Traditionally known for its lucrative oil fields, oil palm plantations and the mystique of its diverse Borneo rainforests, the Malaysian state of Sarawak is in the midst of an historic makeover that is irrevocably transforming its economy, alongside its social and cultural landscape. In tandem with the government’s overarching development goals to modernise the economy and boost revenues while improving the lots of Malaysians as a whole, Sarawak now finds itself at the forefront of this progression as a top destination for foreign investment and ensuing export growth.

Powered by ample, inexpensive electricity generated by a string of new hydroelectric power plants and acres of greenfield sites, the epicentre of new investment is the Sarawak Corridor of Renewable Energy (SCORE). Lured in by a wave of generous financial incentives, investors from across Asia have been signing on to produce a wide array of products ranging from aluminium ingots to processed foods.

BY THE NUMBERS: Capitalising on its plentiful natural resources, Sarawak has long been a substantial contributor to Malaysia’s balance sheet, showing consistent trade surpluses year after year. The state’s trade balance has become increasingly positive over recent years, growing from RM37.69bn ($11.47bn) in 2009 to RM50.02bn ($15.22bn) in 2010 and RM69.92bn ($21.27bn) in 2011 before tailing off to RM65.64bn ($19.97bn) in 2012, according to Department of Statistics Malaysia data. The ledger increased again in 2013 to RM69.47bn ($21.13bn) and was on pace to outperform this total in 2014 after the balance stood at RM62.64bn ($19.06bn) through the first 10 months of the year compared to RM55.61bn ($16.92bn) over the same time period in 2013.

Sarawak’s exports rose to RM108.40bn ($32.98bn) in 2013, up 4.6% from the RM103.63bn ($31.52bn) seen in 2012, and 75% greater than 2009 shipments of RM61.97bn ($18.85bn). This growth trend continued in 2014 with year-on-year (y-o-y) shipments tallying RM95.82bn ($29.15bn) by the end of October compared to RM88.06bn ($26.79bn) over the same time period in the previous year.

EXPORTS: In spite of the ongoing diversification of the state’s economy, primary resources continue to dominate Sarawak’s export ledger, with mineral fuels and lubricants accounting for 78% of the value of all exports in 2013. Due in a large part to Sarawak’s contributions, Malaysia has grown into the world’s second-largest exporter of liquefied natural gas (LNG), signing lucrative supply contracts with Japan, South Korea, Taiwan, China and Singapore. Among this group are the country’s top-four purchasers of exports, led by Japan, which bought RM43.07bn ($13.1bn) of Malaysian goods in 2013, followed by South Korea with RM11.56bn ($3.52bn), Taiwan (RM9.34bn, $2.84bn) and China (RM8.45bn, $2.57bn). Composed primarily of LNG, total shipments of these products were valued at some RM84.49bn ($25.7bn) in 2013, up from RM79.48bn ($24.18bn) the previous year.

The other two major export sectors of animal and vegetable oil and fats, and manufactured goods have been mirror images of each other in recent years as softer commodity prices for crude palm oil (CPO) have eroded the value of agriculture exports while the growing capacity of the manufacturing sector continues to increase its output. Between 2011and 2013 vegetable oil and fats shipments declined by 21% from RM9.42bn ($2.87bn) to RM7.78bn ($2.37bn). A more recent recovery of CPO prices starting in 2013 appears to have stemmed this decline, however, as exports through October 2014 tallied RM7.86bn ($2.39bn) compared to RM6.25bn ($1.9bn) over the same time period the previous year.

MANUFACTURED GOODS: Meanwhile, the first pioneer investors in Sarawak’s SCORE industrial development corridor are churning out a growing number of manufactured goods destined for foreign shores. Manufactured shipments have continued to display consistent y-o-y growth, expanding by 57% from RM4.79bn ($1.46bn) in 2009 to RM7.5bn ($2.28bn) in 2013. This positive growth trend continued in 2014 with exports totalling RM6.87bn ($2.09bn) through the first 10 months of the year compared to RM6.22bn ($1.9bn) in the year to October 2013.

Other exports include crude inedible material, of which RM3bn ($912.6m) was exported in 2013 along with RM2.93bn ($89.31m) worth of machinery and transport equipment, RM1.37bn ($416.75m) of chemicals and RM990m ($301.16m) in food.

