Major public and private initiatives driving development of key sectors in Malaysia

One of the largest of Malaysia’s 13 states, Sabah is banking on an economic development strategy that aims to make the most of its strategic position in the South China Sea, the beauty of its landscape and the riches of its natural environment. The plan centres on the Sabah Development Corridor (SDC), one of five economic development zones established throughout Malaysia that are planned to encourage growth by targeting investment in key industries.

In Sabah, the corridor covers the entire state and is focused on developing natural resources, primarily hydrocarbons and agriculture, predominantly palm oil, but also food crops. Sabah is also looking to increase tourism, with Mount Kinabalu (South-east Asia’s tallest mountain), some of the world’s most stunning dive sites, and iconic wildlife, attracting visitors from across the globe. The challenge for Sabah’s policymakers is to achieve a balance and to ensure sustained economic growth even while conserving the state’s natural resources.

Economic Background

Sabah joined Malaysia in 1963 and is located on the northern tip of Borneo, more than two hours flying time from the country’s capital, Kuala Lumpur. The state is the second largest in the country and had an estimated population of 3.74m in 2015, including 32 indigenous tribes.

The biggest contributors to the state’s GDP are oil and gas, and plantations are vital as well. Sabah produces just over a quarter of Malaysia’s entire supply of palm oil; industries that are dominated by big companies such as Malaysia’s state oil company, Petronas and Sime Darby Plantations, which operates 17 estates and four mills in the region.

However, most Sabahans are employed by small and medium-sized enterprises, some of which employ only a handful of people, so it is important for economic growth that downstream activities are nurtured and small businesses are supported, Patrick Tan, director of the Department of Industrial Development and Research, told OBG. Sabah’s growth over the 10th Malaysia Plan, which covered the period 2010-15, was 3%, according to recent statistics from the federal level Economic Planning Unit.

Along with Perlis, a tiny state bordering Thailand, the expansion was the slowest of the country. Nevertheless, GDP growth is forecast to accelerate to 4.6% over the course of the 11th Malaysia Plan (11MP), which runs until 2020.

Regional Growth

Growth rose to 5% in 2014, compared with 3.1% the year before, according to the Statistics Department. The regional economy was worth RM66.28bn ($16.4bn), or RM19,672 ($4870) on a per capita basis. The government is keen to diversify the state’s sources of growth and develop more value-added downstream industries, both as an entry point for smaller companies and as a way to cope with volatility in commodity prices.

To support growth, Yap Cheen Boon, vice-president of the Federation of Sabah Industries (FSI), says Sabah should also position itself as a trading centre for Malaysia, noting that at least 40% of Malaysia’s trade takes place with China, Taiwan, Korea and Japan, all of which are much closer to Sabah than to Peninsular Malaysia. The FSI is championing the development of Sabah as a trans-shipment hub.

Sabah’s development plans are closely linked to the federal government’s overall economic strategies, notably the Economic Transformation Programme (ETP) launched in 2012. Under that plan, Sabah was identified in 71 different entry points covering 10 national key economic areas, including oil and gas, agriculture, palm oil and tourism.

Under the 11MP, the state capital, Kota Kinabalu, was one of four major cities identified as a key growth area, a recognition of the role these cities play as a centre for finance and logistics and a magnet for talent. Under the proposal, authorities in each city will draw up plans in six areas including enhancing quality of life, developing public transport and diversifying into knowledge-based industries. The four cities are also supposed to ensure their development does not take place at the expense of the environment.

Geography & Infrastructure

Sabah’s location on the South China Sea provides the state with a strategic advantage that other parts of the country lack. It has strong links to north Asia and is part of the ASEAN economic initiative known as the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA), a grouping that encompasses some 55m people in a growing economic area.

The airport at Kota Kinabalu has already benefitted from this geographic advantage; it is less than three hours by air to any ASEAN capital and is the country’s second-busiest aviation hub after Kuala Lumpur International Airport. About 9m passengers use the facility each year, and 12 airlines fly internationally from Kota Kinabalu. A wide-ranging renovation plan that started in 2005 was completed at the end of 2015 and included a runway extension – it can now accommodate the world’s largest aircraft, the Airbus A380 – and a new passenger terminal. With all commercial traffic now operating from the improved and enlarged Terminal 1, the plan is to transform Terminal 2 into a hub for cargo plans and private jets.

