as a major challenge to conducting business in the state. Another challenge facing the Sabah economy is utilities. Electricity in particular is a segment that is also looking to bring in major investments. The state’s IT network is also in need of some upgrades, particularly beyond the main city centres and in the last mile segment.

Finding and keeping the human resources necessary to carry out the development strategies of the state can be an issue, with Sabah suffering from a “brain drain” to the peninsula and beyond. The government would also like to encourage more of an enterprise culture, making jobs in local businesses at least as attractive as corporate or government employment. The state does have a notable education sector, however, with Universiti Malaysia Sabah and SIDMA College, among others. The Sandakan Education Hub is also being developed to concentrate more on higher education and research institutions, with entrants qualifying for SDC incentives upon locating there.

Outlook

The days when Sabah was simply a source of raw materials for other economies are rapidly coming to an end. The strategy of processing these raw materials in state, then exporting them at a higher value is beginning to bear fruit, with investment growing and new industries developing. Bolstering infrastructure and talent is key to moving this to the next level, with plenty of indications that both the state and federal governments are active on these fronts.

Indeed, with many incentives available under the SDC and NKEAs, there is much for investors to take an interest in nowadays in the “Land Beneath the Wind”.