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MY previous article titled “Sabah’s timber sector worth saving via industrial Tree Planting” (published in The Daily Express on the 7th September 2025) argued that the future of Sabah’s timber industry lies in industrial tree planting (‘ITP’) as a means to replenish the decline in natural tropical timber production. 

However, it is observed that since its inception back in in 1997, ITP log production in 2023 only reached 40,000 m3 harvested from some 500 hectares of plantation timber. Put in perspective, this amounts to approximately 80m3 of timber per hectare. 

However, this is an incongruous figure since the Sabah Forest Department also reported that in 2023, ITP development over the various Forest Management Units (‘FMUs’) reached some 177,000 hectares. 

This discrepancy between developed ITP areas and the woefully disproportionately low volume of ITP log production reflects (i) ineffective planting methods and strategy; (ii) insufficient financing / direct investment in ITP and (iii) a lack of serious commitment from some FMU licencees to replant.

This article will explore some of the barriers which deter FMU licencees and investors from committing capital to ITP projects and their related downstream activities.

Are Log Royalties A Problem?

Sabah has a reasonably straight forward system for charging royalties on log and timber production. For ITP logs, the Sabah Forest Department imposes a RM15 per m3 royalty on logs, if trees are felled for local production.

This rate increases to RM30 per m3 if the ITP logs are felled for export. For the sake of comparison, Sarawak charges RM5 per m3 for domestic use and RM15 per m3 for export (see: Sarawak Government Gazette Part II, 1st March, 2022).

It has been argued by some of the major ITP investors in Sabah that the Sabah Government should consider waiving royalties on ITP logs because of the relatively high costs involved in cultivating and maintaining ITP plantations.

For example, depending on the area and topography, it can cost anywhere between RM16,000 to RM20,000 per hectare to develop a timber plantation (although some estimate lower costs at between RM10,000 to RM15,000 per hectare). 

There are also holding costs involved because the maturity cycle of trees is between 8 and 12 years, depending on the species and method of cultivation.

So, in theory, it will cost between RM16-RM20 million to plant 1,000 hectares of  ITP timber over an average maturity period of, say, 10 years. This business model is capital intensive from the start.

Given that the selling price of ITP logs can vary between RM200 and RM300 per m3, it has been argued that after considering the cost of paying royalties, the lengthy gestation period and modest return on investment, the ITP business presents an unattractive proposition for investors.

To address this, existing ITP planters have proposed that the Sabah Forest Department waive royalties on all ITP log production and instead, charge royalties or State Sales Tax on the sale of down streamed ITP wood products. It is argued that the increase in consistent ITP log supply will stimulate investment in wood manufacturing facilities. 

In turn this will increase the volume of ITP wood products available for both the domestic and export markets. It is at this point, that royalties or state sales taxes can be imposed since the raw materials used (ITP logs) have, by this stage, undergone substantial refinement and value adding.

Put simply, if ITP logs are cheaper to plant and produce, more people will invest in their production, and this will result in more economically beneficial activities and competitively priced ITP wood products.

To further support this, it is also stressed that additional and substantial investment in downstream timber manufacturing facilities will create more economic opportunities and benefits for Sabahans overall – the multiplier effect. More jobs, better wages and knowledge / skills transfer are among some of these benefits.

Additionally, this approach is not new since Sabah has already experienced such benefits during its first timber boom during the 1970s and 1980s.

Plantation Management and Economies of Scale, Not Royalties, are the Problem

In contrast, other ITP operators argue that royalties are not the problem. Rather, it is the economies of scale and planting methodologies that hinder successful ITP production.

It is observed that most FMU licencees have, in effect, enjoyed a type of subsidy in respect of ITP planting costs. This is because within the FMU concession, “salvage logging” is permitted to make way for ITP tree planting. ‘Salvage logging’ is a curious term since its practical effects are many and varied. However, for the purposes of this article, it suffices to say that salvage logging creates an additional income stream for FMU licencees.

