Sabah Development Corridor 2008 2025 Briefing EU Economics

Sabah Development Corridor 2008 -2025 Briefing EU Economics & Commercial Counsellors IDS Conference Room 14 th May 2009 0

1. 2. 3. 4. 5. 6. 7. 8. Key development challenges: • High cost of doing business – poor infrastructure and high freight costs • Shortage of critical mass of human capital • Highest incidence of households living in poverty High cost of doing business mainly due to high shipping costs and poor infrastructure • Shipping costs: low originating cargo, low ship call frequency and double handling • Unreliable electricity supply and shortage of water supply • Poor road and rail connectivity leading to high transportation costs Shortage of talents in strategic sectors; and heavy dependence on foreign labour Largely rural, with a poverty rate of 23% (6. 5% hardcore poor). Gross Domestic Product: Sabah’s GDP of RM 15. 1 Bn is 7 th largest in Malaysia GDP per capita in 2005: RM 5, 100 ; Malaysian average: RM 9, 800 Monthly household income in 2004: RM 2, 487; Malaysian average: RM 3, 249 Unemployment is currently at 5. 8%; Current workforce is 1. 198 million

Sabah Development Corridor 2008 -2025: The National Context: Issues and Benefits • Narrow-base of national export: too dependent on electronics, oil & gas and palm oil • Relatively weak resource-based industries • Widening income inequality • Employment growth lagging behind economic growth • Relatively weak linkage between economic growth and poverty incidence • Lack of human capital in strategic sectors • Heavy dependence on foreign labour in agriculture and construction

KLSE COMPOSITE INDEX: JANUARY-DECEMBER 2008 39% Decline over the period

WORLD ECONOMY ‘WEAKEST SINCE 30’s: the United Nations The United Nations says “the world economy faces its worst downturn since the Great Depression. . . [and] expects world economic output to shrink by as much as 0. 4% in 2009, due to a slump among developed countries - particularly the US and in Europe. … “The eurozone economy will shrink 1. 9% in 2009 and grow by only 0. 4% in 2010…. ” (the European Commission, 2009) “This would mark the world economy's first year of contraction since the 1930’s” (Source: the BBC)

Sabah Development Corridor 2008 -2025 The vision for Sabah is to be a vibrant, economically successful and liveable state SDC is underpinned by 3 key principles • Capture higher value economic activities • Promote balanced economic growth with distribution • Ensure sustainable growth via environmental Phase 1 (2008 -2010) Phase 2 (2011 -015) conservation Building the foundation for growth Catalysing future growth via infrastructure as well as high economic impact and poverty eradication projects Accelerating economic growth Higher order value-add activities, the presence of global companies and a strong base of local SMEs Phase 3 (2016 -2025) Expansion An attractive destination for FDIs with strong supporting infrastructure, global companies and knowledge workforce

January 2008 The vision for Sabah is to be a vibrant, economically successful and liveable state by creating and articulating a set of 5 unique attributes that will mould the future of Sabah: • A preferred gateway for trade, investment and leisure for leading businesses and talent from around the world in key areas • A happy and cohesive community that lives in harmony and prosperity regardless of race, language or religion • A tech-savvy state that uses and showcases technology in enhancing quality of daily life • A place of opportunity where residents and foreign talents find rewarding employment opportunities • Amongst the most liveable place in Asia with culture, heritage, quality of life and clean environment 6

Sabah is blessed with excellent Location, Resources and Bio-diversity which it can build on… Location Resources Cultural and Bio-diversity • Gateway for regional trade • Ideal for transhipment and value add for cargo between Kalimantan–South Philippines and North Asia (China, Japan, Korea) • Capitalise on market deregulation of AFTA • Rich in natural resources (oil & gas, fertile agriculture land, minerals, forestry) • Capture high value add downstream activities such as oleo chemicals, gas processing plant, oil refineries and wood based products • Position Sabah as centre of excellence for agriculture • Rich bio-diversity (flora-fauna and marine life) • 32 ethnic groups spawning diverse cultural backgrounds • Capture knowledge from international researchers • Stimulate biotech activities 7

