Page 2 of
5 Brunei's
fund of wealth and scandal By
Geoffrey C Gunn
character. Even so, as
discussed below, in the wake of the "Prince Jefri
crisis", a new national petroleum company has been
formed.
While historically the division of
profits between Shell and the Brunei state had
advantaged the former, by the early post-war
period the terms had been altered to benefit the
state and the royal family. Natural gas production
in Brunei is of more recent origin, with an
liquefied petroleum gas plant opened in 1973, the
largest of its kind in the world at that time.
Brunei is currently the world's ninth largest
producer of LPG.
Today the oil industry in
Brunei is dominated by four companies
belonging to (Royal)
Brunei Shell. The state holds a 50% share in each.
Dominating is Brunei Shell Petroleum (BSP),
responsible for exploration and production as well
as oil refining. Second in importance is Brunei
LPG, a three-way tie-up between Brunei, Shell, and
Japan's Mitsubishi Corporation. A third company,
Brunei Coldgas, buys the liquefied gas, and a
fourth, Brunei Shell Tanker, transports the gas to
Japan’s Tokyo Electric Power Company, the Tokyo
Gas Company and the Osaka Gas Company. (Around
nine huge tankers continuously circle between
Brunei and Japan).
In 1994 South Korea
became an additional customer for LPG, an
important step for Brunei in diversifying markets.
And, in November 2000, Brunei Shell signed an
agreement to export 10,000 bpd to China, a first
for Brunei. Australia, Indonesia and Korea are the
major customers for Brunei’s oil exports, with the
US, Japan and China taking small percentages.
State efforts to stimulate the private
sector and reverse the state-dependent mentality
of local Bruneian entrepreneurs and contractors
have been desultory. Numerous schemes have been
routinely touted or attempted, such as developing
financial services, promoting foreign investment
in new start-ups, stimulating fisheries, and
promoting niche tourism or ecological tourism. In
discussing the "diversification dilemma" in
Brunei, Cleary and Wong list the constraints to
diversification as "labor, capital, resources and
management skills" in a "political and cultural
system that is often highly rigid, conservative
and traditionalist." [5]
The first
"outside" player on the production side was Jasra
Elf, a tie-up between the royal family-controlled
Jasra International Petroleum and French major Elf
Aquitaine that has made important offshore
discoveries, not only extending Brunei's known
reserves but breaking the Brunei Shell monopoly.
(New Zealand’s Fletcher Challenge Energy also
entered into partnership with Elf, but Shell has
been seeking a take-over of Fletcher’s share.) To
put this arrangement into perspective, while BSP
accounted for 90% of gas production in Brunei,
[Jasra] Elf-Fletcher produced the other 10%. But,
as explained below, the oil industry in Brunei is
subject to some major new innovations.
Royal family economy and sovereign
wealth Brunei's "national" wealth is
closely bound up with the privileged and secretive
royal family economy. The Sultan’s fortune is
virtually indistinguishable from the resources of
the state. Simply stated, as supreme executive and
sovereign, the Sultan has the power to dispose of
all State assets as he sees fit. Subject of much
speculation, the Sultan may at one time have been
worth between US$40 billion and $80 billion, a
figure equal to Brunei's reserves, not to mention
the significant assets of his three brothers.
As is well known, the Sultan's assets run
from luxury hotels in London, Singapore and Bali,
to cattle stations in Australia, to jewellery and
art collections. At home, the royal family wealth
is manifest in sprawling palaces and domains.
Prince Mohammed has a high local profile through
owning a controlling interest in a
Singapore-registered company QAF Holdings, with
interests in a range of ventures from supermarkets
to newspapers (Borneo Bulletin), to a tie-up with
the government of Myanmar. Prince Sufri and, as
discussed below, Prince Jefri, both have private
investment companies.
It is notable that
Royal Family economic activity in Brunei is not
reflected in national accounts and falls outside
of surveys conducted by the government Economic
Planning Unit. The separation of the family
economy from the Brunei economy also extends to
separate electricity supplies and
telecommunications among other services.
The amassing of sovereign wealth is not
unique to Brunei. It is a phenomenon shared by
states accumulating natural resource revenues as
with the petroleum-rich Middle Eastern countries,
mineral exporting countries such as Australia, as
well as states such as Singapore, China, and Japan
that enjoy impressive foreign exchange surpluses.
