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How to say no to a sultan, Brunei and its leader try economic discipline

New York Times - March 6, 2001

Wayne Arnold, Bandar Seri Begawan, Brunei There is probably no better vantage point on the changes creeping across this oil-drenched sultanate than astride one of the sleek, powerful horses at the Jerudong Park Polo Club.

Not long ago, the club's 200 imported Argentine ponies, immaculate fields and opulent clubhouse were restricted to family and guests of Sultan Hassanal Bolkiah. Now, in what this country has declared Visit Brunei Year, anyone can ride for as little as $20.

The open-stable policy, though, is far more than equestrian outreach. The club was built in a decade of royal extravagance that, coupled with the Asian financial crisis in 1997 and 1998, devastated Brunei's wealth and helped push its economy into a recession from which it has yet to fully recover.

In response, Brunei's multibillionaire monarch has assumed the unlikely role of economic disciplinarian, trying to drag his sleepy, conservative Muslim enclave into the global economy. Selling pony rides is part of a larger effort to refill the coffers, lure tourists and investors, and wean Brunei from a long overdependence on oil and government money.

"We have to be more competitive," said Wahab Juned, director general of the Economic Council Secretariat, whose 12 members were appointed by the sultan to draft an economic blueprint. "We need to create jobs."

Skepticism over Brunei's efforts abounds. Brunei has been vowing to diversify its economy since the mid-1980's, but reductions in the dominance of oil have been achieved largely by raising government outlays. Surging oil prices have taken some of the urgency out of the reform drive. But while the sultan's planners have honed their free-market vocabulary, few are willing to discuss how economic liberalization might reduce the dominance of a man most will refer to only as "His Majesty."

"What Brunei needs now is transparency and accountability in the government," said Hatta Zainal Abidin, president of the Solidarity National Party, the country's only legal political opposition group.

The sultan's family has been ruling this part of Borneo for six centuries, gradually ceding territory to what is now Malaysia to the point that modern Brunei's roughly 300,000 people live in an area the size of Delaware. Brunei is so small that it has no central bank, instead pegging its currency to Singapore's. The capital remains a quaint backwater, where most women cover their heads, buildings rise no higher than the central mosque and alcohol is banned.

The discovery of oil here in 1929 clinched Brunei's fortune and has made the sultan, 54, one of the world's wealthiest individuals, with a net worth estimated at $16 billion. His spending is legendary: he has two palaces, one for each wife, the largest a $350 million, 1,788-room building bigger than the Vatican. He paid $53 million in 1985 for London's Dorchester Hotel, then two years later spent an estimated $185 million to buy the Beverly Hills Hotel.

Since the sultan is the absolute ruler, his wealth and the nation's are indistinguishable, even though Brunei is technically a constitutional monarchy. The constitution and legislature have been suspended since an abortive rebellion in 1962. The dearth of elected officials keeps the sultan busy: he is the self-appointed prime minister, finance minister, defense minister, police superintendent and chancellor of the national university.

Autocracy has been good to Bruneians. They pay no income tax. Education and health care are virtually free. And despite its generosity, Brunei's government has no debt.

Brunei is no Kuwait, however. There are no flashy boutiques lining the streets of the capital, Bandar Seri Begawan; Mercedes do not clog the parking lots. On paper, Brunei's average personal income is on a par with Canada's, but it is anyone's guess what the average income is if the royal family is excluded.

The 207,000 barrels of oil Brunei produces every day still account for roughly 40 percent of its economy and almost 90 percent of its exports. Oil is the private sector's biggest customer and the government's chief source of revenue. Yet Brunei Shell Petroleum, the government's joint venture with the Royal Dutch/Shell Group and the dominant oil producer, hires only about 2,800 Bruneians.

As a result, nearly half the population works for the government, a situation that authorities long ago realized was unsustainable. But it took the country's previous finance minister, the sultan's famously flamboyant playboy brother Prince Jefri, to drive the point home. Prince Jefri was in charge of the super-secret Brunei Investment Agency, or B.I.A., which invests the nation's oil wealth, and of Brunei's largest private company, Amedeo Development. Amedeo poured state money into building projects power stations, street lights and the country's cellular phone network helping to halve oil's role in the economy. Amedeo built the playground at Jerudong, including the polo club, a country club, an amusement park and a $1 billion, 600-room hotel with real gold leaf on the walls, a saltwater lagoon and its own golf course designed by Jack Nicklaus.