As well as providing connections to Kuala Lumpur and other major cities on the peninsula, flights from Kota Kinabalu operate to major Asian centres including Seoul, Hong Kong, Jakarta, Singapore, Taiwan and a number of Chinese cities. Charter flights are also common during holiday seasons, while a Ministry of Tourism marketing agreement with Singapore Airlines is expected to boost European and Chinese arrivals through Changi, South-east Asia’s busiest airport. Nazri Aziz, the minister of tourism and culture, described Sabah as the “gem of Malaysia’s tourism industry”, especially its ecotourism sites. Malaysia Airports has also provided the Sabah Tourism Board with RM10m ($2.5m) to promote tourism in the state.

The Department of Industrial Development’s Tan says that the airport has been the key to attracting tourists to the state, and has also underpinned growth in areas such as food production and distribution, because these types of products benefit from the speed and ease of air cargo.

The state government also aims to highlight air connectivity to encourage non-resource industries such as technology firms to operate in the state. “Compared with Kuching or Brunei, Kota Kinabalu is the gateway to Borneo,” Tan told OBG.

Diversification

However, air cargo is not appropriate for all kinds of manufacturing and others hold the view that if Sabah wants to diversify its economy it must do more to improve sea links and address the logistical constraints that restrict industrial supply chains. “Sabah should be transformed into a commercial trading hub because of its geographical location,” Yap told OBG. “We must look beyond oil, gas and tourism.” Yap estimates the cost of doing business, as a result of the logistical constraints could be as much as 30% higher than on the peninsula. Industry wants improved sea links and is calling for a “Dual Gateway” structure for Malaysia that would put Sabah’s Sapangar Port on a level footing with Port Klang on the peninsula, bridging the world’s western and eastern trading routes. It is also calling for an end to a cabotage policy that was introduced in 1980 to support and protect the national shipping industry, which they say not only hinders Sabah’s development but makes goods sold or made in Borneo more expensive than in Peninsular Malaysia. Under the policy, only Malaysian-flagged vessels can transport locally made goods from the peninsula to Sabah and vice versa. Shipping companies have noted that deepening regional integration as a consequence of the ASEAN Economic Community is already beginning to benefit Sabah, but the state must expand export businesses to boost trading volume.

“For Sabah to become a successful trans-shipment hub the state needs to further develop supporting industries and capability to ensure it stands out from other potential hubs in the region,” Chow Yang Ann, managing director of Standard Marine and president of the Sabah Shipping Agents Association, told OBG.

Tan, among others, acknowledges that the state cannot wait for demand to come if it wants to become a shipping hub. “We need to provide efficient services, benchmarked against the best in the region. Then they will use it. We need to have the right physical infrastructure and the best port systems and practices,” he told OBG.

Improvements to Sapangar Port are under way already. Capacity is expected to double to 1.25m twenty-foot equivalent units (TEUs) by 2020 and 2m TEUs by 2025. A 73-ha inland port at the Free Economic Zone, which is scheduled to open in 2022, will be able to handle 500,000 TEUs.

Roads

Sabah’s mountainous interior means road and rail links are also relatively poorly developed, despite investment in new roads. Road coverage increased from 5606 km in 2009 to 7246 km in 2014, according to the 11MP. That compares with total coverage of 38,131 km on the peninsula. Improvements are still ongoing in this area.

The government has recently renewed its commitment to improving the road network, not only in Sabah but across Borneo itself. The 2239-km PanBorneo highway, first planned in the 1960s, will link Kuching in Sarawak, through Brunei’s capital Bandar Seri Begawan to Kota Kinabalu.

Sabah is expected to sign a development agreement with the federal government and project delivery partners for its part of the RM13bn ($3.2bn) project in 2016, with construction works expected to be divided into 35 different packages.

The road, a two-lane highway in each direction with rest-stops, will be of particular benefit for transporting agricultural products, according to the Sabah Economic Development and Investment Authority (SEDIA). Construction on the Sarawak portion of the highway, which is expected to cost approximately RM16bn ($4bn), commenced in 2015.

Recent development plans have also seen improvements to electricity provision and water supply across the state. According to the 11MP, 94.1% of rural homes now have electricity coverage, compared with 77% in 2009. Some 80.6% now have water supply compared with 59% previously.

Rich Resources

Oil and gas are a major pillar of Sabah’s economy, with oil reserves totalling 1.5bn barrels, a full quarter of Malaysia’s overall reserves. The state has reserves of 1trn cu feet of gas, 12% of the national reserves. Most of these resources are found offshore and operated by foreign oil companies in partnership with Petronas, which is investing heavily in the state’s hydrocarbon reserves.

The Sabah-Sarawak Integrated Oil and Gas Project includes the development of offshore, deep-water fields like Kebabangan, in which ConocoPhillips and Shell each have a 30% stake, but also in two onshore projects – the Sabah Oil and Gas Terminal (SOGT) in Kimanis, and the Sabah-Sarawak Gas Pipeline.

