ASEAN Economic Community to bring new deals to Brunei Darussalam's construction sector

The ASEAN Economic Community (AEC) is set to allow the free flow of goods, services, investments and skilled labour, while facilitating the movement of capital across the region. Formally established on December 31, 2015, the community is built on a series of agreements and pillars that establish a stable foundation for liberalised trade and economic expansion in the region. The four key pillars include the creation of a single market and production base, the development of a competitive economic region, the realisation of equitable economic growth and integration with the global economy. As a single regional market and production base ASEAN’s combined GDP in 2014 was $2.5trn, making it the seventh-largest economy and third-largest population in the world, according to a 2015 ASEAN report.

Opportunity Calls

The AEC could open up a plethora of business opportunities both for Brunei Darussalam’s large construction firms and small and medium-sized enterprises (SMEs). However, the state of the country’s labour market has become a potent issue with regard to AEC integration, as have the relatively low number of SMEs in the Sultanate. In 2015 smaller businesses accounted for only 22% of total employment in the country, compared to between 60% and 97% across ASEAN. Whether or not the country’s labour pool is ready for open competition is still under scrutiny. “Brunei [Darussalam] has to ready its human resources professionally,” Rudhito Widagdo, minister counsellor of economy affairs at the Indonesian Embassy in Brunei Darussalam, told The Brunei Times in August 2014.

Eliminating Tariffs

Reducing tariff and non-tariff barriers falls under the AEC pillar of creating a single market and production base. Indeed, tariffs on all building and construction goods and products have been eliminated for Brunei Darussalam, Indonesia, Malaysia, Thailand and the Philippines since 2010. Vietnam, Cambodia, Laos and Myanmar are set to become tariff-free by 2018. In the long term, plans are to remove tariffs altogether. The ASEAN-6 member states – Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand – are signatories to the ASEAN Trade in Goods Agreement (ATIGA), which came into force in 2010. ATIGA eliminates import duties for ASEAN-6 states, which is useful for exporters of building and construction materials and products. Indeed, the ASEAN-6 have almost fully eliminated intra-regional tariffs, with 99.2% of tariff lines at 0%, according to ASEAN’s report.

ATIGA ensures not only tariff reduction, but also most-favoured nation (MFN) treatment and national treatment on internal taxation and regulation, both of which can be leveraged by member states’ construction sectors to ensure favourable treatment. MFN gives ASEAN the right to request that any member state that gives a non-member state more favourable commitments incorporate that commitment into the ATIGA. National treatment prohibits any ASEAN state from treating imported goods less favourably than its own domestically produced goods in terms of internal taxation or regulation.

Accessing Services

The ASEAN Framework Agreement on Services (AFAS) aims to eliminate restrictions to trade in services and enhance cooperation within ASEAN. AFAS benefits companies providing services, including construction services, in the ASEAN region by ensuring national treatment, market access and recognition of professions under mutual recognition arrangements (MRAs). MRAs have been agreed on for engineering, architecture and land surveying professionals, facilitating free movement and access to opportunities within ASEAN, while at the same time maintaining high standards of accreditation.

Among the various packages signed by ASEAN economic ministers, construction-related agreements include eliminating restrictions on activities such as construction of commercial buildings, installation works, rental of construction equipment and civil engineering. Other agreements in the planning stage will see MRAs tabled for the construction and building sectors, among others. To grasp just how transformative such an agreement could be for the construction sector, one must only look at the MRA for architectural services, which was finalised in 2007. The agreement covers the provision of architectural services in connection with an array of activities, such as monitoring and supervision of construction and project management, and provision of preliminary studies, designs, models, drawings, specifications and technical documentation, among other things. With this sizable remit, professionals from any ASEAN member country offering relevant architectural services are eligible to apply to the ASEAN Architect Council to be registered as an ASEAN Architect.

Protecting Investments

Investors are provided with protections under the ASEAN Comprehensive Investment Agreement (ACIA), which protects existing investments and prospective investors. This could prove beneficial to any construction project requiring foreign investment and could ultimately create a larger marketplace for mega-projects along the lines of the Temburong Bridge.

Along the same lines as the ACIA, the Investor-State Dispute Settlement (ISDS) mechanism gives investors the right to use dispute settlement proceedings against a government when it is unable to obtain compensation after unlawful direct or indirect expropriation. The ISDS also allows for improved transparency in investment regulations, calling for member states to make information on laws, regulations, administrative guidelines or policy changes relating to investments publicly available.

Championing SMEs

Brunei Darussalam, along with the Philippines and Myanmar, is a “country champion” for the ASEAN Strategic Action Plan for SME Development 2016-25 goal to promote entrepreneurship and human capital development in the community. This goal puts the country in the position of driving human capital development to enable micro enterprises – firms with one to five employees – and SMEs to succeed. The desired outcomes include instituting entrepreneurial education and learning programmes, enhancing human capital development for micro-enterprises and promoting women’s participation in micro-enterprises and SMEs. In order to achieve the entrepreneurship goal the association will review and assess adoption of a common entrepreneurship curriculum, develop and maintain an ASEAN Online SME Academy and establish an ASEAN-wide internship scheme and post-study programmes in business and entrepreneurship, among other things. The focus for the Sultanate must be to ensure that the objective of creating effective entrepreneurial human resource development can be achieved quickly. The Institute of Brunei Technical Education at the Ministry of Education is the major provider of vocational and technical education and continuing education programmes in the country.

Leading The Way

Showing its leadership in this arena, in January 2016 the Energy and Industry Department under the Prime Minister’s Office announced the formation of a new statutory body that will be responsible for the growth of local SMEs. Darussalam Enterprises (DARe) will encourage and manage the growth and development of local enterprises, including SMEs. With 85% of DARe’s board of directors being drawn from the private sector, the body will be a mix of representatives comprising entrepreneurs and veteran industry players from the Sultanate’s construction, logistics and consultancy sectors. The government will be represented by only two members on the board, which essentially hands responsibility to the private sector.

In order to facilitate opportunities for Brunei Darussalam’s SMEs, DARe will also take control of industrial sites previously overseen by the now-defunct Brunei Industrial Development Authority. DARe will use the income from these sites to fund SME development. Another key need for SMEs in the construction sector is financing. Chinta V Rao, director of engineering firm Duners, told OBG, “While lending schemes for SMEs are being developed by local banks, some local construction firms are facing challenges to source enough funding in order to complete their projects as a result of tight credit regulations.”

With the necessary rules and regulations in place, and with the energy of entrepreneurs matched by the experience of businesspeople, the Sultanate looks well placed to move its economy in the direction of ASEAN integration with a focus on how the construction sector can contribute to this movement. As a fully compliant member of the various ASEAN agreements, Brunei Darussalam expects the excellent state of its transport infrastructure, as well as the experience it brings to the table, to speak for itself as it navigates the new world under ASEAN.