Oil and Economic Development Issues in Brunei 9789814377638

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The Institute of Southeast Asian Studies

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modem Southeast Asia. The Institute's research interest is focused on the many-faceted problems of development and modernization, and political and social change in Southeast Asia. The Institute is governed by a twenty-four-member Board of Trustees on which are represented the University of Singapore and Nanyang University, appointees from the government, as well as representatives from a broad range of professional and civic organizations and groups. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer.

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OIL AND ECONOMIC DEVELOPMENT ISSUES IN BRUNEI

by

B.A. Hamzah

Research Notes and Discussions Paper No. 14 Institute of Southeast Asian Studies 1980

PREFACE

The purpose of this brief study, which forms part of a larger work now m preparation, is twofold: feedbacks.

to explore critical ideas and to invite constructive

Readers are therefore most welcome to submit comments.

The major work will examine in greater detail the political economy of oil in Brunei. A pioneering study, it will attempt to expose oil "imperialism" in a Southeast Asian sultanate. Brunei is a British protected state. Barring any maJor political setback, it IS scheduled to become independent in 1983. Brunei is, however, essentially a petroleum enclave. Through many years of political autonomy and consolidation, Brunei Shell has managed to create for itself a state within a mmi sultanate. Enclaves exist m different forms and shapes. In form, the Brunei model IS not unique, but in present day international petroleum nomenclature, it is extraordinary. The anomalous state-company relationship that has arisen in the sultanate Is a source of political embarrassment that Great Britain can no longer Ignore.

10 June 1980

B.A. Hamzah

Oil and Development The importance of oil in the economic development of both industrial and nonindustrial countries is well established; but the two kinds of economies differ greatly in the amount of energy they use in proportion, as can be determined by the input-output analysis. For nonindustrial, developing economies, Scott Pearson's case study on Nigeria is an indispensable example of petroleum input-output analysis. 1 As this is not primarily a quantitative work on economic development, no effort will be made to produce for Brunei an input-output matrix similar to that in Scott Pearson's study. The author's purpose is to illustrate in very general terms the relationship between oil and Brunei's policy of economic development. The stress is on policy processes rather than development per sc. The direct contribution of the petroleum and gas industries to the economy of Brunei is already known. 2 Aside from contributing heavily to the national product of Brunei, the oil industry has for some time contributed over 95% of Brunei's total export value, a proportionately large share of foreign exchange credits and, most important of all, a major portion of the state's tax. The ratio of oil royalties to total revenue in 1974 was over 21%; it averaged 17% in the previous three years. If all other economic rents paid by Brunei Shell to the state were added, the proportion of oil revenue would be much higher. It was stressed elsewhere that oil and gas made up 99% of the total value of Brunei's 1976 exports, an increase of 5% since 1972. 3 However, the government's total revenue and total exports were not compared; nor was the actual amount of royalties that Brunei Shell paid over a selected period of time shown. Table 1 shows the companson between revenue and export statistics during 1968-76.

S. Pearson, Petroleum and the Nigerian Economy (Stanford: 1970).

Stanford University Press,

2 B.A. Hamzah, "The Political Economy of Oil in Brunei " (Ph.D. Dissertation, Fletcher School of Law and Diplomacy, Tufts University, Medford, Mass., 1980), hereafter cited as "Political Economy of Oil."

3 Ibid.

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Table 1:

Revenue and Export Statistics {in million Brunei dollars)

Total Revenue

Year

1968 1969 1970 1971 1972 1973 1974 1975 1976

199.7 222.64 186.77 209.01 256.50 368.86 1,027.42 i,564.37

Sources:

Export

281.43 270.14 292.10 323.74 497.10 852.10 2,388.32 2,494.81 3,294.15

Excess of Exports over Revenue

81.73 47.5 105.33 114.73 240.60 483.24 1,360.90 930.44

Brunei Statistical Yearbook, 19 75/19 76, pp. 49-70. Statistics of External Trade, 1976.

It is essential to recognize the difference between export value and foreign

exchange. Since the export of oil and gas is exclusively in the hands of foreigners using Brunei Shell as their corporate veil, the value of export is not the same as foreign exchange accruals. Nevertheless, the difference between export earnings and state revenue does indicate that the retained earnings are smaller. To put it in another way, the portion of oil revenue received by the state is much smaller than that received by Brunei Shell. Similarly, the amount of royalties as a percentage of the total revenue IS patently low. The computations in Table 2 adequately support the point that Brunei's gains from oil royalties have been minimal. The increase in the proportion of oil revenues between 1948 and 1951 attributed to the rise in royalties from two shillings a ton previously to three shillings a ton since 1948. 4 To arrest the declining revenue proportion from 1949 onwards, a three-tier royalty-rates concept was introduced in 1955. (It was revised in 1963 and 1969.) 5 The major declared purpose of the

IS

4 A. Lumsden, "The Gulf State of the Far East," Petroleum Economist, June 1978. 5 See B.A. Hamzah, "Political Economy of Oil," Chapter IV.

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Table 2:

Oil Royalties m Brunei* (in Brunei dollars)

Year

Oil Royalties

67,510 Z35, 755 286,929 383,112 499,172 482,567 592,350 710,059 792,537 548,701

1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942-45 1946 1947 1948 1949 1950 1951 1952 Note:

n o t

58,550 994,912 4,239,287 5,608,844 13,226,026 24,212,465 26,781,619

*

Total Revenue

362,403 580,750 645,020 813,532 928,690 1,049,293 1,179,979 1,274,644 1,556,354 1,325,912 a v a i l a b I c: 744,145 4,389,974 6,856,299 8,736,148 17,302,869 69,390,750 75,625,620

% of Total Revenue

18.6 40.5 44.5 47.1 53.7 45.99 50.2 55.7 50.9 41.4 60.5 22.6 61.8 64.2 76.4 34.8 35.4

The computations are extracted from various annual reports and other published official records.

enactments of 1955 (and of the enactments in 1963 and 1969) was to mcrease the proportion of royalties payable to the state; but, as it may be seen from Table 3, the contrary occurred. The oil industry's most important contribution to the economy of Brunei derives from its payments to the government as well as from the foreign exchange and capital investments it brings into the country. Unlike the Nigerian case described by Scott Pearson, there are practically no backward or forward linkages arising from the petroleum industry in Brunei. This 1s because the oil industry is so capital-intensive that it does not have the attributes to influence backward or forward linkages. In addition, with most of the firms being foreign-owned, the greater part of the revenue is repatriated. Tax linkages are equally weak since the government does not tax personal income and the 50% corporate tax and the 8-12Y2% royalties are too low.

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Table 3:

Oil Royalties m Brunei, 1968-74 (in Brunei dollars)

Year

Oil Royalties

Total Royalties*

1 968 1969 1970 1971 1972 1973 1974

29,420,611 39,561,027 33,969,709 37,779,189 45,300,000 62,928,373 216,954,000

30,710,974 41,076,157 35,533,026 39,427,396 50,728,263 64,705,969 217,270,784

Notes:

Total Revenue**

% of Oil Royalties to Total Revenue

191,713,539 222,641,118 186,774,669 209,011,069 256,602,544 368,861,523 1,02 7,427,596

15.3 17.7 18.2 18.0 17.6 17.0 21.1

* Includes forest royalties and other forms of nonoil related royalties. ** Includes all forms of economic rent and revenue sources.

Being extremely capital intensive, both the liquefied natural gas (LNG) industry and the oil companies employ a small labour force. In 19 7 6, they employed only 3,621 persons -- about 7.1% of the total work force 6 -- and produced about 52.2% of the Gross Domestic Product (GDP). 7 However, the government hopes that the oil industry would absorb 3,500 workers between 1974-79. 8 This figure was based on the assumption that new investments in the forms of an ammonia plant, a urea plant, and a petrochemical complex would be undertaken. However, as indicated elsewhere, the government plans to defer development on these projects.9 In the author's judgement, the government should go ahead with the original plans; that is, encouraging the companies to invest in the petrochemical

6 National Development Plan, 1975-1979, p. 41. 7 Ibid., p. 41. 8 Ibid., p. 43. 9 B.A. Hamzah, "Political Economy of Oil," pp. 49-98.