In theory, income from salvage logging should cover up to 15% of the costs associated with ITP planting and, to some extent, justifies why royalties should be charged – the Sabah Forest Department, by allowing salvage logging, has provided a direct financial benefit and incentive to undertake ITP planting in earnest.

It is argued that the real issue with the ITP industry in Sabah today is due to ineffective planting and cultivation methods and general economies of scale.

Traditionally, replanting was undertaken through a process known as Mosaic. In layman’s terms, you cut one part of the forest and leave the adjacent (or adjoining part) alone. The idea is that the un-logged area will naturally re-populate the logged area. Alternatively, the logged area is planted with ITP to replace the felled natural forest.

This approach is arguably less effective than the cultivation of dedicated ITP areas where plantation timber is not co-mingled with natural forests. A dedicated, properly managed, well planned and financed ITP plantation can produce up to 200 m3 of timber per hectare.

By comparison, natural tropical log production per hectare is only between 30 to 60 m3. The average existing ITP production within FMU areas is only around 80 m3 per hectare (there are notably a few exceptions to this).

Assuming that log prices are at RM300 per m3, one economic analysis shows that after deducting RM245 per m3 in royalties, direct, administrative and finance costs, a well-run ITP plantation can generate a pre-tax profit of RM55.00 per m3 of production.  At 200 m3 per hectare of ITP log production, this model would generate approximately RM11 million in profit before taxation (200m3 x RM55.00 x 1,000 h.a. = RM11m).

However, this model assumes that log prices are stable which, they are not. A market downturn in log prices will severely impact profits. If log prices drop to RM240 per m3, this business model would result in a loss of RM3 million for the same 1,000 hectares. Clearly, a full fee-paying royalty model has its risks and is, in of itself, both capital and human resource intensive.

What perhaps warrants consideration a hybrid model where maximising the additionality of ITP areas leads to the generation of carbon credits which, in turn, finance tree planting activities. This model is currently being explored by carbon credit project companies such Permian Global and ought to receive the full support of the Sabah Government.

However, it is proposed that an immediate and practical approach to Sabah’s royalty / royalty-waiver argument is this: reduce overall royalties to a flat RM15 per m3 for both export and domestic use. Incentivise investment in timber manufacturing – not just sawn timber but other value-added areas such as finished and semi-finished product lines. 

In terms of taxation, there ought to be a tax holiday for at least the first 2 ITP plantation cycles so that companies can build reinvestment and capital reserves to buffer any downturn in log prices.

ITP plantation operators must invest in downstream manufacturing facilities to value add. The business model must steer away from cut and sell and move towards cut and make (manufacture / value add).

Finally, it is time for the Sabah government to initiate and implement its own ITP lending scheme. If operators are to meet the Chief Minister’s target of 400,000 hectares of planted ITP areas by 2036, a proper, ITP industry specific and focussed loan scheme must be put in place by the Sabah Government. 

At the same time, Invest Sabah Bhd should use its good offices to mobilise and encourage foreign capital to take up equity positions in domestic ITP operators, ensuring that ITP plantations and activities are sufficiently financed.

Such initiatives and reforms coupled with a coordinated taxation and financing policies will prove crucial to the future development of ITP in Sabah. Provided that all is in place, Sabah’s timber industry is indeed, well worth saving.

Tengku Fuad is a senior lawyer specialising in commercial and public law and has, and continues to, act for the Sabah Government in complex cases. In 2021 Tengku Fuad was appointed as a member of the Federal Government’s Special Task Force  to review legal matters related to the sovereignty of Batu Puteh, Middle Rocks and South Ledge and, in 2022, was also appointed to the Federal Government’s Special Task Force to resist the Sultan of Sulu’s (heirs) claim against Malaysia. Prior to establishing his firm, Tengku Fuad served as a public company director and was involved in the corporate sector. 

The views expressed here are the views of the writer and do not necessarily reflect those of the Daily Express. If you have something to share, write to us at: Forum@dailyexpress.com.my