IMPORTS: On the other side of the balance sheet, imports have surged 60% since 2009 as the deluge in investments along with rising GDP drive up consumption. The value of imports between 2009 and 2013 expanded from RM24.27bn ($7.38bn) to RM38.93bn ($11.84bn). Machinery and transport equipment top the list of imports, with RM13.4bn ($4.08bn) of such goods delivered in 2013, along with some RM5.07bn ($1.54bn) of manufactured goods, RM3.85bn ($1.17bn) in food and RM4.94bn ($1.5bn) worth of chemical products. In spite of hosting a substantial amount of the country’s hydrocarbons extraction operations, Sarawak also imported RM7.38bn ($2.24bn) worth of mineral fuels and lubricants due to its lack of refining capacity.

CASH FLOW: Lured by the promise of cheap, abundant inputs and generous financial incentives, billions in investment are now pouring into Sarawak. In 2013 the state attracted investments of RM8.3bn ($2.52bn), mainly in chemicals and chemical products (RM3.9bn, $1.19bn), basic metal products (RM2.9bn, $882.18m) and electronics (RM1.2bn, $365.04m), according to data from the Malaysian Investment Development Authority. Inflows rose in 2014 to RM10bn ($3.04bn) through the first three quarters of 2014, the latest available figures, making the state the second-largest recipient of investment behind Johor with RM20.13bn ($6.12bn) and well above third place Pulau Pinang at RM6bn ($1.83bn). The vast majority of this inflow is derived from foreign sources – primarily Japan, South Korea, Taiwan, China and Singapore – which accounted for 87% of all investment from January to September 2014 (see analysis). As a result, Sarawak was the single-largest beneficiary of approved foreign direct investment (FDI) of any state during this period. This extreme split exceeds the overall national trend in which Malaysia held a 72.5:27.5 domestic-to-foreign investment ratio in 2013; a figure in line with the government’s target of a 73:27 by 2020.

This recent surge is also evidenced in investment growth in Malaysia as a whole; the country has exhibited robust expansion since the 2009 economic slowdown. FDI grew from RM5.12bn ($1.56bn) during an anomalous 2009 – FDI was RM29.25bn, ($8.9bn) and RM23.92bn ($7.28bn) the previous two years – to RM38.8bn ($11.8bn) in 2013, a figure that was itself up 24% over the RM31.1bn ($9.46bn) recorded in 2012. This growth substantially outpaced global FDI in 2013, which rose by 11% to $1.46trn, according to UNCTAD’s Global Investment Trends Monitor.

The leading source of FDI in 2013 was the US, with a total of RM6.3bn ($1.92bn), followed by South Korea at RM5.5bn ($1.67bn), the EU with RM5.1bn ($1.55bn), Singapore (RM4.5bn, $1.37bn) and Japan (RM3.6bn, $1.1bn). These five economies jointly accounted for 82% of FDI approved in the manufacturing sector for 2013. The same investors played a game of musical chairs in 2014 as Japan launched into FDI lead after spending RM10.65bn ($3.24bn) in the first nine months on 47 projects, a substantial portion of which was channelled into SCORE-based manufacturing plants. It was followed by Singapore, with RM5.74bn ($1.75bn) in approved investments, along with China with RM4.69bn ($1.43bn), Germany (RM4.01bn, $1.22bn), South Korea (RM1.54bn, $468.47m) and the US falling to sixth with RM1.13bn ($343.75m).

BIG PICTURE: On the macro level, investment in Malaysia continued to perform well, increasing 29% to RM216.5bn ($65.86bn) in approved investments over 5669 projects in 2013. Services accounted for roughly two-thirds of this with RM144.7bn ($44.02bn) in investments, up 18% on the year. More than half of these outlays took place in the real estate sector with RM83.3bn ($25.34bn) in investments, with no other service subsector exceeding RM10bn ($3.04bn). The impact of investments in Sarawak is also apparent in national trends as the scale of funds being poured into new projects has helped place the industrial sector just behind the services sector. In 2013 manufacturing attracted investments worth RM52.1bn ($15.85bn) spread over 787 projects, which was 26.8% more than the RM41.1bn ($12.5bn) achieved in 2012. Of this, RM38.1bn ($11.59bn) or 73.1% were for new projects, while the balance were reinvestments in expansion or diversification projects by existing investors. Sarawak’s SCORE development was the second-largest recipient of five economic development corridors in 2013, with RM6.8bn ($2.07bn) in manufacturing projects behind only Iskandar Malaysia’s RM10bn (3.04bn).