It all began to unravel in 1997 with a mysterious rift between the brothers. In February, the sultan took over as finance minister. The next month, a former Miss USA and six other American women sued the two in an American court, accusing them of trying to turn them into sex slaves. The sultan denied the charges, and the case was dismissed on the grounds that the men had diplomatic immunity.

The suit was followed by a conservative crackdown in Brunei against un-Islamic practices.

In July 1998, the sultan fired Prince Jefri from the B.I.A. and Amedeo. Auditors went in to find Amedeo teetering under $6 billion in debts and $16 billion in losses. Worse, some Amedeo projects appear to have been financed or backed with B.I.A. funds. Last year, the sultan sued the prince to recover $15 billion he said had been misappropriated. The prince denied the charges.

Before the court could force the prince to shed light on the inner workings of the B.I.A., he and the sultan settled, with the prince agreeing to relinquish his assets in return for a $300,000-a-month allowance.

Outside the Jerudong amusement park, some of the prince's 2,000 cars can still be seen parked behind "For Sale" signs. The Jerudong facilities were put under private management, with the sultan handing over all but 93 of his ponies to an Indonesian company as part of the new equestrian center.

Cleaning up the Amedeo mess was devastating to the economy. Not only did it mean pulling the plug on the nation's biggest private-sector investor, but it forced the sultan to halve government expenditures.

Combined with slower oil exports, Brunei's economy shrank 4 percent in 1998. Rising oil prices have since pulled part of the economy back, but the nonoil economy remains in recession, and incomes and opportunities for new job seekers are falling.

Government officials say they hope the embarrassing financial fiasco will jolt the country from complacency. "It's a blessing in disguise," Mr. Wahab, of the Economic Council Secretariat, said. "These things have opened up our eyes."

The sultan established the council in 1998, and last year it evolved into a 12-member secretariat charged with devising a more balanced economic diet. The secretariat's solution is to cut government spending and subsidies, privatize government-run companies and find new sources of cash even by issuing Brunei's first government bonds. At the same time, the secretariat hopes to stimulate the private sector by promoting Brunei as a financial center, tourist destination and high-technology center.

There are formidable obstacles, the first being that half the nation's work force is happy working for the government. Government salaries exceed most private-sector wages, according to Rosni Tungkat, director of the finance ministry's department of economic planning and development. And while government employees get low-interest loans to buy a car and a house, private-sector employees live with the risk of losing their jobs in a country with no unemployment insurance.

Despite having such a vast policy machine, Brunei's progress is hampered by one major bottleneck, critics say. "At the end of the day, the sultan appears to be the one who makes the decision on every economic matter," said one economist, who, like almost everyone working in Brunei, insisted on anonymity. Government planners, he said, "have this way of thinking very big and doing very little."

Few policy planners even know just what resources are available. The B.I.A. discloses nothing; even talking about its investments is forbidden by law. "I myself don't know how much we have or how much we have earned," Ms. Rosni said.

Gradually, progress is being made. The government has frozen hiring and replaced its pension plan with a national fund that applies to nongovernment workers as well, all to encourage more civil servants to take the plunge to the private market.

It recently opened the country's first toll road. There is even talk of charging for health care and education and instituting an income tax.

Also in the works is a local stock market, where the government plans to sell to private investors a bevy of state-owned agencies, from the national telephone operator to the airport. The secretariat is also considering the creation of a national oil company to explore for oil and refine it independently of Shell. Last month, the government inaugurated a program with several banks to provide low-interest loans to local entrepreneurs.

"This is what we've been waiting for," said Abas Mohamed, deputy president of the National Chamber of Commerce and founder of a Web design company. "It will take another couple of years, but the entrepreneurs in Brunei will be stronger."

The Ministry of Industry and Primary Resources, meanwhile, is struggling to lure foreign investment in everything from shrimp and poultry farms to dot-coms and pharmaceutical research, according to Matdanan Jaafar, director of the ministry's planning and industrial promotion department.

Mr. Matdanan acknowledges that interest has been low so far. "Our incentives are not up to date," he said. "And we also have a long approval process." To increase Brunei's allure, he said, the government is considering doubling its corporate-tax exemption for foreign investors to 10 years.

Mr. Matdanan says Brunei has a better chance promoting itself as an exotic destination for tourists visiting the rain forests of Borneo. Travel agents are less sanguine. While Brunei's ban on liquor is no deterrent, Marcel Boeni, a visiting Swiss agent, said its high prices and small size make it a poor alternative to neighboring Malaysia.

And while Jerudong's attractions are high on the list of potential draws, they are not likely to bring crowds, Mr. Boeni said. After all, he asked, "Who rides a plane 17 hours to learn how to ride a horse?"

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