PARADISE FOUND IN SABAH

By : OXFORD BUSINESS GROUP

WITH lush rainforests, vibrant coral reefs and one of the richest collections of flora and fauna on earth, Sabah is a true wildlife paradise. This has not gone unnoticed by tourists, who are flocking to the state in ever-growing numbers.

Annual arrivals more than doubled between 2002 and 2010, and Sabah's appeal is such that further increases are expected over the coming decade with the government targeting another near doubling of visitor numbers by 2020.

"Sabah has emerged as one of the wor|d's most popular ecotourism destinations," William Baya, Deputy Permanent Secretary of the Ministry of Tourism. Culture and Environment, told OBG. "Given our comprehensive plans to expand marketing, enhance conservation and increase private investment, we have set ambitious targets for the future."

A PLAN FOR SUCCESS: Long-term success, however. will require planners to address key sector weaknesses, including a lack of human resources and poor transportation capacity, both of which constrain development. To grow sustainably and remain competitive, Sabah must also diversify beyond the nature segment and promote new tourism products such as culture. health and sports. Given Sabah's distinct and cohesive multiethnic society, cultural tourism is an especially promising market.

"To present a more unique and varied product, we should focus on promoting our fascinating culture, which harmoniously blends dozens of languages and ethnicities," Evon Foo, General Manager of hotel apartments Likas Square Condotel, told OBG.

Arrivals and receipts continued to climb in 2010, which was also a time of reform, highlighted by concerted efforts to address sector challenges. Public authorities formulated the second Sabah Tourism Master Plan to direct sector growth, private firms began working on major resort projects and international agencies collaborated with domestic partners to develop more environmental preservation programmes. Meanwhile, the sector continued to generate more jobs, benefitting the people of Sabah as a whole.

“The tourism sector in Sabah generates significant economic spill over, bringing gains to everyone involved. This includes private investors, hotel operators, taxi drivers and street vendors," said Loisin Romut, the Manager of Research. Communication and Corporate Services at the Sabah Cultural Board, which promotes Sabah’s multiethnic heritage.

RISING NUMBERS: Visitor numbers have increased over the past 20 years, with tourism emerging as the state’s second-largest industry. In the early 1990s, a time when Sabah had limited commercial capacity, annual arrivals hovered around 100,000.

Tourism picked up, however, shortly after the implementation ofthe 1994 Sabah Tourism Master Plan, which boosted spending on marketing and hospitality infrastructure. After hitting the 1m mark in 2002, arrivals reached 2m ln 2006 and 2.5m in 2010. Having staked its claim in the global marketplace, Sabah is currently aiming to attract some 4.5m tourists annually by 2020, with the hope that this will generate more than RM10bn ($3.1bn) in yearly receipts.

FOREIGN ARRIVALS: Visitors from other parts of Malaysia have traditionally outnumbered foreign arrivals by three to one, but international tourism has surged in recent years. Foreign arrivals jumped from 562,144 in 2009 to 795,953 in 2010, an increase of 41%, In 2010 visitors from Asia most commonly came from Indonesia (222,975), Brunei (109,141) and China (97,072). The European market was led by the UK (27,100); Sweden (7157) and Germany(5,464). Other major markets in 2010 included Australia (22,137), the US (13,075) and Canada (6,335).

The biggest yearly gains from 2009-10 in terms of foreign arrival numbers came from Asian nations. The Philippines saw a hike of 15.3%, from 61,944 to 71,404. Arrivals from Taiwan increased by 46.2%, from 31,599 to 46,213. Figures from Indonesia jumped from 91,892 to 222,975, a 142.6% increase.

The largest percentage gain was by Brunei, which saw an increase of 218.5%, from 34,252 to 109,141. According to most observers, Sabah has become an increasingly popular destination for Bruneians due to the strength of the Brunei dollar relative to the Malaysian ringgit.

There are also strong transportation Iinks between the two nations, including a land connection through the Pan Borneo Highway and a direct flight by Royal Brunei Airlines. Sabah and Brunei are also connected by a daily ferry service that came on-line in early 2010.

