With ample energy resources, Brunei Darussalam is working to build a stronger industrial base using its access to cheap power and petroleum products. Downstream industries have already seen significant successes, and efforts are also being made in unrelated sectors, including in the agro-industrial sector, and specifically halal products, where the Sultanate has resources and expertise.

High-tech industries are also attracting significant attention. Moves to address skills gaps and support innovation are also playing their part in expanding industry. Indeed, industrial diversification is now delivering improved economic productivity and the realisation of national growth objectives.

ECONOMIC CONTRIBUTIONS: The country’s manufacturing industries shrank in the five years from 2004 to 2009; starting with real GDP of BN$105m ($82m) at 2000 prices, by 2009 it had hit a low of BN$69m ($48.5m). In 2010, however, the sector staged a 30% year-on-year recovery to BN$90m ($68.7m), 6% negative growth overall from 2003, according to the IMF. Industry’s historical performance overall is also reflected in manufacturing’s nominal allocation of commercial loans, averaging just 2.8% from 2005 to 2010.

Reversing the industrial status quo is the foundation of Brunei Darussalam’s National Vision 2035, also known as Wawasan Brunei 2035, which was first incorporated into the ninth national development plan (2007-12). The sizeable resources at its disposal allow the country plenty of time to undergo the process of diversification away from oil, but observers have stressed the need to tackle economic reform more urgently to combat concerns regarding labour productivity and to reduce the reliance of the population on government welfare.

PRIORITIES: Economic diversification poses major challenges for a country of 425,000 with a labour force of 120,000, two-thirds of whom are migrants. Population growth was near flat at 1.6% in 2012, and although the Sultanate largely welcomes migrant labour, there is little retention of this skilled workforce because of immigration restrictions.

Complex government bureaucracy, access to financing and an inadequately educated local workforce, were identified as among Brunei Darussalam’s biggest challenges in the World Economic Forum’s 2011 “Global Competitiveness Report”. These issues are publicly acknowledged, and while the Sultanate does not envision becoming a top global industrial player, it does intend to develop its complementary industry and services sectors to become an attractive investment destination.

Initially, this has meant capitalisation on energy and diversifying into downstream industries, a move which has registered several dramatic successes so far. At the same time, attention has also been focused on sectors where the Sultanate sees niche opportunities to capitalise on its other resources and hinterland. These include making use of Brunei Darussalam’s well-known ecological biodiversity, which could have research & development (R&D) potential for the environment, health care and health services industries. This has stimulated development in associated industries, including pharmaceuticals, agribusiness, cosmetics and software development, among others, and has highlighted the need for investment amongst the economy’s supporting industries, namely logistics, aviation, oil field services and financial services. However, these are still early days, and most infrastructure needed to meet these ambitions remains emergent.

DOUBLING DOWN: With further investment into the full industrial spectrum of its energy resources, attempts to capitalise on Brunei Darussalam’s abundant feedstock, downstream petrochemicals and heavy industries have prospered. The Sultanate’s initial flagship downstream foreign direct investment, the Brunei Methanol Company (BMC), located at the 271-ha Sungai Liang Industrial Park (SPARK), began operations in 2010 and now produces 850,000 tonnes per annum of grade AA methanol, which accounts for 1.5% of total oil and gas exports. Brunei Darussalam is considering foreign direct investments in a new gas-based petrochemical complex that will produce ammonia, urea and its derivatives at SPARK.

ISLAND POTENTIAL: Following the initial successes that demonstrated the Sultanate’s appeal for downstream industries, the government has pushed forward with development of the 955-ha uninhabited island of Pulau Muara Besar (PMB), first flagged in 2003. Adjacent to Brunei Darussalam’s principal port at Muara and an appropriate site for a deepwater port, the Brunei Economic Development Board (BEDB) expects to complete the main road across PMB island and the access bridge from the mainland in 2016.

