Published: July 21, 2008
Brunei Darussalam is located just off the island of Borneo in South East Asia. Situated between two Malaysian countries, Sabah and Sarawak (where Swinburne University International campus is located), Brunei has a population of 374,577 as of July 2007, the majority living near the capital city; Bandar Seri Begawan. The country has a strategic position only two-and-a-half hours by air from Singapore and Kuala Lumpur, Malaysia and eight hours from Melbourne, Australia. Per capita GDP was estimated by the Oxford Business Group (2007) to be $25,000 in 2006, making it the richest country in Borneo and the second richest in South-east Asia. The population enjoys high living standards without income tax. Bruneians also largely benefit from free medical care and education up to university level.
Tertiary level education is provided by the University of Brunei Darussalam, the number one university in Brunei, as well as other technical and vocational schools. The government provides scholarships to residents to undertake tertiary level studies abroad and these students are bonded to work with the government for an agreed period of time. After this they are free to stay with the government or join the private sector. Popular destinations for tertiary level education for Bruneians are the United Kingdom, Australia, Malaysia and Singapore.
The government of Brunei benefits from its highly literate, skilled and educated workforce, which is helping to develop a successful, knowledge-based economy. Since 2001, literacy levels in Brunei have significantly increased to approximately 92%.
This constitutional sultanate, with its renowned Sultan Sir Haji Hassanal Bolkiah, is famous for being a major exporter of oil and gas. Pumping 220,000 barrels of oil a day, exporting 90% and accounting for excess of 95% of the government’s revenue, Brunei is known as the Kuwait of the East. The country’s oil and gas export partners are Japan (30.5%), Indonesia (19.9%), South Korea (14.9%), Australia (11.5%) and United States (7.7%) (Central Intelligence Agency, 2008). Predictions of fast depletion of oil and gas supply have been the reason for the nation’s diversification planning, especially the upgrade of its financial and banking sector. Brunei Darussalam is marketing itself as an Islamic financial hub as well as an offshore financial centre to realise this diversification approach. [[[PAGE]]]
The Brunei Economic Development Board (BEDB) was set up in 2001 to generate this two-fold strategy and to stimulate growth, expansion and development of the economy by promoting Brunei as an investment destination. Through this vision, Brunei Darussalam is confident that it can uphold its position without depending on its oil and gas industry. According to Alderman John Stuttard, Lord Mayor of London in 2006-07, “Brunei is a cohesive society that makes changes easily and fluidly and it is ideally placed to develop financial services”.
Making Brunei Darussalam the next leading location for treasury centres (TCs) is a strategy which is already in progress.
As part of this diversification strategy the Investment Incentives Order of 2001 allows start-up businesses in Brunei to benefit from tax exemptions and other ongoing incentives.
After the 1997-1998 Asian financial crisis, Asian economies have rebounded and gone from strength to strength :”Asia Pacific has foreign exchange reserves in excess of USD2.5 trillion and is becoming and engine growth in its own right” (Wong, 2007). More and more multinational corporations (MNCs) are either setting up new Asia-Pacific treasury operations or setting up new ones.at both regional and local levels. This creates a huge opportunity for Brunei Darussalam. With other ASEAN countries only two hours away from the capital city, it is easy to gain access to one of the biggest markets in Asia..
Making Brunei Darussalam the next leading location for treasury centres (TCs) is a strategy which is already in progress. Its financial regulations must be further improved to be attractive to MNCs and treasurers. This was demonstrated when China made substantial changes to its financial infrastructure and as a result received huge amounts of foreign direct investments (FDIs) into the country, to a total of $30.5bn by the end of April 2003.. In 2006, China opened its banking industry entirely for foreign banks to trade in local currencies.
What sort of financial regime/regulation reforms are necessary in order to draw treasury centres into Brunei? What exactly is a treasury centre and how does it work? What are the different organisational structures? What makes a financial regime favourable to MNCs and treasurers?
Simkova, 2005 (cited in Polak et al. 2007) establishes the key factors that need to be considered in setting up an international treasury centre for a holding company in Czech Republic. This suggests that international treasury centres nowadays largely involve the function of cash pooling across country borders. The difference between international and regional cash pooling lies in the exchange rules and rules for payment relations. While ‘regional’ TCs operate in the same region as the regional operations, ‘international’ TCs are situated in a different country where there is no base of operation. Before establishing the factors to consider in setting up treasury centres, it is crucial to define a treasury centre, its functions and organisational structures to figure out ways in which external adjustments can be done to fit this form of corporate into a location either regionally or internationally.
Giegerich et al. (2002) defines TC as a “centralized treasury management function which is legally structured as a separated group or as a branch and is normally located in a tax efficient environment”. Tax ‘efficient‘ basically means that the location offers low percentage tax incurred by MNCs. This is one of the many financial regulations that need to be assessed in Brunei to see how competitive it is with other countries. Blair (1999) reaffirms the importance of tax system: when Nokia faced the apparent need to be close to its international operation in Singapore, it considered setting up treasury centres in Singapore, Hong Kong, Malaysia and Australia. And due to unattractive tax systems offered by Hong Kong, Malaysia and Australia, Singapore was chosen. Murphy (2000a) points out further that the location of RTCs or ITCs is primarily tax driven where tax on profits generated is at a favourable rate.
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The functions of a treasury centre as defined by Potty et al. (2004) are three-fold: asset liability management, sales and trading, and risk management. Fundamentally, TCs provide financial management and transaction services for the other group entities (Geigerich, 2002).
