Economic Diversification
in
Negara Brunei Darussalam
Report by
Manu Bhaskaran
The Centennial Group
for
The Centre for Strategic and Policy Studies
Brunei Darussalam
August 2007
Whilst every effort is made to avoid inaccurate or misleading data, the findings, interpretations
and conclusions expressed in this report do not necessarily reflect the views and policies of the
Centre for Strategic and Policy Studies (CSPS) nor of any institution with which the author may
be associated with. CSPS accepts no responsibility or liability for the accuracy of the data and
information included in the publication nor does it accept any consequences for their use.
The material in this publication is copyrighted. For permission to reprint all or part of this work,
please send a request with complete information to: CSPS, Simpang 347, Gadong BE1318, Brunei
Darussalam, or email to [email protected].
However, any material in this work may be freely quoted subject to appropriate acknowledgement.
Permission to reproduce any part of this work is not required for academic and similar noncommercial purposes.
Published by the Centre for Strategic and Policy Studies, Brunei Darussalam
Printed by Brunei Press Sdn. Bhd.
Synopsis
The study on Economic Diversification was commissioned by the Centre for Strategic and Policy
Studies (CSPS), with the support from His Majesty’s Government of Brunei, corporate bodies,
professional organisations and other relevant stakeholders as a means of addressing the need to
diversify the Sultanate’s economic base from its traditional oil and gas sector. CSPS would like
to thank Manu Bhaskaran1 from Centennial Asia Advisors Pte. Ltd. and his team of professional
researchers in completing ‘The Brunei Economic Diversification Report’.
The consultants undertook their consultation task by:
• Publishing the Brunei Darussalam Economic Report in January 2008 with the objectives
and principles of diversifying the economy with crucial assessments made on policy
development, legislation and administration.
• Holding public seminars at The Empire Hotel & Country Club, Brunei Darussalam in the
form of a Round-Table session in collaboration with Asia Inc Forum in June 2008.
CSPS wishes to thank the many individuals and organisations who made submissions and
participated in consultations and meetings in completing this consultancy report. The comments
and suggestions made in submissions and meetings have been a valuable input into the consultants’
deliberations while preparing this report.
1
Manu Bhaskaran can be contacted at [email protected]
Table of Contents
List of Tables and Figures v
Executive Summary vi
Chapter 1: Introduction
1.1 Background
1.2 Aim, Mandate and Methodology 1.3 Definitions
1.3.1 What is the Aim of the Economic Policy regarding Diversification?
1.3.2 Definition of Economic Diversification
1.4 Key Trends Affecting Small Economies 1
1
2
2
2
4
5
Chapter 2: The Track Record 2.1 Past Diversification Efforts
2.2 Measures of Diversification
2.3 Brunei Has Considerable Strengths
2.4 Assessment
8
8
10
11
13
Chapter 3: Why Brunei Has Not Been Successful in its Economic Diversification
3.1 Clarity of Purpose is Not Sufficient
3.2 Bureaucracy
3.2.1 Case Study: Evidence of Bureaucratic Constraints
3.3 Corporate Sector is Not Dynamic Enough
3.4 Human Capital
3.5 Attracting FDI
3.6 Cost Structure
3.7 Unexploited Resources
14
14
15
16
16
18
19
19
20
Chapter 4: What Needs to be Done?
21
4.1 Creating the Right Enabling Environment
21
4.2 The State as a Pro-active Enabler of Economic Development and Diversification 23
Chapter 5: Conclusion
25
Appendices Appendix 1. Case Study - Botswana
Appendix 2. Petrochemicals - Singapore
26
26
30
List of Tables and Figures
Table 2.1: Summary of Major Studies Recommending Economic Diversification 9
Table 2.2: Brunei’s FDI - overwhelmingly related to oil/gas
11
Table 2.3: World Bank Governance Indicators
12
Table 3.1: Land Ownership in Brunei
17
Table 3.2: Enrolment in Tertiary Education 18
Table A2.1 Key Indicators of the Petroleum Industry
31
Table A2.2: Ethylene Production Capacity
31
Figure 2.1: Investment to GDP ratio low and falling
10
Figure 2.2: Share of oil exports to total exports surging
10
v
Executive Summary
Economic diversification was adopted as a goal of national policy as early as the Second
National Development Plan (1962-1966) and stated explicitly as a goal in the Third National
Development Plan. Brunei’s failure to diversify – despite much effort and despite good
governance. Despite considerable strengths and advantages, the fact is that Brunei has failed
quite substantially in its efforts to diversify its economy. In terms of what drives the economy,
it is still very much oil and gas directly or indirectly through government spending. When oil
prices fall sharply, the economy weakens severely. This failure is not because of a lack of effort.
There have been several efforts to diversify, especially since the late 1990s. Yet, there has been
little progress in terms of projects that get off the ground or significant new engines of growth.
Neither is this failure a result of poor governance. Compared with peers, Brunei comes across well
ranked in governance indicators. The key problem is the enabling environment. Thus, the failure
must be due to weaknesses in the enabling environment. We believe that this can be traced to:
• Lack of clarity of purpose - it is unclear what the trade-offs that policy leaders accept – if
Brunei is to diversify, there are costs to be paid in terms of foregoing some other cherished
social or political or other objectives. This has not been made clear.
• Bureaucratic hindrances - while the elite ranks of the government are well regarded, the
implementing layers of the bureaucracy appear to be a major obstacle to getting things
done.
• Corporate sector is weak - this is the basic unit of the economy, yet outside Brunei Shell
and a very small number of local companies, local companies have not developed well.
• Lack of scale - a small population with a skewed income distribution means that there is a
small domestic market which does not allow economies of scale to be exploited.
• Human capital development is weaker than it should be.
• Foreign direct investment outside the energy sector is barely present.
• The cost structure is high.
• Potential growth areas are not exploited.
vi
Policy Recommendations
Creating a Better Enabling Environment
1. Articulate clearly the trade-offs in policy making. A new consensus on social taboos such as
alcohol and on intakes of foreign professionals is needed.
2. Reform the bureaucracy – change the mindset, delegate responsibility, undertake a thorough
audit of rules and regulations with a view to abolishing at least a third of them.
3. Create a more business friendly regime by considering more radical tax regime changes and
the creation of more powerful agencies for specific high priority objectives such as economic
diversification.
Government as a Pro-Active Enabler of Development
4. Brunei needs to gain scale through innovative arrangements with friendly countries. Consider
a “Two Countries, One System” model where links are established with a larger but friendly
country which will then provide Brunei companies and workers with some degree of economic
scale.
5. There must be more aggressive efforts to develop human capital models for early intervention
at primary and secondary levels to ensure a high percentage of the work force entering tertiary
education or professional fields are needed.
6. A stronger local business sector can be developed through tax changes and the establishment of
agencies dedicated to supporting and nurturing small and medium size enterprises. Privatisation
of government agencies should also be considered.
7. One area where Brunei has global scale is its accumulated savings from oil revenues. The
Ministry of Finance has used part of the smaller fiscal savings to seed fund management
companies. But Brunei has to use its financial reserves on a much larger and aggressive scale if
such efforts are to make a material impact on diversification.
vii
Chapter 1.