Developed by a Singaporean consortium including Surbana International Consultants and Global Maritime and Port Services, the Master Plan for PMB has been completed. The privately owned Zhejiang Hengyi Group of the People’s Republic of China announced in mid-2012 the development of the country’s first integrated refinery and aromatics cracker, marking the nation’s largest downstream investment to date. Zhejiang Hengyi Group’s $4bn complex will have a capacity of 175,000 barrels per day and will serve as the anchor tenant on PMB. Phase 1 of the project will produce refined petroleum products and petrochemicals, such as paraxylene and benzene, which are mainly used in the textile industries.

A portion of the refined petroleum products will be marketed locally and the rest will be exported; the paraxylene and benzene will be exported mainly to China as feedstock for Zhejiang Hengyi Group’s own textile plants. The group has also expressed interest in developing a Phase 2 of the project to produce olefins, which would entail a $6bn investment.

PMB’s facilities will host a number of facilities that will provide upstream services. The proposed $1.8bn smelting plant by US-based Alcoa is one of the potential projects being considered for PMB. The BEDB has signed a memorandum of understanding with Alcoa to explore the feasibility of this project. No definite decision has been reached to date. Tenders opening in 2013 include storage, berthing facilities, ship maintenance and repair services, shipbuilding and oil and chemical storage. An integrated marine supply base with a fabrication yard is additionally expected to be done via a request for proposal, instead of a tender.

INFRASTRUCTURE NEEDS: The size of the energy sector means it will continue to attract significant investment, but this is expected to have knock-on effects for other industries, notes Abdul Amin bin Haji Hashim, deputy director general at the Department of Economic Planning and Development’s (JPKE).

“There are many more activities in the oil and gasrelated sectors, so that indicates to us that the services sector can grow alongside it,” Hashim told OBG. “In the next five years the non-oil and gas sector will still continue to grow as we have seen in the past, although contribution-wise we may not see significant changes. Basically, this is due to the fact that investment that is relatively more significant is directed into the oil and gas sector.”

Anticipating industrial developments, the BEDB has earmarked sites for industrial activities outside of the oil and gas centre, which should help support the growth of emerging industry clusters.

TEXTILES: Once a mainstay of the manufacturing sector, Brunei Darussalam’s textile industry fell 74% in real GDP terms from BN$212m ($165m) 2003, to just BN$58m ($44.3m) in 2010 after the US eliminated its garment quota system at the end of 2004. Low-cost labour among ASEAN neighbours, notably Vietnam, Cambodia and Myanmar, have out-priced the Sultanate, while price discounts up to 20% over the border in neighbouring Miri (Sarawak), have served to only further undermine local demand, which has been the sector’s mainstay.

BUILDING BLOCKS: Brunei Darussalam has also managed to remain a net importer of both concrete and steel (see Construction chapter). Buoyed by large-scale infrastructure projects included in the 2007-12 development plans, imports of steel have risen 62% since 2007 to hit BN$110.3m ($85.9m) in 2011, while cement imports grew 78% to BN$48.7m ($37.9m) in the same period, according to JPKE.

While dwarfed by imports, the country’s steel reexports saw strong growth, posting a 75-fold increase between 2007 and 2011 to BN$3.89m ($2.95m). Although re-exports of cement posted a 210-fold rise in the same period, at just BN$390,000 ($297,000) it is clear that the sector caters almost exclusively to domestic demand. Bruneian cement provider Timbertech saw monthly demand from neighbouring Sarawak grow to a reported 1600 piles in 2012, but initial export figures for the first half of 2012 were 7.5% of the total for 2011, suggesting that supply is almost entirely committed at home.

NEW AREAS OF INTEREST: The country’s ambitions are now focused on developing industrial sectors that demand technical expertise. Foreign direct investment (FDI) rose 287% between 2007 and 2011, from BN$392m ($305.3m) to BN$1.52bn ($1.15bn), and the Sultanate is re-investing in its manufacturing sector, focusing on emerging new technologies and niche markets. However, the manufacturing sector’s potential is unproven, with FDI dropping 67% from BN$114m ($88.8m) to BN$37m ($27.8m) between 2007 and 2010. However, initial FDI commitments have caught global attention; foremost in its halal ventures.

HALAL: With the launch of the Brunei Halal brand, the Sultanate has moved to capitalise on its respected halal accreditation system to engineer a market niche in different sectors (see analysis). The Sultanate’s paucity of food production has ensured that most of its attention has been focused offshore through an ongoing programme of acquisitions, notably in the UK.

