Change is in the air: Regional and local regulatory reforms are set to open up the sector

With a small population and limited non-hydrocarbons exports, Brunei Darussalam’s transport system has long been considered adequate to handle current volumes of trade and traffic. While the country’s infrastructure is modern, it is comparatively basic: the single-runway Brunei International Airport (BIA) and the small port at Muara handle the vast majority of cargo and passengers entering the country, which until recently has been well within their capacities.

UPGRADES NEEDED: The country’s ambitions to serve as a centre for regional trade, however, are now motivating a number of investments and long-term strategic planning. The most visible of these projects is the modernisation of the BIA, which will double the airport’s capacity and offer expansion opportunities to regional airlines such as Malaysia-based MASW ings. Meanwhile, the restructured flagship, Royal Brunei Airlines (RB), was reported in early 2013 to be considering a partnership with an international logistics firm to boost cargo activity. However, increasing trade with its neighbours, particularly in the Brunei-Indonesia-MalaysiaPhilippines East ASEAN Growth Area (BIMP-EAGA), will require upgrades to the seaport and to land border posts.

Brunei Darussalam is also fleshing out the deficiencies in its land transport infrastructure, connecting several remote areas by bridge and expanding a section of the country’s main highway into a dual carriageway. Even as it makes the country more accessible by road, however, the Ministry of Communications (MoC) is attempting to curb dependence on cars. A land transport master plan, due in mid-2013, is expected to spell out plans for improving the public transportation system. Finally, the private and public sectors are working to improve logistics efficiency and capacity, through information and communications technology (ICT) solutions, as well as streamlined bureaucracy.

BY THE NUMBERS: A brief glance at freight import and export figures confirms the structural imbalance of trade in Brunei Darussalam and emphasises the challenges faced by its logistics industry. According to the Ministry of Communications, it imported 1.04m tonnes of freight while exporting just 34,358 tonnes. Over 98% of imports came through Muara Port, with 2%, or 16,765 tonnes, coming in as air cargo. The mixture was more balanced for exports, with cargo loaded at Muara representing 67%, or 22,997 tonnes of the total.

Moreover, Muara Port, which has six conventional berths along its 611-metre-long wharf and a 250-metre-long container berth, is well below total capacity: the port handled 101,397 twenty-foot equivalents (TEUs) of cargo in 2011, an 8.7% increase over the 93,230 figure from 2010. The capacity of the container terminal within the port, meanwhile, is between 220,000 and 300,000 TEUs per year—and even that is not a massive figure, compared with capacities of 400,000 and 500,000 at the ports of Sarawak and Sabah, respectively. “Brunei’s air and seaports are not up to standard, but with the volume of imports and exports that we currently see, they do not need to be.

We do not need a mega-airport or -seaport,” Izman Junaidi, the managing director of Megatrans, told OBG.

PORT OF CALL: That said, Muara’s port and associated infrastructure have seen several upgrades in past years, most notably the construction of three inland container depots (ICDs), which have enhanced Muara’s container processing capabilities. The ICDs, located at Muara, Kuala Lurah, and Sungai Tujoh, Belait, offer better storage, refrigeration and Customs processing facilities for containers imported through the main port.

The most recent, a BN$3.8m ($2.96m) facility in the second-largest city, Belait, was opened in January 2012.

Another major addition will be a 150- to 200-metre extension to the container wharf, announced in early 2012 as part of the 10th National Development plan for 2012-17. The extension is prompted by the anticipated increase in containers once the heavy industries on Pulau Muara Besar begin operations. Under the expansion, one more container berth and one crane will be added, along with associated equipment for power generation and container handling. The Ports Department is also exploring the possibility of new modality to outsource its operation to a third party.

AIRPORT MODERNISATION: Strong passenger growth over the past several years has strained the capacity and revealed the limitations of the Sultanate’s one airport. According to the Civil Aviation Department under the MoC, the volume of passengers coming through Brunei International Airport increased from 1.44m to 2.02m in 2007-11, an average annual increase of 8.65%.