Introduction
This chapter looks at the background to the study, explains the mandate given to the consultants
preparing the study and prepares the ground for the rest of the report by clarifying issues such
as definitions of terms and policy objectives. The chapter ends with a review of some of the
interesting economic trends in the global economy which could affect small economies.
1.1
Background
Brunei Darussalam has explicitly stated economic diversification as a major policy objective
at least since the Third National Development Plan (covering 1975-1979) although references
to the need for economic diversification go back as far as the Second National Development
Plan (1962-1966). As part of the planning and conceptualisation process for the various
efforts at diversification, many studies have been commissioned, all of which have been well
formulated with specific projects and recommendations. Yet, as explained in more detail
below, these efforts do not seem to have produced the desired results. However, diversification
is viewed – whether it is looking at the structure of output, exports or government revenues,
the dependence of the economy on the oil/gas sector and government expenditure has not
diminished fundamentally.
1
Chapter 1
1.2
Introduction
Aim, Mandate and Methodology
This report was thus commissioned to study why this desired economic diversification did
not progress in Brunei. The mandate given to the author was to investigate the weaknesses
in the macro or business and economic environment in Brunei which inhibited economic
diversification and to come up with ideas on how to diversify the economy. More specifically,
this study was commissioned with the focus on studying the macro-economic environment and
not to look at micro-economic issues or sector specific themes.
On being commissioned to undertake the study, the author was encouraged to be frank in
putting forward views, even where they seem critical of policy or of the country. The report is
prepared in this spirit, on the assumption that it is better to face the facts directly than to flinch
from them. If at times, the report appears less than sensitive, the author hopes that the views
are taken in the right spirit – only by putting across as honestly as possible what we believe
can the cause of economic diversification be advanced.
The study was conducted on the basis of a literature review, analysis of economic data, three
visits to Brunei for meetings with a range of officials, bankers and businessmen and a study
of other economies.
1.3
Definitions
The rest of this chapter attempts to clarify some key definitions and related issues so as to lay a
proper foundation for the rest of the report.
1.3.1 What is the Aim of the Economic Policy regarding Diversification?
One of the most important issues to settle at the outset is – what is the vision for Brunei that
underlies its economic policy? What is it that policies such as economic diversification are meant
to maximise or optimise? Based on our understanding of Brunei, reading the various national
development plans and our experience elsewhere, we would think that the overall objective of
policy would be to achieve the following:
First to achieve a good balance between economic growth, employment creation, equity, economic
stability and risk management.
2
Chapter 1
Introduction
• High economic growth
Brunei should aim for high economic growth and achieve as dynamic and vibrant an
economy as possible but one that is consistent with other important considerations such as
those mentioned below.
• Employment opportunities
The pattern of growth should result in the creation of the kind of job opportunities that
Bruneian workers desire. Since Brunei has already achieved a fairly high standard of
living, this means that the jobs created should be of a high quality, ones that pay a high
salary and have comfortable working conditions.
• Equity
A reasonably fair distribution of the benefits of growth so that the majority of the citizens
of Brunei will enjoy the fruits of economic progress. Economic policies for diversification,
or anything else for that matter, should be crafted so that there is an equitable distribution
of income and wealth in the country, with no group feeling left out or alienated.
• Stability
The pattern of economic growth promoted by policy should also ensure that economic
stability is maintained: inflation should remain low and in line with Brunei’s main economic
partners such as Singapore with which it has a currency union; the current account balance
should not be in large and continuous deficits; the government fiscal balance should not be
in deficit over a cycle; and there should be sustainable rates of monetary and loan growth.
These conditions will help prevent sharp fluctuations in output and incomes that could
unsettle Bruneians and raise risks for the economy.
• Appropriate risk management
Since Brunei is a very small and open economy, policy makers have to constantly keep
in mind the need to manage and contain the risks and shocks that might come along
unpredictably from time to time. The economic structure so produced, should also be able
to accommodate longer term challenges such as the ageing of the population.
• Inherent capacity
For small and vulnerable states such as Brunei, the fact that the future is not predictable
carries far more policy implications than for larger and more settled economies. Ultimately,
small countries have to ensure that there is a substantial indigenous ability to drive the
economy, what we might call the inherent capacity of the economy. Inherent capacity means
3
Chapter 1
Introduction
that indigenous workers and locally owned companies are able to play a key role in the
economy, even if the small scale of the economy dictates that foreign companies and workers
will always play a large role. For instance, if foreign companies are the only ultimate engines
of growth, this may not be consistent with inherent capacity since the future of the economy
would be held hostage to how a few large firms decide to operate their strategy.
Thus, the aim of economic diversification can be seen as part of the process of achieving a good
balance among all these various policy objectives.
1.3.2 Definition of Economic Diversification
The next key question is what precisely is economic diversification? The essential reason for
promoting diversification is to contain risks – depending substantially on just one or two engines
of growth is risky because if just one engine fails, the economy could contract and create massive
dislocations.
We would suggest that economic diversification means introducing a wider and more diverse
array of sources of wealth, income, government revenues, export receipts and employment
generation. In other words, economic diversification should be measured not only by the
diversity in engines of GDP growth but also consider other economic variables such as fiscal
revenues and employment generation. There can be diversification within the oil/gas industry
as well as diversification away from oil and gas to entirely new activities. Anything that
contributes to a more diverse range of activities in the economy will be helpful.
Since Brunei is vulnerable, being a small and highly open economy, diversification should be
taken in the broadest manner. We can further argue that diversification should also consider the
types of companies that generate economic output. In other words, economic diversification is
achieved when a good balance is struck among multinational companies (MNCs), smaller foreign
companies, government-owned companies, large domestic private companies, small and medium
sized enterprises and other ways of organising economic activities such as co-operatives. The
economy should not be disproportionately reliant on one particular company or a category of
companies.
Another important consideration is just how feasible is economic diversification for
a very small economy?
4
Chapter 1
Introduction
Some argue that there is a limit to which a small economy can diversify since such a country cannot
have too many activities or niches with economies of scale. Unlike larger countries, small ones
would simply not have the number of workers, companies or consumers that would allow enough
scale for a large number of economic activities to be viably pursued.
This is certainly an issue. However, this argument is not one against diversification, only an
argument to aim for a limited number of areas. A small economy needs to diversify into only few
niches for it to achieve growth with some degree of variety in its growth engines and so achieve an
optimal level of risk management.
1.4
Key Trends Affecting Small Economies
There are a number of important trends operating in the global economy which affects how a small
economy might want to diversify its economy.
• Agglomeration effects
The global economy has been marked in recent years by two seemingly divergent trends.
On one hand, there has been an increased dispersal of economic activities as seen in the
relocations of manufacturing activity from more developed economies to countries such as
China, eastern and central Europe and others. In services, there has been more outsourcing
of activities to countries such as India, China, Malaysia and the Philippines. Advances
in information and communications technology have also enabled many professionals to
work in dispersed fashion, operating from home offices for instance.
