Pre-Feasibility Study of Sabah–North Kalimantan Cross-Border Value Chains
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PRE-FEASIBILITY STUDY OF SABAH–NORTH KALIMANTAN CROSS-BORDER VALUE CHAINS June 2018 The views expressed in this publication are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make judgments as to any legal or other status of any territory or area. ADB encourages printing or copyright information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative words for commercial purposes without the express, written consent of ADB. Notes: In this publication, “$” refers to United States dollars. ADB recognizes “China” as the People’s Republic of China. Foreword iii Contents Figures and Tables v Map of North Kalimantan and Sabah ix Acknowledgments x Abbreviations xii Executive Summary xiii I Introduction 1 1 Background 3 2 Historical Connections 7 3 Objective and Coverage 10 II Pre-Feasibility Components 15 4 Pre-Feasibility Design 17 5 Stakeholder Preferences 21 III Economic Profiles 25 6 North Kalimantan’s Takeoff Stage of Development 27 7 Sabah’s Drive to Maturity 32 8 Connectivity 36 IV Government Objectives 39 9 Indonesia 41 10 Malaysia 47 V Economic Analysis of Traded Goods 55 11 Export Characteristics 57 12 Competitive Advantages 60 13 Trade and Investment Potential 64 VI Economic Analysis of Traded Services 67 14 Medical Tourism 69 15 Higher Education and TVET 82 VII Program Design 97 16 Strategic Plan 99 17 Master Plan 102 18 Action Plan 105 VIII Cost–Benefit Analysis 111 19 Palm Oil 113 20 Wood Products 125 21 Fisheries 138 iii iv Contents 22 Organic Foods 146 23 Medical Tourism 149 24 Private Technical and Vocational Education and Training 157 25 Multi-Destination Tourism 166 IX Nonmonetarized Project Appraisal 171 26 Rating Project Characteristics 173 27 Nonmonetarized Benefits in Project Appraisals 179 X Overall Program Appraisal 187 28 Program Viability 189 29 Road Connectivity: Impact Analysis 196 XI Execution Strategy 199 30 Program Implementation 201 Foreword 1 v Figures and Tables Figures 3.1 Methodology for Medical Tourism and Education and Vocational Training Analysis 11 3.2. Stages of the Pre-Feasibility Study 12 4.1. Project Development Framework 17 4.2. Phases of Border Economic Area Development Project 20 5.1 Possible Cross-Border Economic Cooperation Interest Groups 21 5.2 Distribution of Preference Ordering among Commercial and Welfare- Improving Interests 22 6.1 North Kalimantan Administrative Regencies 27 6.2 Map of North Kalimantan 29 6.3 North Kalimantan Typography 29 6.4 North Kalimantan Land Use 30 7.1 Sabah Administrative Divisions and Districts 32 8.1 Air Connectivity between Kota Kinabalu, Tawau, and Tarakan on MASwings 36 8.2 Land and Sea Routes between Sabah and North Kalimantan 38 8.3 Road Crossing between Sabah and North Kalimantan 38 9.1 North Kalimantan Border-Connecting Road Network 44 9.2 Location of Planned Sebatik Island Airport 45 9.3 Tarakan Airport Runway Extension 45 10.1 Sabah Forest Lands 52 10.2 Major Programs of Sabah Development Corridor 53 10.3 Sabah Structure Plan 2033 Summary Map 54 11.1 Sabah and North Kalimantan’s Exports by Harmonized System Section Headings 57 11.2 Sabah and North Kalimantan’s Exports by Harmonized System Division Headings 58 11.3 Sabah and North Kalimantan’s Export Size, Concentration, and Diversification 59 12.1 Sabah’s Revealed Comparative Advantages of Top 20 Export Products 60 12.2 North Kalimantan’s Revealed Comparative Advantages 61 12.3 North Kalimantan and Sabah Revealed Comparative Advantage, by Broad Product Categories 61 12.4 Nominal Exchange Rates of Malaysia and Indonesia 62 12.5 Real Cross Rates of Malaysia and Indonesia 63 14.1 Trade Restrictiveness in Medical and Health Services 71 14.2 Sabah’s Medical Tourism Competitiveness 72 14.3 Number of Doctors and Beds in Sabah’s International Hospitals 72 14.4 Gleneagles Kota Kinabalu Medical Centre 73 14.5 KPJ Sabah Specialist Hospital 73 14.6 Jesselton Medical Centre 74 14.7 KPJ Damai Specialist Hospital 74 14.8 Tawau Specialist Hospital 75 v vi Figures and Tables 14.9 Pertamedika Tarakan Hospital 76 14.10 RSUD Tarakan Hospital 76 14.11 Methodology for SWOT Analysis 77 14.12. Internal Strengths and Weaknesses of Sabah’s Medical Tourism Industry 78 14.13 Nominal and Real Bilateral Exchange Rate Indexes of the Malaysian Ringgit and Indonesian Rupiah 81 14.14 External Opportunities and Threats to Sabah’s Medical Tourism Industry 81 15.1 Distribution of Sabah’s Private Higher-Education Degree Fields 86 15.2 Universiti Malaysia Sabah’s Bachelor’s Degree Fields 88 15.3 