As a small and relatively high-income country with an economy built around oil and gas exports, Brunei Darussalam is quite active in international trade and both inward and outward foreign investment. The bulk of inward foreign investment has come from Brunei Darussalam’s close relationship with AngloDutch oil company Royal Dutch Shell. The firm made the first discovery of onshore oil in the country in 1929, and as the focus of exploration and production has moved to larger offshore gas fields Royal Dutch Shell has remained the main foreign player through Brunei Shell Petroleum (BSP), a joint venture with the Brunei National Petroleum Company (BNPC), the national oil and gas company. The Sultanate also has long-standing relationships with Japan’s Mitsubishi, which helped launch liquefied natural gas (LNG) exports in 1973, and France’s Total, which has been present as an operator of offshore natural gas fields since 1986. Chinese polyester producer Zhejiang Hengyi is moving to be the next largescale foreign investor in Brunei Darussalam, with advanced plans for a major oil processing and petrochemicals complex (see Energy chapter).
Foreign Investment
The country actively recruits foreign investment, offering generous tax incentives to targeted projects that bring in high-paying jobs, help diversify the economy, add value to existing oil and gas production, or efficiently substitute for imports. The Brunei Economic Development Board, a government agency, is the main initial partner for foreign investors coming to the Sultanate, handling international tenders and serving as an investment promotion agency.
Foreigners can own up to 100% of Bruneian companies, except for those that are involved in natural resources or food security, where foreign equity is capped at a maximum of 70%. Foreign ownership of land is prohibited and long-term leases of land to foreign firms require government approval. In practice, all major foreign direct investments (FDI) are joint ventures with the government, a sovereign wealth fund or a local firm. Investments are sought for the purpose of bringing in international experience, technology and connections, not for the sake of capital, of which Brunei Darussalam has plenty thanks to its large trade surpluses. The country is actually a net exporter of investment to the rest of the world, through sovereign wealth funds and the private financial sector.
Imports & Exports
Trade policy is relatively open, and Brunei Darussalam is an enthusiastic supporter of multilateral free trade agreements, including the Trans-Pacific Partnership, of which it is a founding member (see analysis). Exports have traditionally been focused on the energy-hungry, advanced economies of North Asia, Japan and South Korea, which consume most of Brunei Darussalam’s oil and gas output. Imports, meanwhile, come mainly from China and neighbouring South-east Asian countries, which are also taking a growing share of exports. The market for imports is large relative to the country’s size and diverse, ranging from staple foods to sophisticated military equipment.
Cost Challenges
However, the Sultanate does face serious cost challenges affecting both trade and investment. Besides the relatively high income levels that result from oil and gas production, the country’s ability to achieve economies of scale is limited by its small population of just over 400,000. Another major issue is that Brunei Darussalam’s exports are virtually all liquid fuels shipped out on specialised tankers, whereas nearly all imports are brought in on container vessels. This increases costs, since ships are typically empty or nearly so on either the inward or outward leg of their journeys.
Exporters of goods shipped by container face particularly high costs due to the inconvenience for shippers of handling small volumes. On the plus side, however, unskilled labour costs are low for such a high-income country and energy is inexpensive.
Trade Surpluses
Brunei Darussalam runs very large trade surpluses relative to its GDP, totalling BN$8.8bn ($6.9bn) in 2013, or 43.6% of GDP, according to the Department of Economic Planning and Development (JPKE). That figure was down from BN$10.63bn ($8.34bn) in 2012, or 50.17% of GDP, as the country’s exports dropped in 2013 due largely to extensive maintenance that affected oil and methanol output in particular. In 2013 exports came to BN$15.35bn ($12.04bn), down from BN17.24bn ($13.53bn) the year before.
Merchandise accounted for 90.75% of exports in 2013, and oil, gas and methanol in turn made up 97.7% of merchandise exports. LNG was the largest export at BN$7.41bn ($5.81bn) in 2013, down slightly from BN$7.71bn ($6.05bn) in 2012. Exports of oil totalled BN$6.4bn ($5.02bn) in 2013, down from BN$7.82bn ($6.14bn) the previous year, and chemicals exports, nearly all of which are methanol, fell from BN$311.6m ($244.5m) in 2012 to BN$115.4m ($90.5m) in 2013.
Exports remained soft in early 2014 amid weakness in Asian LNG markets, with monthly goods exports in January to April keeping pace with the year before. Exports reached BN$698.8m ($548.35m) in April 2014, 12.9% higher than the BN$619.2m ($485.8m) recorded for the same month in 2013.
