What is the cabotage policy and why is it a big deal in Sabah?

Numerous new developments are coming up along the coast leading up to Kota Kinabalu. The cost of construction is Sabah is estimated to be at about 20 per cent higher than in peninsular Malaysia, due to raw materials costing more to ship over. — Picture by Saw Siow Feng
Numerous new developments are coming up along the coast leading up to Kota Kinabalu. The cost of construction is Sabah is estimated to be at about 20 per cent higher than in peninsular Malaysia, due to raw materials costing more to ship over. — Picture by Saw Siow Feng

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KOTA KINABALU, Feb 9 ― Last year, a Sabah electrical appliance manufacturer closed shop after more than a decade. Not because it had no customers, but it simply cost too much to fulfil orders.

The company was producing about 300 units a day but was over-supplying the local market. In order to make a profit, the products needed to be sold on the international market.

Having secured sellers in Vietnam and Philippines, the products made their way to these destinations via Port Klang as the manufacturer did not have the volume to charter a vessel.

The container with those electrical products would arrive in Port Klang and be put on transit for three weeks.

“We will be lucky if there is no theft while our containers are left there waiting. Every time it is moved, we have to pay. Every day it sits at the port, we have to pay the costs.

“By the time the products finally reached our market, the cost has almost doubled, and the price is no longer competitive in its market category. After one or two failed attempts at export, I tried to adjust the production costs locally, but it didn’t work, and I stopped manufacturing altogether,” said the factory owner who only wanted to be known as Lee.

Other industry players like timber furniture manufacturers and local seafood suppliers face the same issues exporting their products: high costs and lack of shipping options.

This also affects the cost of bringing in products to Sabah. For example, the cost of construction is estimated to be at about 20 per cent higher than in peninsular Malaysia, due to raw materials costing more to ship over, and this is reflected in property prices in Sabah, among the highest in the country.

For example, condominiums in the city centre range between RM800 and RM1,200 per sq ft while a semi-detached house in Kota Kinabalu’s surrounding suburbs costs upwards of RM600,000.

A bowl of Sabah’s famous ngiu chap beef noodles now cost upwards of RM7.50 and a kopi c ping or iced coffee with evaporated milk costs on average RM2.80 at a regular coffee shop.

For decades, the east Malaysian state has been complaining about paying a higher price ― up to 30 per cent ― for goods, a fact that is seen as adding insult to injury, as the state already suffers from a lower than the national average pay scale.

Goods from peninsular Malaysia sent to Sabah also go through a longer supply chain which includes shipping agents and forwarders, truckers and shipping lines. Up to nine intermediaries are part of the chain and this contributes to the price of goods, driving prices up further.

What is this cabotage policy?

This difference in cost between Sabah and peninsular Malaysia has been largely attributed to the cabotage policy implemented in the state since the 1980s; it requires all domestic transshipment of goods to be made using Malaysian vessels.

Over the years, it has been argued by industry players, opposition parties and even non-governmental organisations that this is the main reason for Sabah’s manufacturing and export industry's stunted growth.

“The cabotage policy has been the bane of Sabah’s manufacturing industries. With most of Sabah’s industries being small to medium enterprises (SME), they cannot reach their full potential and take advantage of the abundance of natural resources and strategic geographical location,” said Federation of Sabah Industries president Datuk Mohd Basri Abdul Gafar.

He said that not only has it not brought any benefit to the industry or the majority of the people in Sabah, its protectionist nature has only benefitted shipowners and directly or indirectly driven up the cost of living in Sabah.

The business group argued that instead of a thriving shipping industry, this has shrunk to a few players monopolising the business and they are struggling even with support from the federal government.

The policy has little adverse effects on peninsula Malaysia, where rail and highways over shorter distances provide other means of transport for goods.

The former FSI president Datuk Wong Khen Thau, who has spent the last 15 years fighting for the abolishment of the policy, said that if no drastic measures are taken to liberalise the policy, the export industry in Sabah will die off.

The manufacturing industry now is only at 8.6 per cent of the state's gross domestic product, far behind the service and tourism sector (40.9 per cent), agriculture (25.3 per cent) and mining and quarrying (21.8 per cent).

A chicken and egg situation ― cabotage policy or lack of load?

