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Making It Easier to Do Business in the Pacific

Project Result / Case Study | 30 June 2014

It is now easier to register a business in many Pacific island countries following a successful pilot program in the Solomon Islands.

Not long ago, registering a new company in Solomon Islands was a torturous bureaucratic process that often took months. Aloysio Ma'ahanao, an accountant who has helped his clients register new companies, remembers those times well.

"Under the old Companies Act, it took from 2 weeks up to 2 or 3 months, and under the new act the longest it takes me is 2 days. The registration itself takes about 5 minutes."

The quick business registration that Aloysio's clients enjoyed was due to reforms that have taken place as part of the Pacific Private Sector Development Initiative. It is helping 14 Pacific island countries improve their business climate to promote social and economic development.

Solomon Islands has been one of the 14 Pacific countries benefiting from the ADB's support through regional technical assistance for the Pacific Private Sector Development Initiative.

Committed partners working together

The Pacific Private Sector Development Initiative has made it easier to do business in the Pacific by reducing barriers to starting and operating a business. It is supported by the governments of Australia and New Zealand, and ADB. This included grants of $6.1 million from ADB, $41.7 million from the Government of Australia, and $4.5 million from the Government of New Zealand. The support has helped simplify and modernize business laws in the Pacific island countries.

The initiative addressed the poor business climate in many of the countries in the Pacific. Natural impediments, including small market size, remoteness, and susceptibility to natural disasters, constrain their business activities.

Throughout the Pacific, business operators have faced high start-up costs, and expensive and time-consuming processes and regulations, as well as laws that restrict investments—particularly foreign investments.

While it is difficult to avoid the high costs associated with business impediments in the Pacific islands countries due to their small and remote economies, the initiative has worked to create an environment that minimizes the costs of doing business, while encouraging dynamism and entrepreneurship.

The initiative introduced reforms that reduced the time required to start a new company, and increased opportunities for people to access credit to operate a business. Outdated laws and regulations that hindered business were amended. Through the initiative, the governments have eliminated the need for lawyers when incorporating a new company, and have helped remove cumbersome identification requirements.

Taking the lead

Although reforms are underway throughout the Pacific, Solomon Islands has been a leader in improving its business climate. Undertaking much-needed reforms requires strong government commitment. Despite understandable concerns about loss of revenue, the government abolished the fee to reserve a company name and the obligation to create a company seal. This has significantly reduced the cost of incorporation.

"One of the things you have to do to encourage investors to come in is reduce the cost of doing business," says Prime Minister Gordon Darcy Lilo. "We can encourage our people to own companies, build up excess capital, and then put it to good use."

The country's company registry is now fully online, with fast company name searches, simple forms, and automated checking of completed documents.

As a result of an improved registry, the time it takes to approve a loan has been reduced from 28 days to 1 day. More loans are being made, which is creating more businesses.

"These reforms have helped the business community because companies are spending less time on bureaucracy and more time on their core business."

Hayden Everett, a senior country specialist at ADB

"These reforms have helped the business community because companies are spending less time on bureaucracy and more time on their core business," says Hayden Everett, a senior country specialist in ADB. "Women entrepreneurs who run informal businesses and want to enter the formal business sector have also benefited."

Since the company law reforms took effect in 2010, the number of business owners in Solomon Islands has grown significantly. In the 5 years before the reforms, from 2005 to 2009, there were on average 124 new companies formed per year. Since 2010, the average has more than doubled.

Before the reforms, it cost $336 to incorporate a business. It now costs $175. Likewise, business incorporation time has been reduced from 45 days before the streamlined system to less than 2 days now.

The increased number of companies operating in the country's formal sector has also created new job opportunities.

A loan in a day

For Hudson Wakio—the 35-year-old owner of a company that sells computers, office supplies, and electronic items— the impact of the new law has been startling. He applied for a loan to buy a delivery truck for his company, Advanced Technologies.

"I thought loan approval would take months, instead it only took a day," he said. "Within an hour the forms were processed, and by the end of the day I had the truck. I couldn't believe it." Hudson now has nine trucks.