Vision & Sectoral Focus

SDC VISION To be a leading economic region in Asia by being the preferred gateway for trade, investment and leisure Physical infrastructure Structured infrastructure development in transportation, utilities and communication to enhance living standards and enable commercial activities Social Environment Sector-specific visions Agriculture: Services: Manufacturing: Highly productive Premier ecotourism High value jobs Food selfsufficiency Second home High value add downstream Sustainable and safe Low cost of business Successful pool of SMEs Harmonious and Cohesive society Pristine and well conserved No Hardcore Poverty Soft Infrastructure Systematic skills upgrading of existing workforce in key industries, retain talented Sabahans and targeted import of foreign talent in professional and managerial positions Confident and Independent Renowned worldwide 9

Sabah Development Corridor is made up of 3 sub-regions Characteristics of Sabah Development Corridor • SDC is made up of 3 sub-regions – Western Sub-region: Kudat, Kota Belud, Tuaran, Kota Kinabalu, Penampang, Papar, Beaufort, Kuala Penyu, Sipitang – Central Sub-region: Pitas, Kota Marudu, Ranau, Tambunan, Keningau, Tenom, Nabawan – Eastern Sub-region: Sandakan, Beluran, Kota Kinabatangan, Tongod, Lahad Datu, Kunak, Kalabakan, Semporna, Tawau • Sabah consists of 5 administrative divisions*, subdivided into 24 sub-divisions (or districts) • 32 officially recognised ethnic groups • Area = 73, 997 km 2 (22. 4% of Malaysia); Population = 3. 1 million** *1. West Cost Division: Kota Belud, Kota Kinabalu, Papar, Penampang, Ranau, Tuaran; 7, 588 km 2, popn. =953, 900. 2. Interior Division: Beaufort, Nabawan, Keningau, Kuala Penyu, Sipitang, Tambunan, Tenom; 18, 298 km 2, popn. =420, 800. 3. Kudat Division: Kota Marudu, Kudat, Pitas; 4, 623 km 2, popn. =189, 500. 4. Sandakan Division: Beluran, Kinabatangan, Sandakan, Tongod; 28, 205, popn. =676, 000. 5. Tawau Division: Kunak, Lahad Datu, Semporna, Tawau; 14, 905 km 2, popn. =756, 800 **Department of Statistics Malaysia (2006) Source: IDS Concept Paper; Team analysis 10

Core Components of Sabah Development Corridor Sub-Regions 11

CURRENT URBAN HIERARCHY AND LINKAGES FOR SABAH Sub-Regions KUDAT (11): 27, 443 KOTA BELUD (10): 31, 001 TUARAN (8): 35, 499 KOTA KINABALU (1): RANAU (12): Regional Growth Centre 22, 425 323, 817 PAPAR (6): 42, 598 SANDAKAN (2): 268, 821 Secondary Regional Growth Centre Penampang (4): 81, 867 KENINGAU (9): 32, 754 LAHAD DATU (5): 71, 176 SEMPORNA (7): 41, 624 TAWAU (3): 155, 099 Sub-Regional Growth Centre

Sub-Regional Growth Centre Urban Growth Centre Sub-Regions Rural Growth Centre KOTA KINABALU CONURBATION Regional Growth Centre THE PROPOSED URBAN HIERARCHY AND LINKAGES TO REDUCE SUBREGIONAL AND RURAL-URBAN GAP Secondary Regional Growth Centre Sub-Regional Growth Centre

Services Tourism & Logistics

TOURISM: Sabah’s beauty and rich cultural and bio diversity Tropical Research Centre of Excellence Eco-Certification One District One Product Tropical Research Field Station Poring Hot Spring Spa Tourism Skills Training Centre Maliau Basin Arts & Culture Development Fund Danum Valley Keningau Handicraft Production Village 15