Malaysia’s INVITE Initiative 89 15.4 Internal Strengths and Weaknesses of Sabah’s Medical Tourism Industry 92 15.5 External Opportunities and Threats to Sabah’s Medical Tourism Industry 94 16.1 Strategic Plan for Sabah–North Kalimantan Border Economic Area 100 18.1 Sabah–North Kalimantan Border Economic Area 105 18.2 Representation of Sabah–North Kalimantan Border Economic Area 106 18.3 Border Economic Area Components 107 18.4 Value Adding and Development Potential of Border Economic Areas 108 19.1 Cross-Border Value Chain in the Palm Oil Industry 116 19.2 Crude Palm Oil Milling Process 118 19.3 Palm Oil Derivatives 119 19.4 Change in Quantity Demanded of Crude Palm Oil and Palm Kernel due to Lower Transportation Costs 120 19.5 Oil Palm Plantation with Fresh Fruit Bunches Being Trucked, Seedlings Being Cultivated, and Oil Palms in Background 121 19.6 Economic Internal Rate of Return for Sabah’s Palm Oil Industry under Alternative Scenarios 122 19.7 Economic Internal Rate of Return for Palm Oil Industry under Alternative Scenarios 123 20.1 Sabah’s Wood Products Production Process 127 20.2 North Kalimantan’s Official Wood-Product Exports by Major Destination, 2015 129 20.3 Cross-Border Value Chain in Wood Processing Industry 131 20.4 Economic Internal Rate of Return for North Kalimantan’s Wood-Products Industry under Alternative Scenarios 135 20.5 Economic Internal Rate of Return for Sabah’s Wood Products Industry under Alternative Scenarios 136 21.1 Distribution of North Kalimantan’s Official Marine Product Exports, 2016 139 21.2 Cross-Border Value Chains in Fisheries Industry 141 21.3 Economic Internal Rate of Return for North Kalimantan’s Fisheries Industry under Alternative Scenarios 143 21.4 Economic Internal Rate of Return for Fisheries Industry under Alternative Scenarios 144 22.1 Cross-Border Value Chain in Organic Vegetables and Crustaceans 148 23.1 Medical Tourism Value Chain 151 23.2 Operating and Capital Costs of Sabah’s Hospitals 152 23.3 Medical Tourism in Malaysia, Thailand, and Singapore, 2003–2013 153 23.4 Gini Coefficient of Selected Locations in North Kalimantan, 2013 153 23.5 Gap Analysis of Sabah’s Five Leading Private International Hospitals 154 23.6 Overall Payback Schedule of Sabah’s Investment in Medical Tourism Industry 155 24.1 Value Delivery Network of International Higher Education and TVET 159 Figures and Tables vii 24.2. Changes in Sabah’s Skilled Labor Requirements, by Source 160 24.3. TVET Gap Analysis: Oversupply (+) versus Undersupply (–) 161 24.4 Gap Analysis of Sabah’s TVET Institutions 162 24.5 Sabah TVET Discounted Cash Flows 164 24.6 Economic Internal Rate of Return for TVET under Alternative Scenarios 165 25.1 Multi-Destination Tourism Value Chain 167 25.2 Sabah Visitor Spending in Base and High-Growth Scenarios 168 26.1 Combined Ratings of Major Project Characteristics 175 27.1 Sabah Project Rankings Based on Mean Average of Their Key Features 181 27.2. North Kalimantan Project Rankings Based on Mean Average of Their Key Features 181 27.3 Sabah Project Rankings with Preferences Given to Commercial Interests 182 27.4 North Kalimantan Project Rankings with Preferences Given to Commercial Interests 182 27.5 Sabah Project Rankings with Preferences Given to Welfare Improvements 183 27.6 North Kalimantan Project Rankings with Preferences Given to Welfare Improvements 183 27.7 Sabah’s Projects: Monetarized and Nonmonetarized ENPV Equivalents 184 27.8 North Kalimantan’s Projects: Monetarized and Nonmonetarized ENPV Equivalents 184 28.1 Economic Net Present Value of Sabah 192 28.2 Economic Net Present Value of North Kalimantan 193 29.1 Impact of Cross-Border Road Construction on Program’s Economic Net Present Value for Sabah Goods and Services 197 29.2 Impact of Cross-Border Road Construction on Program’s Economic Net Present Value for Sabah Goods 197 29.3 Impact of Cross-Border Road Construction on Program’s Economic Net Present Value for North Kalimantan 198 30.1 Investment Program 201 30.2 Integrated Project Design 202 30.3. Stages of Border Economic Area Cross-Border Cooperation 203 30.4 Stages of Sabah’s Border Economic Area Development Program 204 Tables 6.1 North Kalimantan Profile 28 7.1 Sabah Profile 33 8.1 Air Connectivity between Tawau, Sabah (TWU) and Tarakan, North Kalimantan (TRK) 36 8.2 Air Connectivity between Tarakan (TRK) and Tanjung Selor (TJS) 36 8.3 Air Connectivity between Kota Kinabalu (BKI) and Tawau (TWU) 37 11.1 North Kalimantan’s Top 10 Export Products 58 11.2 Sabah’s Top 10 Export Products 59 13.1 Trade Compatibility Indexes for Sabah Exports and North Kalimantan