Supporters have argued the cabotage policy alone is not the cause of high prices and abolishing it will not bring down the prices of goods ― inefficiency of port operations, higher land transport costs and also smaller volume of trade contributed to the problem.

Brunei-Indonesia-Malaysia-Philippines East Asean Growth Area (BIMP-EAGA) Business Council (BEBC) chairman Datuk Roselan Johar Mohamed argued that it was not the policy’s fault that the industry was suffering.

He said that the policy has been liberalised and foreign vessels have been able to send direct shipments of rice and corn, crude palm oil and cars directly to Sabah, without stopping at Port Klang.

He conceded, however, that smaller export quantities still have to go via Port Klang.

According to Roselan, the problem lies with the one-way load from Port Klang and not enough cargo returning to the national shipping hub; the load is roughly at a 80: 20 per cent ratio, favouring Port Klang to Kota Kinabalu, but empty on the way back.

“We have to reciprocate. We need to grow surely and steadily before we can command any ship to come to Kota Kinabalu to go for direct exports,” he said.

Parti Bersatu Sasa Malaysia (Bersama) acting president Philip Among was recently reported saying that the current policy does not prevent foreign vessels from landing in Sabah but they would still be reluctant to unload goods here as the volume is small and that would incur various costs and valuable time.

Industries in turn argue that the policy is not conducive to the export industry, and hinders its growth, leading to a vicious cycle of blame which grinds any progress to a halt and results in companies like Lee’s closing down.

“No matter how much the problem is argued between the industries and the shipping companies, the problem always goes back to the fact that there is not enough load, or export, to fill up containers to Port Klang,” said an economic analyst.

Industrial development minister Datuk Raymond Tan, who has admitted that the low yield from the industry was a cause for concern as any developed nation must have more efficient exports, said his hands were tied as the decision lies with Putrajaya.

“I will do what I can, but I am only the messenger, not the towkay,” he said adding that he had spoken to the Transport Minister Datuk Liow Tiong Lai, who understood the problem and has promised to further liberalise the policy.

A proposal to solve the problem

To Wong, the solution to reviving the industry now and create load for both ways is designating the Sepanggar Bay Container Terminal as Malaysia’s other transhipment hub ― that is to make it compulsory for certain goods to be sent to Sabah instead of Port Klang.

“Initiating a load equalization scheme that will channel certain goods here will benefit shipping companies because they have to send goods back to Port Klang, and Sabah will benefit from normal prices of goods. It’s a win-win situation,” he said, explaining that it will mean local ships will get the volume they need to make a profitable return trip to Port Klang.

Sabah’s strategic position in the South China Sea makes it a hub “for the Far East” with realigned policies, serving not only the BIMP-EAGA region but also exports from Japan, Korea, China and Taiwan can land in Sepanggar as Malaysia's second national load centre.

The hub will be even more impactful if a proposal to build a canal through the Kra Isthmus in southern Thailand, bypassing the Strait of Malacca, goes through.

The Kra Canal, estimated to cost some US$28 billion (RM119 billion), will cut transportation costs and time for international shipping, and could help make Thailand a new entrepot for maritime trade.

But the analyst said that while the hub is a workable solution, manufacturers need to address the problem of export products first as no matter how efficient the facilities and policies are, products need to be in demand.

“Are the local products competitive in an international market? If the product is attractive, then yes, an SME, no matter how small, can attract international buyers who will send an empty vessel directly to Sabah under the current policy,” he said.

The Sabah-based analyst said that most companies don’t invest in quality research and development and market feasibility which takes into account current economic climates and marketing surveys, which eventually leads to the failure of their product.

Meanwhile, Tan said industries also needed to move towards a more high income advanced economy if they want to stay relevant in the current economic climate.

“It is imperative that they focus on downstreaming and value added processing instead. Move towards a high-pay, high income economy ― that is the way to boost the sector in this climate,” he said.

A timeline for change

FSI and opposition parties have recently renewed calls for a review of the cabotage policy, a call which might be answered by Agriculture and Agro-Based Industry Minister Datuk Seri Ahmad Shabery Cheek who has promised that the problem will be discussed at the National Export Council meeting this month.

But while shippers and the manufacturing sector players continue to bicker over policies, all parties, especially the consumers, will continue to pay higher prices.

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