MPRA Munich Personal RePEc Archive Pre-Feasibility Study of Sarawak-West Kalimantan Cross-Border Value Chains Montague Lord and Susan Chang Asian Development Bank, Montague Lord International February 2019 Online at https://mpra.ub.uni-muenchen.de/94732/ MPRA Paper No. 94732, posted 4 July 2019 06:30 UTC PRE-FEASIBILITY STUDY OF SARAWAK-WEST KALIMANTAN CROSS-BORDER VALUE CHAINS Montague Lord and Susan Chang This pre-feasibility study on Sarawak-West Kalimantan cross-border value chains covers six topics: It analyzes existing trade patterns and competitive advantages of Sarawak and West Kalimantan, as well as government objectives in promoting cross-border commercial activities. It proposes a border economic area spread over a wide geographic area that covers a network of interrelated activities and provides a fully integrated approach to the border economic area design and implementation. It identifies potential cross-border value chains that can serve as high-profile projects for the border economic area. It determines the preference orderings of project features by key stakeholders such as government and development partners, commercial entities, and the local population. It estimates the net monetary returns for the project portfolio, a cost-effectiveness analysis of the stand-alone capacity-building projects, ranks stakeholders’ non-monetary preferences, and incorporates the the preference ranking order into the project portfolio’s net monetary returns. It provides an overall program appraisal for the set of projects. Based on pre-feasibility results, it lays out a plan for implementation of the border area development program. February 2019 i The views expressed herein reflect those of the authors and do not necessarily reflect the views of any organization with which the authors are currently or formerly associated. ii Contents Contents .......................................................................................................................... iii List of Figures and Tables .............................................................................................. vi Map of Sarawak and West Kalimantan ......................................................................... xii Acknowledgements ...................................................................................................... xiii Abbreviations ................................................................................................................ xiv SUMMARY ...................................................................................................................... xvii PART I. INTRODUCTION .................................................................................................. 1 1. Background .......................................................................................................... 2 2. Objectives and Methodology ............................................................................... 6 3. Coverage ............................................................................................................. 11 PART II. SOCIO-ECONOMIC FEATURES ...................................................................... 17 4. Sarawak’s Structural Transformation ............................................................... 18 5. West Kalimantan’s Economic Transformation ................................................. 22 PART III. GOVERNMENT POLICIES .............................................................................. 34 6. Sarawak Public Policies ..................................................................................... 35 7. West Kalimantan Public Policies ....................................................................... 37 8. Border Crossings and Inland Port..................................................................... 40 9. West Borneo Economic Corridor ...................................................................... 48 PART IV. ANALYSIS OF TRADE .................................................................................... 51 10. Sarawak Exports................................................................................................. 52 11. West Kalimantan Exports .................................................................................. 55 12. Competitive Advantages .................................................................................... 58 PART V. TRADE MODELING AND FORECASTING ...................................................... 62 13. Modeling Trade ................................................................................................... 63 14. Forecasting Trade Benefits ............................................................................... 71 PART VI. CROSS-BORDER VALUE CHAINS ................................................................ 83 15. Aluminum ............................................................................................................ 84 16. Natural Rubber ................................................................................................... 91 17. Palm Oil ............................................................................................................... 99 18. Wood Products ................................................................................................. 106 iii 19. Fisheries ........................................................................................................... 114 20. Ship Building .................................................................................................... 122 21. Organic Agriculture .......................................................................................... 131 22. Tourism ............................................................................................................. 138 23. Medical Tourism ............................................................................................... 145 Source: Data provided by Department of Statistics Malaysia. .................................. 148 24. Higher Education and TVET............................................................................. 150 PART VII. COST-BENEFIT ANALYSIS ......................................................................... 157 25. Common Assumptions .................................................................................... 158 26. Palm Oil ............................................................................................................. 160 27. Natural Rubber ................................................................................................. 168 28. Wood Products ................................................................................................. 174 29. Medical Tourism ............................................................................................... 180 30. Higher Education and TVET............................................................................. 184 PART VIII. COST EFFECTIVENESS ANAYSIS FOR TECHNICAL ASSISTANCE ....... 189 31. Approach and Summary Results .................................................................... 190 32. Aluminum: Reducing Transport Costs ........................................................... 193 33. Wood: High-Value Modular Furniture ............................................................. 195 34. Fisheries: Reducing Trade Costs .................................................................... 197 35. Shipbuilding: Upgrading Technologies .......................................................... 199 36. Organic Foods: High Value-Added Agriculture .............................................. 201 37. Tourism: Multi-Destination Travel ................................................................... 203 PART IX. PROGRAM DESIGN ...................................................................................... 205 38. Design ............................................................................................................... 206 39. Implementation ................................................................................................. 214 40. Strategic Framework ........................................................................................ 220 PART X. OVERALL MONETARIZED APPRAISAL....................................................... 223 41 Program Viability .............................................................................................. 224 PART XI. OVERALL NON-MONETARIZED APPRAISAL............................................. 230 42. Rating Project Characteristics......................................................................... 231 PART XII. EXECUTION STRATEGY ............................................................................. 236 43 Program Implementation ................................................................................. 237 ANNEX A: ECONOMETRIC MODELING OF TRADE ................................................... 241 1. Unit Root Tests ................................................................................................. 241 2. Modeling Demand Relationships in Trade ...................................................... 243 iv 3. Modeling Price-Competitiveness Effects ........................................................ 245 4. Gravity Trade Modeling .................................................................................... 246 ANNEX B: PROJECT APPRAISAL .............................................................................. 250