The slump in the price of the commodities has definitely affected the state, according to SEDIA. With economic growth slowing, Malaysia has already revised its 2016 budget, reducing its projection for the oil price to between $30 and $35 a barrel, compared with $48 in September 2015 when the budget was announced in parliament.

Sabah has been trying to reduce its exposure to Sabah has been trying to reduce its exposure to international commodity price fluctuations by developing its own downstream industries in the oil and gas, palm oil and agriculture segments, with major investments centred on the Sipitang Oil and Gas Industrial Park (SOGIP) and the Palm Oil Industrial Cluster (POIC) in the state’s eastern region.

At Sipitang, a two-hour drive south-west of Kota Kinabalu, Petronas Chemicals Group is developing a fertiliser hub – leveraging on the proximity of its gas fields, its petrochemical expertise and the demand for fertiliser from Sabah’s agricultural industries. The Sabah Ammonia and Urea project is expected to become operational by the end of 2016 with the capacity to produce 1.2m metric tonnes of granulated urea a year. Petronas has announced it may also develop an ammonia plant at Sipitang.

Added Benefits

Investors in selected industries within the SOGIP who apply before December 31, 2020 are eligible for 10-year tax exemptions, while those involved in shipbuilding and ship repair industries are eligible for a five-year tax exemption. Petronas remains the major investor in the project, but SEDIA says it is also evaluating some pipeline projects, which are seen to have some substantial potential. SOGIP also sits along the route of the 500-km Sabah-Sarawak Gas Pipeline, which transports gas from SOGT to Bintulu in Sarawak.

SOGT, which was delayed by a number of technical and construction issues, commenced its operations in 2014 and currently has the capacity to handle up to 1bn standard cu feet of gas per day as well as 300,000 barrels of oil per day.

The development of the palm-oil industry is centred on the east of the country around Sandakan and Lahad Datu, and is designed to leverage on the state’s 1.5m ha of oil palm plantations. The two industrial parks are designed to cater to palm oil and palm oil -related businesses, offering tax and other incentives to investors, as well as the infrastructure and utilities to operate a business successfully. They also benefit from investment incentives for less-developed areas that were introduced in the 2016 budget, Bilson Kurus, senior manager, research and information, at POIC, told OBG. POIC Lahad Datu, with a dry-bulk port terminal and a liquid terminal, had attracted cumulative investments of RM9bn ($2.2bn) by January 2016, according to SEDIA. A container terminal costing RM450m ($111.4m) is due to open at the end of 2016.

KKIP

Kota Kinabalu Industrial Park (KKIP) is an important component in diversifying Sabah’s industrial base. As of December 2015, the park is home to 283 factories with investment of approximately RM2.6bn ($643.6m), and has seen some important developments recently. In April 2016, KKIP signed a collaboration agreement with Malaysian Biotechnology Corporation, an agency under the federal Ministry of Science, Technology and Innovation, to develop a biotechnology hub in the park, initially spanning 12 ha, but with possible expansion of 40 ha in future. KKIP’s CEO Melvin Disimond told OBG that the park had signed an agreement with Lembaran Asia in collaboration with Lufthansa Technical Training, for the development of an aerospace training centre. Regarded as a potential catalyst for a maintenance, repair, and overhaul industry, initial investment in the centre clocks in at RM25m ($6.2m) and will have a starting capacity for 250 students annually. In addition, in the first quarter of 2015 Singaporean Conglomerate F&N purchased 8.6 ha in KKIP, with plans to invest approximately RM85m ($21m) over the next six years in a new plant. While such developments are highly promising, according to Malaysian Investment Development Authority statistics, overall investment in the state’s manufacturing sector took a significant hit in 2015, down from RM2.9bn ($717.9m) in 2014 to RM348.2m (86.1m).

Tourism

The tourism sector is the third pillar of Sabah’s economic development plan, with the state aiming to leverage on its natural beauty and unique wildlife to attract tourists looking for pristine seas, mountains or rainforest adventures.

Sabah has a number of national parks and wildlife reserves including the Danum Valley, Maliau Basin and Tabin Wildlife Reserve, and was designated by Conservation International as a “mega-diversity hot spot”. The 754-sq-km Kinabalu Park was gazetted in 1964 and is centred on the 4095-metre Mount Kinabalu. Sabah is also home to five protected marine parks including the Sipadan Island Park, which is ranked as one of the world’s top dive destinations.

Some 3.18m people visited the state in 2015, according to provisional data from Sabah Tourism Board, compared with 3.23m in 2014. Most of the visitors were Malaysians. International arrivals totalled 978,426, compared with 996,522 in 2014, but the number of tourists from Taiwan, South Korea, Vietnam and Indonesia recorded double-digit increases.

