C O N F I D E N T I A L SECTION 01 OF 03 BANDAR SERI BEGAWAN 000229

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/MTS AND EB/OMA

E.O. 12958: DECL: 07/31/2017
TAGS: EFIN ECON PGOV BX
SUBJECT: BRUNEI TO REVIEW SOVEREIGN WEALTH FUND MANAGEMENT
POLICY


Classified By: DCM Justin Friedman, reasons 1.4 (b) & (d)

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SUMMARY
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1. (C) The visit of U.S. Treasury experts to initiate a
dialogue on sovereign wealth fund management practices
succeeded in raising the issue at senior levels of the GoB.
Brunei sees itself as a small player in global wealth
management. The Brunei Investment Agency declined to
disclose details to us of how much and how it manages the
GoB's foreign investments, but asserted that it adhered to
industry standard practices. High oil prices have made the
GoB flush with cash and Brunei's foreign holdings are likely
to continue to increase. A dialogue based on IMF backed best
practices is the most likely way to bring more transparency
to GoB's sovereign wealth fund management. END SUMMARY.

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Smaller but Experienced Sovereign Wealth Fund
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2. (C) U.S. Treasury's Robert Kaproth, Director of the Office
for International Monetary Policy, and Benjamin Cushman,
International Economist in the Office of Asian Nations,
visited Brunei July 19 to initiate a dialogue with the GoB on
sovereign wealth fund (SWF) management. Together with the
DCM, they briefed senior officials at the Ministry of
Finance, the Currency Board, the Brunei Investment Agency
(BIA), and prominent local banking and accounting officials
on the U.S. interest in working with our partners to develop
a better understanding of the role of SWFs in the global
economy. Dato Hj Ali Apong, Permanent Secretary at the
Ministry of Finance and member of the Board of BIA, told the
visiting Treasury team that this visit had raised issues he
had not previously considered and that he would welcome
further dialogue and input from the IMF and World Bank on SWF
best practices. However, Ali noted, and in a separate
meeting, BIA acting Managing Director Pg Abdul Rahman Salleh
echoed, that BIA was too small to influence markets,
particularly when compared to larger and more experienced
SWFs.


3.

(SBU) By law, the Brunei Investment Agency's (BIA) primary
function is to hold and manage the GoB's external reserves.
All funds it manages come from the Ministry of Finance
(MinFin). Financial industry observers estimate the value of
BIA's holdings at approximately USD 30 billion, in the top
ten globally among sovereign wealth funds. The GoB -- and
more particularly, the royal family when now-exiled Prince
Jefri was Finance Minister and ran the family's and the GoB's
intermixed investments -- earned a reputation in the roaring
1990s for spendthrift excess and lax management of its
sovereign wealth funds. This mismanagement came to a halt
when Jefri ran afoul of his brother, Sultan Hassanal Bolkiah,
and the law with his mis-managed Amadeo Investment Company
which went bankrupt around the time that the Asian financial
crisis combined with low world oil prices left the GoB
relatively short of cash. One industry estimate is that
Brunei's overseas investments peaked at USD 100 billion in
the late 1990s.

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Internal Accountability over External Transparency
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4. (C) Dato Ali said that the "Prince Jefri" problem was
caused, in part, by the BIA board not exercising sufficient
oversight and attention to the SWF performance. As a result,
stronger internal audit and scrutiny by "other public organs"
were now standard practice. Both Ali and Rahman said that
accountability to the BIA Board of Directors, and by
inference, to the Sultan, were sufficient to ensure no repeat

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of the Amadeo problem. The GoB has also looked to Singapore,
Abu Dhabi, and Kuwait for models of how to run its SWF. BIA
regularly conducts internal audits to ensure internal
guidelines are adhered to and the guidelines themselves are
regularly reviewed. BIA employs a total of 204 staff from
fund managers to chauffers. Fund managers' performance is
tracked to industry benchmarks. By law, employee
compensation cannot be based on the performance of the assets
managed.