Four main strategies under the tourism sector. . . Tourism Strategy 1 2 3 4 1 Rationale Position Sabah as the premier eco-adventure destination • Leveraging on Sabah’s natural endowment • Tapping on fastest growing segment of tourism industry; ecotourism growth of 20% compared to 7% for overall tourism 1 Develop new tourism products anchored by signature resorts • Moving towards high-yield market • Leveraging off their marketing efforts and loyal customer base Market Sabah as the exclusive holiday home destination • Increasing demand for exclusivity among the rich and famous – Sabah is still largely undeveloped unlike Phuket and Bali • Extending length of stay of high-end visitors Encourage rural participation through community-based tourism • Enhancing rural income • Encouraging entrepreneurship The International Ecotourism Society, Ecotourism Fact Sheet (September 2005) 16

Agriculture

AGRICULTURE: Focus on food sustainability, high value export to North Asia and poverty eradication Bengkoka Rubber Resettlement (2, 500 families) Jatropha Site Palm Biotech R&D Centre Integrated Collection Centre R&D Centre Jelapang Padi Programme (7, 000 families) Permanent Food Crop Production Parks Upgraded fishery landing sites E Sabah Agro-Industrial Precinct Sandakan Education hub Aquaculture zones E National Marine Aquaculture Centre Seafood Terminal Livestock cluster Agrifood production zones Agrifood industrial zones Jatropha Pilot Site Keningau Integrated Livestock Centre 18

Three main strategies for the agricultural sector. . . Agriculture Strategy 1 Develop high-value, high-potential products • To move towards high value markets • Leveraging off the natural biodiversity strengths of Sabah from both sea and land • Potential enhancement via increased R&D and marketing Enhance food-based agriculture sub-sectors • To reduce Sabah’s food import requirement • To enhance involvement and income of rural community • Potential enhancement via increased technical and financial support Position Sabah as the centre of excellence for oil palm • Sabah is the single largest contributor to the oil palm industry in Malaysia • Sabah has high potential in downstream activities for palm oil 2 3 Rationale 19

Manufacturing

MANUFACTURING: Sabah will focus on leveraging its natural resources as feedstock to capture value in downstream activities Wood-Based Industry Cluster Industrial Corridor POIC Sandakan Sabah Oil and Gas Terminal Minerals Based Industry Energy Intensive Cluster POIC Lahad Datu 21

MANUFACTURING: Integrated Petrochemical Complex at the Kimanis landing site will generate RM 5 bn of private investments and create high value jobs …to an integrated gas or petrochemical complex, attracting investments and spawning high value jobs From landing site… Export Natural gas LPG bottling plant Hydrogen peroxide Stabilisation unit Condensate Crude oil LPG Tank farm Slug catcher and gas conditioning Gas Ammonia/ urea Off gas GPP Future NPK plant 300 MW Power plant Compressor station Gas pipe to Bintulu LNG plant Source: Interviews with Oil & Gas expert 22

Three main strategies for manufacturing sector. . . Manufacturing Strategy 1 2 3 Rationale Enhance basic infrastructure, focus on reducing cost of doing business • Basic infrastructure is crucial to operational efficiencies of manufacturers • Cost of doing business is fundamental to investors’ choice of location Invest in human capital for existing and new industries • Skilled manpower is key to manufacturing competitiveness • Systematic approach to matching industry needs with supply of human capital via fine-tuning current education and training courses Attract world class companies in high value add downstream activities • Leverage Sabah’s natural resources as feedstock raw materials • Elevate the standards of local SMEs supplying to world class companies • Serve as a draw for talent and quality FDIs (management and technical knowhow) into Sabah 23

