vanuatu private sector assessment, 2009

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Sustaining Growth A Private Sector Assessment for Vanuatu



© 2009 Asian Development Bank

All rights reserved. Published 2009.Printed in Australia.

Publication Stock No. RP 090281ISBN 978-971-561-779-6 Cataloging-In-Publication Data

Asian Development Bank.Sustaining Growth: A Private Sector Assessment for Vanuatu. Mandaluyong City, Phil.: Asian Development Bank, 2009.

1. Economic growth. 2. Private sector development. 3. Vanuatu. I. Asian Development Bank.

Tis report was written by Paul Holden, Laure Darcy, and erry Reid, and edited by Deborah Dangay, under thesupervision of Winfried Wicklein and Jeremy Cleaver of the Asian Development Bank (ADB) Pacic Liaison andCoordination Office, Sydney, Australia. Melissa Dayrit was the managing editor of this publication. Tis report wassupported by the Pacic Private Sector Development Initiative (PSDI), an ADB regional technical assistance projectsupported by the Australian Agency for International Development.

Te views expressed in this report are those of the authors and do not necessarily reect the views and policies of ADB or itsBoard of Governors or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for anyconsequence of their use.

Use of the term “country” does not imply any judgment by the authors or ADB as to the legal or other status of anyterritorial entity.

ADB encourages printing or copying information exclusively for personal and noncommercial use with properacknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercialpurposes without the express, written consent of ADB.

Asian Development Bank

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el +63 2 632 4444Fax + 63 2 636 2444 www.adb.org

Pacic Liaison and Coordination OfficeLevel 18, 1 Margaret StreetSydney, NSW 2000, Australia

el +61 2 82709444Fax + 61 2 827 09445

www.adb.org/plco

For orders, please contact:Department of External RelationsFax +63 2 636 [email protected]



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S u s t a i n i n g G r o w t h : A

P r i v a t e

S e c t o r A s s e s s m e n t f o r V a n u a t u

I . S u m m a r y a n d

R e c o m m e n

d a t i o n s



Contents

Foreword 1

I. Summary and Recommendations 2

A. Recent Developments in the Economy 2

B. Constraints to Sustained Growth 4

C. Recommendations for Policy Reform 8

II. Upgrading Infrastructure 11

A. ransportation: Inadequate and Poorly Maintained 12

B. Air ransport: A Vital Lifeline 16

C. elecommunications: Liberalization Underway 18

D. Power: Competition and Regulation Needed 19

E. Access to Water and Sanitation 20

III. Improving Governance and Reducing the Role of the State 22

A. State-Owned Enterprises: Inefficient and Poorly Governed 22B. Te Vanuatu Commodities Marketing Board: Constraining the Growth of Agriculture 25

