Private Sector Meeting
Speech
by
Sirpa Jarvenpaa
Regional Director, SPSO
Asian Development Bank
Organized by AusAid
Tanoa Plaza
Suva, Fiji Islands
21 June 2005
Good afternoon and thank you for the opportunity to present to you the recommendations of the Private Sector Assessment in Fiji
It is now widely recognized that having a strong and vigorous private sector is the only way for countries to achieve sustained growth that will eliminate poverty, by providing a sustainable source of employment growth.
In the Pacific, much attention has been recently paid to analyzing private sector development. ADB has published the results of a number of investigations of the factors influencing the private sector in the Region. These findings were summarized in the Bank's Swimming Against the Time - of which I brought few copies with me for those, who still do not have a copy.
This publication pointed out that from the perspective of the private sector, most countries in the region are exacerbating the disadvantages of small size and remoteness by implementing policies that increase the undesirable impact of these factors on their economies. Fiji is no exception and must bear the responsibility for these policies.
Last year ADB prepared a Private Sector Assessment, as part of its underlying thematic assessments of the fundamental development constraints and opportunities based on which ADB's own Fiji Country Strategy and Program is being prepared.
The aim of this assessment is to identify and achieve the necessary reforms. In achieving the reforms, cooperation and a unified front are necessary to overcome the many vested interests that currently exist.
It is common, for example, for private sector operators in Fiji to blame government bureaucrats for their failure to implement reform without admitting the extent to which entrenched private sector interests benefit from the distortions in the economy. Many also benefit from the extensive role of the state in the economy, from high public sector salaries to overstaffing of ministries and agencies.
Reform implies that some beneficiaries of the status quo will have to make concessions in the short/medium term in order to improve the business environment. However, if the result is dynamism and entrepreneurship that leads to more investment and growth, all will benefit in the longer run.
Achieving a thriving business environment entails introducing competition where monopolies previously prevailed, implementing regulatory restraints where monopolies cannot be competed away, and realizing that the public sector exists to provide service to the whole population, not to entrench the interests of the employees of government or state-owned enterprises (SOEs).
Deviations from the path of reform should be questioned, acknowledged, and corrected.
And above all, it is necessary to have faith that the resourcefulness of Fijians will triumph if given the chance to succeed. In the past these abilities have been stifled by the heavy hand of a State that engages in business activities in which it has no expertise and yet fails to provide the essential elements of an environment in which private sector activities can succeed.
ADB is working to make the PSA a published document. It is our hope that the donor community would consider this report as a call for action and that there is close coordination between donors so that Fiji receives unified advice that is backed up by the funds and technical assistance necessary to initiate reforms.
ADB is taking action on several recommendations identified in the PSA. It has started on an analysis of the legal commercial framework for private sector development in three Pacific Region countries, one of which is Fiji. The ADB has started to examine the basis for collateralized lending in several countries in the Region, including Fiji.
The World Bank/FIAS have begun to review foreign investment regulations and practices. These developments are all to be welcomed. Some of the problem areas require in depth analysis that will identify further reform initiatives. To complement these processes, the PSA suggests some areas for closer examination that should occur as part of these activities that are getting started.
While relatively isolated, Fiji has rich natural resources, a tropical climate, and a vigorous tourist trade. Some might call it idyllic. But, it is a country that is not without problems. GDP growth over the last 3 decades has been volatile, a problem that has not been helped by political coups and natural disasters.
While a small open economy, Fiji is still the largest and most prosperous Pacific Island economy. The reports reflects a vision of Fiji as a low cost, high growth magnet for private entrepreneurship and investment, both local and foreign
The National Plan established 5% growth as the target, and more recently, the prime minister have set eight % growth rate for the economy as a goal. The government has taken a more proactive stance towards the private sector and is actively pursuing the identification of measures that will raise the investment rate to a level that will support higher growth rates.
Rules of thumb (admittedly very approximate) indicate that a long run growth rate of 5%, requires gross capital formation of at least 25% of GDP, of which more than 50% should be private sector investment. Currently, private sector investment remains in the range of 4 - 6% of GDP and the total investment at amounts 17% - levels that are much below what is needed. For the most recent years for which data are available, foreign direct investment has been negative.
Correspondingly, GDP growth has been below the country's potential and also below what will be needed to substantially reduce poverty and improve economic welfare. GDP growth has averaged only 2.8 percent between 1999 and 2004, with the current forecasts for coming years still much lower (e.g., 1.2 percent for 2005).
Furthermore, gross capital formation as a percentage of GDP is low and insufficient to generate the growth necessary to employ the large number of school leavers of about 15,000.
Investors are looking for more political stability and are averse to political uncertainty. Political and economic uncertainties have conspired to create an environment of little business confidence, and remain the biggest single impediment to investment. While Fiji's FDI levels have improved since the period surrounding the political unrest, but they are still at chronically low levels and do not compare well regionally.
The private sector development agenda (PSD) is shaped by the need to strengthen the framework of commercial laws and regulations; improve the tax and incentive system; enhance infrastructure and accelerate private sector participation in delivery of such services; accelerate State-owned Enterprise reforms; improve access to finance and develop the domestic financial market; examining reform options for Fiji National Provident Fund (FNPF); and resolve property rights issues, including the simplification of procedures for Fijians to unlock land for productive and economic uses, without touching ownership issues.