Domestically, however, Brunei Darussalam has been keen to leverage the untapped potential of its home-grown resources both in terms of labour and biodiversity. One step towards achieving this is establishing the 500-ha Brunei Agro Technology Park to host these nascent industries once the first 50 ha comes on-line in 2015 (see Agriculture chapter).

The BEDB has facilitated Canadian firm Viva Pharmaceutical’s investment in a halal manufacturing plant in Lambak Kanan (East) industrial estate valued at BN$26m ($20.2m). Announced in 2010, with operations scheduled to start in 2013, the 100,000-sqft phase I plant will produce cosmetics, solid dose medicines, mainly for the over-the-counter market, and nutraceuticals. The plant will employ about 100 people. Production will then move into antibiotics with the construction of a facility with 200,000 sq ft of production space at the end of phase IV.

An established player in the Middle Eastern halal pharmaceuticals market, Viva Pharmaceutical envisages Brunei Darussalam as a gateway production base for South-east Asia and the Middle East, then later for R&D. It hopes to capitalise on the Sultanate’s stringent halal rules that stand distinct from more ambiguous interpretations by regional competitors and which support product development, Edward Ko, general manager at Viva Pharmaceutical Brunei, told OBG.

PIQUING INTERESTS: Viva Pharmaceutical has benefitted from the administrative assistance of the BEDB and the government. Its investment is covered by local financiers and Aureos Capital — ostensibly a private equity fund under the Ministry of Finance, it is a joint venture between Aureos Capital and the Brunei Investment Authority, wholly owned by the Strategic Development Capital Fund (SDCF) at the Sultanate’s Ministry of Finance.

As well, the SDCF is also involved in a joint venture with Canadian civil aviation and defence firm CAE to build a $102m high-tech multi-purpose training centre, which is scheduled to commence in 2014. The BEDB also established a Paris-based office in October 2012 with the aim of promoting greater awareness of Brunei Darussalam as an investment destination among European multinational corporations. The BEDB hopes that the greater availability of funding will provide the Sultanate with added leverage to attract investors from Europe’s distressed markets.

INCENTIVES: “We feel that Brunei Darussalam’s tax and financial incentives, which include the possibility of co-investment for strategic projects, would be particularly attractive to European companies,” Vincent Cheong, BEDB’s CEO, told OBG. “We would like to encourage European firms to consider Brunei Darussalam as a hub because the Sultanate is ideally located in Asia – a growing market – and this has given it potential as a relatively low-cost centre compared to its neighbours.”

Incentives offered by the Sultanate include a lower corporate income tax rate of 20% from 2010. Under the Investment Incentives Order 2001, industries granted “pioneer status” are eligible for tax relief of up to five years for investments between BN$500,000 ($389,400) and BN$2.5m ($1.95m). Investments in excess may be granted eight-year tax relief, extendable by three years if they are located in a high-tech industrial park. Companies can also receive exemption from import duties on machinery, equipment, component parts, accessories, building structures and raw materials.

To earn investor confidence, however, the Sultanate still has some way to go to address issues such as bureaucratic red tape, overlapping jurisdictions and other inefficiencies, which continue to pose challenges. Improvements are being made, however, with the Sultanate gaining three places in the World Bank’s 2012 “Ease of Doing Business” report, to rank 86th.

“While Brunei Darussalam does provide a stable and attractive investment environment, its government and much of its public infrastructure, where present, continues to be run in a rather traditional and inefficient manner. Comparative to other investment destinations in Asia, this is the downside to investing in Brunei Darussalam and why Viva Pharmaceutical is conservative about further investments,” Ko told OBG.

ENERGY SUPPLIES: The Sultanate has also tapped its substantial energy reserves to further pique investor’s interests. The BMC, for example, signed an agreement with Brunei Shell Petroleum (BSP) for gas supply for its facility at the SPARK industrial park, representing an allocation of 500bn cu feet of natural gas. Another 500bn cu feet has been set aside for other projects at SPARK.