C. Te Agricultural Development Bank: Risky and Ineffective 26

D. Establishing a Framework to Promote Competition 27

E. Amendments to the Employment Act: Damaging to the Economy 28

IV. Modernizing the Commercial Legal Framework 29

A. Te Legal Framework for Companies 30

B. Bankruptcy and Insolvency: Costly and Difficult 31

C. Te Legal Framework for rusts 31

D. Laws Governing Contracting: Complex and Expensive to Use 32

E. Burdensome Regulations: An Obstacle to Investment 33

F. Access to Information About the Legal System 34

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Contents

V. Expanding Access to Finance 35

A. Access to Credit 35

B. Te High Cost of Borrowing 37

C. Financial Services: Expanding Access 37

D. Te Personal Property Securities Framework: Te Benets of Reform 38

E. Looking for a New Role: Te Offshore Finance Centre 40

F. Te International Financial Crisis: Could It Reach Vanuatu? 40

VI. Reforming the Land Leasing System 42

A. Te Structure of Land Ownership 43

B. Problems Related to Land Ownership 44

C. Leasing: Te Rights of Customary Landowners 45

D. High ransactions Costs for Leasing 47

E. Land Administration: Inadequate Records 48

F. Addressing the Future: Te National Land Summit and Next Steps 48

VII. Conclusion 49

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d a t i o n s

iii

Figures, Tables, and Boxes

Figures

Figure 1: Vanuatu Growth Performance (%) 2Figure 2: Gross Fixed Capital Formation (% of GDP) 3Figure 3: Real Gross Domestic Product and Sector Growth (Annual Percentage Change) 3Figure 4: Paved Roads (% of otal Roads) 13Figure 5: Stevedoring Charges ($/ EU) 14Figure 6: otal Landing and Passenger Charges ($) 16Figure 7: Cost of Peak Mobile Calls ($ per Minute) 17Figure 8: Cost of Internet Connection ($ per Minute) 18Figure 9: Average Electricity ariffs (¢ per KwH) 19Figure 10: Average Water ariffs ($ per m3) 20Figure 11: Domestic Credit to the Private Sector (% of GDP) 36Figure 12: Property and Non-property Lending (% of otal) 36

ables

able 1: Government Shareholding of Government Business Enterprises 23

Boxes

Box 1: Millennium Challenge Corporation: Vanuatu Compact 12Box 2: What is a Security Interest? 39




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Abbreviations

ADB – Asian Development Bank ADR – alternative dispute resolution AusAID – Australian Agency for International Development AVL – Airports Vanuatu LimitedCRP – Comprehensive Reform ProgramDMC – developing member country FSM – Federated States of Micronesia GBE – government business enterprise

GDP – gross domestic productMAQFF – Ministry of Agriculture, Quarantine, Forestry, and FisheriesMFEM – Ministry of Finance and Economic ManagementMIA – Ministry of Internal AffairsMIPU – Ministry of Infrastructure and Public UtilitiesM NVB Ministry of rade and Ni-Vanuatu BusinessNISCO – Northern Islands Stevedoring Co.NBV – National Bank of VanuatuNZAID – New Zealand Agency for International DevelopmentPacLii – Pacic Islands Legal Information InstitutePMO Prime Minister’s OfficePNG – Papua New Guinea PPP – public-private partnershipPPSA – Personal Property Securities ActPPSR – personal property securities registry PWD – Public Works DepartmentRMI – Republic of the Marshall Islands

SOE – state-owned enterpriseS – Solomon elekom Company Limited

CC – onga Communications CorporationEU – twenty-foot equivalent unit

UK – United KingdomUNELCO – Union Electrique du Vanuatu Limited

VANWODS – Vanuatu Women Development Scheme VCMB – Vanuatu Commodities Marketing Board VCPL – Vanuatu Coconut Products Limited VFSC – Vanuatu Financial Services Commission VIPA – Vanuatu Investment Promotion Authority

NO E: In this report, “$” refers to US dollars unless otherwise stated.



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S u s t a i n i n g G r o w t

h : A P r i v a t e S e c t o r A s s e s s m e n t f o r

V a n u a t u

F o r e w o r d

Foreword

Assisting our Pacic developing membercountries (DMCs) to promote environmentsthat encourage private sector development isa core focus for the Pacic Department of the

Asian Development Bank (ADB). Signicanteffort and resources are being devoted to helpingour Pacic DMCs identify constraints to privatesector-led growth, prioritizing policy actions, andimplementing reform. Te process commences

with analytical work on constraints to privatesector growth, comprehensive discussionsof the ndings with various stakeholders,including from the government and theprivate sector, and publicizing the results. Tendings and recommendations inform ADB’scountry assistance strategies, and are ultimately

translated into reform activities. In many Paciceconomies, reforms are now underway in theareas of improving the efficiency of state-ownedenterprises and improving the delivery of publicservices through public–private partnerships,modernizing commercial legal frameworks, andimproving access to nance.