But, increased dispersal has also been accompanied by the need to manage and service this
dispersal; this has produced a trend towards greater concentration of such urban economic
activity in fewer and fewer global centres of commerce1. However, agglomeration effects
seem to result in a few major cities capturing the predominant value creation in such centres
of commerce. For instance, in financial services, the number of financial centres has grown
in line with the liberalisation of financial markets and the opening up of capital accounts. Yet,
this has been accompanied by the increased concentration of value creation in areas such
as capital market activities or commodities futures activities in just a few financial centres
such as London and New York. This concentration trend has been particularly evident
within countries. For example, Frankfurt in Germany, Milan in Italy and Paris in France
1
See for instance, MasterCard Worldwide Global Centers of Commerce TM - The Dynamics of Global Cities and Global
Commerce 2Q 2007.
5
Chapter 1
Introduction
now concentrate a much larger share of financial sector value creation than in the 1980s
as other financial centres in each of these countries lost market share to the dominant
cities. The same is seen in countries such as Australia where Sydney has displaced
Melbourne and in Canada where Toronto has displaced Montreal. It would appear that
functions to control and manage dispersed activities need to be concentrated in a few
cities because they depend on functionalities provided by densely concentrating
activities within a small geographic area. Such dense urban areas allow a rich and
diverse mix of activities to co-exist and provide synergies to each other. Firms that
provide these critical services “thrive in cities which offer complex and diverse
environments that function as knowledge centres, with dense networks linking other
specialised firms and highly skilled professionals with worldwide experience.2”
• Increased competition
Up to the early 1990s, a relatively small number of developing economies were open to
foreign investment. In the 1990s though, China’s opening and reforms reached a point
where it became much more investable to MNCs. Similarly, a large number of former
Soviet bloc countries also opened up to foreign investment – eastern Europe as well as
Vietnam. In addition, countries which had followed inward looking policies also began
to open up – India and Latin America being the most prominent among these. Not only
were these countries removing legal and other obstacles to foreign investment, they
were also reforming their economies so that they could provide a much more profitable
location to MNCs to produce goods or services. More and more countries therefore
started to compete for foreign direct investment (FDI).
But the competition was not just in attracting FDI. Countries in their keenness to
grow faster were competing in other areas as well. Export markets became much
more competitive as countries floated their exchange rates and made their export
sectors more competitive while also removing policies which had undermined export
competitiveness. The increased competition also extended to competing for tourist
spending as more countries began to realise the extensive multiplier effects as well as
employment creation opportunities offered by the tourism sector.
2
MasterCard Worldwide Global Centers of Commerce TM - The Dynamics of Global Cities and Global Commerce 2Q
2007.
6
Chapter 1
Introduction
• Globalisation: higher growth but an increased frequency of economic shocks
These trends were the product of increased globalisation of economic activity. As a result
of economic reforms and more open economies, average economic growth rates have
risen. In recent years, virtually every part of the global economy, save a few countries
ravaged by war or disastrous governments, have been growing at multi-decade high
growth rates. India has broken out of its low growth trap; many countries in Africa are
seeing the best economic performance in decades and other large developing
economies such as Turkey, Pakistan, Brazil and Mexico are in the best economic
shape they have been in decades. But while the flows of goods, services, capital,
people and ideas increased all over the world to produce higher globalisation, the
globalised economy seems to be prone to more shocks than before. In the past 15 years
of increased globalisation, we have experienced the tequila crisis, the Asian financial
crisis, the bursting of the technology bubble and the now current and extremely messy
unwinding of the global credit boom. Countries benefit from increased globalisation
only if they have the wherewithal to be resilient to such shocks. Thus, globalisation
has widened economic opportunities and has helped provide a constructive backdrop
to countries such as Brunei that seek to expand their economic base. But globalisation
also increases the need for small economies like Brunei to pursue policies that enhance
their resilience to such global shocks.
7
Chapter 2.
The Track Record
Given this backdrop, how has Brunei fared in its efforts to diversify its economy? This chapter
briefly looks at past efforts at diversification and the progress that has been made.
2.1
Past Diversification Efforts
Economic diversification was adopted as a goal of national policy as early as the Second National
Development Plan (1962-1966)3. But it was only later, in the Third National Development Plan
that economic diversification was stated explicitly as a goal. The need for economic diversification
became more vigorously expressed in the 1990s. This became much more urgent when the aftermath
of the Asian financial crisis produced a sharp fall in oil prices and led to some degree of dislocation
in the Brunei economy.
The post-Asian crisis slowdown in Brunei highlighted the risks of a lack of economic diversification.
The Brunei Darussalam Economic Council’s 1999 report warned of fundamental problems which
threatened to undermine prosperity and social stability. There had been a sharp deterioration in
government finances as oil prices fell, the unemployment rate rose rapidly to 5.1%, and several sectors
contracted sharply and simultaneously – construction, vehicle sales, retail, property and tourism.
3
Presentation on “A Pragmatic Public-Private Sector Partnership Practice in Brunei Darussalam” by YM Dato Hj Mohd
Hamid Hj Mohd Jaafar, Permanent Secretary, Ministry of Industry and Primary Resources, 14 March 2007
8
Chapter 2
The Track Record
Table 2.1 summarises the major reports and their main recommendations. There are many similarities
among the reports, with sectors such as Islamic-related activities, special tourism niches such as
eco-tourism, food processing and transportation or logistics related services often mentioned. Most
of the recommendations make eminent sense and play to Brunei’s strengths in some way or other.
Table 2.1
Summary of Major Studies Recommending Economic Diversification
Manchester
Business School
Ministry of
Industry and
Primary Resources
Brunei Darussalam
Economic Council
National
Development
Committee
Monitor Group
1995
1997
1999
2001
2003
Islamic banking
Business
Services
Sectoral Recommendations
Air transport
Agricultural
production
Islamic financial
services - fund
management,
reinsurance, capital
markets
Insurance/
reinsurance
Food processing
Tourism niches
Eco-tourism
– conventions,
meetings,
international sporting
and cultural events.
Financial
Services
Offshore financial
services
Capture fisheries
Regional distribution
centre
Info-communications
technology
Hospitality &
Tourism
Constructionrelated business
services
Fish processing
Sea / airborne cargo
trans-shipment
Bio-technology
Transportation &
Logistics
Food and beverage
manufacturing
Logging
Freight and parcel
processing and
distribution
Food processing
Clothing
Downstream timber Export re-processing
processing
Handicrafts and handwoven materials
Furniture
Eco-tourism
Food trans-shipment,
processing and
quality-testing
Garments
High technology
Clothing
Aircraft and shipping
bunkering and
maintenance
Construction materials
Furniture/related
handicrafts
Specialised services
– engineering,
architecture, estate
management, law,
accounting
Food and beverage
manufacturing
High technology
Source: Update by Centennial Group of Exhibit 0.1 in “Accessing and Attracting Foreign Direct Investment” a report
by the Brunei Economic Development Board and the Monitor
9
Chapter 2
2.2
The Track Record
Measures of Diversification
Brunei has made some progress in creating new sources of economic growth apart from oil
production. In the 1970s, gas fields were discovered and then developed, creating a new source
of growth even though it is closely related to oil. Many efforts have also been made to start new
industries – industrial estates have been established and some foreign investment has been attracted
such as the methanol project. In the finance sector, the Ministry of Finance has succeeded in
establishing an offshore financial sector and more recently has attracted fund managers to set up
in Brunei.
