Addressing Barriers to the Integration of Brunei Darussalam's Business Services Sectors into Global Value Chains - December 2019
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Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains December 2019
Addressing Barriers to
the Integration of Brunei
Darussalam’s Business
Services Sectors into Global
Value Chains
December 2019Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains © Commonwealth Secretariat 2020 All rights reserved. This publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or otherwise provided it is used only for educational purposes and is not for resale, and provided full acknowledgement is given to the Commonwealth Secretariat as the original publisher. Views and opinions expressed in this publication are the responsibility of the author(s) and should in no way be attributed to the institutions to which they are affiliated or to the Commonwealth Secretariat. Wherever possible, the Commonwealth Secretariat uses paper sourced from responsible forests or from sources that minimise a destructive impact on the environment. Printed and published by the Commonwealth Secretariat.
Acknowledgements \ iii Acknowledgements This report was commissioned through technical assistance provided by the Commonwealth Secretariat at the behest of the Government of Brunei Darussalam, under a project to diversify the economy and improve export competitiveness. The Asian Trade Centre, Singapore led by Dr Deborah Elms, Executive Director and her team, conducted the research analysis and wrote the report. Olayinka Bandele, Interim Head of Trade Competitiveness Section at the Commonwealth Secretariat, edited the final report. Sincere thanks is extended to all individuals, agencies and private sector firms who provided information and insights leading to the preparation of this Services Report for Brunei Darussalam. The views expressed in this publication are those of the authors and do not necessarily reflect the official position or policy of the Commonwealth Secretariat or any other agency or government identified.
Contents \ v Contents Acknowledgements iii Acronyms and Abbreviations vii Executive summary ix 1. Introduction 1 2. Global Value Chains 3 2.1 What are global value chains? 3 2.2 Changing patterns of global value chains 3 2.3 Key drivers of global value chains 4 3. Services Activities in Global Value Chains 6 3.1 What are services? 6 3.2 Services in global value chains 6 3.3 Managing services in trade agreements 7 3.4 Services activities in the Asia Pacific region 8 4. Brunei’s Economy and Diversification 9 4.1 Overview of Brunei’s economy 9 4.2 Strategic goals and planned outcomes 11 5. Logistics 14 5.1 What are logistics services? 14 5.2 Logistic services and global value chains 15 5.3 Market overview of Brunei’s logistics services sector 15 5.4 Logistics: promise and opportunity 17 5.5 Assessment of Brunei’s logistics services sector 18 6. Financial Services 21 6.1 What are financial services? 21 6.2 Financial services and global value chains 22 6.3 Market overview of Brunei’s financial services sector 23 6.4 Government initiatives in Brunei 24 6.5 Financial services: promise and opportunity 25 6.6 Assessment of Brunei’s financial services sector 26
vi \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
7. A Framework for Reforming Brunei’s Services Sectors 30
7.1. Ratify the Comprehensive and Progressive Trans-Pacific Partnership 30
7.2. Implement ASEAN commitments 31
7.3. Drive investment to increase trade and financial flows 32
7.4. Closing the circle 34
References 35Acronyms and Abbreviations \ vii
Acronyms and Abbreviations
2PL 2nd Party Logistics
3PL 3rd Party Logistics
4PL 4th Party Logistics
ACTS ASEAN Customs Transit System
ADB Asian Development Bank
AEC ASEAN Economic Community
AEC Center ASEAN Economic Community Strategy Center
AFAFGIT ASEAN Framework Agreement on the Facilitation of
Goods in Transit
AFAFIST ASEAN Framework Agreement on the Facilitation of
Inter-State Transport
AFAMT ASEAN Framework Agreement on Multimodal Transport
AMBD Autoriti Monetari Brunei Darussalam
(Brunei Monetary Authority)
APEC Asia-Pacific Economic Cooperation
ASEAN Association of Southeast Asian Nations
BEDB Brunei Economic Development Board
BIBD Bank Islam Brunei Darussalam Berhad
CBTP ASEAN Framework Agreement on Facilitation of Cross-
Border Transport Passengers by Road Vehicles
CIBFM Centre for Islamic Banking, Finance and Management
CIS ASEAN Framework for Cross-Border Offerings of
Collective Investment Schemes
CPTPP Comprehensive and Progressive Trans-
Pacific Partnership
CSCMP Council of Supply Chain Management Professionals
DARe Darussalam Enterprise
EDB Economic Development Board of Singapore
ERIA Economic Research Institute for ASEAN and East Asia
FAPAA Federation of Asia Pacific Air Cargo Associations
FDI Foreign Direct Investmentviii \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
FTA Free Trade Agreement
FTZ Free Trade Zone
GATS General Agreement on Trade in Services
GDP Gross Domestic Product
GPS Global Positioning System
GVC Global Value Chain
IFSB Islamic Financial Services Board
IL Inbound Logistics
IIMM Islamic Inter-Bank Money Market
IoT Internet of Things
IPO Initial Public Offering
IT Information Technology
JICA Japan International Cooperation Agency
LSP Logistics Service Provider
M&A Mergers and Acquisitions
MCT Muara Container Terminal
MFS Micro Financing Scheme
MNC Multinational Corporation
MPC Muara Port Company Sdn. Bhd.