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and urea plant projects. The government still has some leverage to effect this policy. First, Brunei's proved reserves of hydrocarbon resources are still adequate to make these investments economically viable. Secondly, there are presently minimum political risks. In view of the significant role of oil, it will be proper to investigate economic development policies in Brunei so as to establish the extent to which planners have accounted for oil and gas in their development plans.

Review of Past Development Plans Brunei is now experiencing the impact of its three Five-Year Plans. The first of these covered the period 1953-58.10 The second was instituted in 1962 and lasted until 1966. 11 After six years without a national development plan, the Sultan of Brunei, at the budget session of the Legislative Council on 27 December 1972, commanded that the Third Brunei Plan be prepared. 1 2 The government took three years to produce a 21-page plan. Common to all three plans are brevity and a lack of coherence. There IS also little precision in the plans' objectives. Indeed, in all three development plans, the same fourteen points have been repeatedly stressed as the objectives for development. There is no one overriding development objective linking the others. This can be seen from the following fourteen specific objectives enumerated in the second national development plan adopted by the government in 1963: 13 ( 1)

Diversify the economy to reduce dependency on oil.

(2)

Reduce and avoid marked disparities in the prosperity and growth of different areas and regions in the country.

(3)

Maintain a high level of employment.

10

National Development Plan, 1953-1958.

11

National

12

The Sultan's address to the Legislative Council, 27 December 1972.

13

Also enumerated in National Development Plan, 1975-1979, pp. 34-36.

D~velopment

Plan, 1962-1966.

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(4)

Raise per capita mcome through the increase of productivity.

(5)

Maintain a relatively stable pnce level.

(6)

Encourage and foster good industrial labour relations to achieve increased efficiency and higher productivity.

(7)

Achieve a more equitable income distribution.

(8)

Develop an adequate and comprehensive national system of education.

(9)

Develop a comprehensive system of national health services to provide facilities adequate to raise the levels of all aspects of public health.

(10)

Provide adequate public services through: (a)

improved communication means;

(b)

adequate water, sewage and sanitation facilities to all areas of the country;

(c)

drainage and 1rngation facilities for agricultural development, proper industrial zoning, town and country planning.

( 11) Community development. ( 12) Provision of adequate power facilities. (13)

Cultural development.

( 14)

Encourage and promote private sector participation m all aspects of national development projects.

The mam problem with all Brunei's national development plans is that they neither suggest how nor at what pace these objectives can be met. Also missing from the plans are the essentials: capital formation, the structure and characteristics of the economy, important development data, and designation of responsibilities. Despite a long- standing pledge to diversify the economy, Brunei is becoming increasingly dependent on oil and gas exports. Similarly, progress in other major development areas which the government plans to encourage has not been very impressive. The case of employment illustrates this point well.

- 7 Granted, the rate of 2.6% unemployment is comparatively low. 14 But the deferment of ammonia and urea plant projects, along with the decision not to go ahead with the petrochemical complex, the timber complex or other related industries, will affect the future employment pattern. It was anticipated that the above projects would create 10,000 new jobs under the Third Brunei Plan. 15 Deferring them has cost the government 3,500 new jobs. Besides, the government has not indicated which other productive sectors, apart from the mining sector, will produce these jobs. It is impossible to keep track of Brunei's development plans in the

absence of development reviews. In 1973, in an attempt to streamline its development policies, the government created the Economic Planning Unit, l6 whose functions include: ( 1)

the formation and revision of national development plans.

(2)

co-ordination of technical assistance activities.

(3)

implementation of agreed development projects.

The author's investigations have shown that the Economic Planning Unit has never revised past plans. Nor has it begun to produce a new five-year plan though the present one is due to expire at the end of 19 79. If Brunei officials feel any urgency about producing a more comprehensive five-year plan, the author has not detected it. On the contrary, a senior officer 1 7 of the Economic Planning Unit confessed that any new plan would be an exact carbon copy of previous ones. He also admitted that the present government methods and private machinery to promote ambitious development projects are inadequate. Moreover, he confessed that any abrupt change in the lethargic pace of development may not be well received by the ruling 'elite.

14

National Development Plan, 1975-1979, p. 48.

15

Ibid., p. 43.

16

Ibid., p. 61.

17

Confidential source.

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The Third Brunei Plan18 There is a very striking similarity in the text and presentation of the Third Plan and its predecessor. While the Third Plan should represent the logical extension of the ideas and objectives contained in the previous plan, nevertheless one would expect some new ideas injected into it. The absence of new ideas is not altogether surprising since Brunei development plans only indicate a framework and the general direction for planning purposes. The brief plan lacks essential statistical data and is incomprehensible. Fifty percent of the plan is a repetition of the objectives of the second plan. There is no objective or statistical review of the achievements m the interim. The remaining sixteen pages are divided into six short chapters. Reading between the lines, one can discern a few ambiguous objectives. At one point, there is mention of creating 10,000 new jobs as the "main objective". Yet in another section, one's attention is drawn to the pitfalls of not taking into consideration economic factors. To avoid such pitfalls, the Third Brunei Plan was formulated and designed for strengthening, improving and further developing the economic, social and cultural life of the people of Brunei with top priority to be given to the following objectives: (a) (b)

Maintain a high level of employment; and Diversify the economy through the accelerated development of agriculture and industry.l9

Creating 10,000 new jobs between 1974 and 1979 is within the framework of maintaining a high level of employment. To create these jobs and to keep pace with a projected increase in population of 2.3% per annum, the GDP has to grow by at least 2.8%. 20 The overall target, however, is to attain a 6.8% GDP2 1 growth per annum. Based on provisional figures between 19 74-7 5, the GDP at market prices grew at 8% and 16.3% between

18

National Development Plan, 1975-1979.

19

Ibid., p. 46.

20

Ibid., p. 48.

21

Ibid.

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1975-76.22 So the attainment of the desired 6.8% GDP annual growth is within limits. But there are two problems. First, in the absence of family planning education, the target of a 2.3% population increase is too high for Brunei. It has been stressed elsewhere that between 1970-71, the population grew at 4.5% per annum. Granted that 1.2% of this annual increase was attributed to immigration, the projected 2.3% annual population growth is still too high. Secondly, GDP growth is not evenly distributed. Growth occurs exclusively in the oil mining and related industries, and this leads to another crucial problem. The oil industry is capital intensive and has reached its optimum in manpower employment. For many years, the annual increase of the labour force in the oil mining sector has averaged slightly more than 120 people. In fact, in 19 76 the oil industry employed less people than in the previous year. (For details see Table 4.) The second major objective of the Third Brunei Plan is the diversification of the economy, emphasizing accelerated agricultural and industrial development. 23 Like the first objective, the second is a repetition of a long-standing government pledge. There is an implicit problem in determining whether this objective can be attained. This is because the government has not specified how and when this objective is to be attained except to describe in very general terms that expansion has to take place "through accelerated agricultural and industrial development. "2 4 It has been demonstrated that progress in the agricultural sector is not very impressive. 25 The government has evidently given lip service to this goal. It has also been shown that Brunei is basically an agricultural country. It has no other industries apart from those associated with the production of crude oil and natural gas. Worse still, it has no industrial infrastructure and is very much isolated from Singapore and Kuala Lumpur or Manila to benefit from any spillover. Besides, the petroleum sector is already overloaded. The deferment of the petrochemical project is evident of one kind of overloading.

22

National Development Plan, 1975-1979, p. 48.

23

Ibid., p. 46.