Transactions costs are high: Fiji is a costly place in which to conduct business. Starting and running businesses, enforcing contracts and closing businesses down are complex and time consuming processes for local entrepreneurs and even more so, for foreigners. It is an environment in which transactions costs are high and business faces many constraints. These delays and procedures serve to make property-related transactions costly. In business dealings, this registration requirement unnecessarily increases transaction costs. Under Fiji's legal framework, each transfer has to be registered in the property registry. Many transactions have expensive registry certifications. Fiji inherited most of its commercial laws from England. It has modeled its more recent laws after those of Australia and New Zealand. Unfortunately, these laws incur high transaction costs for doing business in Fiji. The legal procedures work in the countries of origin because of the larger investments in public institutions so businesses get more value for the cost and the costs are lower relative to the value of the transaction than they are in Fiji. However, they are inappropriate within the framework of Fiji's economy and its government institutions. These laws also contain many gaps that further increase transaction costs because they increase the risk of enforcing business deals. Fiji laws heavily tax business transactions with customs, excise, and stamp duties. The state also establishes price controls and unnecessarily regulates many industries,
Also, a reputable international NGO concerned with corruption found that Fiji's problem of kickbacks is pervasive. This situation is not surprising since the procedures and discretion surrounding the implementation of Fiji law provides the exact conditions that allow corruption and bribery to prosper. The legal procedures to obtain licenses or registrations require the "discretionary" authority of a public official and there are no clear automatic legal standards under which the government must grant licenses and process registrations. Yet there is no compensating public policy objective inherent in these procedures - simpler proceedings in other countries function better than those in Fiji. The existing system encourages corruption and increases transactions costs.
Microeconomic incentives do not promote efficient allocation of resources; property rights are weak; financial markets do not fund investment and entrepreneurship effectively; the commercial legal system for private sector activity is outdated; there is pervasive government presence in many sectors that results in bureaucratic delays and onerous red tape; and the State has an ownership share in nearly 30 companies and public corporations
In spite of significant incentives, investment remains low - investment as a percentage of GDP averaged less than 15% in the 1990s, fell to around 10% as a result of the political uncertainty after the recent coup, and remains well below the level required to induce a long run growth rate consistent with high employment generation.
Thus, Fiji needs a dynamic private sector that will lead to
- higher growth;
- more investment;
- more job creation; and
- better human development indicators.
The private sector needs -
- less political certainty and more policy stability,
- incentives that encourage efficient resource allocation;
- light regulation that promotes entrepreneurship;
- less state ownership and more private sector ownership;
- financial markets that intermediate more effectively;
- an improved legal system for business; and
- improved infrastructure.
In light of this, the PSA recommends that support be extended for recent Government reform initiatives toward the following:
reducing pervasive regulation, especially on foreign investment - by continuing dialogue between the government and private sector to identify problems, cataloguing and eliminating redundant regulations, removing investment rule disparities for foreign and domestic investors.
Reducing incentive distortions - by reducing company tax rates and eliminating tax holidays; vigorously prosecuting tax evasion; removing price controls on agricultural products.
Strengthening property rights - by reforming the Agricultural Land Trustee Act including ensuring certainty in lease renewal, increasing lessor compensation, and considering block lease system for agricultural land leases - and by improving the land Security for Native Fijians including analyzing ways in which the Native Fijians can mobilize their land assets more effectively by allowing fully negotiable leases - and by streamlining NLTB procedures
Upgrading Infrastructure To Reduce Cost Imposed on Business.
Rationalize the State involvement in the Economy - by formulating and approving an SOE policy that increases private sector participation through management contracts, privatization and other forms of private participation, by developing an action plan and timetable for implementation of SOE reform, by privatizing and corporatizing SOE sector, by removing FNPF's control of ATH by selling licenses as compensation, by eliminating restrictions to allow private investment in areas traditionally accessible only by the state.
Improving intermediation in the financial markets - by relaxing controls on FNPF investing overseas and isisting on at least 25% investment off shore, insisting on 25% of asset managed by Unit Trust, and by increasing supervisory role of CMDA regarding FNPF investment portfolio
Reforming the secured transactions framework - by participating in the ADB's RETA in the area, and by setting timetable for a legal and institutional change in this area
Modernizing the legal system for business
The report recommends support to the Government in translating the PSD agenda into reform action. ADB's PSD strategy for Fiji will focus assistance on reform area (i) that represent underlying constraints to doing business, as identified by the private sector and reflected in the PSA; that Government has expressed interested in addressing; for which the Government is institutionally and politically ready to undertake reform (including existence of reform champions); that are in line with ADB's core areas of PSD support, as reflected in ADB's Pacific Strategy 2005-2009; that have linkages to, and potential to reinforce, ongoing or planned government reform activities, especially those supported by ADB's TA and loan program; and in which ADB has comparative advantages among donor agencies.
In support of the Government's Strategic Development Plan 2003-2005, and in line with ADB's Private Sector Development Strategy and ADB's Pacific Strategy 2005-2009, the objective of ADB's private sector development strategy for Fiji is to support a conducive environment for the private sector, with a view to achieving rapid private sector-led economic growth.
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