MSMEs Micro, Small and Medium-Sized Enterprises
NSW National Single Window
OEC Observatory of Economic Complexity
OECD Organisation for Economic Co-operation and Development
OL Outbound Logistics
PC Personal Computer
RBA Royal Brunei Airlines
RCEP Regional Comprehensive Economic Partnership
RKN Rancangan Kemajuan Negara (National Development Plan)
TEU 20-Foot Equivalent Unit
UK United Kingdom
USA United States of America
WEF World Economic Forum
WTO World Trade OrganizationExecutive Summary \ ix
Executive Summary
Brunei Darussalam’s government has identified The single biggest challenge is the chicken-and-
some critical challenges for the future. The egg problem of the economy. These backbone
oil and gas revenues that have sustained the services require sufficient demand to develop,
country’s growth for decades are winding down. but the current state of the domestic economy
Diversification of the economy is therefore more is too small to drive much demand for better
critical than ever. services. This has left these important services
too expensive and inefficient, in many cases
The issue of diversification has been placed
rendering domestic firms more uncompetitive
squarely at the heart of various government plans,
in a GVC world than they would otherwise have
including its Vision, Wawasan Brunei 2035. The
been. A GVC world requires firms to deliver goods
desire to integrate more deeply into the regional
and services quickly and seamlessly at globally
and wider economy has also driven engagement
(or at least regionally) competitive prices. At the
efforts at the Association of Southeast Asian
moment, Brunei companies struggle to deliver on
Nations (ASEAN) level and with Asia Pacific
this promise.
partners through important initiatives like the
Comprehensive and Progressive Trans-Pacific What is to be done? The domestic economy in
Partnership (CPTPP) and Regional Comprehensive Brunei is unlikely to suddenly grow significantly
Economic Partnership trade negotiations. larger in the near term. Demand will not come from
this source. Instead, Brunei must work much harder
Despite significant planning, however, Brunei’s
to harness regional demand and build up capacity
economy still remains heavily centred on oil and gas
and infrastructure to deliver the required backbone
and dominated by a large pool of micro, small and
services on the back of wider regional companies.
medium-sized enterprises. These smaller firms
Fortunately, Brunei has at least two immediately
continue to underperform, with limited contributions
available opportunities that must be seized for
to overall economic growth and fewer connections
creating regional demand.
to global value chains (GVCs) than other economies
in the region (e.g. OECD, 2018, p. 209).Foreign Brunei is a member of ASEAN. One of the primary
inbound investment figures remain low and export purposes of this bloc is to create a seamless
figures in the non-oil and gas sector are limited. regional integration platform. Brunei must better
harness ASEAN’s infrastructure at the domestic
This situation represents a puzzle. It may be that
level to get Brunei-based firms to ‘think ASEAN’.
Brunei’s inability to plug into GVCs is a function of
Rather than a market of 400,000, Brunei companies
missing, inefficient or uncompetitive ‘backbone’
should be working with visions of the sixth largest
services. If so, then addressing these services may
economy in the world.
go a long way towards powering the overall growth
of the economy and driving the diversification Second, Brunei is an original signatory to the
agenda the government seeks. CPTPP. This high-quality trade agreement gives
Brunei a unique opportunity to access important
Two backbone services have been identified as
markets across the Pacific. Quick ratification and
particularly important and potential areas for
implementation do not just help firms trade within
growth: logistics and financial services. Each
the CPTPP but also provides a signal of Brunei’s
is relevant for firms seeking to plug into GVCs
intention to foster trade and investment more
and both are needed for greater domestic
intensely than in the past. Firms should latch onto
firm opportunities.
the CPTPP and, as with ASEAN, consider the wider
This report highlights multiple challenges in both market from the very beginning.
sectors. Brunei is neither efficient nor effective
Finally, Brunei should take important steps to
in delivering logistics or financial services to its
drive demand in a few key sectors, like halal food,
own companies and cannot currently compete
aquaculture and downstream oil and gas industries,
with regional players in delivering such services
to help spur the domestic economy directly. Brunei
more broadly.x \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
should also work to develop online digital services, fully into GVCs. It is only with greater demand
as these can be delivered seamlessly directly from from outside the domestic economy that more
Brunei and will allow smaller firms to plug directly efficient backbone services in logistics and financial
into GVCs. services can be built. In addition, it is only with more
productivity in such services that Brunei companies
Taken together, Brunei has the resources to deliver
can become more competitive. Peicing together
many of the outcomes it wants to achieve. The
the puzzle shows that Brunei has to work on both
plans are largely in place. It is time for the country
ends at once: demand and supply have to be
to seize the opportunities presented by the wider
delivered in tandem.
regional and Pacific economy to integrate moreIntroduction \ 1
1. Introduction
Over the past two decades, international foreign direct investment (FDI). Most of Brunei’s
competition, globalisation and economic domestic investment has been limited to resource
liberalisation have encouraged the development extraction, with downstream industries related to
of global value chains (GVCs). Value chains used to oil and gas processing, petrochemicals and the like
be called ‘supply chains’, but the GVC label more done elsewhere in the region.
accurately captures the range of activities included
Over the past decade, however, Brunei’s growth
in the production of goods, the delivery of services
rate has been relatively stagnant, particularly in the
and the intermingling of the two.1
private sector. Heavy reliance on the oil and gas
Technological advancements, preferential trade sector has made the country vulnerable to volatile
treatments and free trade more broadly have changes in the prices of these commodities. The
enabled firms to diversify their production and inevitable decline in natural resources available for
manufacturing processes. Firms have increasingly extraction has added additional urgency to the need
opted to fragment their production stages into to rethink existing policies.
different countries and industries in the drive for
The Brunei government is interested in seeking
higher competitiveness in dynamic global markets.
opportunities to diversify its economy in a bid to
Today, GVCs are deeply embedded in conversations
reduce its dependency on its extractive oil and
of the global economy and cross-border flows of
gas industries and to improve productivity in its
goods, services and investment.
economy. To realise this goal, Brunei has released
Production networks, like supply chains and its long-term development vision, Wawasan Brunei
value chains, are becoming predominant in both 2035, which sets out the country’s core principles
developing and developed economies, as firms and frameworks to increase economic growth and
seek creative ways to reduce costs and tap into enhance diversification.