24

Ibid.

25

B.A. Hamzah, "Political Economy of Oil," Chapter II.

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Table 4:

Number of Employees m the Private Sector by Major Industry, 1971-76

Industry

1971

1972

1973

1974

1975

Agriculture 598 Oil & Natural Gas 2,850 Sawmilling 431 Other Mining 1,245 Construction 5,416 Wholesale & Retail 1,342 Coffee Shop, Restaurant & Hotels 540 Transport, Storage & Communication 506 Financial & Business Services 512 Community, Social & Personal Services 2,897

NA NA NA NA NA

302 3,238 619 1,191 5,010

317 3,458 520 1,164 4,265

303 3,626 553 1,451 5,487

341 3,621 544 1,500 6,837

NA

2,017

1,857

2,112

2,181

NA

753

760

969

964

NA

671

697

1,004

1,051

NA

547

783

304

805

NA

1,814

1,632

1,857

1,817

14,289

16,162

15,253

18,066

19,660

AD Industries Sources:

16,357

1976

Labour Department Annual Reports, 1971-1975; Employment Returns, 1976; Brunei Statistical Yearbook, 1975/1976.

To prove the point that the government has done little towards diversifying the economy, the following statistics on government spending since 1965 were computed. It is possible from these statistics to compare the actual financial disbursements with mere statements of commitment. Since it is the declared policy of the Brunei Government to diversify its economy via expansion in agricultural and industrial sectors, it is anticipated that the government will allocate more money to these sectors. The statistics in Table 5 will bear testimony to whether the government has actually fulfilled its pledge.

Government Current Expenditure by Major Departments (in million Brunei dollars)

Table 5:

Department

Chief Minister and State Secretariat Adat lstiadat * Agriculture Radio and Television Royal Brunei Malay Regiment Customs District Offices Education Electrical Fire Services Religious Affairs Marine Medical and Health Municipal Police Postal Services Public Services Survey Telecommunications

Note: Source:

*

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

.81 .29 1.11 1.43 9.61 0.63 1.80 10.20 2.64 9.52 2.05 0.83 4.36 1.63 3.64 0.50 9.91 0.88 1.18

1.32 0.12 1.38 1.44 19.62 0.73 2.38 13.22 3.74 0.58 2.65 0.85 4.93

1.32 0.28 1.46 1.77 17.97 0.82 2.79 14.52 3.97

1.98 0.23 1.90 1.56 13.51 0.87 3.22 15.87 4.72

1.96 0.52 2.03 1.84 22.28 0.98

2.34 0.60 2.34 1.92 30.12 0.96 2.67

2.21 1.30 3.78 2.54 53.17 1.44 3.79

0.72 4.14 0.91 6.17

2.00 0.85 2.18 2.12 29.17 1.02 2.69 25.94 7.19 0.95 5.92 0.88 8.38 2.93 8.77 1.12 15.20 1.26 2.81

1.81 0.60 2.45 2.09 34.95 1.06 2.62 27.99 7.30

0.75 3.55 0.77 5.46 2.08 4.99 0.79 11.61 1.10 2.20

1.62 0.23 1.85 1.76 19.70 0.85 3.47 17.52 6.35 0.96 4.49 0.89 6.29 2.53 6.08 0.97 12.66 1.15 1.62

4.12 1.29 4.25 4.25 97.89 1.50 4.42 41.88 12.47 1.33 9.69 1.30 14.98 5.07 14.98 1.80 25.10 1.66 3.17

2.03 4.15 0.67 11.98 1.07 2.17

Ceremonial Duties

Brunei Statistical Yearbook, 1975/1976, p. 72.

2.28 5.13 0.93 12.04 1.08 1.89

2.88 19.39 6.55 0.79 4.94 0.88 7.02 2.50 6.20 0.91 12.14 1.21 2.43

22.81 7.21 0.87 5.15 0.85 7.67 2.74 7.90 1.08 12.83 1.29 2.20

1.02 6.60 0.94 9.59 3.41 9.64 1.14 15.19 1.32 3.20

35.22 8.63 1.35 8.51 1.47 12.61 4.90 12.61 1.59 23.24 1.70 3.58

-

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The above figures speak for themselves. In eleven years ( 196 5-7 5 ), the allocation for agricultural development grew by only four times, compared with ten times the growth of the allocation for defence, five times that for the Office of the Chief Minister and the State and four times that for education. In absolute figures, for the period under review, the annual allocation to agriculture never exceeded that to each of the following: the Religious Affairs Department, Electricity Board, Radio and Television, Defence, Education, the Customs Department. In fact, in 1972 and 1973, more money was allocated to the Civil List of His Highness, the Sultan of Brunei, than to the Agricultural Department. In 1974 and 1975, the Sultan and his immediate family received $2.61 million26 and $2.62 million respectively.27 It is more than apparent that, contrary to the proposed plan, the agricultural sector received very little attention from the government. By the same token, unless the government reviews the whole budget allocation and distribution, the proposed diversification cannot be properly addressed. It is imperative that more money be given to the agricultural sector, but the amount to be given depends on the government's plans and the absorptive capacity of the sector concerned. The proposed diversification plan includes investment m the following fields: ( 1) Rice Production. The plan recognizes that the present output is only between 20-25% of domestic demand. 28 The government plans to increase productivity and output to meet 50% of the domestic demand by 1979. The author's figures indicate that the proposed target may not be attained. It will be recalled that the increase in utilized land has been marginal. While output was relatively high during 1973-75, it dipped in the 1975-76 period. The government does not specify how and when it plans to attain self-sufficiency. But it does propose increased productivity via large- scale investments. However, in Southeast Asian rice cultivation, most rice fields are too small and cannot be economically worked on a large- scale mechanized basis. Besides, mechanized rice

26

Unless stated otherwise, all references in the text are to Brunei dollars.

27

State of Brunei:

28

Ibid., pp. 53-54.

Estimates of Revenue and Expenditure, 1975, p. 15.

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cultivation has never been carried out successfully in Southeast Asia. This is partly due to the cultural behaviour of the Malays who produce rice for household demand. Furthermore, being a smallholding private enterprise involving seasonal cropping, rice cultivation is unlikely to attract large-scale private investment. (2) Livestock Production. It would appear, at the outset, that the government has made some progress in this area. The government has successfully induced a Japanese company to start large-scale livestock breeding. However, since the project is still in its infancy, it is unlikely that it will be able to produce the expected surplus in the 1980s. Plans are also at hand to introduce agro-based industries and to develop the tourist industry. With respect to the latter, the plan is geared towards the construction of international-class hotels to cater to 100,000 to 200,000 tourists by 1978.2 9 In July 1978 it was found that there were only two hotels of international standard -- in Bandar Seri Begawan and Kuala Belait; even when three other substandard hotels were taken into account, the total capacity was less than 1,000. Besides, tourism is an induced sector. Statistics show that Brunei is not popular with tourists. Between 19 7 0-7 6, Brunei was visited by only 10,741 persons, less than 2,000 tourists a year.30 The figure for 1978/79 may not exceed 5,000. The government's target of 100,000-200,000 tourists for 19 7 8 is an impractical exaggeration. There is no way for either the government or the private sector, or even for both, to cope with an influx of tourists on the proposed scale.

Defence Allocation With regard to government spending, it may be observed that the expenditure on defence is unusually large. Table 5 shows that since 1969, the government has spent more on defence than on any other sector. In 1974 and 1975, expenditure on defence exceeded that of education by a factor of almost two. 31 Traditionally, education has been Brunei's biggest budget item.

29

State of Brunei:

Estimates of Revenue and Expenditure, 1975, p. 56.

30

Brunei Statistical Yearbook, 1975/75, p. 60.

31

Ibid., p. 72.