Infrastructure and Human Capital

INFRASTRUCTURE SDC infrastructure vision Key targets by 2025 1 CONNECT SABAH • 61% of all roads are still gravel & earth roads Ensure connectivity to enable • 80% of all gravel roads to be sealed by 2025 productivity via roads, rail, sea • Focus on enabling intercity connectivity and SDC and air projects 2 POWER UP SABAH Provide sufficient & reliable electricity for Sabah • • 3 QUENCH SABAH’S THIRST Provide sufficient water to keep pace with demand • Current demand outstrips supply by 23% • Supply to meet demand by 2010 • Reduce NRW from current levels of 57% to 25% by 2025 4 EMBRACE TECHNOLOGY Enhance data connectivity • Current broadband penetration is 4. 9% • 65% of population connected by 2025 • Enable businesses and move towards a knowledge based economy 5 • 3. 95% of population with tertiary education in 2000 INVEST IN SABAH’S • 15% of population with tertiary education by 2025 TALENT Build human capital to provide • Using companies and MNCs to develop talent skilled talent pool Current coverage is 67% 90% of population covered by 2010 Enhance rural electrification Increase capacity and strengthen grid 25

Environment

Adventure Experience… of Pristine Wilderness in Primeval Rain Forests Mt. Kinabalu Mt. Tambayukon Mt. Trusmadi Crocker Range Danum Valley Imbak Canyon Maliau Basin ‘Sabah’s Lost World’ Nature at its Best Heart of Borneo

ENVIRONMENT: Conservation is necessary to preserve our heritage, boost tourism and export of agriculture related products Education and awareness • Educate public on recycling, cleanliness, conservation of biodiversity, preservation of clean river system, etc. Infrastructure • Manage sewage and solid waste • Protect settlements, river systems, mangrove Forests • Clearly demarcate boundaries and regulate forest reserves • Restore degraded forests By 2025, most liveable place in Asia Biodiversity • Preserve marine and wildlife • Preserve flora and fauna • G 2 G agreements on protection of highly migratory species Physical conservation • Shoreline management • Conserve World Heritage sites Sustainable development • Promote certification of agriculture produce to comply with credible sustainable standards (s. a. RSPO) Source: Team analysis 28

Implementation & Expectation

Key tenets need to be in place for SEDIA to have the best chance to successfully deliver the programmes planned in the SDC Blueprint Key tenets for SEDIA • The Sabah Economic Development and Investment Authority (SEDIA) Enactment 2009 • Joint Working teams comprising of federal and state agencies to expedite approvals • Commitment and obligation on all parties concerned to meet service levels Measure of successful implementation Impactful programmes Targeted resource delivery Balanced socio-economic • Permanency to stay the course of the Blueprint • Right management structure and enablers 30

SDC INVESTORS “The government will put in place policies to make it easier to do business here. . . We will not compromise on the environment and our culture"- SEDIA DATUK SERI PANGLIMA MUSA AMAN Company Registration Licence Approval Work Permits Land Matters Planning Approvals Utility Approvals Incentives

Ø Mega biodiversity, relatively Ø Ø Ø unaffected by the Ice Age Kinabalu Park – Malaysia’s first World Heritage Site (UNESCO: Dec, 2000) Danum Valley Research Centre and Sepilok Orang Utan Rehabilitation Centre Islands (esp. Sipadan), Maliau Basin, Tabin Wildlife, Caves (Gomantong & Madai) Valuable ethnobotanical knowledge from the indigenous communities Infrapro & Deramakot (since 1992, FSC cert. ) carbon sequestration model Multi-racial society with rich cultural heritage (Tingkayu Valley archeological sites Largest oil palm plantation area in Malaysia; Fertile soil, adequate rainfall and conducive climate Relatively clean and unpolluted natural environment Livestocks free from foot and mouth disease Access to deep water and sheltered Ø Moves the economy up the value Ø Ø Ø chain and promotes economic growth by optimising the utilisation of Sabah’s factor endowments, locational advantages and competencies Rationalises the spatial distribution of Sabah’s population and facilitates the integration of Sabah sub-regional economies, thereby reducing regional imbalance Enhances human capital thereby improving the quality of life and thus reducing social imbalances Attracts private investments, tourists, highly skilled workers as well as scientific researchers Offers Sabah and Malaysia generally, to participate in the vibrant knowledge-based economy driven by S&T convergence Reduces poverty by creating new business and employment opportunities