TRANSPORT LINKS: Sabah is extending transport links well beyond Brunei, with Kota Kinabalu International Airport (KKIA) hosting flights from more locations in the region and further airfield. After naming Kota Kinabalu its 'Eastern Hub' in late 2010, Malaysia Airlines (MAS) opened a new route running three times a week from KKIA to Perth and announced that weekly services would increase between KKIA and Osaka, Seoul, Taipei and Hong Kong Given that more than 90% of visitors to Sabah arrive by ain the frequency of these routes shows significant confidence in the sector’s long-term growth.

"More direct links between Kota Kinabalu and major cities in the region are in line with our efforts to further develop tourism as one of the growth sectors of our economy," Chief Minister Musa Aman noted in a recent statement to the press.

KKIA is also undergoing capacity expansion developments, In early 2011 MAS delivered four Boeing 737-4100 and two Boeing 737-800 aircraft to the airport, along with a team of 150 pilots and 250 cabin crew. In addition, after delays, some of which were caused by disputes between contractors and the Environment Protection Department over the effects of the work on the environment, an extension of the KKIA runway is now slated for completion by early 2012.

Once it is completed, KKIA will be able to accommodate up to 25 flights per hour; double the present rate of 12 flights per hour:

"Once the extended runway is online, Sabah will be able to arrange more point-to-point flights throughout the region. This will provide a significant boost to tourism," Ben Kong Chung Vui, the CEO of Wah Mie Group, a Malaysian property development and investment holding, told OBG.

KINABALU PARK: Sabah's most prized tourism asset is Kinabalu Park. Covering an area of 754 sq km, the UNESCO World Heritage Site contains four climate zones, more than 5000 species of flowering plants, over 150 species of trees, around 100 kinds of mammals and 326 species of birds. In 2009, 252,245 tourists visited the park, a 7% increase over the 2008 total of 235,396. In 2009 47,664 visitors climbed Mount Kinabalu, one of the highest yet must accessible mountains in all of South-East Asia.

"All of the sites within Kinabalu Park are highly accessible, including Mount Kinabalu. This is a major draw for tourists, who are able to escape to an exotic world of canopy walkways, lush botanical gardens, soothing hot springs and astonishing biological diversity with relative ease," Maklarin Lakim, the Assistant Director of the research and education division of Sabah Parks, told OBG.

PRIVATE PARTICIPATION: In terms of regulation, an important development at Kinabalu Park has been the ongoing privatisation of accommodation and facilities. In response to surging visitor numbers, the public authority began to privatise hotels and catering facilities at the site in 1998, thereby allowing the government to focus exclusively on conservation.

After privatisation was initiated, the results of visitor satisfaction surveys improved noticeably, with respondents praising overall improvements in service quality. More recently, however complaints have surfaced about the rising costs of private lodging, prompting an announcement in early 2010that price hikes at the park had been suspended indefinitely.

Pricing disputes aside, many analysts expect privatisation to gradually extend throughout the parks system. Indeed, given Sabah`s ambitious growth targets and limited public resources, it is clear that the private sector will play an expanded role in all aspects of tourism development and environmental conservation.

As noted in the Economic Transformation Programme (ETP), Malaysia'; tourism industry will require RM203bn ($63.6bn) in funding from 2011 to 2020 to achieve its growth targets. Some 97% of which is expected to come from private investors.

DEVELOPMENT PRO]ECTS: The role of the private sector in Sabah’s tourism industry was further bolstered in late 2010, when two major development projects were announced. The first project will involve the construction by Karambunai Corporation of an integrated eco-nature resort in Sabah over a 10 year period at a cost of RM6.5bn ($2bn).

Featuring environmental attractions such as nature lodges and rainforest safaris, the resort will strengthen Sabah’s competitive advantage as a nature travel destination. Moreover, by offering options for duty-free shopping, as well as a water park and a full golf course, the resort will also attract high-yield and long-stay travellers, an overarching objective for the sector The venture is also expected to create 15.000-20,000 local jobs.

The second major development project in the works is the RM75m ($23.5m) Pulau Gaya Resort which will be constructed by the YTL Group, one of Malaysia’s largest infrastructure conglomerates. Once completed, the upscale resort will contain a deluxe spa village, a wide range of swimming pools and 132 seafront villas with views of Mount Kinabalu. This range of luxury amenities is expected to attract high-yield visitors from around the globe and thus help boost the state’s tourism receipts.