Sovereign wealth funds amassed by such
countries are not of a kind, and run from
aggressive international strategic investors, such
as Singapore’s Temasek Holdings, to domestic
investors in former state-owned companies, such as
Khazanah of Malaysia, to passive financial
investors in international markets of which Brunei
is an example. But one shared feature of many
sovereign wealth funds is that they do not have
public accounts, annual reports, or other
published information. Another defining feature of
sovereign wealth funds, including Brunei, is that
they are usually established as separate entities
from line ministries or government agencies. [6]
Shielded from the Asian financial crisis
that began in 1997 by its small size and
irrelevance as an investment site, the fall in
world oil prices nevertheless brought the economy
to its most critical state since independence. On
June 27, 1998, the Sultan issued a series of
Emergency (Supplementary) Supply orders for 1999
and 2000 or special appropriations out of the
Consolidated Fund. Government allocations draw
from two funds, the Consolidated Fund which covers
operating costs, and the Development Fund which
funds the National Development Plans.
Nevertheless, Brunei was not entirely
immune to regional economic trends. The Brunei
dollar, which is pegged to the Singapore currency
(at present about S$1.4 to US$1), lost about 14%
of its value against the US dollar. Additionally,
certain of Brunei's non-oil exports, such as
textiles, were affected by the crisis in other
ASEAN countries. While that section of the
population with dollar accounts and other assets
was shielded by the decline in the local currency,
expatriate workers, many private sector
contractors, and other marginal elements were
hurt. Expatriate construction workers and other
skilled and unskilled labor have always born the
brunt in times of crisis.
What triggered
the crisis for Brunei was a 1998 decline in prices
of crude oil and LPG by respectively 37% and 25%
over the previous year. With oil production
constant at around 150,000 to 160,000 barrels per
day, this meant that the contribution of the oil
sector to Gross Domestic Product (GDP) declined
sharply.
As a consequence of revenue
shortfalls and economic malaise, growth of real
GDP of fell sharply from 3.75% in 1996-97 to less
than 1.00% for 1998-99. The 1998 budget registered
a deficit estimated at 6% of GDP, obliging the
government to corporatize some government agencies
and to privatize some government projects. Other
government efforts centered on generating
alternative sources of revenue to supplement
declining oil and gas revenues. [7]
By
2003, GDP growth rose to 3.75% but slowed to 1.75%
in 2004 as repair and upgrading of oil and gas
production facilities reduced output. Non-oil
economic activity strengthened reflecting
increased government spending. Most of the
windfall revenue accruing from higher oil prices
was saved, resulting in improvements in the fiscal
situation. Oil production was also expected to
grow following repairs and upgrades to facilities.
[8]
Domestically, rising unemployment went
together with a budget deficit since 1988. In
1992, for example, expenditure increased by 10.8%
mainly due to increased spending for lavish
ceremonies commemorating the Sultan's Silver
Jubilee of accession to the throne and other
expenditures for the royal family. Since 1994, the
government budget deficit has averaged B$1 billion
(US$724 million) a year. This shortfall was funded
by drawing upon Brunei's reserves. Essentially,
deficits are financed by drawing upon foreign
investment income, itself a closely guarded
secret.
In September 1998 the Sultan
created the Brunei Economic Council in to take in
hand strategic planning. The Council was chaired
by Prince Mohamad with membership from both the
public and private sectors. The Council embarked
on a three-pronged Action Plan for economic
recovery. This involved a stimulus package to
inject liquidity, especially for small and
medium-sized enterprises (SMEs); an implementation
strategy; and a communications initiative.
Rhetorically, the package promoted such
concepts as "fast track" payments, IT
infrastructure, investment in people, think-tank,
private sector, bumiputra or Brunei Malay-owned
companies and, last but not least, transparency.
The recommendations of the Council were to be
incorporated in a future economic blueprint for
Brunei Darussalam. [9] There is little evidence,
however, of such rhetoric translating into a
significant break in economic praxis. The case of
royal favoritism and extravagance is illustrative.
The Brunei Investment Agency and
scandal Established in 1983 in the run-up
to independence from Britain the following year,
the Brunei Investment Agency (BIA), located in the
Ministry of Finance, was positioned to manage the
Sultanate's reserves, a role hitherto performed by
the British Crown Agents. As documented elsewhere,
the BIA role in the external recycling of oil rent
took the form of a triple-alliance linking the
state, the new business elite, and international
capital. [10]
The nature of this triple
alliance has long been the subject of speculation
by financial journalists. [11] The modus operandi
of the BIA has been subject to little
investigation, although its managing director,
Dato Abdul Rahman Karim, also Permanent Secretary
of the Ministry of Finance, stated in 1991 that
the agency handled only 40% of the Sultanate's
foreign reserves, which he estimated at US$27
billion. The remainder, he indicated, was divided
among eight foreign banking and investment
institutions, with 50 to 60% of the BIAs money
placed in bonds and the balance in stocks and
shares.
The picture is incomplete,
however, without examining the nexus linking the
BIA with the state, the business elite, and
international capital. While BIA assets were
estimated to have risen to US$60
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