new technologies in the market. While multinational
As one of the five priority clusters for economic
corporations (MNCs) have been leading the way by
diversification, the business services sector can
participating in GVCs as suppliers, recipients and
help Brunei better integrate into the global economy
partners in strategic ventures, the development of
and achieve Wawasan Brunei 2035. Brunei’s
new information and communication technologies
definition of business services includes logistics and
has enabled micro, small and medium-sized
transportation, as well as innovative financial services
enterprises (MSMEs) to increasingly integrate into
products. Having these services exist on their own is
GVCs. Brunei Darussalam is one of the countries
not an especially useful end goal, however. Instead,
taking the initiative to anchor new pathways to
these services should be seen as complementary
economic growth and development in GVCs.
to the broader objectives of integration of Brunei
With a population of approximately 400,000, Brunei firms into the global and regional economy. Both
is the smallest country in Southeast Asia. The transport/logistics and financial services are enabling
domestic economy will never be substantial since services for other sectors of the economy.
the total number of potential consumers is likely to
To help jumpstart improved productivity in the
remain modest, although an abundance of natural
economy, it makes sense to focus on improved
resources like oil and gas has given Brunei one of
connectivity between Brunei and other firms
the highest gross domestic product (GDP) per
through GVCs. These chains can include both
capita rates in the world, with a skilled workforce.
traditional chains for the oil and gas sector and new
Unlike many neighbouring countries, the presence
GVCs in a wide range of goods.
of these resources has meant that Brunei has not
actively sought or intensively promoted inbound The Brunei government has been active in a
range of trade agreements that have been
specifically crafted with the goal of encouraging
the development of GVCs, including the
1 Value chains can be regional or global, but the shorthand
is typically GVC rather than RVC, to avoid confusion with Comprehensive and Progressive Trans-Pacific
Regional Value Content used in Rules of Origin. Partnership (CPTPP), the Regional Comprehensive2 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
Economic Partnership (RCEP) and the Association The sections outline domestic and international
of Southeast Asian Nations’ (ASEAN’s) ASEAN+1 barriers and opportunities for the integration of
agreements, which provide new or renewed Brunei into GVCs.
incentives for firms to choose Brunei as a GVC
For both sectors, the competitiveness of the
location. The timing is therefore particularly ideal
existing businesses is extremely low. While logistics,
to explore how the development of supporting
for example, has improved, with additional port
services can facilitate the diversification of the
and air cargo capacity coming on stream, the
Brunei economy.
volumes remain very modest. As long as volumes
To encourage GVCs to locate in Brunei and thrive, stay so small, costs are extremely high, particularly
or to spur the improved integration of existing compared with regional competitors. High costs and
Brunei firms into regional and global value chains, low productivity limit integration into GVCs for goods
effective and efficient business services such as and services companies of all types. These factors,
transportation, logistics and financial services are in turn, make it harder for backbone services like
critical. The development and growth of business logistics and financial services to flourish and grow.
services are directly linked to the development
Section 7 offers a roadmap and framework
of a highly skilled labour force, innovation,
that Bruneian businesses and authorities can
technology, higher levels of economic dynamics and
use to overcome some of these domestic and
sustainability. This is a good opportunity for Brunei’s
international challenges and take advantage of
business services sector to expand and integrate
opportunities to better enable the creation of local
while contributing to Wawasan Brunei 2035 goals.
GVCs and the integration of firms into regional and
This project aims to contribute to Wawasan Brunei global value chains.
2035 by supporting the integration of Brunei’s
The path ahead is complicated. While the roadmap
business services sector into GVCs. This report
identifies opportunities, the challenges should not
provides a diagnostic assessment of current
be underestimated. Both logistics and financial
domestic and international barriers as well as
services are underdeveloped in Brunei at the
opportunities for Brunei’s business services. In
moment, meaning there is significant potential
addition, it provides a framework and roadmap that
room for growth. Both should be viewed as
will allow Brunei to overcome challenges and take
backbone services. Neither is likely to thrive in the
advantage of new opportunities.
absence of a wider growing domestic economy.
Section 2 introduces the concept of GVCs and Logistics services, for example, are of limited utility
identifies important trends and drivers within the if there are few goods to move. Financial services
development of GVCs. matter little if firms have few demands for new
capital. Hence, the key challenge for Brunei is
Section 3 highlights the increasing role that services
less how to make logistics and financial services
activities play in the growth and diversification of
competitive and more about how to drive the
GVCs. It maps services activities across different
overall economy forward.
stages of a GVC and outlines the impact of service
activities in the Asia Pacific region. Until Brunei is more successfully integrated into the
wider economy, with goods and services of value
Section 4 provides an overview of Brunei’s
and interest to GVC firms, backbone services will
economy and outlines the country’s economic
similarly struggle to grow and become competitive.
development and diversification plans.
Brunei must focus on growing its own economy,
Sections 5 and 6 define logistics and financial including building investments in halal food and
services, outline their relationship to GVCS and aquaculture as well as creating additional GVC
provide a market overview of Brunei’s logistics opportunities in oil and gas. These should be ‘low
and financial services sectors. In addition, both hanging fruit’ that can be exploited to help build
sections provide an assessment of Brunei’s demand for local services. In addition, Brunei needs
logistics and financial services sectors based to better tap the potential of helping MSMEs,
on (i) the country’s development goals, (ii) a including through financial services, by getting
regional analysis of market opportunities and (iii) smaller firms to ‘think regional’ from birth, and
stakeholder interviews with relevant private and creating platforms to help them grow and develop
public financial services stakeholders in Brunei. outside the local market.Global Value Chains \ 3
2. Global Value Chains
This section defines GVCs and introduces delivery of services from anywhere. Brunei’s highly
key trends characterising and driving their skilled workforce should provide opportunities for
development. In light of these trends, the section engagement with services GVCs.
establishes the rising relevance and significance of
Brunei is very involved in GVCs but the economy
services input to GVCs.