Nevertheless, the bottom line is that economic diversification has not made enough progress
and is certainly nowhere near enough to materially alter the country’s dependence on
oil/gas. Figure 2.1 shows that exports remain the key driver of economic growth. Figure
2.2 shows that the overwhelming bulk of exports is related to oil and gas. Only in years
when the oil price fell sharply as in the late 1990s did the oil/gas share of total exports
diminish.
Figure 2.2
Share of oil exports to total exports surging(1)
Figure 2.1
Investment to GDP ratio low and falling
Investment
Investment
Exports
Exports
BR:BR:
Share
Share
of of
Oil Oil
Exports
Exports
95 95
60 60
50 50
90 90
40 40
30 30
85 85
20 20
10 10
2004
2005
2005
2002
2004
2004
2004
2000
2002
2003
2003
1998
2000
2002
2002
1996
1998
2000
2000
1994
1996
80 80
0
1992
1994
0
%
100100
1990
1992
70 70
%
BR:BR:
GDP
GDP
Composition
Composition
PCE PCE
1988
1990
%
1988
%
80 80
Source: Collated by Centennial Group using Brunei Statistical Yearbook 2005 and ABD Database
(1)
The rapidly rising share of Brunei’s oil exports is attributed partly to the surging global oil prices in recent years
Table 2.2 shows how foreign direct investment (FDI) is predominantly in mining – i.e., the oil/
gas sector. While the share of FDI in manufacturing has increased of late, it is not clear that
this is a sustainable increase.
10
Chapter 2
The Track Record
Table 2.2
Brunei’s FDI – overwhelmingly related to oil/gas
Industry (% of Total FDI)
2001
2002
2004
2005
Primary
0.0
0.2
0.0
0.0
Mining
97.5
40.1
97.8
74.7
69.0
Manufacturing
1.5
3.1
1.2
12.9
22.1
Construction
0.2
0.2
0.4
2.4
1.1
Wholesale % Retail Trade
0.5
0.8
0.3
6.3
5.6
--
55.2
--
--
1.2
Hotel & Restaurant
0.0
0.0
--
--
0.4
Finance & Business Services
0.2
0.0
0.3
3.3
0.6
Other Private Services
0.1
0.4
--
--
--
(1)
Transport & Communication
2003
--
(2)
Source: Collated by Centennial Group using Brunei Statistical Yearbook 2006
Primary sector includes agriculture, fishery and forestry
(2)
Indicates composition of less than 0.1%
(1)
In the late 1990s, when the oil price collapsed, Brunei suffered a disproportionate hit to its economy.
As oil/gas revenues fell, government revenues fell sharply, dragging down government spending –
the other engine of growth - as well. With the two ultimate sources of demand diminished, all the
other major sectors in the economy – retail, construction, financial services and business services
- all weakened drastically. This shows clearly that Brunei had not succeeded in diversifying its
economy.
2.3
Brunei Has Considerable Strengths
This failure to make headway in a crucial economic objective is surprising given that Brunei
has considerable strengths.
It has substantial financial resources as the windfall gains from oil/gas have generally been
well managed. This is something that few countries actually do get right, demonstrating a
degree of effectiveness and integrity in the system.
Brunei enjoys a degree of political stability that few other countries enjoy. This goes beyond
being just a political benefit. It is also an economic advantage since low political risk translates
in a low risk premium which then reduces the cost of capital – and so provides a greater
inducement to invest.
11
Chapter 2
The Track Record
With political stability and a well-resourced government, Brunei is able to offer residents very
good living conditions.
Related to this is the presence of a competent government. Visitors to Brunei will see a country
which works; its infrastructure is not only good but well maintained. It has well-regarded technocrats
staffing the ministries. Crime is low and there is little obvious corruption that troubles tourists or
businessmen. The population is well cared for and so is generally happy. Basic services such as
utilities, schools and medical care are of global standards.
What is more, this is a system that is tried and tested. In the late 1990s, it was hit by two shocks
– the Asian financial crisis and the Amadeo crisis. Both were dealt with in a sensible manner,
suggesting that the system overall has the capacity to respond effectively to shocks.
Table 2.3 compares Brunei against two outstandingly successful small countries – Botswana and
Singapore. Botswana is the fastest growing economy in the 1996-2005 period, having sustained growth
even faster than China over this very long period. It is a multi-party democracy, politically stable and has
a sovereign credit rating equivalent to Japan’s. Singapore’s track record is also well known – high growth,
extraordinary economic and social transformation and constant ability to re-invent itself.
Table 2.3
World Bank Governance Indicators
Botswana
Brunei
Singapore
Points
0.52
-1.08
-0.07
Percentile
66.8
17.4
46.6
Voice and Accountability
Political Stability
Points
1.23
1.23
1.3
Percentile
93.3
92.8
94.7
Points
0.74
0.71
2.20
Percentile
73.9
72.0
99.5
Points
0.48
0.96
1.85
Percentile
65.4
80.0
99.5
Points
0.63
0.32
1.82
Percentile
67.1
59.5
95.2
Points
0.81
0.24
2.30
Percentile
78.2
63.6
98.1
Government effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Source: World Bank Governance Indicators
12
Chapter 2
The Track Record
Overall, Brunei does not compare badly in terms of key governance indicators. Although its
ranking in control of corruption appears low, this result might have been overly influenced by
media reporting of the Amadeo case rather than actually reflecting on poor control of corruption.
Brunei stands out in terms of regulatory capacity.
Clearly, the lack of progress is not because of an ineffective government or due to other failures
such as poor governance, political instability and a collapse in the rule of law that are so prevalent
in the developed world.
2.4
Assessment
The argument in this chapter points towards an important conclusion. There is no real problem
with the various recommendations and strategies suggested by highly regarded agencies and
consultancies on what sectors to diversify into. Neither is there any real issue with governmental
effectiveness or governance.
This lack of diversification is despite many sensible recommendations on what specific sectors
and businesses to diversify into and many detailed plans on what to do. The problem is therefore
not in these plans but in the enabling environment. Clearly policy is being implemented in an
environment which somehow does not allow full and effective implementation. The challenge is
therefore to identify the deeper roots of this inability.
13
Chapter 3.
Why Brunei Has Not Been Successful in its
Economic Diversification
This chapter analyses the reasons why policies for economic diversification may not have
worked.
3.1
Clarity of Purpose is Not Sufficient
Why diversify and what is the real urgency to do so? Is it because oil is going to run out? This is
not clear because it has not been fully articulated.
What does Brunei really want and what price is it willing to pay and what price is it not willing to
pay? All economic policy is about making trade-offs between often conflicting economic, social
and political objectives. Such trade-offs have to be clearly sorted out so that implementing agencies
know how far to go and what exact measures to take.
Our visits to Brunei and our meetings seem to show that there is a lack of clarity about how far
economic diversification should be pursued if diversification efforts potentially undermine some
other social or political objective. Examples:
14
Chapter 3
Why Brunei Has Not Been Successful in its Economic Diversification
-
Tourism is desired but not if it brings in alcohol and other social ills. But is the trade-off
really that stark – are there not ways to introduce a bit more flexibility on alcohol for nonMuslim visitors without compromising religious values as other countries have done?