With the airport rated at between 1.5m and 2m in capacity, and the terminal mostly unchanged since its opening in 1974, the decision was made in 2008 to consider an upgrade. The Brunei Economic Development Board (BEDB), which is typically responsible for soliciting foreign investment for projects such as the Sungai Liang Industrial Park, was tasked with the role of implementing the modernisation project.

The BEDB handed the consultancy to Changi Airports International, a spinoff of the group that operates Singapore’s airport; the construction contract was awarded to a joint venture between Swee, a local Bruneian firm, and Trans Resources Corporation, a Malaysian contractor with experience on three airport projects in Malaysia. The BN$130m ($1.01m) project, designed to increase capacity to 3m passengers annually, is scheduled for completion by the fourth quarter of 2014. It includes the addition of 50% more floor space, a new Customs and immigration area, a new arrival and departure hall, new aerobridges, and a full renovation of the existing terminal. It does not, however, include upgrades to cargo handling facilities, which has perplexed some logistics providers, since one-third of freight exports go through the BIA.

According to Julian Fung, the head of infrastructure development at the BEDB, a plan to expand the cargo terminal is in the works, but was not included in the scope of the project assigned to the BEDB.

ROYAL REFOCUS: Whether the new space at the rebranded BIA actually gets utilised will depend in part on the results of RB’s own rebranding efforts, which has seen the Sultanate’s flagship carrier shrink in order to remain competitive. RB cancelled five of its 18 routes in October 2011, stating that it could not afford to keep subsidising unprofitable routes. The affected destinations are Auckland, Brisbane, Perth, Ho Chi Minh City and Kuching, with the remaining long-haul routes being Melbourne, Jeddah, Dubai and London.

The elimination of most of the Australasian destinations represent RB giving up on the so-called “kangaroo route” between the UK and Australia – a market which RB had entered gradually over the past decade in a bid for expansion. However, with strong competition from Qantas, Singapore Airlines, Etihad and Emirates, RB was pushed to offer cut-rate pricing to attract customers. It also leased six Boeing 777 aircraft to boost its own fleet and help compete against stronger product offerings from the larger airlines. Ultimately, however, the services became a drain on the coffers of the government, which supports RB financially. While the preservation of routes such as London and Melbourne had strategic and political importance for the country, state officials decided that subsidising transfer passengers was not a worthwhile endeavour.

According to Dermot Mannion, the deputy chairman of RB, the decision will not significantly impact the country’s attractiveness as a tourist destination. “Some 90% of the seats on the downsized routes went to transit passengers, who provide little to no benefit to Brunei,” Mannion told OBG. “By contrast, having a slimmeddown RB with expanded services within the Southeast Asia region will be more advantageous for the industry.” However, cutting out these routes will likely impact the BIA’s capacity expectations – transit passengers represented nearly 400,000 out of 2m passengers at the BIA in 2011, or about 20% of the total.

Moreover, the BIA is highly dependent on its country’s flagship carrier, with RB accounting for 70-80% of passengers at the airport. While 2012 figures had not been released by early 2013, the transit numbers likely dropped, something airport concessionaires and logistics operators will have to take into consideration. Mannion told OBG that RB’s operating figures have improved by 35% after cancelling its most unprofitable routes, although whether it is now profitable was unclear. Some of the fleet put out of service by the cancellation have been returned to their owners, but RB has also increased its frequencies to Kuala Lumpur and Melbourne. It sees South-east Asia, which already represents 44% of its seat total, as its new market of focus, with Bangkok and Singapore its most active routes.

However, whether RB will be able to compete with an increasingly dynamic South-east Asian aviation market – one marked by emerging low-cost carriers (LCCs) such as AirAsia and Lion – remains up for debate. RB has signalled it will not attempt to compete directly with LCCs for budget travel, preferring instead to brand itself as a “boutique” airline. This plan includes offering business class on all of its flights, and becoming one of the first airlines in South-east Asia to receive the muchhyped Boeing 787 Dreamliners.