has been largely stuck at the start of the process –
with the extraction of oil and gas. These products
2.1 What are global value chains? are then shipped to other countries to be converted
A value chain refers to a full range of activities into higher-value items. Brunei needs to think
that a firm may undergo during its production about not just diversification away from oil and
process. This starts from the conception stage and gas but also how to leverage the sector to move
continues to the end stage, when final consumers up the value chain in what has been a key element
use a product or service (OECD, 2012, p. 4). GVCs of its economy for decades. Oil and gas can be
typically include the following activities: design, further processed in Brunei rather than allowing
production, marketing, distribution and support to value to be added in other markets. This has been
the final consumer (ibid, p. 9).1 a perennial item on the ‘to do’ list, but the urgency
in creating domestic demand is growing since
A good example of a GVC is presented by a
ancillary activities are also dependent on improved
complex product like the iPhone. This is designed
local competitiveness.
by Apple in the USA, created through the inclusion
of thousands of parts and components drawn from
across the world, assembled in China, then shipped 2.2 Changing patterns of global
and sold globally in merchant shops. The iPhone
includes goods like semiconductors, screens and value chains
screws, services like research and design or retail In recent years, various developments like
sales and intellectual property like patents. technological advancements have enabled the
expansion and evolution of GVCs. Therefore, in
A GVC need not be such a complicated product.
studying GVCs, it is crucial to understand the trends
Even a bar of soap made by a small firm in Brunei
shaping their development.
can be viewed as part of a GVC if it involves an idea
hatched in Brunei, contains ingredients sourced The GVC phenomenon can be best represented by
regionally and from overseas, is manufactured two main trends. First, value chains are becoming
in Brunei and is sold to customers regionally or increasingly regional and less global. Since 2013,
globally through online digital platforms. Given the the intraregional share of global goods trade has
dominance of smaller firms in Brunei, it is important increased by 2.7 percentage points. Before 2012,
to encourage MSMEs to see themselves as the intraregional share of global goods trade had
‘mini-MNCs’ able to engage with the wider world as declined for more than a decade – from 51 per cent
part of GVCs. in 2000 to 45 per cent in 2012 (Lund et al., 2019,
p. 9). This is a shift from before, when value chains
While the primary focus of GVC work has been
revolved around long-haul trade across oceans and
on trade in goods, it should be noted that GVCs
countries. In regions like Asia, regionalisation and
that are entirely made up of services could be
lower communication and transportation costs
created. For example, large consultant firms can
have led to increased regional trade.
bundle together a wide variety of services sourced
from individuals and other firms from across the Second, developing countries have increased their
globe and deliver them to clients located in MNCs. participation in GVCs. MNCs appear to be shifting
The growth of the internet allows for the digital their development and production to emerging and
developing markets. According to the McKinsey
Global Institute, developing countries receive the
1 Organisation of Economic Co-operation and
Development. 2012. “Mapping Global Value Chains.” (7) most benefit from value chains and are projected to
Accessed July 12, 2019. account for more than half of all global consumption4 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
(Lund et al., 2019, p. 11). Overall, these trading costs and consequently have the greatest GVC
patterns have led to the increased role of services in participation when compared to other regions
the development of GVCs. In the past decade, trade (OECD and WTO, 2015). As trade costs decrease,
in services has grown more than 60 per cent faster firms are encouraged to relocate their facilities to
than trade in good (ibid., p. 5). countries that will reduce business costs. This can in
turn drive regional and global value chains.
However, traditional trade statistics do not fully
represent the impact of increased flows of services. One key premise driving the development of ASEAN
For instance, they do not track increasing cross- over the past decades has been precisely the
border flows of digital services. The McKinsey development of an integrated regional production
Global institute reports that YouTube, Facebook and base. This has led member states to drop all tariffs
WeChat may have created an estimated US$8.3 to zero across the region, a focus on cutting barriers
trillion in value annually. Overall, gross services trade, in services and investment and improved trade
services embedded in goods trade and free cross- facilitation, particularly through the creation of the
border digital service account for more than half of ASEAN Single Windows. The path culminated in the
value added in overall trade (Lund et al., 2019, p. 7). launch of the ASEAN Economic Community (AEC)
in 2015 and renewed progress towards additional
It is therefore relevant to consider the relationship
integration in the AEC Blueprint 2025.
between services inputs and value chains, so that
emerging markets like Brunei can capture the 2.3.2 New products and stakeholders
benefits of GVCs. In order to better understand
how to leverage GVCs, it is crucial to recognise Today, advancements in digital platforms like
the forces that shape them. The next subsection blockchain and the Internet of Things (IoT) are
outlines some of the main factors driving the reducing transaction and logistics costs ‘either by
development of value chains. changing the economics and location of production
or by changing the actual goods and services
2.3 Key drivers of global value demanded’ (Lund et al., 2019, p. 14).
chains New technologies encourage the creation of
new products, which promote trade and further
Three important forces drive the development
participation in GVCs. The World Bank reports
of GVCs: decreasing trade costs, technological
that 45 per cent of the world is online; this gives
advancements and preferential trade agreements.
developing nations access to communications
Although not exhaustive, these three factors
and interactions. New technologies like big data,
have encouraged more firms to fragment their
GPS and drones have ‘enabled improved extension
production and manufacturing processes across
services’ and more efficient logistics and supply
multiple localities.
chain management (Rodrik, 2018, p. 2).
2.3.1 Decreasing costs In addition, new features of production
technology have caused disruptions to traditional
When trading, firms incur land transport costs, port
configurations of value chains, further introducing
costs, freight and insurance costs, tariffs and duties
new players into the development of industries. For
and costs associated with non-tariff measures, as
instance, developments in technology allowed PC
well as mark-ups from importers, wholesalers and
manufacturers from Taiwan to enter the PC industry,
retailers. These trade costs vary by country and
once heavily dominated by Japanese companies
sector and will affect a firm’s direct participation in
(Satoshi, 2017). This created healthy competition
value chains.
among firms and spurred firms to find innovative
The United Nations Economic and Social ways to reduce their production costs by engaging
Commission for Asia and the Pacific/World Bank in GVCs.
