The development of local small businesses is a key area of focus

One of the most important trends in Brunei Darussalam’s economy is the government’s push to develop small businesses. Although the government has long sought to encourage development of small businesses as part of its efforts to diversify the economy and increase employment opportunities for locals, the effort has intensified in recent years as a demographic bulge of young adults has led to high youth unemployment.

Virtually every business in Brunei Darussalam has been affected by some aspect of the government’s drive. The most important part of the effort is the Local Business Development (LBD) policy, which mandates minimum local ownership, management and employment levels for government contractors and large firms in which the government is involved. Other policy changes include steadily falling corporate income tax rates, reductions or exemptions for small and new businesses, reforms simplifying the process of starting a new business, and a variety of programmes to support small businesses with training and financing.

Dependence On State Jobs

Government employment has traditionally played a role similar to a public welfare system. It comes with excellent job security and benefits, and tends to be preferred over private sector employment and promoted to young adults by their parents. The availability of such jobs has helped support very high labour force participation rates, which are well over 90% among men in their prime working years of 25 to 54, and over 80% among women aged 25 to 44. However, a demographic bulge in the 10-39 age range is overtaking the government’s need for staff, and a decision in 2010 to raise the retirement age from 55 to 60 has slowed the rate at which government jobs are being vacated. This has led to relatively high unemployment rates among young adults.

Since young people tend to delay getting married and living independently until they have secured an appropriate job, the shortage of jobs for young people is an important factor holding back growth in incomes and domestic demand. A 2011 population census put the overall unemployment rate at 9.3%, but it is likely several points higher among citizens and permanent residents, as temporary residents make up about 40% of the labour force and are nearly 100% employed. Unemployment is concentrated among young adults, largely reflecting their willingness to wait for favoured jobs.

The trend in unemployment is hard to gauge, as such censuses are taken only once per decade. Another, more limited unemployment series is published more frequently, which counts only those who register at job centres. The number of such registered job-seekers has steadily shrunk from a peak of 7.2% of the labour force in 2001 to 1.1% in 2012, but businesspeople in Brunei Darussalam told OBG that the unemployment trend had been going in the opposite direction.

Shazali Sulaiman, partner at KPMG Brunei, told OBG that the 2011 census impressed upon the government the need to tackle the problem. “There’s been a strong push coming personally from the Sultan. It has been felt most strongly in the energy sector, where there was a sense that foreigners were controlling the contracting business and giving all the jobs to foreign workers. Now there is an increasing awareness among locals of job opportunities in the energy sector.”

Local Businesses

For investors in Malaysia or other ASEAN countries, Brunei Darussalam’s LBD policies are likely to sound familiar. Much like Malaysia, the Sultanate’s LBD policies consider not only citizenship but also ethnicity to promote opportunities specifically for Bumiputera(native citizens). Members of ethnic groups who arrived relatively recently, particularly the Chinese, are not considered Bumiputera, and thus do not count as local towards many LBD requirements, even if they hold Brunei Darussalam citizenship. The core of the LBD policy is to require certain minimum percentages of local ownership, management and employment among government contractors and large firms partly owned by the government, including Brunei Shell Petroleum. However, there are no blanket minimums: rather, the policy is applied company-by-company, depending on the type of business it does. As a rule of thumb, the most specialised work can still be contracted out to international companies, but less specialised work is restricted to foreign-local joint ventures or local firms with all or part Bumiputera ownership, and minimum quotas of Bumiputeras among managers and employees. LBD minimums also apply to subcontractors, and generally rules have been tightened to reduce “fronting” by Bumiputera companies for firms that do not meet LBD minimums.

The government has also been gradually tightening rules on employing foreign labour. For example, in May 2014 it cancelled the unused portions of foreign labour quotas that had previously been granted to employers. The move effectively slowed down the process of getting permission to employ foreign labourers by limiting companies’ ability to apply in advance for positions they do not intend to immediately fill.

Making Business Easier

Brunei Darussalam has traditionally lagged behind Singapore and Malaysia in making its business climate as simple and hassle-free as possible, but in recent years the government has made significant improvements. As a result, the Sultanate has been moving up the World Bank’s annual ease of doing business rankings, from 96th out of 183 countries in 2010 to 59th out of 189 in 2014. The main reason for the improvement was a reduction in corporate income taxes, which were lowered in steps from 30% prior to 2008 to 20% in 2012. After a pause in 2013/14, the government approved a further reduction to 18.5% in 2015. Also, the first BN$100,000 ($78,400) of income is taxed at a quarter of the normal rate (4.625% in 2015) or is free from tax for businesses less than three years old, and the next BN$150,000 ($118,000) of income is taxed at half the normal rate (9.25% in 2015).

These measures help alleviate one of the unintended side effects of Brunei Darussalam’s revenue model, which relies mostly on income sharing from oil and gas, and features zero personal income tax. That creates incentives for small businesses to remain sole proprietorships, which are untaxed, and for established firms to structure themselves with affiliated sole proprietorships as profit centres. Bankers told OBG that the prevalence of sole proprietorships makes it difficult to lend to most small and medium-sized enterprises (SMEs).

The World Bank also attributed the rise in Brunei Darussalam’s ranking to faster company registrations and the introduction of an electronic Customs system, one-stop shops for obtaining construction approvals and electricity, and a national credit history database. The Sultanate ranked best in sub-rankings for paying taxes (20th), getting electricity (29th), cross-border trade (39th), construction permits (46th), resolving insolvency (48th) and getting credit (55th). However, it continued to rank relatively poorly in sub-rankings for starting a business (137th), registering property (116th), protecting investors (115th) and enforcing contracts (161st). Forming a company took an average of 101 days, mainly due to licensing procedures, while registering a property transfer took an average of 298 days. The low investor protection ranking was due to weak minority shareholder protection, and the contract enforcement ranking was due to the high cost and time required to obtain and enforce a judgment.

Supporting Small Businesses

The government also operates a number of programmes to assist or support small businesses, mainly through the Brunei Economic Development Board (BEDB). Grant programmes range from BN$2000 ($1569) micro-grants to youth entrepreneurs up to BN$5m ($3.9m) to fund local research and development. There are also subsidy programmes for food processors, employee training and participating in international trade fairs, and zero-interest loans given for small business expansion and low-interest (4%) loans for start-ups and export financing. Government investment funds will also invest equity up to BN$1.5m ($1.2m) in high-tech start-ups.

The BEDB operates workshops for SMEs and a business incubation centre for high-tech and media startups as well. The centre offers subsidised office space, meeting rooms, mentorship and training, and assistance with enterprise development and fundraising.