5. (C) Neither Ali nor BIA's Abdul Rahman saw a need to make
the GoB's and BIA's investment strategies and portfolios more
transparent to the public beyond existing disclosure rules in
the markets in which they invest. Abdul Rahman stated that
BIA operates in many ways like a "fund of funds," making
direct investments in companies and investing in managed
funds. The GoB structures its internally managed investments
with a focus on long term returns and follows the results of
leading fund managers to measure how its portfolio is
performing. Brunei's government secrecy laws forbid
disclosure of BIA's portfolio, so BIA officials could only
assure us that asset allocations were similar to peer
averages. Ali said that through BIA, the GoB has a sizeable
fixed income portfolio with relatively low returns. Other
assets include real estate, hedge funds, venture capital, and
some commodities. BIA officials declined to state the total
size of the assets under BIA management, but did not object
to the USD 30 billion estimate. Similarly, they did not
disclose their achieved rates of return, but did indicate
that they maintained a real return target for the aggregate
portfolio. Abdul Rahman said that internal guidelines
restrict the size of its investment in any one company -
including shares held through intermediary investment funds -
to five percent. BIA officials also said that they do not
exercise voting rights on portfolio equity shares held in
internally managed funds.

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Not All Eggs in BIA Basket
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6. (C) Possibly as a lesson learned from the Amadeo collapse,
the MinFin has placed some assets directly with other
managers. Pakistani national Saquib Mawar-Khan (protect),
Brunei director for Emerging Markets Partnership (EMP), told
us that the Ministry of Finance was a major investor in the
Washington, DC-based EMP's Islamic Development Fund. (Note:
asset allocation is available on EMP's internet site
http://www.empglobal.com) The MinFin is a "substantial
investor," holding a "major share" of the USD 730 million in
the 10 year, closed end fund. Mawar-Khan said that the GoB's
investment was a critical factor in EMP opening an office in
Brunei and the MinFin has a seat on the fund's managing
board. Although MinFin often delegates its board seat to a
BIA offical, the Minister of Finance II, Pehin Abdul Rahman
Hj Ibrahim, often comes himself to board meetings and is an
able and active participant. The IDF has been a success for
EMP, far exceeding its target internal rate of return of 18
percent and work has already begun to create a second fund
targeted at investments in Islamic countries with a planned
total capital of USD 1 billion. (BIONOTE: Mawar-Khan is an
experienced investment banker, having worked in New York and
London for major investment brokerages. He was Pakistan's
Ambassador to Brunei in 1989-1990 and returned to Brunei five
years ago to open the EMP office here.)


7. (C) The MinFin is also in the process of creating a new
domestic investment fund to help diversify Brunei's economy
away from the oil and gas industries which it will capitalize
at USD 300 million. An AMCIT director of the U.S.-owned
financial firm which will probably be engaged to manage this
fund told the Ambassador that it would provide venture
capital to projects in Brunei in partnership with foreign
direct investment. The two "rules of the road" for this new

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fund is that the projects must create jobs and do at least
fifty percent of their work in Brunei and may not invest in
oil and gas projects.

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COMMENT
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8. (C) Continuing high oil prices have helped boost Brunei's
GDP growth to its highest level in a decade, 5.1 percent for
2006, and softened memories of the leaner times of the last
decade. The GoB has a hard time spending all the funds it
currently allocates to the state budget, so the short to
medium term prospects are for ever larger contributions to
BIA. The continuing challenge for the GoB will be to avoid
slipping into complacency and reducing vigilance in
overseeing how its SWF is managed. Greater transparency in
public finance has been a slow but steady trend here since
the Sultan reopened the Legislative Council in 2004 and
introduced some public debate on the state budget.
Nonetheless, the line between GoB and royal family finances
remains fuzzy. While we don't expect a major change in
current practices at BIA, a dialogue with the GoB focused on
increasing transparency in public finance in line with IMF
and World Bank approved best practices is our best approach
to bringing more of the GoB's financial practices into the
open. END COMMENT.


9. (U) Treasury cleared on this message.
SKODON