PRESERVATION: As ambitious development plans continue to move forward, Sabah must focus on balancing growth and ecology, otherwise, both of these aspects will suffer. This is widely understood by the state government. as well as by the international community. Domestic and international agencies alike have devoted considerable resources to environmental preservation in the state.

"The state budget for conservation is steadily increasing and we are expanding protected areas across the state," Lakim told OBG. "To bring in more capital and expertise. we are also collaborating with renowned environmental organisations worldwide."

One way the public authority promotes environmental protection is by regulating visitor traffic to major sites. The number of tourists allowed to ascend Mount Kinabalu has been limited to 192 per day, while the number of daily permits issued for diving at Sipadan Island has been capped at 120.

Given the substantial revenue potential at both sites, which have become increasingly famous worldwide, these restrictions reflect the seriousness with which the government is approaching conservation. To further protect Sabah's wi|derness, the Forestry Department has mandated that total forest cover in the state remain at or above 55% of the landmass.

"We want to preserve the state’s rich biodiversity and natural surroundings as these are the main assets Sabah can use to attract tourists, especially from overseas, to come and spend their holidays here. The tourists are visiting Sabah because of our nature," Masidi Manjun, Minister of Tourism, Culture and Environment, told the press in late 2010.

Among the many international organisations working to protect Sabah's natural heritage, the World Wildlife Fund (WWF) has the most established reputation. In 1974 the WWF helped create Tunku Abdul Rahman Park, a marine site that attracts 300,000 annual visitors.

Over the years the WWF has also carried out various expeditions to identify areas in need of protection, and has formulated impact assessments on land management, reforestation and coastal development.

Moreover, as part of its broader Heart of Borneo initiative, which aims to protect 24,000 sq km of forest on the island. the WWF launched the Green Business Network in early 2011. The programme is designed to engage local industries in sustainable development. Indeed, given the expanding role of industry in both tourism and conservation, links between NGOs and the business world have become crucial to effective conservation initiatives.

ECOTOURISM:/As environmental awareness increases, more travellers are heading to Sabah to take part in ecotourism, which educates and involves tourists in conservation and often delivers a portion of revenue to local communities. According to estimates, ecotourism in Sabah is expanding at an annual rate of 20%, making it one of the fastest growing segments in the state’s tourism industry. This has given providers in the sector an opportunity to deliver ecologically conscious but lucrative services that attract a broad range of clientele.

“Given the staggering richness of Sabah’s biodiversity, along with the imperative for conservation, one of our main target markets has become ecotourism? Paul Basintal, Director of Sabah Parks, told OBG in an interview.

"Within this segment there are also many groups that can be targeted individually, such as European bird-watching enthusiasts, who tend to be high-yield and long-stay visitors."

Containing 42 indigenous families of birds over an area measuring 123,000 ha, the Tabin Wildlife Reserve is one of the most exotic ornithology sites in all of Borneo and a prime example of ecotourism successfully managed by the private sector. According to many repeat visitors, the quality of guided tours and facilities has improved considerably since services at the site were privatised in 1998.

In keeping with the spirit of ecotourism. the operator Tabin Wildlife Resort has adhered to a policy of buying local goods whenever possible, thereby reducing the resort‘s environmental impact, while at the same time benefitting the people living in nearby villages. Privatisation has also allowed the public authorities to devote their limited manpower and capital strictly to preservation of the environment, knowing market growth will not be neglected.

Sabah's tourism industry also features a growing number of eco-lodgings, some of which have garnered international recognition, In 2010 the Sukau Rainforest Lodge (SRL) was named Asia`s 'Best Green Hotel' by international travel ratings organisation World Travel Awards, which selected the company for its adherence to high conservation standards and for its involvement of the local community in various environmental initiatives. ln a move signalling that visitor numbers are strong, SRL announced plans in 2010 to expand and upgrade all guest rooms at a cost of RM2m ($627,000),reflecting the growing demand in Sabah for ecotourism locales equipped with luxury accommodation.

HOTELS: Sabah’s diverse hotel industry has grown to keep pace with increasing demand. In 2005, when arrivals were nearing the 2m mark, the state had 279 hotels and 11,528 rooms. By 2009, however, the 2.5m tourists arriving in Sabah had a choice of 443 hotels, along with an aggregate total of18,065 rooms. Sector growth has also produced more local employment opportunities, with the percentage of Sabah`s workforce employed in hotels and restaurants increasing from 4.6% in 2005 to 6.1% in 2009.