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Our investigations show that Brunei is determined not to be caught defenceless when it becomes independent in 1983. 3 2 As it prepares for independence, its spending on defence has increased. Recently, the government ordered US$60 million worth of British-made Rapier Blindfire surface-to-air missiles as protection against air attC~cks. 3 3 The~e heat-seeking, electronically-guided missiles are mobile and have a computerized guidance system with a range of eight kilometres. Technicians are being trained in England to manage the systems which are expected to be deployed in Brunei by 1980. Brunei is also taking delivery of new patrol boats equipped with Frenchmade surface-to-surface missiles of the EXOCET type. 34 EXOCETS are currently being used in many navies worldwide, including those in Singapore and Malaysia. In addition to this equipment there are reports that Brunei has purchased nineteen scorpion tanks from Great Britain and a large quantity of submachine guns from the u.s. 3 5 Such heavy spending would be appropriate for a large defence force. But Brunei has only two infantry regiments, with an air wing of thirteen helicopters and a naval unit of fast patrol boats. In 1975 Brunei spent an estimated sum of $98 million on defence, 3 6 and this does not include the annual recurrence of one million pounds sterling for the upkeep of one Gurkha regiment in Seria, 3 7 ostensibly for training. It is no secret that the regiment has been deployed there at the request of Brunei Shell to protect the oil installations. Besides being used as a deterrent against external aggression, the Gurkhas are also employed as bodyguards for the Sultan and his close relatives. Regarding defence allocations, it was discovered that British officers and men seconded or on loan to the Brunei Royal Malay Regiment were paid higher

32

The treaty was signed on 7 January 1979.

33

G. Lovell, "Brunei -- No Headlong Stampede to Statehood," Business Times (Malaysia), 24 January 1979.

34

Ibid.

35

Private source.

36

Estimates of Revenue and Expenditure, 1975, pp. 66-74.

37

Private source.

- 15 -

than their local counterparts. 38 A British lieutenant colonel receives a salary of $41,000 a year compared with $24,000 for his local counterpart. 3 9 The difference becomes more visible if the aggregate salary expenses are compared. In 1975 the Government of Brunei spent $12.7 million on salaries for 2,048 locally enlisted personnel, and $4.29 million for only 88 British service personnel on loan. 40 Despite increasingly large military expenses, not a word on the role of security forces in development can be found in the Third Brunei Plan. That there is a symbiotic relationship between security and development is an accepted rule. Without good security and a general sense of safety, it is impossible for people to enjoy life and pursue economic activities. Foreign investment is also very sensitive to the security situation in a country. The question is whether Brunei should spend more money on defence or on other more relevant sectors. It will be prudent for Brunei to reallocate resources, spending more money on social infrastructure and on restructuring the existing economic imbalance between the urban rich and rural poor. Restructuring the society along these lines is the only secure guarantee against future political uncertainty, for a well-armed and sophisticated military force cannot always enhance political stability or maintain an unpopular status quo. On the contrary, a well-balanced and restructured society with minimum social stratification tends to provide a more stable political environment. It has been posited elsewhere that defence planning and economic growth are closely linked. In a study conducted by Emile Benoit, the relationship between defence expenditures and growth in forty-four countries were scrutinized. 41 Benoit finds that a heavy defence burden has a positive effect on the rate of growth. In a later article, he speculates that some types of governments may spend more money on defence than others.42 With respect

38

Estimates of Revenue and Expenditure, 1975, pp. 66-74.

39

Ibid., p. 66.

40

Ibid., p. 74.

41

E. Benoit, Defense and Economic Growth in Developing Countries (Lexington: Lexington Books, 1973).

42

E. Benoit, "Growth and Defense in Developing Countries," Economic Development and Cultural Change (1978).

- 16 -

to these findings, the author shares the views expressed by Peter Bloch that other variables must exist for defence spending to generate growth in other development sectors. 43 In Brunei the oversized defence planning has not led to a corresponding growth in local economic activities. Linkages are rare since Brunei imports all its weapons systems ready-made. Servicing and repairing of its helicopter fleet and patrol boats are primarily done in Singapore.

Theoretical Basis In analyzing Brunei's development policies, the author failed to identify their underlying rationale. It was noted previously that the policies only stress direction. The 21-page Third Brunei Plan sets forth only the economic framework, and the economic analysis is inadequate. The discrepancy between policy statement and policy commitment is also exposed. It becomes apparent that the government only pays lip service to agricultural development and diversification. The government allocates more resources for defence purposes; yet not a word on defence is mentioned in the Development Plan. This anomaly has led the author to query the philosophy underlying national development policies in Brunei. Development is a form of change. And change, in broad terms, is of two types: continuous and discontinuous. The continuous, or evolutionary, approach to change is the more common of the two. Evolutionary change Development practitioners who believe undergoes an incremental metamorphosis. in evolutionary change generally concern themselves with the proper planning of gradual development stages. The second type of change is discontinuous, or revolutionary. This form of change involves a deliberate policy to upset the status quo by revolutionizing it. The 1917 Bolshevik Revolution in Russia and the 1945 communist revolution in China are two examples of development brought about via discontinuous change.

43

P. Bloch, "Is Democratic Government a Luxury for Developing Countries?" (Prepared for the Conference on Security and Development in the Indo Pacific Arena, Fletcher School of Law and Diplomacy, 24-26 April 1978).

- 17 -

The use of the term "planned change" to refer to the revolutionary approach of development is misleading on two counts. First, it tends to suggest that evolutionary change is void of planning. Secondly, it gives the impression that all revolutionary or discontinuous types of changes are planned. An important aspect of the latter is change that is brought about by cataclysms such as floods, mass droughts, or other forms of events often beyond the control of mankind. Besides, planned change does not necessarily guarantee the desired development objectives. The fact that Third World countries are shifting towards a revolutionary mode of change is understandable. Revolution is seen as the short cut to development and as a legitimate way to strengthen the government control mechanisms. Under the discontinuous mode of change, the ruling apparatus (that is, the government) becomes the major actor -- directing the types and the rate of change. This kind of intervention from the top is often referred to as the "instrumentalist" approach towards development, as opposed to the "bottom-up" approach. However, whether it is the top-down or the bottom-up approach, in many developing countries the instrument of change is the bureaucracy. This explains why in developing countries a well-educated, balanced, and modernizing bureaucracy is essential. A politicized bureaucracy could only spell doom to the country. The case of Indonesia illustrates the tragedy of a highly politicized bureaucracy and what it can do to development. The significant role of bureaucracy becomes evident when one understands the web of interactions linking the rule-maker and the role-occupant as described by Robert Seidman.4 4 In one's obsession with development models, there is a tendency to downplay the essence of development, which is basically the development of human needs and human beings. More significantly, human beings operate within a socio-political framework, a fact which is already well recognized by development practitioners. The most critical observer is Gunnar Myrdal. In his treatise, Asian Drama, Myrdal identifies the interacting conditions in a social system. 45 The six conditions that he posits are categorized into two different groups: the economic factors and the noneconomic considerations for development. 44

R. Seidman, "Law and Development: (1972).

45

G. Mvrdal, Asian Drama: Panth~on, 1968).

A General Model," Law and Society Review, Vol. 311

An Inquiry into the Poverty of Nations, Vol. III (New York:

- 18 -

One detects many missing links in the national development plans of Brunei. All point to one major defect: the lack of grasp of modernization theories. Some of the modernization theories as analyzed by A.G. Frank will be briefly explored here.46These are:

(1)

The ideal type index approach.

(2)

The diffusion approach.

(3)

The psychological approach.