From a much smaller baseline, investment in primary resources spiked 418% in 2013 to RM19.7bn ($5.99bn). The majority of activity was in the mining subsector, which accounted for RM18.8bn ($5.71bn), followed by agriculture (RM600m, $182.5m), and plantations and commodities (RM300m, $91.26m).

SCORE: By far the largest single contributor to the surge in investment in the state is the massive SCORE project, which continues to attract local and foreign investors, especially in five growth nodes encompassing 10 priority industries of aluminium, glass, oil-based, steel, palm oil, fishing and aquaculture, livestock, timber, marine engineering and tourism. The Samalaju node will become the new heavy industry centre, the Tanjung Manis node is to be developed into an industrial port city and halal hub, the Mukah node will be a “smart city” acting as the nerve centre for the corridor while Baram and Tunoh will focus on tourism and resource-based industries (see SCORE chapter).

In addition to the substantial investment outlays required for projects and sustained future revenue streams, these projects are also creating thousands of permanent jobs in Sarawak. Workforce demands within the Samalaju, Mukah and Tanjung Manis industrial areas alone are projected to create nearly 9000 jobs across 11 new manufacturing facilities, according to 2013 estimates by Sarawak’s State Planning Unit (SPU). The largest single employer will be OM Materials (Sarawak), a Singapore-Malaysia joint venture producing silicone manganese products that is expected to hire 2684 new workers. Other manufacturing plants needing significant numbers of employees to man assembly lines include Press Metal Bintulu, requiring 2036 workers, and food processor Sea Party, which needs another 1342 labourers. Nine other basic metals and food processing projects will also have staffing requirements ranging from 14 to 963.

INFRASTRUCTURE OUTLAYS: Complementing the influx of private investment to the country, state and federal government coffers are also opening up, led by a number of big-ticket projects. These public works are providing a short-term boost for the economy by putting local construction companies along with their spin-off support businesses to work. Furthermore, by bolstering Sarawak’s infrastructure to facilitate the efficient movement of goods and services in and out of the state as well as provide reliable, efficient and competitive utilities, they are supporting long-term growth.

Perhaps the most crucial road link for Sarawak is the 2000-km Pan-Borneo Highway, which has long been in a process of upgrades and expansion. Current work on the roadway, which serves as primary east-west conduit for the state stretching from Sematan in the south-west to Serudong, Sabah, is being funded by a RM27bn ($8.21bn) outlay in the national budget to enhance road accessibility and connectivity as well as to generate economic development and trade transactions between Sabah and Sarawak. Another RM943m ($286.86m) was allocated for the construction of 635 km of rural roads including former logging roads in the two states.

Communication channels are also undergoing a major overhaul as the 2015 budget dedicates RM2.7bn ($821.34m) over three years to build 1000 towers nationwide and lay undersea cables linking Borneo to Peninsular Malaysia as part of the high-speed broadband rollout. Of an initial 400 towers included in the contract, 149 will be erected in Sarawak.

Another seven budgetary items specifically address the Borneo states, with earmarks ranging from RM56m ($17.04m) for lampposts in villages to RM4.5bn ($1.37bn) for electrification expansion. Potable water supply, home construction and rehabilitation, aircraft leasing for rural air service, community development and programmes for enhancements to infrastructure and an upgrade of the Tawau hospital were also included in the federal 2015 budget.

ENERGY INVESTMENTS: As the state’s primary breadwinner by a wide margin, continued development of the energy sector remains crucial in terms of securing a steady income for the foreseeable future. National oil giant Petronas plays a substantial role not only in Sarawak, but in the country as a whole, both in terms of keeping the local market supplied with affordable oil and gas as well as providing a crucial source of foreign currency earnings through energy exports.