The Sultanate exports few goods besides fuels. The next-largest category of merchandise exports is machinery and transport equipment, mostly used vehicles, which came to BN$161.2m ($126.5m) in 2013. Exports of other manufactured goods totalled BN$160.4m ($125.86m). Services exports, predominately related to tourism and travel, came to BN$1.42bn ($1.11bn) in 2013, up slightly from BN$1.4bn ($1.09bn) the previous year.
Destinations
Japan is Brunei Darussalam’s biggest export destination by far, taking nearly 40% of goods exports in 2013 and 44.1% in 2012. Japan mainly buys LNG, purchasing 87% of the country’s LNG exports in 2012 and around 90% in prior years. Japan’s Mitsubishi is also a 25% shareholder in Brunei LNG. South Korea is the Sultanate’s second-biggest export market, taking 16.3% of exports in 2013 and 15.7% the previous year. South Korea is also the largest buyer of Brunei Darussalam’s oil, accounting for 19% in 2012, as well as the remaining 13% of LNG exports that year. The nine other countries of the ASEAN bloc are also important export destinations, with 24% of exports in 2013 and 15% in 2012. The Sultanate’s other major export markets include India on 7.6%, Australia at 7.3% and New Zealand with 4.1%.
Brunei Darussalam’s imports came to BN$6.55bn ($5.14bn), down slightly from BN$6.61bn ($5.19bn) in 2012. Reflecting Bruneians’ love of travel, services are the largest category of imports, coming to BN$2.03bn ($1.59bn) in 2013 and BN$2.15bn ($1.69bn) in 2012. Machinery and transport equipment, mainly automobiles, was next, with BN$1.65bn ($1.3bn) of imports in 2013 and BN$1.39bn ($1.08bn) in 2012. Imports of other types of manufactured goods came to BN$1.4bn ($1.09bn) in 2013, while food totalled BN$599.8m ($470.6m), chemicals (including pharmaceuticals) reached BN$360.7m ($283.04m) and fuels amounted to BN$339.1m ($266.09m), which is due to a shortage of local refining capacity. Imports come mainly from neighbours within the ASEAN region, especially Malaysia, which accounted for 21.9% of merchandise imports in 2013 and 19.9% the previous year, and Singapore, which accounted for 19.1% in 2013 and 23.6% in 2012. Other major source countries for imports in 2013 were the US (11.9%), China (11.2%), Japan (5.8%), Thailand (5%) and Indonesia (4.2%).
Large Inward Investments
Driven mainly by offshore oil and gas infrastructure, Brunei Darussalam had an estimated stock of $14.2bn of inward FDI as of the end of 2013, according to data from the UN. That comes to around $35,000 of cumulative FDI per capita, more than twice that of the US and EU, and very far ahead of most other South-east Asian countries. However, the Sultanate tends to compare itself to regional leader Singapore, which sets a daunting standard with around $157,000 of cumulative FDI per capita.
Annual FDI inflows came to $895m in 2013, according to an estimate from the UN, and averaged just under $900m a year for the period from 2010 to 2012. That was up from an average of $315m per year of inward FDI from 2004 to 2009, and largely reflects an acceleration of offshore exploration and development since 2009 as well as recent renovation of older offshore infrastructure.
Total investment, including domestically financed, came to BN$3.08bn ($2.42bn) in 2013, or 15.3% of GDP, up from BN$2.88bn ($2.26bn) the year before, or 14.2% of GDP, according to figures from JPKE. Construction accounted for BN$1.83bn ($1.44bn) of investment in 2013, up from BN$1.7bn ($1.33bn) in 2012, while machinery and equipment represented some BN$1.25bn ($984.01m) of investment in 2013, up from BN$1.18bn ($925.08m) the previous year.
Among the largest recent offshore projects is the development of a deep offshore field discovered in 2010 in an area where Total is the operator in partnership with Shell and the Bruneian government. Another large recent investment was a $600m methanol plant opened in 2010 by the Brunei Methanol Company, a joint venture of BNPC with Mitsubishi and Itochu. The plant occupies part of a 271-ha industrial development called the Sungai Liang Industrial Park, designed especially to host downstream oil and gas processing facilities.
Petrochemicals
Meanwhile, another large deal struck in 2011 with Zhejiang has been moving forward at a site set aside for downstream development on Brunei Bay’s largest island, Pulau Muara Besar. Zhejiang will occupy the entire 105-ha site with a large oil refinery and petrochemicals complex, costing an estimated $10bn. The complex will consume a mix of local and imported oil and will produce motor fuels for domestic and export use, as well as petrochemicals feedstock for Zhejiang’s polyester plants in China. The $4.3bn first phase of the project will include an oil refinery, a naphtha cracker, and paraxylene and benzene plants, while a second phase set to start in 2019 will double refining and paraxylene capacity and add a mono-ethylene glycol plant.