-
Growth is desired despite a small population base but not if it results in a huge inflow of
foreigners into the economy.
-
Clear economic policy direction is desired but not the streamlining of agencies and authority
that are needed to ensure this.
-
Officials accept that subsidies probably need to be cut but are apprehensive about the effects
on those who stand to lose from any policy change. Any policy that upsets the people – even
if only in the short term – seems to be seen as unacceptable.
So, in policy making, while the general aims are clear, if the trade-offs are not explicitly confronted
and defined, then policy might become prone to paralysis.
3.2
Bureaucracy
Our studies showed a substantial well of dissatisfaction with the way the bureaucracy works.
While the senior levels of the civil service compare well with rest of the world, the middle
and lower levels appear to be a major problem in terms of getting things done and making
decisions in reasonable time.
There is clearly a culture of risk aversion and lack of accountability. No clear decisions are made
or decisions are delayed – yet, no one seems be penalised for the resulting inaction or failure to
achieve objectives.
It appeared to us that far too often, the easy way out is taken - avoid risk or minimise it rather than
learn to manage risks.
15
Chapter 3
Why Brunei Has Not Been Successful in its Economic Diversification
3.2.1 Case Study: Evidence of Bureaucratic Constraints
In our interviews, we were assailed with a welter of complaints about bureaucratic hassles for
businesses. We present them below, not because all of them may be factually correct in every sense
but as a reflection of the deep frustration felt by businesses in the country.
• Sample of complaints about bureaucracy
-
7 departments and 1 year to get business licence;
-
Occupancy permit takes 7 months to come through for a new development;
-
Simple change of a signboard because company moved office to a new location requires
new application;
-
Excessive regulation – e.g., an air-conditioning grill cover had to be changed to suit
regulator;
-
A company is only allowed to transport its own goods; it cannot transport another company’s.
Special permit is needed to drive another company’s vehicle;
-
Sale of a freehold site to another person can turn it into a 60-year lease;
-
Food regulation – every time a consignment of Coke comes, the importer has to apply for a
new permit. One week to get approval for goods in port.
• Examples of failed ventures, news of which deters other investors
-
Garment factory from Indonesia: took months to hear from government about quota so
investor gave up;
-
Setting up a diving school required approvals from all sorts of departments – Defence,
Religious, etc. In the end, the potential investor, a foreign company, went elsewhere;
-
Aquaculture: venture failed after $7m spent. Part of the reason was rigid enforcement of
rules – licence said to be only for tiger prawns and nothing else;
-
Cement venture: excessive red tape is said to have contributed to its failure – form as thick
as a book needed to apply, three levels of committees to approve, etc.
3.3
Corporate Sector is Not Dynamic Enough
The basic unit of a free market, free enterprise economy is the company. It is the company that mobilises
savings to set up a business. It is the company that employs workers, invests in equipment, sources
materials and organises production before finding markets and getting the goods or services to the
16
Chapter 3
Why Brunei Has Not Been Successful in its Economic Diversification
customers. The company has to be able to function well and efficiently if the economy is to succeed.
However, we realised that there were several structural weaknesses in the Brunei corporate sector.
Companies do not keep proper accounts because of anomalies in the tax regime – since corporate
income is taxed but not personal income, businesses do not incorporate the real part of their business.
But that means that companies cannot scale up to serious corporate level and banks hesitate to lend
unless person is very well known etc. While there may be ways around this by bankers adjusting
for this and that item, the bottom line from the bankers we have talked to is that they are not lending
as much as they could if companies were better structured.
But the first source of funding for companies or new business ventures is not bank loans but savings.
However, savings in the economy is skewed. Most of the household sector barely saves, so there
is little surplus to fund business ventures. Much of the savings are in (a) MNC oil companies; (b)
Government which channels savings into long term investments outside the country. The considerable
savings in the economy are thus not available to nourish the growth of local businesses.
Besides access to capital, another key factor of production is land. Part of the corporate sector‘s
weakness we feel is related to excessive government control over land as seen in Table 3.1.
Table 3.1
Land Ownership in Brunei
Category of Ownership
Percentage %
State land
95.4
Bumiputera
2.37
Non-bumiputera
0.11
Unclear
2.12
Source: Report of the Brunei Darussalam Economic Council September 1999
As argued in Section 1.4, agglomeration effects are increasing – economic activity gravitates to
fewer and fewer urban centres over time. Thus, scale has to be created but this can be a problem
for a country as small as Brunei.
Size of population is small – not more than 400,000. Income is skewed so actual spending power
is not great as to create a large pool of consumer demand even though Brunei is a relatively rich
country. Other regional hubs have already been established – aviation, sea port, business centre
for Borneo; this makes it hard to create scale the way that Hong Kong or Singapore did in the
key area of acting as a regional hub that Brunei could potentially have done.
17
Chapter 3
3.4
Why Brunei Has Not Been Successful in its Economic Diversification
Human Capital
Basic education in Brunei is good but tertiary education is poor, as seen in Table 3.2. Many
students are in religious education but not enough are in science, engineering or other professional
or vocational courses. Brunei Shell also complained about the declining quality of students it
interviews, caused by a lack of information technology skills and English. Shell argued that as the
oil business was becoming more electronic and less pneumatic (“smart wells” and “smart fields”),
more information technology expertise was needed but potential recruits did not have the basic
foundations to be easily trained.
Table 3.2
Enrolment in Tertiary Education
Human Development
Index Rank
Country
Percentage of Tertiary
Students
9
Japan
23
12
France
25
13
United Kingdom
29
17
Germany
31
33
Brunei
6
70
Thailand
21
110
Indonesia
28
130
Cambodia
23
Source: The Ministry of Education Strategic Plan 2007-2011
In addition, the prevalence of government jobs and subsidies creates a set of incentives that do
not propel workers to strive and compete, and so excel. Government jobs also might be pushing
up salaries for the rest of the business sector. Getting a good job often depends more on personal
connections than on meritocracy.
We would argue that human capital is not just about accumulating knowledge by obtaining degrees
and diplomas. It is also about:
The incentive structure: if people are complacent because everything is provided for them,
there will not be much urge to improve themselves – a lack of keenness to upgrade, hone their
skills, keep upgrading etc. Without a strong incentive structure, people will choose easy options
– e.g., in courses at university level or earlier, avoiding science and mathematics, etc.
18
Chapter 3
Why Brunei Has Not Been Successful in its Economic Diversification
Institutional framework: people are distributed along a curve since there is a spectrum of
abilities in any population. Consequently, every country needs a range of institutions which can
develop each strata of ability to the maximum possible. We are not sure if Brunei has the full
spectrum of educational institutions – vocational schools for those who are not academically
inclined or who start late.
3.5
Attracting FDI
Brunei has not succeeded in any material way to attract FDI outside the energy sector. FDI is
important because it provides a short cut to growth. Instead of taking years for a country to grow
its own companies which have the management, technology, markets and production processes to
gain market share in the world market, the country is able to short circuit the process by inviting
MNCs into its economy. There seem to be many reasons for this but the main ones are:
• Bureaucratic delays and inconsistencies as described above;
• A lack of confidence in the country in some cases; The Amadeo case may have raised
concerns about a lack of accountability and transparency in the economy;
• Lack of clarity on foreign ownership rules is clearly a hindrance;
• Inadequate number of skilled workers with right qualifications; and
• The domestic market is very small.