This latter effort will see five planes added to the fleet, with their addition scheduled for delivery in August 2013. However, it is likely to be delayed by a few months in the wake of safety concerns that grounded Boeing’s entire fleet of Dreamliners. Moreover, it is unclear to what extent RB’s competitive advantage is actually built on the fact that it holds a monopoly in nine of its 13 remaining routes. Indeed, in a more liberalised Association of South-east Asian Nations (ASEAN) airline environment, RB will have a tough fight on its hands.

ASIAN CONNECTIONS: Brunei Darussalam’s chairmanship of ASEAN during 2013 shines a spotlight on its efforts to promote itself as a linchpin of regional trade. Key arrangements, such as the ASEAN Single Aviation Market and the ASEAN Single Shipping Market will knock down remaining barriers that prevent the region’s transportation companies from competing in each other’s markets. The ASEAN countries pledged in 2008 to implement the third, fourth and fifth “freedoms of the air”, which grants airlines the right to fly from one's own country to another and back, or fly between two foreign countries on trips that originate in one’s home country. Third and fourth freedoms were phased in by 2010, with fifth freedoms scheduled for full liberalisation by 2015. However, a number of countries in the region have already opened up some or all of the routes. The ASEAN’s “open skies policy”, also scheduled for 2015, will expand regional integration beyond the fifth freedom, though the exact timeline and details of the new agreement have yet to be worked out fully.

The removal of restrictions presents both an opportunity and a challenge for the flagship carrier – RB could potentially offer services in more populous regions of the ASEAN, but regional competitors, such as Singapore Airlines or AirAsia, would have equal opportunities in the Sultanate’s home market.

While conceding the challenges that are posed by greater competition, RB is forecasting that its business proposition – which includes moderately priced business class service on all of its flights – will equip it for survival under the open skies agreement. “We believe that given our long history in the region and our reputation for customer service, we will be able to compete in this liberalised market,” Mannion told OBG.

The targeted date of 2015 coincides with the start of the anticipated “ASEAN Economic Community”, under which most restrictions to trade and commerce will be eliminated. This extends to the shipping market, where similar restrictions are scheduled to be removed by 2015 as well. However, protests from the heavily protected shipping industries of several ASEAN countries, such as Malaysia and the Philippines, may delay or weaken some of the liberalisation policies.

REGIONAL EXPANSION: While regional attention will be on the broader ASEAN configuration, it is in the BIMP-EAGA where Brunei Darussalam hopes to play a central role. This ASEAN sub-region encompasses the southern Philippine islands of Mindanao and Palawan, the holdings of Malaysia, Indonesia and the Sultanate on Borneo, and the eastern Indonesian island grouping of Sulawesi, Papua and Maluku. And while Brunei Darussalam is somewhat marginalised within ASEAN by the presence of much larger nations, Bandar Seri Begawan can hold its own among BIMP-EAGA’s smaller regional capitals, such as Davao, Kota Kinabalu and Kuching. Transport plays a particularly large role in BIMP-EAGA discussions, as the three other members are fairly isolated regions of larger archipelagic states. While flights between these cities, from Kuching to Bandar Seri Begawan, or Kota Kinabalu to Mindanao, are minimal, the national airlines often require passengers to go to their capital before flying to a nearby city.

Onerous border restrictions have also weakened interstate coach travel, although this applies mainly to Borneo. Finally, cabotage policies that generally aid national shipping companies in Malaysia, Indonesia and the Philippines have been blamed for raising the price of transport in their more remote provinces.

SPREADING ITS WINGS: Progress on transport cooperation has also been more rapid in the BIMP-EAGA, whose members have more in common than in the more heterogeneous ASEAN grouping. The most notable story is the evolution of MASW ings from a domestic provider in Sabah and Sarawak, to an international operator connecting the BIMP-EAGA region. A 2007 memorandum of understanding between the four governments specified “designated points” within the BIMPEAGA to be linked with air travel, but it was not until early 2012 that MASW ings launched its first routes. These linked Bandar Seri Begawan to Kota Kinabalu and Kuching, as well as Kuching to Pontianak in Kalimantan, and Tawau to Taranak.

