BRUNEI SEEKS U.S. CAPACITY BUILDING SUPPORT IN ECONOMIC

UNCLAS SECTION 01 OF 05 BANDAR SERI BEGAWAN 000165

SIPDIS

SIPDIS
SENSITIVE

DEPARTMENT FOR EAP/MTS
DEPARTMENT PASS TO USTR FOR WEISEL AND KATZ
SINGAPORE FOR FCS AND FAS:KONG
KUALA LUMPUR FOR FAS:GRESSEL

E.O. 12958: N/A
TAGS: ETRD SENV PREL BX
SUBJECT: BRUNEI SEEKS U.S. CAPACITY BUILDING SUPPORT IN ECONOMIC
DIVERSIFICATION DRIVE

Ref: (A) Friedman-Forsyth e-mail 5/8 (B) STATE 57266 (C) 06 Bandar
Seri Begawan 12 (D) Bandar Seri Begawan 50

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SUMMARY
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1. (SBU) Assistant U.S. Trade Representative Barbara Weisel and Lim
Jock Hoi, Permanent Secretary at the Ministry of Foreign Affairs and
Trade, led their respective delegations for the third meeting of the
U.S.-Brunei Trade and Investment Council (TIC) under the U.S.-Brunei
Trade and Investment Framework Agreement (TIFA) on May 7. Brunei
focused this third TIC meeting on seeking U.S. support for its
efforts to diversify its economy away from heavy dependence on oil
and gas exports. The GoB sought U.S. training and technical
assistance on areas ranging from accounting for trade in services
and investment flows, standards conformance and regulation drafting,
Customs IPR enforcement, as well as assistance in attracting U.S.
investment in Brunei. To encourage bilateral investment, the GoB
suggested launching talks toward a double taxation treaty.


2. (SBU) AUSTR Weisel urged the GoB to strengthen IPR protections
and make government decision-making more efficient and transparent
as critical to attracting FDI as well as addressing international
concerns from the WTO Trade Policy Review. She urged the GoB to
seek to harmonize halal food regulations with other producers to
enhance trade in these products and offered technical assistance on
managing Brunei's growing aquaculture sector to help exporters meet
U.S. health regulations. She also noted a number of trade capacity
building programs under the U.S.-ASEAN TIFA which would start once
ASEAN has completed its needs assessment and the two sides have
agreed on next steps. END SUMMARY.

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Strong but Imbalanced Trade
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3. (U) At the start of the third Trade and Investment Council (TIC)
meeting, held May 7 in Bandar Seri Begawan, Brunei shared national
statistical data on bilateral trade (ref A) broken down by sector
over the last five years which showed total exports by Brunei to the
U.S. at BD 815 million and total imports from the U.S. at BD 240
million. (Average exchange rate for 2006 was USD 1 = BD 1.55)
AUSTR Barbara Weisel noted that U.S. statistics show a comparable
level of imports from Brunei (USD 550m) but a significantly lower
level of exports to Brunei (USD 48m). Permanent Secretary for
International Trade at the Ministry of Foreign Affairs and Trade Lim
Jock Hoi attributed the larger Brunei figure for imports from the
U.S. to Brunei statistical methodologies which count imports by
country of origin. Many U.S. products are shipped to Brunei via
distributors in Singapore and Hong Kong. These imports may not show
in U.S. statistics by their final destination of Brunei.


4. (SBU) Lim noted that ASEAN statistical capabilities in measuring
intra-ASEAN trade in services and investment flows were weak and
that ASEAN as a group sought assistance from its dialogue partners
in building capacity. As over fifty percent of Brunei's GDP is
services, Lim stated that improving the government's capacity to
measure these flows would help Brunei make a better case for
attracting foreign direct investment in the service sector.

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Economic Diversification - Phasing Out of Textiles
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5. (SBU) Lim reported that Brunei exported BD 251m in textiles in
2006, under half Brunei's peak year of 2004. With the looming end
to the China safeguard textile quotas, Brunei no longer encourages
development of textile export capacity. Existing producers that
have not closed shops are welcome to continue to operate in Brunei,
but the GoB is encouraging these producers to find niche
opportunities instead of competing directly with lower cost
factories in Vietnam or China. The GoB expects that textile exports
will be depressed further once the U.S. completes an FTA with
Malaysia, and the industry may phase out completely in three years.