With SPARK about to conclude development of infrastructure, this energy supply is expected to be crucial for further methanol, ammonia and urea investments. A feasibility study into an offshore common export facility jetty has additionally been planned.

A key part of SPARK’s remit is to attract foreign investors, which leads to international players being favoured as tenants on site. This should help fulfil Brunei Darussalam’s demand for transfer of foreign technological expertise to local business. Principal recipients of this are expected to be small and medium-sized enterprises (SMEs), which compose 98% of local companies and industries and employ some 92% of the private sector workforce.

SUPPORTING EXPANSION: Recognising that local industry has to expand abroad, and taking its lead from foreign initiatives, the BEDB set up the BN$15m ($11.7m) Promising Local Enterprise Development Investment Fund. This works alongside the BN$3m ($2.34m) Enterprise Technical Assistance Scheme (ETAS), capped at BN$300,000 ($233,640) per recipient over two years, to support the co-funding of professional consultants. These funds are specifically targeted at assisting established companies venture overseas. Progress remains in its initial phases, the BEDB’s CEO Cheong, told OBG. “One of the key challenges was to identify promising local companies which were ready and willing to be ‘groomed’ to expand and regionalise and internationalise their operations.”

SKILLS GAP: Although education levels are above many other ASEAN neighbours, the Sultanate’s labour force lacks the technical disciplines which the country and markets now require. With a higher education participation rate of just 5%, the country falls below the 30% baseline requirement for knowledgebased economies, according to Brunei Darussalam’s Centre for Strategic Policy Studies (CSPS), and will face challenges in meeting its 2035 economic ambitions.

According to Diana Cheong, head of research at CSPS, Brunei Darussalam requires a population of at least 800,000 to 900,000 if it is to achieve a diversified economy. “There is a concerted need for consideration of how we can obtain this critical mass, and, detailed manpower forecasting,” she told OBG.

The CSPS launched a productivity drive in November 2012 and plans to establish a council led by government, employers and the community to address challenges in increasing the scope of the future workforce. It faces a generational task in changing the mind-set of young Bruneians who are content with the status quo or whose ambitions are centred on securing white-collar jobs in an increasingly saturated government sector, Diana Cheong explained.

However, the advent of the ASEAN Economic Community in 2015 may prove to be defining, with the CSPS anticipating fluctuations in the nature of Brunei Darussalam’s available labour force either from emigration or immigration.

Labour force education has nonetheless received significant government attention, with spending seeing substantial growth since 2007, hitting BN$620m ($482.9m) in the 2010/11 academic year. Ministerial scholarship opportunities have increased, higher education institutes are globalising and providing R&D incubation facilities has become a priority, with the new Knowledge Centre and iCentre in the capital.

PATENTING INNOVATIONS: While R&D is pre-dominantly the domain of academic institutions, Brunei Darussalam is creating an environment conducive to further innovation in industry by opening a Patent Registry Office (PRO) in January 2012. The office received 30 patent applications in 2012, including 11 applications from the University of Brunei Darussalam for patents relating to energy, electrical, medical and industrial products.

According to Shahrinah Yusof Khan, Deputy Registrar and Head of the PRO, this may change going forward as Brunei Darussalam has acceded to the Patent Cooperation Treaty on April 24, 2012 and she anticipated more filings in due course. With industrial designs now under the administration of the PRO as of October 2012, she predicted an increase in innovative products from local SMEs.

The introduction of the PRO helped Brunei Darussalam climb 18 spots to take second place in the 2012 Global Innovation Index, a recognition that surprised even the government, and further expansion of the office is planned for 2013.

OUTLOOK: Diversifying away from its energy industries has presented the Sultanate with a long-term challenge in which it must re-engineer its economic outlook. It has embraced this challenge with pragmatism and realism, expecting to resolve capacity bottlenecks and shortfalls over the next two decades. While petrochemicals remains the top industrial segment to date, the coming years should see growth in investment and output from sectors considered nascent today. Brunei Darussalam has recognised that the state alone cannot lead this effort along and has pursued foreign partnerships to provide technology transfer to local businesses. Moving further forward will likely depend on increased private sector engagement.