Whether these routes can turn a profit is a separate question: MASW ings’ loss-making rural air services have long been maintained as a national service obligation to the state-owned Malaysian Airlines. Early reports suggested load factors for BIMP-EAGA flights were quite low, particularly for the Brunei-Kuching route, but demand picked up by the end of 2012 to average 50% load for the year. More flights within Borneo and to the Philippines are scheduled for 2013 in the second phase of the BIMP-EAGA expansion. To fuel its expansion, MASW ings will receive 16 of 36 ATR turboprop planes recently ordered by parent company MAS.

TOURISM TALK: Tourism operators have responded positively to the expansion of MASW ings’ services, particularly in the wake of RB’s cancelled long-haul flights. Brunei’s Anthony Tours has been collaborating with Popular Express Tours of Sabah – an ecotourism hotspot – and with MASW ings itself, to cross-promote Brunei to Asian tourists. Similarly, logistics operators hope that the agreements will spawn further collaboration and liberalisation between the BIMP-EAGA members. “MASW ings is one example of successful BIMP-EAGA cooperation, which moved from policy to implementation quite rapidly thanks to intergovernmental agreements,” Thomas Koh, the chairman of the BIMP-EAGA Business Council Transport Cluster, a logistics services provider, told OBG. “Hopefully we will see similar progress on other projects in the future.”

BIMP-EAGA ministers also plan to implement limited co-terminalisation – a liberalisation that goes beyond fifth freedom rights to allow airlines to stop in two destinations outside of their home countries. Cebu City in the Philippines, Solo in Indonesia and Johor in Malaysia have been designated as receiving cities. When approved, the plan would allow, for example, RB to fly from Bandar Seri Begawan to Kota Kinabalu, pick up passengers and continue on to Cebu.

SHIPPING UP: Beyond the aviation sector, progress on regional transport cooperation has been less dramatic, but the shipping industry did notch one success story in 2010, with the start of the roll-on, roll-off (ro-ro) ferry service between Brunei and Labuan, a Malaysian island just offshore from Sabah. Demand reportedly exceeded expectations and led the operator, PKL Jaya, to consider reopening its Muara-Menumbok route, ferrying cars and passengers from Brunei to Sabah, and cutting out several border crossings. However, that route, which operated briefly in 2010, had not been resumed at the time of press in early 2013.

Ro-ro figures prominently in the BIMP-EAGA’s shipping plans, with the bloc undertaking a feasibility study to consider extending the Philippines’ ro-ro-based nautical highway system to the rest of the ASEAN. Six additional routes have been identified as possible expansion opportunities, including two to Muara port, from the Mindanao cities of Zamboanga and General Santos. Ro-ro allows for the transport of both passenger and cargo vehicles at lower costs, as the loading and docking ports require less expensive infrastructure than for conventional bulk or container ships.

Transport sector figures, however, are hoping for more drastic action from the BIMP-EAGA, suggesting that governments could use incentives to encourage more shipping lines to serve the region. Brunei is currently served by 12 shipping lines, mainly from Singapore and Port Klang in Malaysia. However, these firms charge high freight fees, as their ships leave Muara empty due to the very limited nature of Brunei’s domestic manufacturing and agriculture industries. Transport officials have considered creating a national shipping line and launched a feasibility study to this effect in 2010, but little has come of it. Subsidies from the four governments of the BIMP-EAGA, however, could potentially push major shipping lines to make a combined trip to Brunei, Kota Kinabalu and Mindanao.

Brunei could also leverage its access to Singapore in order to connect to the hinterland of northern Sarawak. “We have shipments coming from Singapore twice every week, while Miri and Limbang do not have direct access to these main ports by sea,” Koh told OBG. “Once the infrastructure and policies are in place, it would make sense to use Brunei Darussalam as a hub.”

However, Muara would have to face competition for this designation, mainly the ports at Sepanggar and Bintulu in Sarawak and Sabah, both of which have larger domestic manufacturing industries than Brunei.