Andrew Sale, advisor for an Australia-funded development project, saw similar results when he helped cocoa farmers incorporate an export and trading company called Solomon Komoditi (Solkom).

"I submitted the application online, and went out for lunch," he says. "By the time I came back, I had an e-mail confirming our registration was successful. It was that quick."

Solkom is a cooperative that represents thousands of cocoa producers in several provinces. The company negotiates with overseas buyers.

Solomon Sedo in Pitukoli Village, one of the company directors and shareholders, is a buyer in Guadalcanal who works with several hundred cocoa farmers.

"It is here, in the rural areas, that we can really see the impact of the company law reforms," says Solomon. "Solkom has negotiated a better price for farmers, and demand for cocoa is increasing. The farmers are busier and earning more income."

Loan without land

In addition to legal and regulatory hurdles, business operators in the Pacific island countries have faced cultural challenges. Land plays a central cultural, as well as productive, role in Pacific societies. A form of customary ownership of land created unclear land rights, making it hard for people to use land as collateral for loans to run and expand businesses.

To overcome the problem, the Pacific Private Sector Development Initiative helped Solomon Islands undertake secured transaction reforms that allow entrepreneurs to have movable assets registered electronically and use them as collateral for loans. This includes items such as boats, cars, store inventories, and farm equipment.

Tony Langston, general manager of Credit Corporation (Solomon Islands), the biggest nonbank provider of financial services in the country, says both the secured transaction and company law reforms have a positive impact on lending.

Before the reforms, when Credit Corporation wanted to provide a loan for a customer, a bill of sale agreement would have to be formalized and then submitted to the government for approval. This process could take up to 2 months according to Tony.

"The reform speeds up the process," he says. "We can log onto the database and instantly confirm whether the company is registered or not. At the end of the day, we are comforted by the fact that our client's asset is registered and secured. From the customer's point of view, they are happy because they get their money within a short time with this new process. We are now able to approve a loan within a day."

Win–win for women

Women who want to operate a business in the Pacific have limited access to finance due to legal and cultural barriers.

The initiative has helped the government to formulate laws that set up single-shareholder companies, making it easier for women to own and operate their own businesses. In the past, women could only operate certain businesses with the permission of a man. After the reforms, women can set up their own independently-run companies.

"The Companies Act has made starting business much easier, and I have started five companies in different sectors," says Julie Gegeu-Haro, who holds a 90% share of ownership in the Premier Group of Companies, which offers real estate and consulting services.

The secured transaction registry, which allows business owners to borrow against their movable assets instead of relying on land ownership is also crucial for women, who lack access to or control over land.

"This reform means that there is no need to save money for start-up capital like I have in the past, and now I can borrow using my assets instead," she says.

Another innovative aspect of the business law reforms in Solomon Islands has been to introduce the concept of community companies. These consist of groups, such as farmers, landowners, or women's organizations that use community assets in the form of handicrafts, fishing boats, or local crops. A company is formed to direct the profits of these activities toward an agreed community goal, and to preserve the community's assets for future generations.

The first community company incorporated was Areatatiki and Aruligo Community Company. Before it was set up, female farmers in the community sold their vegetables in the central market in Honiara. Now the women collectively sell fresh fruits and vegetables though their new community company to a leading hotel in the capital.

"It's really good to sell from company to company," said company representative Rose Sese. "The money received from selling to a company is much better than selling at the market."

The reforms have empowered women, people in vulnerable situations, and others to set up small businesses and contribute to the country's economic prosperity. This is helping to diversify the country's economy beyond extracting natural resources.

"We thought companies were only for logging, for mining, and just for big business," she said. "Now we realize that even this small thing we're doing can be a business, too."

Women bear the burden of work, family, and home responsibilities. Profits from their businesses tend to go the education, health, and well-being of their families. Increased earnings by women benefits both their children and their communities at large.

Solomon Sedo of Solkom cocoa exporting company in Pitukoli Village, says that women make up about half of the cocoa farmers who sell their products to his company.

The increased income, he says, is "used for school fees, access to clinics, and buildings in the community."

This article was originally published in Together We Deliver, a publication highlighting successful ADB projects across Asia and the Pacific that demonstrated development impacts, best practice, and innovation.