3.6
Cost Structure
It is unit costs that matter not absolute costs. For instance, wages might be high but if productivity
is high, then the unit cost of labour would be low. E.g., wages in China’s coastal provinces are
now higher than in Indonesia but because output per worker is so much greater in China than in
Indonesia, the cost of labour per unit of output is lower in China, making it more competitive than
Indonesia.
So, why would wages soar ahead of productivity in Brunei? The dominance of two major
employers might perhaps distort the labour market. The government and the oil/gas sector set up
high expectations for wage demands even by workers who do not get jobs in those sectors.
19
Chapter 3
Why Brunei Has Not Been Successful in its Economic Diversification
In addition, the small scale of the economy may also mean that unit costs are higher. And there
are also some sector-specific cost problems. For instance, in tourism, the inadequate supply of
accommodation could cause costs to be too high. The cost structure problem is made all the more
potent because neighbouring Sarawak is so much cheaper.
3.7
Unexploited Resources
Even with these problems, one suspect that growth might have been higher as there are areas of
unexploited potential:
• Peat: Brunei has 2,200 sq km of peat with 20m depth. But restrictive land ownership rules
such as limits on Chinese owning land and the long time taken to secure approval for land
have hindered exploitation.
• Silica sand.
• Large amount of forested area, yet very little forestry activity, not even in a controlled
manner.
• Tourism – few hotels, resorts.
20
Chapter 4.
What Needs to be Done?
Based on our analysis in Chapter 3, we propose in this chapter that two broad strategies can be
recommended. First, the government needs to improve the enabling environment. Secondly, the
government needs to be a pro-active builder of competitive advantage in the economy. Brunei is
not an economy where the government can take a purely laissez-faire approach. It cannot assume
that all it needs to do is to create the right market conditions and the private sector will then be able
to do the rest.
4.1
Creating the Right Enabling Environment
First, the political leadership must set out clear goals and define more clearly what the trade-offs
are. More than that, it has to accept that some things have to give in terms of long cherished taboo
subjects.
Tourism will not take off unless some alcohol is permitted. It is not that tourists want to drink to
excess when they come. The typical tourists want to go to a place where they feel free, where they
do not have to worry so much about restrictions especially in areas which they take for granted as
being acceptable.
21
Chapter 4
What Needs to be Done?
A new view on the extent of foreign input in the economy and how to manage this. Inevitably,
given Brunei’s small scale, higher and more dynamic growth must entail a larger foreign
involvement in the economy – labour, business ownership, extent of trade, financial and other
interactions, etc. This will of course create more risks in the economy and could also lead to
other social ills. In essence, what this means is that a new consensus is needed in the leadership
on a system to manage the risks involved in opening up. More creative means need to be found
to accommodate religious concerns. For example, there could be special economic zones for
tourist development where a limited amount of alcohol is allowed.
Second, reforms are needed in the government arena:
• Mindset change: Work towards creating a culture of pro-actively supporting economic
growth, instead of taking the safest decisions. The incentive structure in the civil
service needs to be changed, especially in agencies dealing with the business sector.
• More empowerment and delegation to technocrats.
• A streamlined, single agency for economic development: This must cover all sectors
and be armed with authority over all major issues involved in business such as land
allocation, business licensing, infrastructure development, suggesting educational
changes, immigration rules, etc.
• A thorough audit of rules and regulations: Government should conduct such an
audit of all the rules and regulations that affect business. A strict aim to completely
delete a large proportion of such rules, say one-third, should be set.
Third, create a more business-friendly regime: Brunei does not have the luxury of being the
same as others – it has to be much, much better than other jurisdictions if it is to attract FDI
etc. An aggressive transformation of the tax regime into a low tax one would help, one that not
only has low tax rates but also a liberal treatment of offshore income, income from savings
and so on.
• Tax regime:
22
Option 1: Abolish corporate tax entirely and shift to VAT/indirect tax. Continue with
a special tax on oil/gas and other natural resources since these are windfall gains that
should not be swept away by a foreign company or a small group of Bruneians.
Chapter 4
What Needs to be Done?
Option 2: Cut the corporate tax to say a flat rate of 10% - no need to shift to VAT but have
a higher tax rate for oil/gas and natural resources.
Option 3: Impose just a flat fee of, say, $1,000 per incorporated business – except oil/gas
and natural resources as above.
• Foreign investment regime:
4.2
A powerful agency should be established that will pull out all the stops to provide what is
needed to bring in a critical mass of new investments.
The State as a Pro-Active Enabler of Economic Development and Diversification
First, the government should consider innovative ways of achieving scale through linking up with
neighbouring economies. One example could be to achieve scale through a “Two Countries, One
System” approach.
This does not have to be exclusively with one country or a part thereof: Brunei could have two
or three different forms of integration with other countries. For instance, Brunei already has a
monetary union with Singapore - this could be expanded into more areas where there is a seamless
interaction between the two countries. For example, a company registered in one country could
operate freely in the other, citizens of one country could work in the other without an employment
pass for a number of years, professionals such as lawyers, doctors, and accountants could be allowed
to operate freely in each other’s territory so long as they have affiliation in one country. Different
levels of integration could be aimed at with respect to Singapore and/or Sarawak.
Second, more efforts are needed to maximise the human capital Brunei has – it is limited, so there
is no scope for wastage. Possible policy options:
• Consider applying a version of Singapore’s Mendaki model applied to Brunei conditions.
This approach in Singapore to raise the status of the Malay community stressed early
intervention and a tough incentive structure that helped encourage students not to shy away
from tough but marketable courses.
• Have a selective but pro-active approach to wooing talent from abroad. Talent can be
entrepreneurs or highly qualified graduates.
23
Chapter 4
What Needs to be Done?
• Encourage institutional development – more vocational and polytechnic level education.
Third, there needs to be more support for the locally owned business sector. Possible policy options
could include:
• More privatisation: The aim would be to create a more dynamic private sector including
a class of globally competitive, Bruneian-owned companies. This could be started by corporatising and selling some government-owned businesses to locals. There could also be
increased contracting out of government services.
• SME development: Establish an agency or agencies that are dedicated to the SME sector.
Thailand and Malaysia have set up SME banks. Singapore has taken the view that it is not
the funding of SMEs that is the problem but the underlying capabilities of the SME sector
– a problem that is best remedied through upgrading the capacity of the SMEs.
Fourth, make greater strategic use of the accumulated surpluses: Besides oil and gas, the other
strategic resource Brunei has of global scale is its large pool of savings. It is strange that the country
has a globally sized savings pool but no real wealth management industry of global scale. The
Ministry of Finance has made some progress in using budgetary surpluses to seed fund management
companies but a lot more could be achieved by deploying the accumulated savings from oil revenues
more aggressively. Unfortunately, data on the size and availability of these savings is not readily
available. 24
Chapter 5.
Conclusion
There is no fundamental reason why Brunei cannot succeed in diversification. Obstacles and
problems are self-made and can be rectified. The key is the enabling environment. The various
areas where Brunei can diversify into are well known. Government should improve the enabling
environment by reforming the bureaucracy and more pro-actively building up enterprise.