Trade Cost Database estimates that 0-10 per cent
of trade costs are tariffs, 10–30 per cent arise as a 2.3.3 Role of free trade agreements
result of natural geographical and cultural factors
and, lastly, 60–80 per cent come from non-tariff FTAs, especially comprehensive FTAs that include
policy measures. For instance, it is suggested wider and broader commitments across a range
that Southeast Asian countries face the lowest of areas, including goods, services, investment,Global Value Chains \ 5
intellectual property rights and standards, boost Brunei’s participation in the CPTPP will be discussed
participation in GVCs by both improving existing further later in the report but note for now two
linkages between GVCs and creating new linkages important elements in the agreement. First is
(Laget et al., 2018). These deeper agreements the principle of ‘full accumulation’, which allows
encourage GVC development because they goods produced with content from more than one
foster the placement of investment and delivery CPTPP member to qualify as originating products,
of goods and services in exactly the right and therefore access preferential tariff treatment.
geographic location for optimum efficiency with Second is the CPTPP’s self-certification system.
minimum friction. which allows firms to self-certify the origin of their
goods, to reduce cost and clearance times at
Current data from the World Bank shows that FTAs
customs (Chang and Phuong, 2019).
are becoming deeper and more comprehensive,
allowing countries to take advantage of Understanding the significance of trade agreements,
provisions and tariff reductions that significantly technological advancements and lowering trade
reduce their trade costs (Ruta, 2017). The costs can provide a foundation to analyse barriers
CPTPP is an example of a deep FTA that aims that prevent the growth of GVCs. This fundamental
to integrate diverse economies from different information also provides governments a snapshot
continents by promoting the fragmentation of of a myriad of factors that they can leverage to
manufacturing processes. increase their involvement in GVCs.6 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
3. Services Activities in Global
Value Chains
Services activities are becoming a key contributor Trade Report highlights at length the types of
to GVCs. In order to increase their participation in key contributions services make to domestic
such chains, some governments have pushed for economies (WTO, 2019). In most developed
the development of an internationally competitive economies, services now account for up to 75 per
services sector. cent of GDP, with international trade in services
growing much faster than global trade in goods.
This section discusses the role of services in GVCs
and highlights the importance and relevance of Service activities also account for a significant
services inputs for the development of GVCs today. proportion of the development of GVC activities.
First, it provides a definition of services. Second, Lanz and Maurer (2015) have shown that services
it identifies relevant services across the different trade accounts for 70 per cent in GDP accounts
stages of a value chain. The last subsection even though it comprises only 20 per cent of global
provides an overview of the development of balance of payments.
services and GVCs within the Asia Pacific region.
The accelerating share of services inputs in
GVCs can be understood through their role as
3.1 What are services? intermediaries in manufacturing value chains. The
According to the World Trade Organization (WTO), role of services in a GVC can perhaps be compared
services activities can typically be categorised to a glue, as manufacturing firms are often highly
into either ‘embodied’ or ‘embedded’ services. dependent on a myriad of services to link and
Embodied services refer to services inputted coordinate their production activities across
during the production process of other goods and different countries and sectors.
services. Embedded services refer to services
Evidence from OECD countries shows that
input during post-production processes, such as
manufacturers increasingly buy, produce and
during marketing, retail and repair (Anukoonwattaka
export services (Anukoonwattaka et al., 2017).
et al., 2017). This distinction allows for a better
This is known as the ‘servicification’ of the
understanding of the types of services rendered
manufacturing sector or the ‘the increased use
during different stages of the GVC.
of services in manufacturing, both in terms of
In addition to embodied and embedded services, production processes and sales’. As a result of this
services activities can be distinguished as servicification, services have helped increase the
producer or consumer services (Anukoonwattaka productive capacity of firms to gradually embed
et al., 2017). According to the Organisation for themselves into GVCs.
Economic Co-operation and Development (OECD)
Demand for services activities happens at every
Glossary of Statistical Terms, producer services
stage of a value chain. Services can be located
are ‘intermediate inputs to further production
upstream from the manufacturing phase of
activities’ and possess high information content,
production, in the manufacturing phase and
such as business and professional services, financial
downstream, when conveying the product to the
services and insurance services.1 Consumer
final consumer. According to the Asia-Pacific
services are referred to as ‘final or end-use
Economic Cooperation (APEC) Policy Support
services’ and are often directly used or received by
Unit, services inputs can be mapped onto value
consumers (Anukoonwattaka et al., 2017).
chains across six separate stages. Table 1 lists the
categories and provides illustrative examples of
3.2 Services in global value chains services falling within each of the categories.
Services activities are now the largest contributor
In recent years, services companies have been
to GDP and employment. The latest WTO
able to create new production models that
1 https://stats.oecd.org/glossary/detail.asp?ID=2440 deviate from traditional linear models commonServices Activities in Global Value Chains \ 7
Table 1. Mapping services onto GVC production stages
Production stage Examples of services inputs
Establishment Embodied Government negotiations and licence applications; land clearing
services and preparation; construction
Pre-manufacture Embodied Design; research and development; procurement and transport of
services inputs; customs services; licensing requirements for health, safety
and environmental compliance of inputs; storage of inputs
Manufacture Embodied Transport and handling of raw materials; testing; maintenance and
services repair of equipment; cleaning; utilities; compliance inspections for
environment, health, safety and working conditions
Post-manufacture Embedded Packaging; transport; installation; advertising; marketing; branding;
services retail; quality control standards assessment
Post-sales services Embedded Repair and maintenance of machinery and other facilities; inventory
services and warehouse services for parts; reverse logistics*
Back-office services Embedded Back-office accounting; legal services; personnel; insurance
services
Note: * ‘Reverse logistics’ has been added by authors into the list of examples.