The Ideal Type Index Approach4 7 This approach prpposes essentially that backwardness or underdevelopment is the result of the lack of modem traits. These traits include universalism, the achievement syndrome, functional specificity and other indices usually associated with modernity. According to the proponents of this approach, the level of development in Third World countries can be measured by subtracting the indices of underdevelopment from those of development. The remainder determines the level of development. Two major variants can be distinguished under this approach: the pattern variables and the stages of growth theory. The pattern variable approach was first conceived by Max Weber and it was modified and further developed by Talcott Parsons.48 Later, Hoselitz elaborated on it. 49 He posited that the developed countries are developed because they possess all the traits of modernity: they are universalistic, achievement-oriented, and not particularistic. Moreover, in their societies, roles are functionally specific rather than diffuse.

46

A. G. Frank, "Sociology of Development and Underdevelopment of Sociology," in Cockroft, ed., Dependence and Underdevelopment, Latin America's Political Economy (New York: Anchor Books, 1972).

J. 47

Ibid., pp. 325-344.

48

T. Parsons, The Social System (Glencoe:

49

B. Hoselitz, "Social Structures and Economic Growth," Economica Internatizionale, Vol. 6, No. 3 (August 1953); also, B; Hoselitz, "Social Stratification and Economic Development," International Social Science journal, Vol. 16, No. 2 (1964).

The Free Press, 1951).

- 19 -

Rostow's growth theory posits that the level of development can be determined by the stages of growth. 50 Therefore, it has become fashionable for development practitioners to try and distinguish whether the level of economic growth of a certain country has reached the take-off stage or not. One major problem with this concept is that it ignores the historical process of growth. It has been resolved that Great Britain attained hegemonic power through its ability to exploit and mobilize the resources of the colonies under its control. A.G. Frank is also convinced that the development of the underdeveloped countries springs from the inability of the colonies to mobilize their own resources for their own development. By the time they are in a position to utilize these resources most of these would have been squandered away. A.G. Frank finds the premises and the hypotheses underlying the ideal type and Rostow's stages of growth theories to be theoretically inadequate. 51 Moreover, it should be appreciated that the development of the developed societies cannot be isolated from the underdevelopment of their counterparts: the underdeveloped societies.

The Diffusion Approach52 This approach posits that development in the underdeveloped countries can only occur through the assimilation and diffusion of the cultural elements of developed societies. Backwardness or underdevelopment, according to the proponents of this theory, is due to lack of assimilation of knowledge, skill, values, organization, technology and capital. Whatever flaws this theory may have, its logic is sound. For a country to develop, the stated ingredients must exist. The author does not agree with some of the harsh criticisms levelled at this approach. It is true that the state of Brunei gains very little from foreign investments. However, this is due not so much to flaws in the theory but rather to the nature of the power relationship between Brunei Shell and the state. By the same token, the weakness of the state in

50

W. Rostow, The Stages of Economic Growth, A Non-Communist Manifesto (Cambridge: Cambridge University Press, 1962).

51

A. Frank, "Sociology of Development," p. 355.

52

Ibid., pp. 356-382.

- 20 -

negotiating for better financial terms has led to the anomalous position described previously. In the author's opinion, the hydrocarbon resources in Brunei could not be exploited without external assistance. Without the infusion of technology and capital from Brunei Shell and Mitsubishi, the LNG industry would not have been established. The infusion of these elements is necessary for Brunei to develop -- but the introduction of foreign values is another matter outside the scope of this study.

The Psychological Approach53 This approach views backwardness as the consequence of clinging to traditional values and attitudes. The usual criticism against this approach is that mental revolutions do not necessarily change the size of the farm nor increase the output or yield. While this is true figuratively, the correct mental approach towards development is critical to goal attainment. Granted, psychology or attitude by itself cannot generate development. It has to be accompanied by other important variables -- some of which have already been discussed in passing. We return to Myrdal. He emphasizes in his writings that development is a long process which includes noneconomic factors which are difficult to quantify. Of course Myrdal is not alone in advocating this idea. The other popular proponents of development as a process approach include Friedman and Meagher and Smith. 54 The last two see development along cultural-specific lines. This means that for development ideas or regulations to reach the grass roots, they must be compatible with specific values and cultures of the to-be-developed societies. Any value which opposes indigenous norms is likely to be rejected. Too often, critics of this development approach offer only the socialist avenue as an alternative. But socialism is no panacea to underdevelopment; nor does it solve all the social problems afflicting nation-states. The examples of

53

A. Frank, "Sociology of Development," pp. 382-394.

54

W. Friedman, "The Relevance of International Law to the Process of Economic and Social Development," in R. Falk and C. Black, The Future of International Legal Order (Princeton: Princeton University Press, 1970); R. Meagher and D. Smith, Law and Development Practitioner, Final Report for International Development on Contract, 31 December 1974.

- 21 -

China, Cuba, Kampuchea, Vietnam, and many countries m Eastern Europe are instructive of the problems in any socialist system. The truth is that both systems have their strengths and weaknesses. Success of Third World development policies depends on how the governments mobilize their resources. Robert Seidman, for example, emphasize& the use of the bureaucracy to channel policies to the role occupant. Robert Seidman's ideas can be conceived diagramatically.

Social, Economic and Political Inputs fS.E.PJ

+ + ++Feedback

I BUREAUCRACY ..., _ _ _ ___,..~··1 ROLE- OCCUPANT'

+ +

s.E.P

+ +

S.E.P

Law, Development and Bureaucracy

- 22 -

Even with its flaws, Seidman's theory is applicable inasfar as it concerns getting all the policies down to the grass roots. The essence of Seidman's theory is the stress on a need to establish a two-way communication facility between the rule-maker and the role-occupant. This communication is handled via the bureaucracy ~ch, besides managing conflicts, has the function of seeing that the rules and policy decisions decided at the highest level reach the roleoccupant. It is also the function of the bureaucracy to act as a clearing house, co-ordinating and passing feedback from the role-occupant to the rule-maker, who synthesizes reactions and new objectives to formulate the next strategy. The major problem with the revolutionary approach is that the initial sacrifice tends to be too painful to be tolerated too long. The recent events in Kampuchea, Vietnam, Iran and Cuba are instructive. Excessive government intervention can be harmful, and yet in the Third World countries without government intervention in directing development policies, development is at a standstill. Brunei authorities must be aware that the revolutionary approach tends to consolidate the government machinery and its control mechanisms. Many governments of developing countries become less conciliatory and more offensive to any group that rejects their policies. Rejection is perceived as defiance of the legitimacy of the government, not a result of a lack of capacity to conform to development discipline. Those who do not conform to government policies are treated as deviants. Some of the theories treated above may be of use to Brunei development practitioners, who do not seem to have even a minimum grasp of development theories. It was suggested that none of Brunei's five-year plans exhibits any sound theoretical basis nor does any of the plans balance economic with noneconomic factors. More significantly, there is a lack of participation from the people.

Oil Policy Issues The present nature of the economy, coupled with worldwide problems of crude oil availability and soaring oil prices, makes a strong case for a well-co-ordinated policy on oil. Before a national oil policy can be formulated, there are certain major policy issues that need to be addressed. Some of these issues are explored below.