Training
Outside of oil and gas and related industries, the largest recent foreign investment is the $70m CAE Brunei Multi-Purpose Training Centre, which opened in 2014. Primarily a helicopter training facility, the centre is a 60:40 joint venture between Canadian flight-training company CAE and the Bruneian government. The centre is the first in Southeast Asia to offer training for the latest Sikorsky helicopters, used by the Brunei military and BSP, which will be its anchor customers. The centre also aims to train military and offshore energy industry pilots from around the region, and plans to expand to offer emergency response and health care training, which will bring total investment to over $100m.
Kevin Speed, director of the centre and vice-president of CAE Asia, told OBG the project grew out of CAE’s participation in the Brunei Darussalam International Defence Exhibition held biennially since 2007. “The government wanted to diversify and create more high-tech jobs, and they have invested a lot in the latest Sikorsky models, so it made sense to train their pilots here,” he said. For its part, CAE was motivated by the security of long-term contracts with anchor customers and the prospect of rising regional demand for training in the military, offshore energy and health care fields, he added.
The investment in the centre coincides with moves by Sultan Hassanal Bolkiah to position Brunei Darussalam as a regional leader in national disaster response and peacekeeping. The country has been part of a small international peacekeeping mission in the southern Philippines since 2010, and the government sends response teams around the region after major natural disasters, such as Typhoon Haiyan, which struck the Philippines in November 2013.
Other Investments
Another recent large-scale foreign investment is a $26m pharmaceuticals plant, Simpor Pharma, led by Viva Pharmaceuticals, part of a Chinese-Canadian group with other Asian investments. The project is a joint venture with a Bruneian government private equity fund managed by the Abraaj Group, a major Dubai-based private equity fund manager. Simpor expected to begin production by the end of 2014, with a first phase producing halalcertified nutritional supplements and plans to expand into halal-certified cosmetics and generic pharmaceuticals. Other recent or planned inward investments include Hana Soy & World, a Japan-Brunei Darussalam joint venture that produces soy drinks for the Bruneian market, and a BN$32m ($25.1m) pipe threading plant, serving the local energy industry, that Japan’s Sumitomo Corporation plans to begin building in 2014 and complete by 2016.
Infrastructure For Trade
The government is also undertaking or planning a number of major investments in infrastructure, largely aimed at supporting international trade. These include a BN$150m ($117.7m) upgrade of the Brunei International Airport, scheduled for completion in late 2014. The project will modernise the passenger terminal and boost its capacity from 1.5m to 3m passengers per year (see Transport chapter).
The country has long been a proponent of open skies policies and encourages foreign airlines to boost the number of routes they serve from the Sultanate. As of mid-2014 the airport hosted flights by Malaysia and Singapore’s national carriers and the Malaysian and Philippine discount carriers AirAsia and Cebu Pacific. They and Brunei Darussalam’s national airline, Royal Brunei Airlines, fly direct to most major ASEAN capitals, several regional cities in Malaysia and Indonesia, as well as Hong Kong, Shanghai, Melbourne, Dubai, Jeddah and London.
The government is also planning an expansion of the Muara deep-sea container port that will allow it to load and unload two ships simultaneously. A consultancy contract was awarded in March 2014 to the Singapore engineering firm Surbana International Consultants in a joint venture with a local firm. A tender is expected in the autumn of 2014. The Muara container terminal is operated by Manila-based International Container Terminal Services, one of the world’s largest port operators.
The largest planned infrastructure project is a bridge linking the main, western part of Brunei Darussalam with the isolated, eastern Temburong region, which currently can only be reached by boat or a winding drive via Malaysian territory. With an estimated price tag of $2bn, the project will include a 13.4-km bridge over Brunei Bay and another 16-km highway over land and mangrove marshes. A tender was held in July 2013, but as of August 2014 had not been awarded. Kim Sung-eun, deputy chief of mission at the South Korean Embassy in Brunei Darussalam, told OBG that Korean bidders in the tender were still waiting for a decision. The link will facilitate development of Temburong and trade with Malaysia by reducing travel times on the Pan-Borneo Highway, which runs along the northern coast of Borneo and connects Brunei Darussalam to Malaysian regions to the south-west and north-east. A temporary, more winding route for the highway was completed in December 2013 following the opening of the 189-metre-long Malaysian-Bruneian Friendship Bridge over the Pandaruan River, linking Temburong with the Malaysian region of Limbang.