Source: Adapted from Low and Pasadilla (2015).
in manufacturing processes. In fact, there has economy. Those that succeed in doing so can
been a rising phenomenon of ‘networked’ GVCs participate in higher value added segments of
(Anukoonwattaka et al., 2017). This happens when supply chains and broaden the scope and of their
service providers offshore or out-source their work participation in GVCs (Low, 2013).
to other service providers, therefore creating a
constellation of service providers in one production 3.3 Managing services in trade
chain. Modern communication and transport
technologies have enhanced the tradability of
agreements
services, which has facilitated their incorporation Brunei’s government has recognised the importance
in supply chain production as traded inputs (Low, of opening services sectors in new and innovative
2013). Such practices have enabled the mapping ways to help facilitate growth. Early attempts to
of services inputs into various networks of value tackle the vexing issue of making commitments
chains. For instance, developments in IT now for sectors that could not be easily seen, tracked or
allow service providers from the information and measured across borders gave way to the General
communications, marketing, computer and finance Agreement on Trade in Services (GATS) system in
sectors to offshore and out-source their work to the WTO. The GATS system divided services into
service providers from other countries. four ‘modes’ of supply, depending on ‘who or what’
moved across the border. As an example, under
Services used to be considered ‘difficult to trade mode 1 no one moved – neither the supplier nor the
across borders’. In the past, services activities consumer – just the service that crossed the border.
were described as ‘immobile’ and highly At the time, the primary mechanism for mode 1
non-transportable (Anukoonwattaka et al., 2017). delivery was by post or letter. Now, of course, most
As a result, many countries did not account for the mode 1 delivery is via the internet.2
share of services in supply chains, or measure the
value of services in GVCs. Many services inputs 2 Mode 2, to continue the simplification, has consumers
‘moving’ to consume a service, like patients going to get
thus tend to be uncaptured and unaccounted for hospital services in a foreign country. Mode 3 is what most
in statistics. However, the increasing input and view as FDI, where the provider firm ‘moves’ to deliver
contribution that services activities have in GVCs the service: the hospital ‘moves to’ or invests in the host
country to provide hospital services. Finally, under mode
make it imperative for countries to assess the
4, the service provider (or the person) moves to deliver the
extent of the contribution and potential of services service: the doctor moves temporarily (typically for less
to build a more diversified, prosperous and dynamic than three years) to provide hospital services.8 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
This system of splitting services delivery made investment for GVC operation, it is not possible
sense to negotiators grappling with services for the to build a flourishing GVC environment if services
first time in the late 1980s and early 1990s. A similar sectors are not opened for participation for CPTPP
system of working on services trade has continued companies. Hence, member governments agreed
in many trade agreements since then, including to allow nearly every single services sector to be
most ASEAN trade deals. opened to one another under this trade agreement.
However, businesses today tend to find the four The Brunei government also agreed. While Brunei’s
modes of supply completely incomprehensible. ratification of the CPTPP and its entry into force has
Firms do not view operations through the same been delayed,3 the commitments found within the
lens at all. Instead, they deliver services by whatever CPTPP can be seen as a clear signal of intent.
mechanism makes the most sense: online, in
person, via investment or using any combination of 3.4 Services activities in the Asia
the above at once.
Pacific region
Many of the latest trade agreements have opted
to abandon the GATS-type schedules and Partly as a result of various trade agreements,
approach. As a member of ASEAN, Brunei has service activities have seen unprecedented
some commitments that reflect GATS approaches. growth in the Asia Pacific. In the region, the share
However, as a member of the CPTPP, Brunei of services activities in exports grew from 20.4 to
has also taken the leap to transform services 24.1 per cent between 1990 and 2013
commitments to a different approach. The CPTPP (ASEAN–Japan Center, 2017). In 2016, services
dispenses with the ‘modes’ entirely and simply generated about 60 per cent of GDP, employed
opens services sectors under whatever method of more than 40 per cent of the labour force,
delivery firms opt to use. generated most new jobs and attracted an
increasing share – 60 per cent – of greenfield FDI
Further, CPTPP members have taken a radical
projects (Anukoonwattaka et al., 2017).
approach compared with ASEAN agreements
by starting from the premise that all services Specifically, the transportation, storage and
sectors will be automatically opened for member communications sector saw an increase in foreign
competition unless specifically closed. This is a bold value added ASEAN exports from 28.4 to 32.8
step and shows Brunei’s determination to handle per cent. Another high-growth sector was the
services in a radical new way. Under the CPTPP, finance industry, which saw an increase of about
Brunei has agreed to open all 160 sectors and 4 percentage points from 12.6 to 16.3 per cent
subsectors, including logistics and most of financial (ASEAN–Japan Center, 2017). These figures likely
services, to CPTPP members. understate the importance of both sectors, as
services statistics are often less reliable.
The reason for taking such an approach is precisely
to encourage the growth and development of GVC The next section introduces Brunei’s involvement
firms across the CPTPP member states. Given the in GVCs and discusses how services activities are
close connections between goods, services and being mapped into value chains in the country.
3 As of 15 December 2019, Brunei has not yet signalled its
intent to proceed with the CPTPP.Brunei’s Economy and Diversification \ 9
4. Brunei’s Economy and
Diversification
Increasingly, countries are interested in doing Traditionally, Brunei has been heavily reliant on its
a better job of harnessing the potential of oil and gas industry: oil and natural gas account for
services. This is especially the case for developed almost 90 per cent of exports. In 2017, petroleum
economies, as services are a large and growing gas represented 51.2 per cent (B$3.84 billion or
share of the economy for every developed US$2.84 billion) and crude petroleum 41.3 per cent
economy. For Brunei, the situation is the same. (B$3.09 billion or US$2.29 billion) of its exports.