25
Appendices
We present two sets of appendices. In the first, we look at Botswana and describe some of the
government agencies that helped Botswana achieve its high growth. In the second we look at a case
study of how Singapore achieved diversification in its oil refining sector towards the establishment
of a petrochemical sector.
Appendix 1. Case study – Botswana
• Introduction
Massive change in the economy since its independence in 1966. From among the poorest
25 nations in 1966, it has since grown at an average annual rate of 9.2%, which ranks
among the fastest in the world4. Today, it is a model in Africa; a democratic, stable,
progressive and prosperous young nation with a GDP per capita of around US$3,000.
Mainly an economy centred on the agricultural sector in 1966. Now its prime mover
is in the mining industry, although tourism is also rapidly gaining prominence within
the economy. Ranked 37th in Transparency International’s corruption perception index,
highest among all the other sub-Sahara African nations.5 Sovereign debt given an A-1
rating by S&P, Moody’s credit rating agencies6.
With three agencies, namely BEDIA (Botswana Export Development and Investment Authority)
BDC (Botswana Development Corporation) and IFSC (International Financial Services
4
Source: World Bank, 1998
Source: Transparency International corruptions perception index 2006
6
Source: S&P (2006) Moody’s (2006)
5
26
Appendices
Centre) to assist, partner and receive investors, both local and foreign alike. These agencies
represent a concerted attempt by the government to diversify the economy away from its
heavy reliance on the mining sector, towards manufacturing, services and tourism7.
• BEDIA – Botswana Export Development and Investment Authority
Implemented the following policies to aid exports:
- Some provisions in the Customs and Tariff Book and VAT Act exempting payment of
certain customs and excise duties as well as VAT (10%) on raw materials imported by
registered manufacturers or industries.
- Industrial Rebates. One of these rebates of duty concessions, known as Industrial
Rebate concession found under Schedule 3 of the Tariff book, exempts some raw
materials from payment of customs duties, the products of which may either be sold
locally or externally. Industrial rebates are accessible to identified industries that the
government would like to stimulate such as textile, prepared foodstuff, and beverage
industries. Raw materials not found locally, and imported for manufacturing and
ultimate re-exportation, will qualify for rebates on import duties. Rebates will be
withdrawn the moment the raw material is found to be obtained locally. Exporters
can also claim back custom duties and VAT that they may have paid on manufactured
materials which they imported for their finished products8.
In addition to the above export friendly policies being implemented, BEDIA also acts as a
one-stop service centre to investors (both local and foreign) with the following functions:
- Enable them to secure all clearances and approvals necessary to set up and operate
business in the country from under one roof;
- Provide assistance which includes company registration, operating licences, visitor’s
visa, residence and work permits as well as infrastructural facilities such as land,
factory buildings, utilities and social prerequisites9.
7
8
9
Source: http://www.africa-ata.org/botswana_business.htm
Source: http://www.bedia.co.bw/sections.php?id=768
Source: http://www.bedia.co.bw/sectionlists.php?id=499
27
Appendices
• IFSC – International Financial Services Centre
A government designated location where financial service businesses are undertaken:
- Fiscal incentives provided to financial institutions, to encourage their establishment
in the IFSC;
- Guaranteed corporate tax rate of 15% until June 2020 (as compared to the normal
25% for non- manufacturing enterprises);
- Exemption from taxes on dividends and royalties paid by an IFSC company to a nonresident;
- Provides access to Botswana’s expanding Double Taxation Treaty network, at present
comprising 9 different countries10;
- IFSC companies are exempt from VAT (10%);
- Facilitates the accreditation and licensing of companies in terms of applicable IFSC
legislation;
- Monitors the accredited companies against their approved business plans;
- Continuously reviews the IFSC framework and makes necessary recommendations to
the Government to maintain the program’s international competitiveness11.
Success of the IFSC: As of the end of March 2006, companies had invested US$18.5 million
and used local support services such as consultants and lawyers, telecommunications, IT
and insurance amounting to P11 million for the year ending March 2006. Most of the
existing companies provide finance and administration functions to subsidiaries in 14
countries in Africa.
Benefits of IFSC programme:
- Provides sustainable employment opportunities;
- Transfer of skills and technologies to local recipients;
- Utilises a range of professional and support services found in Botswana;
- Additional stream of tax revenue for the Government;
- Enhances Botswana reputation in the international financial community12.
10
South Africa, United Kingdom, Mauritius, Sweden, France, Zimbabwe, Namibia, India and Russia
Source: IFSC website
11
Source: http://www.ifsc.co.bw/incentives.htm
12
Source: http://www.ifsc.co.bw/faq.htm
28
Appendices
• BDC – Botswana Development Corporation
- Set up in 1970, to assist the establishment and development of commercially viable
businesses in Botswana;
- Encourages local participation in commercial businesses;
- Supports projects which generate sustainable employment for residents and facilitates
skill transfers to the local labour force.
Through a combination of instruments, such as
- Equity participation (reminiscent of venture capital funding);
- Loan financing at competitive interest rates;
- Provision of commercial, industrial and residential premises.
BDC aims to spur the development of Industry, Property development, Agribusinesses and
Services within the Botswana economy. Apart from the establishment of all these various
agencies, the Botswana Government has recognised the need and importance of a well
educated labour force. It has consistently devoted a huge chunk of its budget for education
purposes - over the last ten years from 1994-2004, it has spent on average 26% of its budget
on education13. In comparison, Singapore spends around 15% of its budget on education14,
(although the private education sector in Singapore is more established than in Botswana), and
Brunei allocated 4.1% (or B$300 mil) of its total development budget to education15.
• Botswana Tourism
- Tourism in Botswana has developed at a remarkable pace; it is currently the second
highest source of foreign exchange – after the mining industry;
- Set aside 17% of its land as National Parks and Reserves, and an additional 22%?;
- Tourism has seen a steady increase over the years, with arrivals rising by 90.2% from
106,800 in 1993 to 203,172 in 199816;
- Constitutes at least 5% of GDP, and employs 15,000 people directly17;
13
Source: http://www.unicef.org/infobycountry/botswana_statistics.html#28
Source: http://www.mof.gov.sg/budget_2007/revenue_expenditure/attachment/Expenditure_Estimates.pdf
15
Source: 8th National Development Plan, section 3.72
16
Source: http://www.worldtourism.org/sustainable/IYE/Regional_Activites/Algeria/Algeria/Bostwana-Tema.htm
17
Source: case_study_botswanaTOURISM.pdf
14
29
Appendices
- Mainly driven by the wildlife and wilderness experience: eco-tourists to the country’s
protected areas increased from 101,125 in 1995 to 159,621 in 199818.
• Tourism policy in Botswana
- Sustainability (focusing on high value, low volume of tourists) and ecologically
friendly;
- Local participation in the form of ownership and management of tourism enterprises/
assets;
- Entrusts the responsibility of managing and administering wildlife to the local
communities;
- Based on the premise that when communities recognise the economic value of their
natural resources, they’ll be more inclined to manage them in a sustainable way.