- 23 -

Certainly, the independent Brunei Government faces the crucial problem of how to capture more economic gains from its depleting hydrocarbon resources. In such a situation, it is not unknown for an emerging nation to take extra legal actions, usually for political reasons. So the question of nationalizing the natural resources is very pressing since all major petroleum concessions in Brunei will expire after the year 2000. Should the government still permit the present concessiOnary system to operate under foreign control, Brunei's hydrocarbon resources will continue to diminish. Notwithstanding the fact that a state has absolute and permanent sovereignty over its natural resources, the policy of nationalization for a weak state like Brunei may bring more harm than good. States do have the unquestionable right to grant and nationalize concessions, but for Brunei that step may have negative implications -- particularly for its economy which is exclusively dependent on the export of one commodity. Any interruption to its petroleum industry can spell doom. To put it figuratively: what will happen to Brunei if the goose that lays the golden eggs flies away? Besides, nationalizing the oil industry may create an unpopular precedent, harmful to future foreign investments in the country, already constrained by a lack of skilled manpower and technology. In the long run, Brunei may be faced with acute political problems resulting from its inability to produce oil and gas in sufficient quantities to sustain the level of affluence that wealthy citizens have come to expect. Given these constraints, nationalizing the hydrocarbon resources is not a viable policy option, at least for the time being. Besides, what Brunei wants to achieve through nationalization (that is, management control, equity participation, more profits, etc.) can be attained through constitutional and other more amicable means. Renegotiating for more compatible financial provisions and changing the anomalous contractual relationship to one that can give the state more control over its diminishing natural resources are what the Brunei Government should aim for. Despite reports of depleting proved reserves and decreasing daily production, the government can still renegotiate the oil agreements in its favour. It seems certain that Brunei Shell (and the other oil companies in Brunei) would want to retain its present amicable relationship with the Brunei Government. Therefore, it is unlikely, in our view, for Brunei Shell to risk its investments even if the present concessions are renegotiated, so long as the concessions remain economically viable. Changes in the financial provisions of the concessions may result in greater gains for the government but Brunei Shell can still be ensured of an acceptable profit.

- 24 -

Other issues, including investments in the petrochemical industry and the introduction of new policies on recruitment and the training of Brunei locals, were explored elsewhere. In considering the latter, the government should insist that all future recipients of oil mining leases must guarantee that within the next five years {that is, by 1983) they would employ Brunei nationals in 75% of management, professional and supervisory positions, and in 100% of all other jobs. The government must also insist that holders of future prospecting licences submit a detailed programme for recruitment and training of locals within the first year of operation. A co-ordinating body {within the bureaucracy) should also be created to monitor all aspects of the industry's operations, and in particular to see that the industry satisfies the recruiting objectives. Within this context Brunei should also plan to create a state-owned oil enterprise {which may be called the Brunei National Oil Company) to be staffed by knowledgeable experts. It may be necessary for the government to hire foreign oil experts to start the enterprise while Brunei trains its own nationals. Besides revising its tax policies, the Brunei Government should also take over the role of determining posted prices for its crude and natural gas. The government must strive to rectify the present arrangement which permits its crude and gas to be sold in the open market far below the world's competitive pnces. Another set of policies that the Brunei Government must address forthwith 1s the royalty rate -cum-income tax payment. Presently, the royalty rate is tied to market prices, not the posted price. Since the government does not determine the market prices, most of the profits gained tend to shift in favour of the oil company. At the same time, the government should also raise the present low royalty rate of 8% to at least 20%, preferably higher, before 1983. Since there is a tendency to tie the royalty rate with posted prices, both must be raised sim ul taneousl y. By the same token, the government should insist on royalties to be expensed. The economics of expensing royalty has been discussed and stressed in the author's dissertation. 55 At the same time the corporate tax level must be raised from the present low rate of 50% to 85% by 1985. The upward revision of the financial provisions will bring more money into the economy.

:J5

B.A. Hamzah, "Political Economy of Oil," Chapter IV.

- 25 -

More revenue means greater fiscal linkages and, invariably, more prospects for development. Fiscal linkages are defined here as intersectoral effects associated with government spending of incremental revenues collected from the expansion of a given industry. In this sense, fiscal linkages refer to external effects associated with the expenditure of the industry's payments to the government. The underlying assumption is that these amounts, though not necessarily earmarked for specific uses, could involve linkage effects wholly analogous or similar to those emanating from the newly created industry itself. A special contribution of fiscal linkages to development is that they provide the government with a tremendous budgetary flexibility in policy choices. One of the choices is conservation, a matter already viewed with some concern in Brunei. However, to rely solely on conservation is like placing all one's eggs in one basket. A conservation programme is only one of many ways to eliminate energy waste. Conservation extends the supply line and minimizes the depletion rate. But the real economics of conservation -- that is, the policy of not increasing the production rate -- has to do with opportunity cost. The central question is whether the government can afford to delay present production in order to forego certain gains in the future. This question has to be dealt with by the Government of Brunei. It 1s important to appreciate that whatever decision the government

makes, it IS contingent upon the supply and demand of its resources. Since demand for oil is presently price inelastic, it is the supply line that the government has to worry about. A well-co-ordinated conservation policy may help the government with its supply side; at the same time, minimizing the depletion rate can also increase the lead time for developing other energy resources. In this context, it may be prudent to embark on feasibility studies of Brunei's coal reserves, a point that has already been emphasized. Viewed from this perspective, a well-balanced oil conservation policy 1s essential to the continuing growth of Brunei's economy. However, it is important to consider conservation only as a short-term option -- that is, as a part of the overall national policy on energy. Brunei must not be lured to consider conservation as the panacea to all energy problems. There 1s another consideration.

To obtain the best results from its

- 26 -

national policy on energy, the government should draw upon the expenence and the expertise of those in the oil business. Their vast experience and support can be critical to the successful development and operation of both the conservation scheme and the national policy on energy. Towards this end, it is recommended that the Brunei Government, in conjunction with Brunei Shell and the Mitsubishi Corporation, form a committee to co-ordinate the energy needs of the country. The creation of a national policy on energy should be the focus of this committee while the Brunei National Oil Company is in the process of being formed. There is yet another policy issue that the government has to address. It is its participation in downstream activities -- in particular, refining. It is distressing to note that despite its early involvement in the oil business, Brunei Shell has not put one refinery in Brunei. The company has been dependent on Lutong in Sarawak until 19 71 when, for political reasons, it was forced to look for refineries elsewhere. In the author's view, a small refinery in Brunei is a viable economic proposition, and it can certainly enhance the security of supply of crude for local consumption. The oil and gas industry investments m Brunei have been responsible for net direct and indirect benefits. But Brunei Shell's investment has also created a dependency state with the characteristics of an enclave economy. It was Gunnar Myrdal who suggested that Third World countries which produced oil usually ended up as "enclaves integrated more closely with the economy of one of the several developed_ countries. ,56

Brunei and OPEC Upon regammg independence, Brunei may decide to join the Organization of Petroleum Export Countries (OPEC). Considering that Brunei is a new exporter of crude petroleum and natural gas, its membership in OPEC is not likely to be opposed, at least not by the major Arab producers. Since Brunei is a predominantly Muslim state, its foreign policy vis-a-vis the Arab-Israeli dispute will be fundamentally similar to that of the Organization of the Arab Petroleum Exporting Countries (OAPEC). The non-Arab members are not likely to oppose what the Arab members do not disagree on.

56

G. Myrdal, The Challenge of World Poverty (New York:

Pantheon, 1970).

- 27 -

There is one problem, however, if the Malaysian experience IS to be believed. Two years ago (August 1977), the question "Should Malaysia join the OPEC?" was raised in the Malaysian Parliament. 57 Responding to the question, the Prime Minister of Malaysia indicated that Malaysia produced too little to be a member. The author's research does not support the Prime Minister's assertion linking production level to membership. There was no linkage at all between a country's production level and membership in OPEC. In fact, at the time, Malaysia produced more oil than eithe1 Gabon or Ecuador, both members of the organization. Evidence in support of this can be found in the OPEC statute. The relevant article on membership which does not state anything on the linkage between production level and membership deserves full citation; 7(3)(c). Any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of member countries, may become a full member of the organization, if accepted by a majority of three fourths of full members including concurrent votes of all the founder members. 58 The remammg clauses on membership refer to type of membership and the procedure for withdrawal from the organization. There is no other prerequisite for full or associate membership. There was, however, a public clarification by the former Secretary General of OPEC. He was reported to have said in an interview with Platt's Oilgram, 22 December 1972, that exporters of only twenty to fifty thousand barrels per day were not qualified for membership. This limitation does not apply to either Malaysia or Brunei since both countries are presently producing more than 230,000 barrels a day each. In examining the options for Brunei's membership in OPEC, one consider-ation that looms ahead is the benefits to be derived from the association. To examine the benefits, one has to know the functions of OPEC. Before the Caracas meeting in late 1979, the organization was essentially a mechanism for

57

B.A. Hamzah, "In the Fold of OPEC," The National Echo (a Malaysian daily), 28 August 1978.