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And Not Many Other Non-energy Options
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6. (SBU) Representatives from the Brunei Economic Development Board
(BEDB) and the Ministry of Industry and Primary Resources (MIPR)
briefed on efforts by the GoB to diversify the economy away from oil
and gas and attract FDI in new sectors. Projects for downstream use

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of Brunei's natural gas are the furthest along. The industrial park
at Sungai Liang is now being cleared for development and a Japanese
firm (Mitsubishi) has signed a series of agreements to develop a
methanol plant reliant on Brunei's natural gas as feed stock.
Construction is expected to start this year and the plant would be
operational in 18 months. An Australian firm is considering a deal
to build a urea - ammonium nitrate plant, also using natural gas
feed stock, at the Sungai Liang park. A Malaysian firm is
considering developing a biodiesel plant at the park to be fueled
with palm oil imported from the region. The GoB has created a
special purpose investment authority to speed licensing of Sungai
Liang projects, including hoped-for spin offs in manufacturing and
services.


7. (SBU) Alcoa has an exclusive agreement to build an aluminum
smelter at the proposed Pulau Muara Besar island industrial park,
but BEDB reps indicated this deal is further away from being
realized. The GoB plans to attract development on the companion
mega-port and export processing zone project on the island by
funding 70 percent of the development costs - dredging, land fill,
link-bridge to the mainland - and grant foreign investors full
control over operations of the port.

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Islamic Banking, the Next Big Thing
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8. (U) To complement the energy downstream diversification
initiatives, the BEDB is also seeking to promote development of four
key industrial clusters: Business services (including information
technology),Financial services (with a focus on Islamic Banking),
transportation and logistics, and tourism.


9. (SBU) Lim commented that Islamic Banking and Asset Management
were logical niches for Brunei to develop as a complement to
Singapore as the region's banking hub. The GoB was seeking to
attract major investment banks to open operations and was currently
in discussions with Merrill Lynch. The GoB believes it has a good
law in place and is consulting annually with the IMF and World Bank.
Weisel cautioned that Brunei was not the only country or first to
seek to develop Islamic Banking. She noted that the U.S. Treasury
had worked with some other countries to address issues related to
establishing Islamic financial services in the U.S.

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Limited Coordination on Industrial Development
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10. (SBU) Lim said that the Sungai Liang Authority was an attempt by
the GoB to develop a 'single window' concept to facilitate foreign
direct investment on the Bahrain model. Eventually, permit
applications would be taken and responded to on-line. Electronic
payment would also be developed, but slow progress on key
e-government infrastructure efforts would delay implementation.
However, in reviewing the multiple agencies that are supposed to
encourage FDI - BEDB for big multinational projects and their
spin-offs, MIPR for SMEs, agriculture, and tourism - GoB officials
acknowledged that key issues such as site approvals and investment
incentive authorizations are decided by duplicative committees.
Notwithstanding the Sultan's instruction to his government to give
"good and fast decisions" on investment projects, administrative
approvals can easily get bogged down in a murky bureaucratic process
for gaining an overall "Go - No Go" decision from the GoB. Noting
intense regional competition for investment, Weisel urged that the
GoB work simultaneously on getting its house in order while also
getting a coherent message out that Brunei was open for investment.

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Aquaculture
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11. (U) MIPR Fisheries Department officials briefed on the progress
made toward developing a shrimp aquaculture industry with the
support of a U.S. consulting firm. Under this three year program,
Brunei aims to develop a premium large shrimp targeted for the U.S.
market. MIPR is also looking at developing off-shore, cage-based
fish farms using U.S. technology. USTR conveyed an offer to conduct
a one-week seminar by US FDA officials for regulators and industry
on how to manage aquaculture programs. The GoB would need to bear
the cost of this training program. MIPR officials welcomed the
offer as a logical follow up to previous assistance from USG
officials and would respond following further internal
consultations.


BANDAR SER 00000165 003 OF 005


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Cautious on Privatization
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12. (SBU) Ministry of Development representatives said the GoB would
look to the Singapore model and proceed deliberately on privatizing
state-owned enterprises. To date, only one firm had been
corporatized - the telecom service provider TelBru - and operation
of the Muara Container Port had been outsourced via concession. The
GoB is developing a master plan and no further action on
privatizations would be taken until the plan was completed.

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Bilateral Tax Treaty Proposed
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13. (SBU) The GoB (led by Ministry of Finance) proposed exploring
the options for a bilateral double taxation treaty and said Brunei
had a model treaty to share. Lim noted that Brunei saw such
agreements as important to attracting FDI, and Brunei currently had
treaties with China and some European countries and was negotiating
with Japan. Weisel said that this idea had not yet been discussed
in Washington, but offered to provide a copy of the model agreement
the Treasury Department uses.