The organisation depends on the extent of treasury functions and management the treasurer may choose. The treasurer may choose to manage practical treasury functions such as liquidity support or simply direct the full range of functions to make treasury the main body of the organisational process. The treasurer may see the necessity of outsourcing some of the functions or promote these functions in-house.
Murphy (2000a) simplifies this and says that TC organisation structure is where there is a treasury group, e.g. in US headquarters, with one or more RTCs under its control. RTCs provide services under the group policy to the group entities located in their region.
The swift expansion of internationalisation operations, together with increasing volatility of financial markets and increasing standardisation of international payments presents challenges for corporate treasury (Giegerich, 2002). Potty et al. suggested four models: Full Service Global, Full Service Local, Limited Service Global and Limited Service Local. Selecting the right model is crucial for MNCs to efficiently and effectively benefit from rapid changing global financial environment.
One of the main factors that is of key importance when considering the location of TCs is the tax system or regime of the location. Simkova (2005) (Polak et al. 2007) suggests a few important criteria to assess when locating a treasury centre for a holding company (CGS) in the Czech Republic: bank transaction fees (minimum), prices for foreign incoming and outgoing payments (minimum), withholding and corporate tax (minimum), withholding tax for intra-group yield (minimum), reporting requirements (minimum), rating (as good as possible), currency environment and existence of other TCs in the region. The evaluation of workforce availability is also important because TCs require skilled employees.
Different financial regulations provided by different locations will suit differently structured TCs. What type/s of TC structure would be suitable in Brunei?
A main factor when considering the location of TCs is the tax system or regime of the location.
Murphy (2000b) examined the non-tax factors/criteria involved. These include cost (people, premises, IT and telecoms), outsourced option availability, location of other operations, centres of expertise (high quality treasury expertise), Control (Directors, CEOs and CFOs are taking direct interest in control of treasury activities), currency control of the euro, banking systems and regulation (availability of modern banking and strong regulation), language (English - prominent financial language) and name-recognition (region well known for setting up TCs).
MNCs embarking on setting up RTCs in Asia tend to have Singapore and Hong Kong at the top of their lists of locations. Levieux (2007) says that this is due to “their roles as International financial centres, solid telecommunications and transport infrastructures, easy availability of qualified staff, loose foreign exchange controls and their benign tax environments”. Lee Chuan Teck, Executive Director, Financial Markets Strategy of Monetary Authority of Singapore, said in 2007 that “we monitor these trends (MNCs setting up operations in Singapore) closely; constantly reviewing our policies and refining our tax regime, to maintain our status as the location of choice for regional corporate treasuries”. New rules were introduced in Thailand so that MNCs could set up TCs there. Necessary changes to financial and banking regulation needs to be done to first draw corporate TCs into the country; regular monitoring for updates by the right authorities to maintain beneficial operation of these TCs is also compulsory for the long term.
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Brunei Darussalam’s future plan is to become an off-shore financial centre led by the newly established Brunei International Financial Centre (BIFC). Getting foreign companies (MNCs) to invest in Brunei has had slow growth for the past decade. This has put pressure on diversification strategy to move away from total dependence on income from its natural resource production. To resolve this issue, developing Brunei’s financial and banking sector may bring in foreign investors as a form of diversification to Brunei economy development. Looking at other countries and how they have developed their financial and banking sector will assist in solving this issue.
Singapore is south east Asia’s International Financial centre number one, followed by Hong Kong. These are MNCs’ favourite countries in which to base their Asian operations. The success of Singapore financial and banking sector is phenomenal and has attracted 3,600 companies to set up operations there. Not only are MNCs basing their Asian operations in Singapore, treasury centres are establishing themselves there privately and brought in treasury activities worth US$204bn to Singapore’s treasury market in 2004.
Brunei’s strategic location is excellent for TCs. With a currency exchange on par with Singapore, roughly BND$1.26 to AUD$1 and BND$1.352 to USD$1, and a fairly high standard of living, the Brunei dollar is quite strong. TCs have to do much transferring of funds and the lack of foreign currency control in Brunei might seem to make it an ideal location for any type of TCs. But this is not the case.
Watanabe (1998) made recommendations of the necessary tax changes to Taiwan to enable Taiwan to compete with Singapore and Hong Kong to become a Regional Finance and Operations Centre. Comparing Taiwan with other OECD countries, Taiwan’s tax system was outdated and inadequate. This study compares Brunei Darussalam’s financial activities and performance including regulations with those of its main competitors Singapore and Malaysia. Much of the work done on locating TCs in Asia has pointed to Singapore and Hong Kong followed by Malaysia and Australia (Blair, 1999). Brunei Darussalam has the capabilities of hosting TCs but this is not the current issue.
Brunei's strategic location is excellent for TCs.
What is needed now is to examine the treasury activities of Singapore and Malaysia and to see the differences in their financial regulations, and how much have these differences contributed to its treasury performance. With this, a further comparison to Brunei’s current treasury activities and financial regulations will hopefully show what Brunei has been doing in this department and why the country is not receiving as much attention from MNCs from all over the world. With this, recommendations to changes that need to be done to Brunei following the success of other countries (Singapore and Malaysia) in attracting MNCs to set up TCs in their region will be made. These changes will be in the form of financial regulation reforms, such as those taxation reforms that have been recommended in Taiwan to compete with their closest rivals - again, Singapore and Hong Kong. Brunei already has the strategic location, unrivalled political and economic stability, comprehensive and up-to-date legislation, strong regulatory and supervisory frameworks, low costs for business operation, presence of liquidity, time-zone convergence, advanced physical infrastructures, diverse domestic support service, excellent international education and health facilities, and well-educated labour force. Further reform of the financial and banking regulations will certainly make Brunei the next leading location for treasury centres.
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