ONE IF BY LAND: Of all possible improvements to intraregional transit, smoother land transport might be the most significant low-hanging fruit. This is particularly relevant for Brunei, which is the only country in the BIMPEAGA to be contained within one landmass; for most citizens, delays when crossing the border into Sabah or Sarawak are their most common encounter with international transport dysfunction. Indeed, drivers going from Miri to Kota Kinabalu along the Pan-Borneo highway must cross five borders and pass through 10 checkpoints: leaving Sarawak, entering Brunei, leaving Brunei, entering Sarawak, leaving Sarawak, entering Brunei, leaving Brunei, entering Sarawak, leaving Sarawak and finally entering Sabah. This complex arrangement is a result of historical circumstances and geography, but rising demand has clogged the route at several junctures, most notably the slow ferry across the Pandaruan river between Limbang and Temburong.

The high volume of traffic between Brunei and Malaysia has prompted both governments to be flexible on Customs and immigration procedures. Sources tell OBG that bilateral cooperation has sped up immigration procedures and reduced transit charges, and a “frequent travelling card” is being implemented, which would cut down on paperwork at the border. The Intelligence Clearance Identification (iClid) system, developed under the BIMP-EAGA, also has strong potential to cut down on Customs processing, but the timeline for its implementation is unclear. The iClid technology, which would use radio frequency identification to track vehicles crossing the border, has been tested in pilot sites at Sunjai Tujoh and Kuala Lurah. The project, which has attracted two investors from Brunei and Malaysia, is completed and scheduled for commencement in 2013 under the BIMP-EAGA Implementation Blueprint, but little has been forthcoming about its progress.

Two upgrades to physical infrastructure could also improve transit time. The third border crossing in a northbound journey straddles the Pandaruan river between Limbang in Malaysia and Temburong district in Brunei, and is served by a small car ferry that can only transport 10 cars at a time. This often produces delays, leading authorities from both countries to propose construction of a bridge across the water course.

Following an agreement between Sultan Haji Hassanal Bolkiah and Malaysian Prime Minister Najib Razak in September 2011, a contract was awarded to Piasau Konkerit Occupational Limited of Malaysia for construction of a 189-metre bridge. Construction on the RM21m ($6.83m) project began in May 2012 and is scheduled for completion by September 2013.

This will only address one chokepoint, however, and some Malaysian representatives have suggested the problem of congestion at borders is as much a product of the narrow, single-lane carriageways that run through each crossing. Malaysia does have ambitions of upgrading the entire Pan-Borneo highway – from Kuching to Kota Kinabalu – to dual carriageway status, but this is a massive undertaking that will require RM17bn ($5.53bn) or more, and attention will likely be focused first on the southern and central industrial areas. Finally, Brunei may partially solve this problem on its own if it chooses to build the Temburong bridge, connecting the Brunei-Muara district to the Temburong district, which will cut out two border crossings.

A MATTER OF CUSTOM: The final area of cooperation for the BIMP-EAGA countries – Customs, immigration, and quarantine systems (CIQS) – will be vital elements in improving the border experience for Brunei-Malaysia travellers and logistics performance. There is much room for improvement: a 2009 study of Customs processing in the BIMP-EAGA found Muara and the BIA to have the second-slowest import processing times in the region – showing an average of 90 hours for the port and 52 hours for the airport.

Speeds have improved since then, according to logistics handlers, but much remains to be done. The BIMPEAGA Task Force on CIQS, with financial support from the Asian Development Bank, is implementing capacity-building programmes with Brunei’s Customs officials that should improve handling times.

OUTLOOK: For some South-east Asian countries – Indonesia is the classic example – transport and infrastructure issues are among the foremost obstacles to competitiveness; the same cannot be said of Brunei, which is a relatively compact state with a central port, airport and good power connections.

Indeed, there is no magic fix – a bridge or container terminal which, if built, could solve Brunei’s lack of diversification and sluggish non-hydrocarbons growth. Officials are looking at the barriers that remain, be they physical or bureaucratic, and taking steps to address them. Carefully planned investments can serve to make Brunei’s transport sector, if not the catalyst of economic transformation, at least an enabling factor.

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The Report: Brunei Darussalam 2013

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