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Agriculture Trade
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14. (SBU) USTR raised U.S. concerns that onerous certification
requirements limited U.S. firms' access to both the halal food
market and agricultural product markets more broadly in Brunei.
Weisel urged that the GoB adopt science-based policies for ensuring
food safety concerns are addressed efficiently and transparently.
Officials from the Ministry of Religious Affairs (MRA) and Ministry
of Industry and Primary Resources (MIPR) briefed on Brunei's halal
and food safety standards, noting that safety inspection
requirements were simpler than the USG's previous understandings.
Once a manufacturer had certified an initial shipment, subsequent
shipments could be certified without a formal inspection and product
testing. On fresh produce, if the exporting country gives a
phytosanitary certificate, the Ministry of Agriculture only requires
random sampling and not checks on every shipment.


15. (SBU) On halal, the GoB was in the process of implementing new
laws which would require stringent inspection of food products to
receive the right to carry a Brunei Halal logo. New requirements
include testing of processed foods at Brunei's labs. Noting that
Brunei will lack sufficient lab capacity during an interim period,
the GoB was concluding MoUs with organizations in Malaysia,
Indonesia, and Singapore, to facilitate halal imports during the
transition. Any product with a country of origin halal
certification can still be imported under the new rules, but
importers bear the burden of proving the halal-ness of the content.
MRA and MIPR officials said that Brunei's strict observance of halal
has created an opportunity to develop a Brunei Premium Halal brand
which they hope to launch formally in August at the International
Halal Products Expo. Brunei was working with Australia and Malaysia
and would work with other interested nations, including the U.S., to
certify products as Brunei Premium Halal. Weisel urged that Brunei
work with the U.S. and other halal food producing nations to develop
a global halal certification. MRA officials responded that no
change was currently envisioned in the rules governing meat products
that would allow non-Brunei organizations to certify a product was
Brunei halal without the currently required presence of two MRA
officers supervising the entire process from slaughter to butchering
to final packaging and sealing in shipping containers.


16. (U) USTR followed up on ref B demarche request encouraging the
GoB to participate in the pilot tropical fruit irradiation program,
noting that Brunei fresh fruit not covered by the initial pilot
could potentially be added in the future. GoB said it would study
the proposal and reply. (Note: DCM had delivered ref B demarche
prior to the TIC meeting, but the GoB had not yet responded.)

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WTO Review - Transparency Key
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17. (SBU) In response to USTR questions about Brunei's preparations
for the WTO review, Lim said that the GoB was working hard to update
key laws governing foreign investment to make them more transparent
and speed up decision-making in time for the February trade policy
review (TPR). He said the creation of the Sungai Liang Authority

BANDAR SER 00000165 004 OF 005


was an attempt in part to address both issues. Lim added that
Brunei wanted to get a World Bank review on the record to establish
a reference point from which the GoB could compare itself to its
competitors and focus efforts on problem areas. Weisel urged that
the GoB be proactive in communicating to other governments its
efforts to address transparency issues in advance of the TPR.

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Request for Standards Training
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18. (SBU) Officials from MIPR and the Ministry of Development asked
for U.S. capacity-building assistance in standards and conformance
in technical regulations. Areas proposed for bringing U.S. speakers
or trainers included:

- international construction codes,
- risk assessment as part of good regulatory practices,
- standard templates / formats for trade regulations,
- market surveillance,
- product liability,
- participation in standards developing committees,
- ISO 22000 - Food management systems, and
- ISO 27001 - Information security management systems.

USTR responded that some of the areas suggested are in the US-ASEAN
TIFA scope of work and suggested that the GoB follow up with a list
of specific areas of interest for USTR to work with other USG
agencies to identify appropriate technical training opportunities.

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ASEAN Single Window
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19. (SBU) Brunei briefed on the plans to develop the National Single
Window in line with the ASEAN Single Window initiative. ASEAN Single
Window operates on two tracks, with the ASEAN-6 aiming for
completion in 2008 and CLMV joining by 2012. The GoB welcomed U.S
offers of assistance through the ASEAN-US Technical Assistance and
Training Facility (TATF) based in the ASEAN Secretariat. The GoB
believes it has an advantage of not yet having a Single Window and
is looking at Singapore and Malaysia for best practices to implement
the ASW template. USTR responded that we are waiting for ASEAN to
complete its gap analysis to identify what is most needed,
emphasizing that the Single Window is a top priority for creating a
single market in ASEAN.