58

The Statute of the Organization of Petroleum Export Countries (Vienna: Publication, 1 9 71), p. 7.

OPEC

. 28 . setting the prices of crude oil, using the Saudi Arabian light crude (34° API) as the market crude.5 9 As long as the light crude is made available at the declared price, the prices of all crudes produced by OPEC countries (and to a certain extent those of non-OPEC countries) must sooner or later fall into line with it, after allowances for quality differences which affect refining yields and costs, and for differences in transport costs are made. Because of the price inelasticity of crude petroleum in today's market, ansmg from the absence of comparable substitutes, the crudes from non-OPEC countries tend to fetch better prices on the basis of comparable quality. Just before the 10% hike by Iran, Libya, Iraq, Kuwait and others in October 1979, the Saudi market crude was the cheapest in the American market; the Saudi light crudes were bought at US$18.00 per barrel, compared to US$25.00 per barrel from Canada. 60 The point is well taken: a net exporter of crude oil does not have to become a member of OPEC to gain from its pricing policy. Since OPEC decisions on pricing have, in effect, been nondecisions ansmg from controversy within the organization over one another's needs for foreign exchange, sustaining the ceiling price will be difficult. To keep the machinery intact, OPEC members must find another less controversial rationale. Fortunately for the organization, the basis for that rationale has long existed in the form of communication facilities as a petroleum resource centre. In determining its option, Brunei should not only be governed by OPEC's pricing policy but also by the gains to be derived from access to information, experience and expertise that the organization has mobilized. Gathering and storing the information and providing expertise is one communication function for which OPEC is well known. Besides, in the past the members of the organization have put up a united front in negotiations with intransigent oil companies. The ability of the member countries to stick together and to co-ordinate their policies vis-~-vis the oil companies have made the organization what it is today. The ability of the member countries to harmonize their fundamental interests through concerted action has enabled them to exert their influence on the oil companies. Looked at from this perspective, membership

59

The attempts by OPEC to control prices after the Caracas meeting have not been successful. The Saudi gesture to restore order to a chaotic petroleum market by reluctantly raising its own price as part of a larger design to return to an agreed benchmark price and quarterly price adjustments indexed to the inflation rate has not been popular.

60

OPEC Bulletin, Vol. X, No. 32 (13 August 1979), p. 7.

- 29 -

m OPEC will not only enhance the political status of Brunei but it will also lend bargaining strength to the state against Brunei Shell. The Government of Brunei can make use of the experience and expertise available in the OPEC organization, in the event that Brunei Shell decides to be intransigent. The fact that member countries in OPEC have to contribute to a Special Fund should not deter Brunei. The OPEC Special Fund was created on 28 January 1976 by OPEC member countries to provide a new facility for concessional financing to other developing nations. Contribution to the fund is voluntary. Gabon is the only noncontributing member. If necessary, Brunei can plead for a special status and exemption from contributing to the Fund. It must also be recognized that participation in the Special Fund is not the most important aspect of OPEC. By the same reasoning, Brunei should not be discouraged from joining OPEC out of fear that it will be affected by the trade restrictions imposed by the U.S. upon countries which are members of producer cartels. (Even though OPEC is not, in a strict sense, a producers' cartel, for the purposes of trading with the U.S., it is so considered.) The restrictions on foreign aid and the mostfavoured nation clause are not applicable to Brunei since, currently, it receives neither from the U.S. In the final analysis, the gains from joining OPEC tend to outweigh the benefits of remaining outside the organization.

Brunei and ASCOPE One sure way for Brunei to contribute to regional development is by joining the Association of Southeast Asian Nations (ASEAN). Its entry into ASEAN will not only enhance the political solidarity of the regional organization but it will also raise the stature of the ASEAN Council on Petroleum (ASCOPE). Although OPEC has been the subject of discussions and speculations, few words have ever been written on ASCOPE. Since the discussion on OPEC and ASCOPE is included in the same chapter, a caveat is necessary. ASCOPE is not another OPEC; ASCOPE was created for a different purpose.

- 30 -

Following the successful OAPEC oil embargo in 1973, the members of ASEAN perceived that it would be in their interests to co-operate on petroleum matters. ASCOPE was created on 15 October in 1975 to fulfil this aspiration and to promote active collaboration and mutual assistance in the development of oil resources for member states. ASCOPE was created, as £\ consequence of apprehensions of another worldwide energy crisis, to act primarily as a communication centre to exchange information on petroleum matters for the ASEAN member countries. The first thing that ASCOPE achieved was the setting up of a petroleum data bank. 6 1 Since its creation in 1975, ASCOPE has held many meetings to review its own progress. One of the most significant conferences was held in Singapore during 24-26 May 1976. At that meeting three resolutions were passed. These were: 6 2 (a)

To form national economic committees to conduct studies on co-operation and co-ordination of the import and export of crude oil and petroleum products.

(b)

To organize an international conference on petroleum on October 1977. (It is now known that the conference was successfully held in Jakarta per schedule. )

(c)

PERTAMINA, then the only active state-owned oil company, was to provide technical assistance to the other member countries, in particular, the Republic of the Philippines.

At the conference, it was stressed that ASCOPE should work towards petroleum autarky in the region. There seems to be minimum consensus on what autarky or self-sufficiency means. The consensus was unanimous, however, with regard to a petroleum-sharing scheme. Considering the regularity of the meetings, some progress must have been made in the organization.

61

The Malaysian Digest, October 1976. The Digest is published periodically by the Ministry of Foreign Affairs, Malaysia. Other relevant information pertaining to ASCOPE is obtained from the New Straits Times (a Malaysian national daily) and Sunday Times (a Singapore weekly).

62

The Malaysian Digest, October 1976, p. 2. By March 1978 three working committees to assist the National Committees were formed. They are: The Technical Committee of ASCOPE (November 1975); The Economic Committee of ASCOPE (May 1979) and the Legal Committee of AS COPE (October 19 79).

- 31 -

The third meeting of the Council was held in Kuala Lumpur, the capital of Malaysia (15-16 October 1977). Originally, the Council was scheduled to meet in Bangkok but the coup against the government of Seni Pramoj necessitated a change of plans. To undersc:ore the importance of the conference, Malaysia's Prime Minister, Datuk Hussein Onn, made a personal appearance at the two-day meeting. One of the most important decisions reached at the meeting was to set up national committees to co-ordinate the machinery for petroleum-sharing in times of short supply and petroleum emergency. The conference further endorsed the decision taken at Singapore to hold the international conference and exhibition in ] akarta the following October. The following decisions were also endorsed at the Kuala Lumpur meeting: (a)

Co-operation in training and petroleum educational facilities.

(b)

Classification of data released to the petroleum industry for uniform data collection.

(c)

Co-operation on pollution control and environmental protection.

(d)

Co-operation in crude and product marketing.

(e)

Formulation of conservation policies.

(f)

Policies on possible utilization of waste energy.

Germane to all ASCOPE's resolutions is the need to come to the rescue of fellow member states in the event of an energy shortage or any other critical exigency. Taken to its logical conclusion, this means that Indonesia and Malaysia, the two net exporters of petroleum crude, will be required to assist the crudedeficient ASEAN member states by giving concessional terms. The expanded study will investigate whether the two oil-producing countries are willing to sell their crude at concessional rates; and if so, at how much lower than the OPEC pnce. In other words, an attempt will be made to determine whether ASCOPE means business or whether it is merely paying lip service to co-operation. ASCOPE is a suborganization within a parent organization, ASEAN. In appraising ASCOPE's future, one must not only review ASEAN's achievements to date but also discuss the limitations in both organizations. At the same time, as ASCOPE is set up to co-ordinate petroleum matters, one has to investigate petroleum capacity, potential and reserves in the ASEAN countries.