As one of two primary hydrocarbons-producing states in the country, Sarawak has been the recipient of substantial investment in recent years as Petronas, along with its international partner companies such as Shell Malaysia, have redoubled their efforts to maintain production levels in the country as legacy fields continue to mature and newer, more technically challenging offshore plays are developed.

Currently four blocks in particular – SK307, SK310, SK316 and SK333 – are showing promise in the state. The first of these is the Tukau Timur field, in which at least 12 separate gas reservoirs were discovered containing approximately 2.1trn standard cu feet (scf) of natural gas at the Tukau Timur Deep-1 well operated by the 50/50 joint venture between Petronas and Shell Malaysia. The next block, SK310, is being worked by a joint venture of SapuraKencana (which purchased its 30% stake from Newfield Exploration Company in 2014), Mitsubishi Corporation and Petronas to monetise some 1.5trn to 3.0trn scf of natural gas in place, according to results from the field’s B-14 well. SapuraKencana reported that it plans to bring the fields on-stream by 2017. A similar-sized resource was also discovered in Kuang North field (SK 316) with the Kuang North-1 and 2 exploratory wells yielding results estimating the field’s gas in place at 2.3trn scf.

The sole onshore discovery of the bunch is the Kecil West-1 well located in SK333. It is the first onshore discovery by Petronas in Sarawak in 24 years, and a drill-stem test achieved flow rates of approximately 440 barrels of crude oil per day and 11.5m scf per day, according to Petronas. The project is a joint venture between JX Nippon Oil & Gas Exploration and Petronas. In all, Petronas rolled out a wave of new risk-sharing contracts to develop 25 marginal oil and gas field projects valued at RM52.5bn ($15.97bn) in 2013.

ENHANCED RECOVERY: In addition to these new sites, both Petronas and Shell Malaysia are investing tens of billions of dollars in enhanced oil recovery (EOR) activities to boost dwindling production in a number of Sarawak’s maturing fields. In 2011 Shell and Petronas agreed to invest $12bn over 30 years in two EOR projects offshore Sarawak (Baram Delta offshore covering nine fields) and Sabah (North Sabah covering three fields) in an effort to raise production by 90,000 barrels per day. More recently, in 2014, Petronas expanded the Baram Delta EOR production sharing contract to include natural gas production, which will be used both for reinjection purposes to assist in oil extraction and for direct gas sales.

INCENTIVES: While the availability of inexpensive and abundant inputs and expanding transportation routes are certain to pique investor interest, further enticement is generally needed to attract international businesses in an increasingly competitive marketplace. To this end Malaysia offers some of the most attractive incentive packages within the ASEAN region, while the state of Sarawak has further sweetened the pot by adding on a few extra incentives of its own.

One of the most beneficial of these is the pioneer status bestowed upon qualified companies in the state’s manufacturing sector, which allows them an enhanced exemption of tax on 100% of statutory income for five years, as opposed to national pioneer status, which grants a partial exemption whereby companies pay tax on 30% of income. The investment tax allowance also grants businesses a 100% exemption (compared to 60% nationally) in respect to qualifying capital expenditure incurred within five years from the date of approval of the project, which can be utilised to set-off against 100% of the statutory income in the year of assessment. Other significant inducements include a reinvestment tax allowance to offset capital expenditures, along with special provisions targeting specific activities and industries such as research and development operations, small-scale businesses, and strategic industries including high-tech, agriculture, biotechnology, tourism and others.

Added to these are Sarawak-specific provisions that include the competitive price of industrial land (which foreign companies may own), a generous rebate on the price of industrial land and flexible terms of payment with a low initial down payment along with additional benefits for manufacturing projects.

OUTLOOK: Buoyed by generous economic incentives and increasingly robust infrastructure, Sarawak appears poised for an influx of heavy manufacturing projects, which will move the state closer to its goals of introducing higher-value-added businesses while diversifying its economy. As the initial SCORE projects ramp up production and a critical mass is achieved among industrial developments along with ongoing outlays in the energy sector, the state should continue to rank among the leaders for investment.

The already robust trade ties within the region are expected to continue to grow as investments bear fruit in terms of increased manufacturing output, creating a ready supply of goods to trade just as the further reduction of trade barriers within ASEAN opens up the market, with a special emphasis on the East ASEAN Growth Area, in which Malaysia is included.