The decrease in numbers followed a rare 6.0 magnitude earthquake that struck Mt Kinabalu in June 2015, killing 16 people. The unresolved disappearance of Malaysia Airlines flight MH370 in March 2014 also acted as a deterrent to Chinese visitors considering a trip to Malaysia, and security concerns continue to weigh on many travellers as some Western countries have security warnings in place and a number of people have been kidnapped since 2014 by groups of armed bandits from the Philippines.

Security

After a group of armed men from the Philippines grabbed control of an area of land around Lahad Datu in 2013, the Malaysian government stepped up security, setting up the Eastern Sabah Security Command and imposing a dusk-to-dawn curfew in certain areas, but tour operators say that until such warnings are lifted insurance companies won’t cover tours in the area. Yet many experts familiar with the situation on the ground argue some of these problems are exaggerated in the media. Sabah’s crime rate is low and what little theft that occurs is more likely to be orchestrated internally rather than by external parties, underscoring the need for businesses to work with security firms to prevent crimes of this nature.

Despite these concerns, tourism remains a key area of growth for Sabah and operators note that independent tourists, who tend to be more adventurous and free from insurance company demands, continue to visit the state even as the number of people on package tours declines. This has opened up the possibilities of new avenues for growth. Mt Kinabalu also reopened in September 2015 with a new route to the summit, while a second will open in April 2016.

Federal and state authorities are also stepping up marketing campaigns and initiatives to win over tourists and encourage them to visit Sabah. As well as an agreement with Singapore Airlines targeting European tourists, the Ministry of Tourism has indicated it is ready to work with airlines in Europe, Japan, Korea and China to provide direct charter flights to Sabah.

Luxury & Ecology

Sabah is also set to benefit from a number of the tourism development initiatives under the ETP, including establishing the Malaysia Mega Biodiversity Hub, which means adding eco-nature resorts, promoting cruises, golf and spa tourism, as well as building more four-star and five-star hotels. Karambunai’s planned development of a luxury resort on the coast of northern Sabah is being fine-tuned, according to the most recent update on the ETP, and is discussing joint ventures with private investors.

Hotel occupancy rates for hotels of between three and five stars in Kota Kinabalu was around 60% in 2015, compared with 65% in 2014, according to local newspaper reports. Jonathan Wheeler, managing director of Pacific Sanctuary Holdings, which is developing PacifiCity – a shopping mall, a 440-room Hotel Jen (part of the Shangri-La group) and apartments – believes there is excellent potential for growth in Sabah. He adds that tourists need to be encouraged to stay longer, but that the shift from package tourists to independent tourists was an indication that the market was becoming more sophisticated.

Training & Opportunities

As Sabah seeks to develop and diversify its economy, it is also working to improve the skills of its people to meet the needs of new industries. The Sabah Skills and Technology Centre is funded by the federal government and provides a link between the public and private sector. It has trained about 15,000 people since 2000, according to its director, Natalie Fung. Its programmes are targeted at providing workers for key industries such as plantations or the oil and gas sector, and focus on both school leavers and graduates. The Ministry of Industrial Development notes that the state government has made more effort to match skills with industry needs. Polytechnics, the Malaysian Agricultural Research and Development Institute and other groups also provide technical and vocational training, and technical and vocational education is a key pillar of the federal government’s education reforms. The government has noted that increasing integration under the ASEAN Economic Community will likely increase competition within the workforce.

Skills training has mainly focused on agri-based industries and the hospitality segment, but is also helping workers in the professional segments, as opportunities for white-collar workers expand. In a recent boon for the state of Sabah, the Multimedia Super Corridor (MSC Malaysia) granted MSC Malaysia status in early 2016 to Sabah-based NXG Shared Services. MSC Malaysia aims to develop Malaysia’s ICT industry, and the granting of such a status comes with a raft of incentives, including tax breaks. “The expansion of eligibility for MSC status to companies headquartered in East Malaysia should be an important catalyst to development of Sabah’s ICT sector. With Sabah boasting four universities and 30 colleges, we will have little problem securing the talent we require to expand our business in Kota Kinabalu and across the state,” Francis Chung, chief operating officer of Nexgen Biopharma, the holding company of NXG Shared Services, told OBG.

Outlook

Sabah continues to move forward with a clear strategy for future development. Although low oil prices in 2016 are likely to have an impact on economic growth, the main challenge for the state government will be to execute its plans effectively. “It’s one thing to have a plan, and another for the government to push through on it,” said FSI’s Yap. The state is also has a large population of foreigners, both documented and undocumented, and is urging employers to ensure all their workers are registered.