“Big ticket” items for remaining 9 MP* • Roads • Replicate Agropolitan • Sea Port • POICs (Sandakan and Lahad Datu) • Human Capital: Sandakan Education Hub • Biodiversity Conservation: Heart of Borneo, wildlife, marine eco-syst • Agri-Business Accelerator: eg SAIP, Integrated Fisheries Compl • Agri. Excel Outreach: Food Security and High Value Crops • Direct assistance (hardcore) • Tropical Biodiversity Research: Sabah Bio-X • Mini Estet Sejahtera (MESEJ)

1. 2. 3. 4. Tourism targets • Increase average tourist spending from RM 2, 517 in 2006 to RM 3, 383 by 2012 and RM 5, 364 by 2025 • Increase tourism receipts from RM 2. 88 billion in 2006 to RM 8 billion by 2012 and RM 48. 5 billion by 2025 • Increase rural community tourism receipts (handicrafts and homestay) from RM 139 million in 2006 to RM 432 million by 2012 and RM 4. 5 billion by 2025 Agriculture targets • Multiply GDP contribution by 4. 1 times from RM 4. 1 billion to RM 17 billion by 2025 • Increase total value of exports from RM 9. 1 billion to RM 60 billion • Reduce negative balance of trade of food by 60% from RM 955 million to RM 353 million Manufacturing targets • Increase capital investments from RM 208 million (2006) to RM 2. 96 billion by 2025 • Enhance employment in manufacturing sector from 135, 000 to 228, 704 by 2025 • Increase proportion of manufacturing workforce with tertiary education from under 10% (2005) to 45% by 2025 Infrastructure targets • Roads: all major towns and rural collection centres are connected by sealed roads • Electricity: 90% of population is connected with SAIDI of 500 minutes (from 2, 540 currently)

Expected Outcome Enhancing The Quality Of Life, And Reducing Regional Imbalance And Poverty Incidence In A Sustainable Manner HUMAN CAPITAL DEVELOPMENT PRODUCTION AREAS FACTOR ENDOWMENT BASIC INFRA. UTILITIES & SERVICES INCENTIVE SCHEMES TO ATTRACT INVESTORS IMPROVE RURAL-URBAN LINKAGES ENHANCE SUPPLY CHAIN EFFICIENCY ATTRACT INVESTMENTS TO TARGETTED AREAS AND ECONOMIC SECTORS OPEN UP NEW ECONOMIC OPPORTUNITIES: THE PRODUCTION POSSIBILITY FRONTIERS CREATING REDUCE POVERTY EMPLOYMENT OPPORTUNITIES BUSINESS OPPORTUNITIES FOR EXPEDITE FARMERS ECONOMIC GROWTH BUSINESS OPPORTUNITIES FOR SMEs REDUCING RURAL-URBAN BUSINESS OPPORTUNITIES GAP: REDUCING RURAL-URBAN FOR LARGE MIGRATION CORP & GLCs HIGHER QUALITY OF LIFE REGIONAL BALANCE REDUCING INCOME INEQUALITIES SUSTAINABLE DEVELOPMENT

With SDC Sabah GDP per Capita (1987 constant prices) (RM) 9 MP growth target 14, 784 2. 9 x 11, 363 5, 100 GDP (RM’bn) 15. 1 21. 9 20. 3 32. 0 27. 1 45. 7 36. 3 63. 2 48. 6 *ADB forecast a growth of 5. 5% for Malaysia for 2006 -2010. Constant growth is based on 6% in line with 9 MP. SDC model in Appendix Source: Team analysis; Asian Development Outlook 2006 36

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