Linking Centres
Two other important bridge projects are under way, both with South Korean participation. The BN$139m ($109.07m), 607-metre-long, cable-stayed Sungai Brunei Bridge will cross the river of the same name, reducing travel times between Bandar Seri Begawan and the river’s right bank. The bridge will also help to promote development on the river’s right bank and shorten the drive to Limbang (see Transport chapter). South Korea’s Daelim Industrial won a tender for the project in 2013 in a joint venture with locals Swee and TRC. Construction began in January 2014 with 2016 set as a completion target. The larger, 2.7-km Pulau Muara Besar Bridge will connect the island of that name to the mainland, near the Muara port. This bridge will support Zhejiang’s planned 105-ha oil refinery and petrochemicals complex. A design consultancy contract was awarded in 2012 to a consortium of South Korean and Bruneian engineering companies led by South Korea’s Pyunghwa Engineering Consultants. A tender for construction of the bridge was held in April 2014, and as of autumn 2014 it had yet to be awarded.
Preparing The Way
Brunei Darussalam has also invested in excellent submarine telecoms connections, hosting three landing stations for networks leading to Europe, North America and North Asia. They are the only landing stations in northern Borneo and are aimed partly at encouraging high-tech investments and entrepreneurship.
Another area where the country has been investing is in developing a recognised halal brand and trusted halal certification system. Halal certification is essentially a value-added service sold to both domestic and foreign food processors, which in either case involves sending Bruneian inspectors to monitor foreign production. The Sultanate has limited agriculture production of its own, preferring to preserve its jungles and forests, and imports the vast majority of its food from abroad.
Looking Outward
The sizeable flows of foreign currency income earned from oil and gas exports make Brunei Darussalam a large net exporter of capital relative to its size. According to IMF estimates, current account surpluses averaged $6.2bn a year from 2006 to 2012. By definition, that is also the estimated pace at which accumulation of foreign assets by Bruneian residents exceeded foreign investment in the country. The lion’s share of outward investment is made by the government through its sovereign wealth funds, which are managed by the Brunei Investment Agency (BIA), an arm of the Ministry of Finance. The BIA has a strict policy of secrecy about its investments, but the scale of flows into sovereign wealth funds can be surmised from the government’s fiscal surpluses, which averaged $2.9bn a year from 2008 to 2013, according to IMF data. The funds also apparently reinvest all their income, which is likely to be greater than $1bn a year.
The Investment Management Institute, a US research institute that tracks sovereign wealth funds, estimated the Brunei Darussalam funds at nearly $39.3bn in 2012. That does not include foreign exchange reserves maintained by the Autoriti Monetari Brunei Darussalam (AMBD), the country’s financial regulator, which came to $3.8bn at the end of 2013, according to IMF data. It is believed the majority of the sovereign wealth funds’ foreign holdings are in portfolio investments and real estate. The largest ones that have been publicly revealed are the Dorchester Collection, a group of 10 high-end hotels in Europe and the US, and two hotels operating under the Grand Hyatt brand in Singapore and Kuala Lumpur.
BNPC is developing into an important outward foreign investor as it seeks to diversify internationally. In October 2013 it won a tender to explore and develop an onshore block in Myanmar, and in December 2013 the company agreed to buy a 3% stake in Progress Energy Canada, which is developing a major gas field and LNG plant. Private individuals and companies also invest abroad, mainly intermediated by the domestic financial sector. Brunei Darussalam’s banking system had BN$8.7bn ($6.83bn) on deposit with or on loan to foreign banks as of March 2014, according to data from the AMBD.
Outward FDI flows reported to the UN apparently do not include sovereign wealth fund investments, as they put the total stock of outward FDI as of 2011 at just $691m. A comparison of net FDI flows reported to the IMF with inward flows reported to the UN implies that FDI outflows averaged $287m a year over the period from 2006 to 2012, which is more plausible, but probably still too low.
Outlook
The investment boom that will accompany the Zhejiang project and the construction of major bridges will boost Brunei Darussalam’s economy during what could be a soft period for Asian LNG prices, as supplies have been growing faster than demand and more supply is coming in from North American projects. Meanwhile, export volumes are set to be boosted when Total begins production from a deep offshore natural gas field, expected in 2015, and when the Zhejiang project begins to come online later in the decade.
Business people and embassy officials say foreign investors, both current and potential, are paying close attention to how Brunei Darussalam handles its transition to sharia law. Although none believed the Sultanate is aiming for a radical implementation, there was concern that any sharia case opened against a foreigner could potentially damage the sense of security to which foreign investors and expatriate professionals have grown accustomed.
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