Brunei’s strategic plans for economic development The main five commodities exported are crude
have been outlined in Wawasan Brunei 2035 and materials, mineral fuels, chemicals, manufactured
Brunei’s national development plans (RKNs), as goods and machinery & transport equipment.
well as current Strategic Plan 2018–2023. After Mineral fuels, the main exported commodity,
reviewing these policies, this section examines decreased steadily between 2014 and 2016 and
Brunei’s plans for diversification. rose again in 2017 and 2018. Currently, the main
largest export partners are Japan, South Korea,
4.1 Overview of Brunei’s economy Malaysia, Thailand and India (OEC, n.d.).
Negara Brunei Darussalam, or Brunei, is located The top five commodities that Brunei imports
on the coast of Borneo, Malaysia, in Southeast are manufactured goods, machinery & transport
Asia. Since its independence from the UK on equipment, food, chemicals and mineral fuels.
1 January 1984, Brunei has transformed itself into a All five commodities experienced fluctuations
modern economy. and finally surged significantly in 2018, except for
chemical fuels, which registered only a 1.05 per cent
Brunei has historically been heavily reliant on natural
increase on the previous year.
gas and petroleum products. Given the wide
fluctuations in the pricing of these commodities, Unlike other countries in ASEAN, which have
it makes sense that Brunei’s growth figures have become major and competitive global or regional
also varied. Most developed economies tend to production centres for a wider range of products
grow more slowly than developing economies. and services, there are almost no such industries in
Brunei’s GDP figure of 1.33 per cent growth in Brunei (Lawrey, 2010).
2017 highlights this trend, from US$8.33 billion
In Brunei, the main commodity – oil and gas –
to US$8.84 billion (World Bank, n.d.a). In a similar
accounts for the bulk of the economy and adds
fashion, Brunei’s FDI, imports and exports of goods
little value to other industries. These industries do
all underwent a sharp rise in 2017, after years of
not appear to be closely inter-related with other
steady decline.
sectors of the economy and therefore produce
Brunei is a small and wealthy economy, with a weak value chains between them (ASEAN–Japan
current GDP of roughly B$18.4 billion (US$13.6 Center, 2018).
billion) (Trading Economics, n.d.). Yearly net inflows
According to a GVC analysis completed by the
of FDI into Brunei experienced a steep decrease
ASEAN-Japan Center (2018), in ASEAN as a
from 2013 to 2016; in 2017, FDI growth surged
whole, 40 per cent of exports are foreign inputs. In
by 134 per cent (World Bank, n.d.b). According to
comparison, foreign value added in Brunei is only
Brunei’s Ministry of Finance and Economy, the surge
12 per cent. Out of US$7 billion in gross exports,
was the result of FDI inflows in the manufacturing
foreign value added amounts to under US$900
sector, which increased by US$470 million between
million. Over the past two to three decades, this
2016 and 2017 (Department of Economic Planning
share has declined to less than 10 per cent.
and Statistics, 2017). The value of Brunei’s imports
and exports in goods escaped negative growth in Because of the heavy reliance of exports on the oil
2017, attaining increases of 13.2 per cent and 12.5 and gas industry, this foreign value added share is
per cent, respectively (World Bank, n.d.c). determined almost entirely by the mining industry.10 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
Figure 1. Growth in Brunei’s GDP, FDI, imports and exports, 2013–2017 (%)
200
150
100
50
GDP growth
0 FDI Growth
%
–50 Import Growth
–100 Export Growth
–150
–200
–250
2013 2014 2015 2016 2017
Source: World Bank (n.d.a, n.d.b, n.d.c).
Evidence from the OECD (n.d.a) shows that mining from ASEAN (ASEAN–Japan Center, 2018).
and quarrying account for more than 60 per cent of Outward FDI is typically related to the creation of
both outputs and value added in Brunei. GVCs outside the country. Both the small value and
the small share indicate an almost complete lack of
The lack of foreign value added, the absence of
production networks outside the country.
other industries and the lack of linkages between
primary industries and other sectors result in an The weak presence of GVCs and RVCs in Brunei
absence of significantly developed GVCs as well as Darussalam reflects the current characteristics of
regional value chains. the economy, which does not necessarily require
the existence of value chains uses little foreign
Poor GVC participation has also manifested in a low
inputs for its exports and attracts a small amount
level of FDI and a negligible share in FDI to ASEAN.
of FDI.
In recent years, FDI inflows have not exceeded
US$1 billion, except in 2003. The country’s FDI
In recent years, researchers from BP World Energy
stock as a share of GDP is lower than the ASEAN
Outlook have forecast that Brunei’s oil reserves
average: 51 per cent versus 73 per cent in ASEAN in
will sustain the economy only until 2035, giving the
2016 (OECD, n.d.b).
government a timeline of about 15 years to diversify
Similarly, FDI outflows from the country have been (Khidir, 2018). As a result, diversification has
small, at less than 1 per cent of total FDI outflows become a top priority of the Bruneian government.
Table 2. Brunei’s top five exports, 2014–2018 (US$ millions)
Year Crude Mineral Chemicals Manufactured Machinery & transport
materials fuels goods equipment
2014 13.0 9082.6 439.6 49.6 133.2
2015 9.4 5919.9 138.3 53.7 182.2
2016 17.4 4364.2 237.2 37.8 241.2
2017 16.7 5046.2 204.8 24.7 141.2
2018 19.1 5898.0 243.1 64.5 169.4
Source: Department of Economic Planning and Development (2014).Brunei’s Economy and Diversification \ 11
Figure 2. Brunei’s top five imports, 2014–2018 (US$ million)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2014 2015 2016 2017 2018
Manufactured Goods Machinery & Transport Equipment Food Chemicals Mineral Fuels
Source: Department of Economic Planning and Development (2014).
