Statism of a new sort: Moves to diversify the economy by supporting the private sector

The Sultanate has created an extensive public sector that dominates Brunei Darussalam’s economy and, in many ways, forms an extension of the generous welfare system – providing jobs and security to the local population. According to figures provided by the Department of Economic Planning and Development at the Prime Minister’s Office (JPKE), the public sector accounted for 36.1% of the total labour force in 2010. Still, only about a quarter of private sector employees (30,077) were locals that year. Indeed, the government spends a significant amount of its annual expenditure on wages and salaries for Bruneians in the public sector. In the 2011-12 budget, for example, the government spent 32.1% of total expenditure – BN$1.86bn ($1.45bn) – on wages and salaries, according to the IMF. Current expenditure, which largely consists of payments towards the Sultanate’s generous benefits and welfare system, accounted for 72.1% of total government spending – BN$4.18bn ($3.25bn) in the same year.

STIMULATING PRIVATE GROWTH: Therefore, while the strong hydrocarbons revenues give the government ample room to implement this public sector led economy – total revenue in the 2011-12 budget stood at BN$5.9bn ($4.6bn), there has been a push to reduce this dependence on the public sector. Although the government is unlikely to roll back its extensive welfare system, there is an increasing emphasis on stimulating private sector growth as a means of diversifying income streams and supporting the development of a broader labour market. In the fiscal year 2010-11, the government generated only 3.2% of its revenue for corporate tax from companies outside the hydrocarbons field. The development of a more extensive and robust private sector could provide an additional stable and sustainable revenue stream for the government. Similarly, with the oil and gas sector accounting for 67.7% of GDP but the total energy sector (including the power sector) only accounting for 17.9% of the labour force in 2010 (according to statistics taken from the JPKE and the Energy Department of the Prime Minister’s Office), the development of a stronger nonoil- and -gas-dependent private sector could be crucial for sustaining future domestic employment. While the government is looking to increase local content and employment within the hydrocarbons sector, it is also pushing for the development of more dynamic and more numerous private companies in other non-hydrocarbons fields. Diversifying the economy in this way could support more high paying jobs in the labour market for Bruneian nationals.

OPEN FOR BUSINESS: According to information from the Ministry of Finance, there are approximately 2500 active companies in the Sultanate. However, with over 4000 non-active firms, Hjh Ning-Lela Dato Mohamad, permanent secretary at the Ministry of Finance, asked the local press, “Is the environment not conducive enough? Or are we being complacent to simply just take and not give back towards building a stronger economy?” As such, the government has been introducing a number of measures to improve the business environment for companies within the Sultanate.

One major measure in this regard is the attempt to streamline the process for establishing a business within the country. In 2010 the government committed to reducing the cost and time of doing business in Brunei Darussalam by 25% by 2015. To this end, the 2012-13 budget allocated BN$795,000 ($619,000) for the establishment of two new organisations to expedite bureaucratic procedures: a state agency for the promotion of the ease of doing business, as well as a new business facilitation centre will be established. Under the new centralised business licensing system that will emerge from this new body, the government has targeted a reduction in licensing time from 160 days to less than two months.

Brunei Darussalam ranks 79th out of 185 economies in the World Bank’s 2013 “Doing Business” report. Although the country beats the regional average (86 for East Asia and the Pacific), there is still substantial room for improvement. Indeed, as highlighted by the government’s attempts to improve procedures, the Sultanate ranks low on the index for starting a business (135th). According to the latest report, it takes 15 procedures and 101 days to start a business in the country. The cost of establishing a business is also an issue, accounting for 10.7% of income per capita, according to the World Bank’s index.

In these respects, Brunei Darussalam is less competitive than many of its regional counterparts. For example, it takes 13 procedures and 33 days to start a business in China, while in Malaysia it requires three procedures at an average of six days.

Brunei Darussalam, therefore, has some way to go before attracting business away from some of its regional competitors. The country also has a low ranking for enforcing contracts (158th), getting credit (129th) and protecting investors (117th).

ADDITIONAL SUPPORT: The new bodies should help the country to move up the rankings in the coming years. However, these are not the only measures being employed to create greater incentives for private sector growth in Brunei Darussalam. The 2012-13 budget also occasioned another tax cut for corporations, reducing the rate from 22% to 20% (for oil and gas firms the corporate tax rate remains at 55%). This follows a reduction of 1.5 percentage points in the previous fiscal year and a reduction of 10 percentage points in the past five years.

Announcing the decision, Pehin Dato Abdul Rahman Ibrahim, the second minister of finance, said, “The purpose of this is for businesses to improve the efficiency and productivity, as well as to attract more Bruneians to work in the private sector.”

Under the tax regime, newly established firms will also be exempt from tax on their first BN$100,000 ($77,880) for their first three years of business. This will also be supported by new regulations to reduce input costs for industrial companies in the country. Ibrahim also announced plans for a reduction in Customs taxes on machinery and industrial equipment using electricity from 20% to 5%, effective from the beginning of the financial year on April 1, 2012. An identical reduction in Customs tax was implemented for heavy machinery. “The purpose is to reduce business costs and exports in Brunei Darussalam,” Ibrahim announced. Taken together, the tax reforms implemented by the government should have a dramatic impact on the cost of doing business in the Sultanate and improve the environment for business growth in the private sector. Hjh Ning-Lela Dato Mohamad told the local press that the tax reforms implemented since 2007 have indeed had a dramatic impact on the tax burden faced by private companies. “All these have a cumulative effect of reducing substantive reduction in tax payment,” she said. “The relief, in many cases, has been calculated to amount to approximately 60% of the previous tax paid.”

HEADING TO WORK: Beyond creating an improved business environment, the government is trying to encourage the employment of Bruneians in the private sector. As such, it announced a tax credit of up to 50% of a Bruneian employee’s basic salary for the first 36 months of employment for private companies that hire nationals. The government hopes this will encourage companies to offer better salaries to encourage Bruneians to work in the private sector.

In addition to this incentive programme, there are also efforts under way that aim to improve the skills and employability of nationals. The Human Resources Development Fund, managed by the Department of Human Resource Development at the JPKE, offers a number of different incentives. These are designed to encourage Bruneians to pursue skills training and other on the job training that will make them more employable and create an increased number of opportunities for them in the private sector.

Under the scheme, local jobseekers will be awarded an extra BN$5 ($3.90) per day for skills training, in addition to receiving an allowance for up to six months of on the job training. The government will meet 65% of the funding for this allowance, while the remaining 35% will be covered by the employee’s company. Furthermore, through the scheme, Bruneian employees will be eligible for a BN$1000 ($778) motivational allowance after completing one year of employment, as well as a further BN$1500 ($1168) for completing an additional year in the private sector.

The government has, therefore, introduced a number of measures in the past year that should support the development of the private sector and Bruneians’ participation in it. Not only have new systems been put in place to improve the environment for establishing a business, but changes to the tax code have also made the country more competitive as a place to operate. It is hoped that such measures will help the country’s non-oil and -gas economy to continue growing at a steady pace. This is expected to help diversify the government’s revenue streams and bolster employment opportunities for Bruneian citizens.