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IPR Enforcement Still Lagging
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20. (SBU) GoB Attorney General's Chambers and Police representatives
briefed on efforts to strengthen IPR protections and enforcement
capacity. New legislation under development would give police
customs-like warrant-less search "ex-officio" authority and stiffen
IPR violation penalties. Brunei Customs representatives welcomed
past DHS-provided training and requested additional training in
identifying counterfeit and IPR-infringing goods. For the
foreseeable future, however, Brunei's IPR enforcement will still be
complaints-based. Brunei police noted previous efforts to work with
the U.S. MPA, but the MPA's failure to follow Brunei's specific
procedural requirements were a primary reason for the failure of an
attempted anti-piracy raid (ref C).


21. (SBU) Weisel replied that IPR enforcement is one of the single
most important issues to generating U.S. investment in Brunei. She
urged that Brunei develop a national plan to address legal gaps in
improve enforcement, including giving police ex-officio seizure and
arrest authority for IPR violations. She said the U.S. has an
officer assigned to the U.S. Embassy in Bangkok with regional IPR
responsibilities who may be available to visit Brunei to look at
Brunei's legal and capacity-building issues. Lim responded that the
GoB would likely seek Customs capacity building assistance.

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US TPA and FTAs
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22. (SBU) AUSTR Weisel briefed on efforts by the USG to gain a
renewal of trade promotion authority (TPA) in Congress. USTR's
priority was to secure ratification of the four completed bilateral
FTAs (Panama, Peru, Colombia, and Korea) and then work with Congress
for renewed broad TPA for the Doha Round and other future FTAs,
including with Malaysia. Weisel commented that the Malaysia FTA

BANDAR SER 00000165 005 OF 005


negotiations were making good progress.

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P4 as Template for FTAAP
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23. (SBU) Lim briefed on Brunei's experience since joining the P-4
Free Trade Agreement with Singapore, New Zealand and Chile (see also
ref D),noting its suitability as a template for a Free Trade Area
of the Asia-Pacific (FTAAP). Although chapters on services and
investment are not complete, negotiations will continue on the
margins of the upcoming APEC meeting in Cairns, Australia. Brunei
wants to attract other members, with Canada, Malaysia, Hong Kong,
Peru and Australia top prospects (discussions with Thailand are on
hold) Were Canada and Hong Kong to join, Lim argued, it would aid
the APEC FTAAP process giving the larger group a high quality
agreement with an open accession process. Lim noted that Peru's
accession would be complicated by it's FTA with the U.S. Weisel
suggested that Cairns would be a good venue to have a further
discussion on the P4 and FTAAP.


24. (SBU) In other FTA negotiations, Lim said that Brunei would sign
a comprehensive bilateral Economic Partnership Agreement with Japan
in June which would cover services, investment, energy, and the
business environment. The ASEAN-Japan FTA was much less ambitious
and would likely be completed by November but not be ready for
signing. ASEAN FTAs with Australia and New Zealand were progressing
well, but would not be finished until next year. Environmental
issues were under discussion but not government procurement. The
ASEAN FTA talks with China were focused only on goods and investment
issues were much more problematic, and as a result, this agreement
was shaping up to be "not a high quality agreement."

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Welcome U.S. Environmental Initiatives
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25. (U) Lim welcomed U.S. environmental initiatives in the region,
including the illegal timber trade initiative with Indonesia, noting
that Singapore and Malaysia had just signed their own similar
agreement. Lim highlighted that demand for illegal timber must be
cut off to get logging under control. He added that Brunei saw the
Heart of Borneo (HoB) initiative as a watershed effort to work with
Malaysia and Indonesia on sustainable development and address the
persistent problem of trans-boundary haze.


26. (U) MIPR provided a current map of the boundaries under
discussion for the 220,000 sq.km or 1/3 of the island of Borneo
covered by the HoB initiative. Brunei proposed working boundaries
for the HOB include 58% of Brunei's territory, which is about 0.6%
of the HoB. The HoB includes 53% of Malaysian Borneo and 57%
Indonesian Borneo. The GoB informed that the three countries are
studying a proposal to create a National Heritage Park within the
HoB, which could be announced during the upcoming BIMP-EAGA Summit.
Brunei welcomed U.S. support to international agencies working with
the three countries on the HoB. Lim suggested that the U.S. look at
supporting a biodiversity study center the GoB is developing in its
Tutong District in the HoB area. Ambassador Skodon noted that the
State Department is considering sponsoring a visit by forestry
officials from Brunei, Malaysia and Indonesia to the U.S. regarding
forest conservation efforts across state lines. The U.S suggested
that this could be a possible deliverable for the ASEAN-U.S. Summit.
Lim also shared that National Geographic would be filming for a
production on Brunei's unique rainforest assets and hoped that this
focus would increase awareness of ecotourism opportunities in
Brunei.


27. (U) USTR cleared on this message.

FRIEDMAN