In a bid to promote diversification, the government for implementation of Wawasan Brunei 2035
has laid out several economic plans. The most and provides information to enable better joint
important current document is Wawasan Brunei implementation and collaboration of programmes
2035, which guides the country’s national and action plans holistically.
development agenda, setting the direction for
The Framework articulates Wawasan Brunei
implementation of Wawasan Brunei 2035 and
2035 into Desired Outcomes – the specific
providing information to enable better joint
achievements to be achieved for each of
implementation and collaboration of programmes
Wawasan Brunei 2035’s Goals; Key Areas – the
and action plans holistically. Brunei also uses 5-year
priority areas or specific actions that need to be
national development plans (or RKNs) and ministry
focused on in order to achieve the Outcomes;
strategic plans, which are, aligned with Wawasan
and National Key Performance Indicators, which
Brunei 2035 and guided by the Wawasan Brunei
are used to measure performance on each of the
2035 Framework.
Key Areas identified. It serves as a guide to the
The next section discusses these plans and their provision of national development programmes
relevance to Brunei’s economy. and projects towards achieving the Wawasan
Goals, for example infrastructure development
4.2 Strategic goals and planned specifically to improve the quality of life of
the people.
outcomes
4.2.1 Wawasan Brunei 2035 Goal 1 aims to establish a strong base of human
resources as the engine of economic growth,
The National Vision, known as the Wawasan
thus putting high importance on the quality of the
Brunei 2035, aims to ensure that, by 2035, Brunei
education system and development of human
Darussalam will be recognised globally for the
capital. One particular emphasis is on equipping
accomplishments of its well-educated and highly
youth with marketable skills and knowledge that
skilled people, its high quality of life and its dynamic
will allow them to compete effectively within the
and sustainable economy.1
country and in the international arena. Goal 1 is
In achieving this, the country’s national supported by three national outcomes:
development agenda is guided by the Wawasan
1. First class education;
Brunei 2035 Framework, which sets the direction
2. Equal educational opportunities; and
1 Wawasan Brunei 2035 information supplied by the
government, December 2019. 3. Human resource development.12 \ Addressing Barriers to the Integration of Brunei Darussalam’s Business Services Sectors into Global Value Chains
Goal 2 sets out to achieve the highest quality of life of life. In 1953, Brunei launched the first RKN, with
and well-being for the Bruneian people, in a peaceful an investment of B$100 (US$73.4 million). This
and healthy environment. Five national outcomes RKN increased living standards in the country
are identified: and introduced a pension scheme that remains
in place to date. Since the first RKN, investment
1. High standard of living;
in implementation of the plans has increased to
2. Upholding sovereignty and stability; B$6.5 billion (US$4.77 billion) – the implementation
budget of RKN 2012; GDP rose from US$0.11 billion
3. A sustainable environment;
in 1965 to US$19.04 billion in 2012 (Yunos, 2016).
4. A resilient and cohesive society; and
The first four RKNs were used to stabilise the
5. Excellent health and safety in the workplace. government agencies of Brunei. In the earlier
periods of Brunei’s development, ministers did not
Goal 3 sets out the target of increasing Brunei’s per
hold their positions for a long time, which made it
capita income to be among the top 10 in the world.
difficult to develop long-term strategic plans. As
This target will help sustain Brunei’s desire to have
Brunei gained political and economic stability, the
a high standard of living, and a strong economy to
restructuring of later RKNs worked to diversify
help achieve this by providing greater opportunities
Brunei’s economy by creating a healthy, educated
and high-quality employment in both the public and
and skilled workforce (Yunos, 2016).
the private sectors. Four national outcomes are
identified under Goal 3: Brunei is currently actualising RKN11 (2018–2019).
A total of B$900 million (US$666 million) has been
1. High and sustainable growth;
allocated to finance 192 projects. Of these projects,
2. Diversified economy; 151 are new projects and 31 have been brought
over from RKN10 (2012–2017). Moving forward,
3. Low unemployment; and
it is therefore likely that any project will reflect the
4. Macroeconomic stability. key principles and strategic thrusts of RKN10. As
RKN11 is currently in its development stage and
In achieving the aspiration of ensuring a sustainable
has yet to be announced, RKN10 still forms the
economy for Brunei’s future generations, the
bedrock for any future project developments in
nation is required to accelerate economic growth
Brunei. Therefore, any policy assessment and
with a large proportion of it to be contributed by
recommendation should comply with these
the non-oil and gas sector. As such, economic
standards and goals.
diversification is still high on the economic
development agenda. 4.2.3 Strategic Plan 2018–2023
Economic diversity is an indispensable factor to
In addition to the RKN, Brunei lays out strategic
ensure a strong and sustainable economy for
plans defining the milestones to be achieved
the country in the long run. Increasing high-value
for a sustainable economy. Currently, Brunei is
growth in production and services with an emphasis
implementing its Strategic Plan 2018–2023. THIs
on innovation and usage of high technology, and
has four specific goals as well as guiding principles
building a broader trading network to enhance the
to achieve these. The goals are:
exports of various sectors, will help attain high
non-oil and gas fiscal revenues. 1. Ensuring high accessibility to quality and
reliable public infrastructure and services;
4.2.2 National development plans
2. Enabling affordability for infrastructure and
To supplement its long-term development plans,
services that support inclusive development;
the Brunei government has actively promoted
the growth of target sectors through national 3. Optimisation of resources and assets
development plans, also known as the rancangan primarily through efforts for integrated and
kemajuan negara (RKNs). sustainable development; and
The RKN has played a key role in the economic 4. Effectively implementing public–private
development of Brunei. Since the inception of the partnerships in order to facilitate investment
first five-year RKN, Brunei has grown into a country in infrastructure development for vibrant
with a high level of per capita GDP and a high quality economic growth.You can also read