According to 2009 figures, of all registered hotels in Sabah, seven are 5 star, seven are 4-star, and 33 are 3 star accommodation. Local properties include resorts, such as the Sutera Harbour; which combines several luxury hotels and recreation facilities including a golf course and marina, as well as hotels geared more towards the business segment, like the Hyatt Regency in Kota Kinabalu, which has recently refurbished its 288 rooms and suites. The average occupancy rate for hotels in 2009 was 60.8%; however; the rate was only 48.3% for 5-star establishments.

Whereas 2007 was a peak year for the hospitality industry, with an average occupancy rate of 77%, 2009 was somewhat sluggish due to the global economic downturn, the outbreak of the H1N1 virus and heightened international air travel security.

COLLABORATION: An important trend in the industry has been close collaboration among sector players. In 1997. when Sabah was just gaining a foothold in the global tourism market, local hoteliers formed the Sabah International Hotel Association (SIHA), which began sharing expertise with the public authorities on development planning and overseas promotion. Further: in what some call a turning point for the sector in 2004 hotel operators intensified cooperation with travel agencies and airlines to offer more enticing package deals to visitors.

"From 2004 onwards, arrival numbers and occupancy rates steadily increased," Alex Cham, General Manager of the Promenade Hotel and Sabah Chapter Chairman of the Malaysian Association of Hotels, told OBG, " Industry partnerships supported this growth as hoteliers began working with tour operators to promote Sabah on a global scale," improved collaboration aside, an abiding weakness in the industry has been a shortage of internationally branded hotels, which can attract a broad range of foreign customers, according to Cham.

As well as a need for brand name hotels, demand for corresponding high-end goods and services remains unmet. A number of hoteliers pointed out to OBG that profits at luxury establishments suffer from missing pieces in Sabah’s overall tourism package.

“To move up the value chain and attract a greater number of high-yield visitors, Sabah must provide more opportunities for boutique shopping, fine dining and evening entertainment," Frank Liepmann, CEO of Sutera Harbour Resort Group, told OBG.

HUMAN RESOURCES: Another persistent challenge in the sector has been a shortage of human resources. According to many industry players, local workers lack the soft communication skills required to provide high-quality service, particularly at luxury hotels with demanding clientele.

Others complain that employees have a weak command of English, the language generally used to interact with international guests. These problems are fundamentally due to weaknesses in Sabah’s education system, which often offers curricula that do not correspond to current market demands.

The industry‘s greatest human resources problem is brain drain, the exodus of skilled Sabahans to other territories, where they can find better paid work. Although many schools have improved the quality of their skills training in recent years, there are not many incentives for graduates to remain in Sabah once they have received advanced qualifications.

"A major issue in the hospitality industry has been the flight of human capital," Rizal Kasim, the General Manager of the Hyatt Regency Kinabalu, told OBG.

"Much of the local labour force lacks skills and training, and those who are qualified often leave the state to seek out more lucrative opportunities in Singapore or Peninsular Malaysia."

There is an ongoing and vigorous debate about how to tackle this problem. On the one hand, many argue that hospitality employers in Sabah have no choice but to improve wages. or at least make them commensurate with salary packages offered in Peninsular Malaysia. On the other hand, hoteliers contend that lower wages reflect reduced company profits.

Room rates in Sabah are cheaper than rates in mainland Malaysia, but operating costs are higher, especially for utilities like water, gas and electricity.

"If the hospitality industry in Sabah is unable to reduce brain drain by improving remuneration, we can instead foster employee loyalty by offering other benefits such as continuous professional development and real opportunities for intra-company upward mobility," said Likas Square Condotel's Foo.

OUTLOOK: The industry has a bright future, with more travellers becoming aware of the state’s incomparable biodiversity and relatively inexpensive services. Given that foreign tourists in Sabah spend 60% more than domestic visitors on a per-capita basis. The trend towards more international arrivals bodes well for the state`s high-yield goals.

To compete more effectively with the likes of Bali, Singapore and Hong Kong; Sabah must address constraints in infrastructure and human resources. Moreover, long-term success will necessitate finding a balance between development and conservation. Nevertheless, those involved in the industry are keeping the focus on growth and sustainability.