- 32 -

There are three related hypotheses to be home in mind with regard to ASCOPE. First, its prospects are a key to the viability of ASEAN itself. Secondly, petroleum-sharing, ASCOPE's major contention, is possible only if there are surplus quantities and willingness on the part of the producing states to share the excess at concessional costs. Above all, the overriding controlling factor in determining the progress (or lack of it) of ASCOPE and ASEAN is the nature of interstate relations.

ASEAN ASEAN will be thirteen years old in August 1980. It began as an economic and cultural organization in 1967 with the Bangkok Declaration pledging (among other things) "to accelerate economic growth, social progress and cultural development in the region. "6 3 That ASEAN has taken a political role of late is less out of desire than of necessity. Following the withdrawal of the British troops east of Suez (1971-75) and the American troops from Vietnam, ASEAN found itself in a situation of political uncertainty, followed by a continuing apprehension of the Domino Theory and the collapse of democratic governments through internal communist subversion. Such common fears inspired the leaders to work more closely in political and security spheres, hitherto given little attention. In fact, it has been suggested from time to time that ASEAN may develop into a formal military organization. Despite continuing bilateral military co-operation (for example, joint border operations between Thailand and Malaysia; Indonesia and Malaysia's joint border operations; the joint ASEAN naval exercises; the existence of an Integrated Air Defence System between Malaysia, Singapore and Australia), military co-operation is not a common objective of the member states. To put it differently, the member states are willing to co-operate in defence matters for specific tasks, but they are not willing to form an alliance that can be construed as a threat to the security of the communist states in Indochina, Laos and Kampuchea. The formation of ASEAN is not the first attempt at regional organization and regional co-operation in the area. By modern standards such efforts are undoubtedly recent. Although organizations like the United Nations Economic 63

P. Lyon, "ASEAN and the Future of Regionalism,'' in Lau Teik Soon, ed., New Directions in the International Relations of Southeast Asia (Singapore: Singapore University Press, 1973), p. 156.

• 33 .

Commission for Asia and the Far East (ECAFE) have contributed to Southeast Asian development for several decades, local initiatives for regional co-operation were realized only in the early part of the 1960s. In 1961, the Association of Southeast Asia (ASA), comprising Malaysia, Thailand and the Philippines, was set up to promote economic, cultural and social co-operation. ASA was stillborn due to political complications arising from the sudden claim by the Government of the Philippines over the Malaysian State of Sabah. Following ASA's demise, MAPHILINDO (a loose political organization of predominantly Malay states, Malaysia, Indonesia and the Philippines) was organized. MAPHILINDO, too, had its political setbacks and collapsed under mounting pressures from Sukarno and his policy of confrontation politics against the newly-formed Federation of Malaysia (1963-65). Despite lagging behind its staggered along to last for more and tribulations for twelve years ASEAN can survive is anybody's

declared economic objectives, ASEAN has than a decade. That it has survived the trials is itself an achievement. How much longer guess and a question for speculation.

Conclusion This paper has focused on the interaction between oil and national development in Brunei. The author's purpose is to examine to what extent the oil factor is responsible for economic development in Brunei. From an econometric perspective, there are presently no backward or forward linkages arising from the petroleum industry in Brunei. This is because the industry is very capital-intensive and does not have the attributes to influence backward or forward linkages. In addition, since the firms are mainly foreign owned, most of the revenues are repatriated. Tax linkages are equally weak in the absence of income tax, low royalties and minimum corporate tax rate. The "real linkage" lies in the fact that Brunei finances all its development projects from petrodollars, its largest source of foreign exchange and domestic revenue. It is recommended that Brunei should consider joining OPEC and ASEAN. ASCOPE is likely to gain from Brunei's presence in the latter organization. Membership in both organizations is one definite way of gaining access to

- 34 -

petroleum knowledge which the decision-making machinery in Brunei lacks. is also likely to raise Brunei's credibility in its continuing relationship with Brunei Shell.

It

To max1m1ze benefits, Brunei should renegotiate the present financial provisions with Brunei Shell. Brunei is howeYer cautioned from pushing its nationalistic fervour to extremes by adopting extra-legal means to change the state-company relationship. Nationalization is likely to bring more harm than good in the long run, given the present level of expertise and the socio-political structure in Brunei. Besides, in international oil business, labels are imprecise. Whether the contractual relationships are called concessions, leases, joint ventures, service contracts or profit sharing, they are simply a form of business contract. The labels very often do not describe the substance of the contract. Too often, critics confuse the symbols with the core-substance. What counts are the financial arrangements.

INSTITUTE OF SOUTHEAST ASIAN STUDIES LIST OF PUBLICATIONS IN THE

RESEARCH NOTES AND DISCUSSIONS PAPERS SERIES 1

M. Mainguy, Economic Problvms Related to Oil and Gas Exploration, 1976. 39pp. S$6.00 (Out of print)

2

R. William Liddle, Cultural a.1d Class Politics zn New Order Indonesia, 1977. 21pp. S$4.00 (Out of print)

3

Raja Segaran Arumugam, State and Oil in Burma, 1977. (Out of print)

4

Hilman Adil, Australia's Polz'cy Towards Indonesia During Confrontation, 1962-66, 1977. 90pp. S$8.00 (Out of print)

5

Albert D. Moscotti, Burma's Constitution and Elections of 1974: Book, 1977. 184pp. S$13.00 (Out of print)

6

Thamsook Numnonda, Thailand and the Japanese Presence, 1941-45, 1977. 142pp. S$13.00 (Out of print)

7

Nguyen The Anh, The Withering Days of the Nguyen Dynasty, 1978. 33pp. S$4.00

8

M. Rajaretnam, Thailand's Kra Canal: (Out of print)

9

R.O. Whyte and Pauline Whyte, Rural Asian Women: Environment, 1978. 34pp. S$4.00

10

Ismail Kassim, The Politics of Accommodation: Malaysian General Election, 1978. llOpp.

11

Leo Suryadinata, The "Overseas Chinese" in Southeast Asia and China's Foreign Policy: An Interpretative Essay, 1978. 45pp. S$5.00 (Out of print)

12

Y. Mansoor Marican, Publ£c Personnel Administration zn Malaysia, 1979. 21pp. S$4.00

13

Norbert Hofmann, A Survey of Tourism in West Malaysia and Some SocioEconomic Implications, 1979. 48pp. S$5.00

Some Issues, 1978.

36pp.

82pp.

S$5.00

A Source

S$8.00

Status and

An Analysis of the 1978 S$11.00 (Out of print)

14

B.A. Hamzah, Oil and Economic Issues in Brunei, 1980.

15

Lee Yong Leng, The Razor's Edge: Boundaries and Boundary Disputes in Southeast Asia, 1980. 29pp. S$7.50

16

Anton van Naerssen, Location Factors and Linkages at the Industrial Estates of Malacca Town: Implications for a Regional Development Policy in Peninsular Malaysia, 1980. 31 pp. S$ 7.50

34pp.

S$7.50

Publications Review Committee Kernial S. Sandhu (Chairman) Sharon Siddique (Co-ordinator) Huynh Kim Khanh P. Lim Pui Huen Pradumna B. Rana Christine Tan (Secretary)

THE AUTHOR B.A. Hamzah, Ph.D., is currently Lecturer in the School of Comparative Social Sciences, Universiti Sains Malaysia, Penang, West Malaysia. He obtained his doctorate from The Fletcher School of Law and Diplomacy, Tufts University, U.S.A. A Research Fellow at the Institute of Southeast Asian Studies from May to June 1980, he is the author of "Political EConomy of Oil in Brunei," Asian Defense Journal (April/May 1980).