Sabah: Eyeing downstream potential

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Efforts to harness Sabah’s abundance of natural resources for downstream industries look to be paying off, with figures showing that investment in the state’s manufacturing sector is rising.

Sabah’s wide-ranging strategy to galvanise value-added production from its resources, which include timber, oil and gas, forms part of the state’s long-term bid to boost the contribution manufacturing makes to growth. However, industry players say more incentives and improved infrastructure are needed to give local firms a better chance of competing both nationally and internationally in downstream processing.

The state plans to roll out a number of initiatives for downstream processing activities, including the high-profile Palm Oil Industrial Cluster (POIC), which is earmarked for the east coast. The cluster will be instrumental in driving forward value-added production in Sabah, which is Malaysia’s largest producer of crude palm oil.

Other manufacturing activities, such as the automotive, rubber and furniture clusters at Kota Kinabalu Industrial Park, are set to support the state’s efforts to channel its resources from agriculture, forestry and hydrocarbons into manufacturing.

With an estimated 12.1trn cubic feet in natural gas reserves, Sabah is also keen to begin mobilising downstream activities in its oil and gas sector. In February, state energy giant Petronas announced plans to invest RM45bn ($14.7bn) in upstream and downstream activities from Sabah’s petroleum sector. Key projects include the RM3.8bn ($1.24bn) Sabah Oil and Gas Terminal and the Sabah-Sarawak Gas Pipeline.

Data issued by the Malaysian Investment Development Authority (MIDA) shows Sabah attracted RM4.8bn ($1.57bn) of investment for manufacturing ventures in the first seven months of 2012, coming second in the country only to Selangor. The figure marks a huge rise in manufacturing investment, which reached a full-year-total of just RM921.4m ($301.6m) in 2011, according to the National Statistics Department.

Sabah’s value-added exports are also on the rise, totalling RM4.6bn ($1.5bn) in 2011, which marked a year-on-year rise of 2.7%. However, while manufacturing sector exports are increasing, the state’s higher logistics costs continue to irk industry players.

In an attempt to address business leaders’ concerns, the government announced a raft of subsidies and measures on September 29 as part of the 2013 national budget, aimed at reducing the cost of transporting essential items and lowering the price of goods.

While the initiatives have been broadly welcomed, representatives from the manufacturing sector say that a failure to address key issues, such as the pitfalls of a three-decade old cabotage policy and the state’s inefficient transportation network, mean pricing inequalities look likely to remain. Under the cabotage rule, only Malaysian-owned shipping companies are permitted to carry out domestic trade between any two of the country’s ports.

The president of the Federation of Sabah Manufacturers, Wong Khen Thau, told local media that the organisation had expected more direct assistance, such as grants and subsidies, to help reduce the cost of doing businesses, especially with the introduction of the minimum wage. “A long-term solution is needed for sustainable economic development, such as improving infrastructure such as roads,” he said.

Speaking in September, Wong also suggested a 15-year tax exemption for Sabah’s industries similar to the 30-year tax break awarded to shipping companies. He added that such measures were worthy of consideration in light of plans for Malaysia to become a high-income economy by the end of the decade.

Sabah aims to boost the manufacturing sector’s contribution to GDP to 20% and double output by 2020, under development plans for its economic corridor project. The first phase of the strategy includes a bid to focus on “catalysing growth through fixing basic infrastructural gaps, investing in human capital and creating pragmatic incentives regime that encourages higher order value-added activities”.

As part of the second phase, companies undertaking research and development and design and technology transfer activities will be offered key incentives. This is expected to be followed by a move to establish connections with affluent markets in North Asia.

Speaking ahead of the budget, the chief of the Wanita Sabah Progressive Party (SAPP), Melanie Chia, highlighted the benefits of driving growth in downstream processing. “With the abundance of natural resources in Sabah, downstream activities should be encouraged which will not only add value to the economy but also provide and increase job opportunities for the local work force,” she told local media.

Sabah’s natural resources certainly provide plenty of potential for the state to develop value-added production and downstream processing ventures. However, industry representatives will be looking to the central government for greater support in their efforts to drive growth in emerging segments of manufacturing and boost its contribution to GDP.

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