Appendix 2. Petrochemicals - Singapore
• Introduction
Singapore is consistently ranked among the world’s top three oil trading locations and is recognised
as a global leader in oil refining. With unwavering focus on relevant infrastructure, technology and
a total-solutions approach - integrating innovation, manufacturing, regional distribution, marketing
and other services - Singapore offers a cost-competitive and synergistic environment for some of
the world’s leading petroleum and petrochemicals and specialty chemicals giants, including Exxon
Mobil, Shell and Sumitomo Chemical19.
- Petroleum and petrochemical industries, account for 2% of manufacturing employment,
5% of wages and 10% of total manufacturing value-added to output20;
- High wages in the petroleum/petrochemical industries - more than twice the average
manufacturing wage;
- High value added jobs in the industry, up to 6 times the average in the petroleum
sector. Indicative of a capital-intensive industry;
18
Source: http://www.botswana-tourism.gov.bw/tourism_s/tourism_s.html
Source: http://www.edb.gov.sg/edb/sg/en_uk/index/industry_sectors/chemicals.html
20
Source: Singstat http://www.singstat.gov.sg/keystats/mqstats/ess/aesa93.pdf
19
30
Appendices
- Potential for Brunei to achieve similar results, and thus reap similar gains from the
petrochemical/petroleum industry.
Table A2.1
Key Indicators of the Petroleum Industry
Employment
Total Value Added
Value Added per worker
Wages per worker
No.
%
S$ M
%
S$ ‘000
% of
average
S$ ‘000
% of
average
Petroleum
3250
0.9
2792.9
5.1
859.4
594
116.3
292
Petrochemicals
4346
1.1
2702.1
4.9
621.7
429
85.9
216
Total Petrochem
7596
2
5495
10
382200
100
234609.3
100
144.6
100
39.7
100
Total
Manufacturing
Source: Singstat: http://www.singstat.gov.sg/keystats/mqstats/ess/aesa93.pdf
Rapid growth of petrochemical and oil refining industry over the past 2 decades, with growth
averaging 16.5% and 22.3% from 1992-1997 and 1997-2000 respectively.
Table A2.2
Ethylene Production Capacity
‘000 tonne per annum
Average growth per annum (%)
1992
1997
2000
1992-1997
1997-2000
Japan
6332
7180
7240
2.5
0.3
S. Korea
3035
4870
4870
9.9
0
China
2322
3827
4748
10.5
7.7
Taiwan
845
1015
2365
3.7
32.6
India
552
1150
2250
15.8
25.1
Singapore
450
965
1765
16.5
22.3
Thailand
315
1135
1735
29.2
15.2
Malaysia
0
630
960
0
15.1
Indonesia
0
520
670
0
8.8
Total Asia
13916
21357
26707
8.9
7.7
Total World
69734
87300
4.6
Source: Monetary Authority of Singapore
31
Appendices
Policies that aided the development of the petrochemical/petroleum industry:
- Initial establishment of an attractive business climate;
- Export Expansion Incentives (Relief from Income Tax) Act that was passed in 1967,
supported by the 1968 Employment Act21 (new employment act allowed longer
working hours, reduced holidays and gave employers more power over hiring, firing
and promoting workers22);
- EDB founded in 1961 with a total budget of $100 million, with the express purpose
of wooing foreign investors into Singapore;
- Proactive marketing and advertising initiatives, with the planting of EDB offices
overseas in New York and Hong Kong (in the 60s), followed by Zurich Paris Osaka
and Houston in the 70s23;
- Provision of a well educated work force, supplemented by strict labour legislations
regarding industrial action24;
- Ease of restrictions on foreign ownership and outflow of capital, profits25.
Singapore was also the natural base for dozens of exploration, engineering, diving, and other support
companies for the petroleum industry in nearby Indonesia, as well as being the oil storage centre for
the region. By the mid-1970s, Singapore was the third largest oil-refining centre in the world.
With a foothold in the oil-refining industry, Singapore started to explore options in the downstream
petrochemicals industry.
In 1984, the petroleum industry was kick-started by investment in a $2bn petrochemical complex
(containing a naphta cracker) on Pulau Ayer Merbau26.
The establishment of Jurong Island – an amalgamation of 7 islands into a homogenous land
mass, as a cluster industry in which petrochemical producers act as each other’s suppliers at
the same location; Contract with Pertamina of Indonesia to supply piped natural gas from West
Natuna gas field (2001).
21
Source: http://www.country-studies.com/singapore/industry.html,http://www.aseansec.org/8829.htm
Source: http://countrystudies.us/singapore/11.htm
23
Source: http://www.edb.gov.sg/edb/sg/en_uk/index/about_us/our_history/the_1960s.html, http://www.edb.gov.sg/
edb/sg/en_uk/index/about_us/our_history/the_1970s.html
24
Source: http://countrystudies.us/singapore/11.htm
25
Source: http://countrystudies.us/singapore/11.htm
26
Source: MASpaper.pdf Monetary Authority of Singapore
22
32
Appendices
To date, Jurong Island spans 32 square kilometres and is home to more than 80 companies
with total investments of around S$24bn. In addition, Jurong Island has its own fire station
and power station, the supply of which is crucial to ensure the smooth operation of industry
on the island27.
• Determinants of Cost Competitiveness of Singapore’s
Petrochemicals Industry28
Feedstock costs – form the bulk of operating costs for petrochemical firms in Singapore.
Note: 2 types of feedstock may be used, Ethane (from natural gas) or Naphta. Ethane contains
higher yields than Naphta (40% as compared to 30%), rendering it a cheaper source of feedstock
if not for prohibitively expensive transport costs. Brunei has ample natural gas reserves which are
transported cheaply within the country, thus it has an inherent natural feedstock advantage over
countries without natural gas reserves (e.g. Singapore).
Plant size – larger plants enjoy economies of scale and are able to push unit costs down.
Generally, newer plants would benefit from the use of better technology - because of the huge
capital outlay, investments in the petroleum/petrochemicals sector tend to last for quite some time
(an attempt by investors to amortise the cost of investment over a larger number of years). For
instance, as of 1999 some 47% of Singapore’s capacity was added before 1992, compared with
over 50% for Japan Korea and China.
Brunei, with its Sungai Liang industrial complex, if able to attract foreign direct investment, will
be equipped with newer and better technology which will grant it a competitive advantage in cost
over the years to come.
Level of integration of petrochemical and petroleum operations: Well integrated operations will
be optimised and help to cut down on capital expenditure as there will be little requirement
for intermediate storage, aided by the close proximity of operations to one another on Jurong
Island.
27
28
Source: http://en.wikipedia.org/wiki/Jurong_Island
Source: MASpaper.pdf Monetary Authority of Singapore
33
Appendices
• Conclusion
With Singapore’s standing as a world-class hub for petrochemicals and petroleum refining activities,
the experience that JTC (which manages Jurong Island) has garnered over the decades can be
instrumental in ensuring the success of Brunei’s Sungai Liang Industrial Park. Jurong International
Group (JTC’s international arm) is well versed in developing and managing industrial parks in many
other countries across the world, with a project presence spanning 126 cities across 36 countries,
amassing an impressive 1008 projects worldwide to date. Thus, we would like to recommend
that the Brunei government adopt JIG (www.jurong.com) as a partner in the development and
establishment of the upcoming Sungai Liang Industrial Park.
34