Sustaining Growth: A Private Sector Assessment for Vanuatu is the eleventh in a series of private

sector assessments undertaken by the PacicDepartment for its member countries over thepast 6 years. Tis report updates the analysisof the earlier private sector assessment forVanuatu published by ADB in 2004 and tracksthe evolution through time of the businessenvironment in the country. I note with greatpleasure that the ndings of this report show thatVanuatu is one of the countries that is makingsubstantial progress in reforming many of the

key areas affecting the private sector. Tis reportconcludes that Vanuatu has made great stridesin the deregulation of air access, the openingup of telecommunications to competition,and in embarking on commercial legal reform.

Vanuatu’s growth performance over the past5 years has been stellar, although a number ofchallenges remain—both structural and of anexternal nature. Yet, the government appearsto be dedicated to carrying out further reforminitiatives, particularly in the areas of rural andmicronance and business law reform, which

ADB is strongly committed to supporting.

I wish to convey my thanks to the Governmentof Vanuatu and to the numerous members ofthe private sector who shared their valuabletime providing background information tothe authors and discussing the ndings in theprocess of producing this report. Te VanuatuChamber of Commerce was especially proactivein organizing meetings and providing insightsto the problems facing the private sector in

Vanuatu. An earlier version of this report waspresented to the National Business Summit in

June 2008, and I thank the participants for their valuable feedback. I also wish to thank Winfried Wicklein and Jeremy Cleaver for managing thisproject; the authors Paul Holden, Laure Darcy,and erry Reid, editor Deborah Dangay, andmanaging editor Melissa Dayrit, for their efforts

in preparing this report; and the Australian Agency for International Development, whichprovided conancing under the Pacic PrivateSector Development Initiative. I trust that thendings of this report will provoke constructivediscussion and provide useful material for thegovernment in the design of further policyreform initiatives.

S. Hafeez RahmanDirector GeneralPacic Department



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ISummary and Recommendations

A. Recent Developments in the Economy

Vanuatu’s economy has expanded rapidlyover the past few years. Growth has comeprimarily from the construction, tourism,and agriculture sectors, but has its roots inimproved economic policy and a gradual

improvement in the quality of institutions. Vanuatu has had one of the fastest growingeconomies among the Pacic island countriesin the recent past. Although growthperformance was disappointing in the yearsfollowing independence, recovery began in2003, and the economy has expanded steadilysince then. Real annual gross domesticproduct (GDP) growth has averaged about6% over the past 5 years. It rose by 7% in2006, 6.8% in 2007, and is forecast to haveincreased by approximately 6% in 2008.In 2007, per capita gross national income,adjusted for purchasing power parity,

was $3,410. Over the past few years, thepurchasing power parity-adjusted annual growthrate has exceeded 2%, after having declined at anaverage annual rate of 1.1% during the 1990s.

Although it is unlikely that Vanuatu will escape

some fallout from the global economic crisis, atthe end of the rst quarter of 2009, little effecthad been registered. Te latest InternationalMonetary Fund projections see real growth of3.5% for 2009.

1. Growth in Key Sectors: Construction,ourism, and Agriculture

Vanuatu has experienced a substantial expansion

in the real estate market, fueled at least in partby spillovers from property booms in Australiaand—to a lesser extent—New Zealand. Vanuatuhas been better placed than other Pacic islandcountries to take advantage of this extension

of demand because it has a well-developednetwork of estate agents, property developers,and mortgage nancing. In addition, investingin vacation property and retirement homesin Vanuatu has become more convenient andfeasible, thanks to improved air connectionsfrom Australia and New Zealand.

Gross domestic capital formation in the pastfew years has averaged over 20% of GDP—thehighest in Pacic island countries. Although asectoral breakdown of investment is not available,it is likely that much of this investment has goneinto construction and other real estate relatedactivities. Investment in property has led tosubstantial increases in land prices and a boomin construction, adding signicantly to Vanuatu’sgrowth rate. A potential downside is that if pricesretreat in Australia and New Zealand, Vanuatu

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e

Figure 1: Vanuatu Growth Performance (%)

GDP growth

GDP = gross domestic product.Source: Asian Development Bank.

GDP per capita growth

Year

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8



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d a t i o n s could be adversely affected by recent propertymarket developments around the world.

Vanuatu’s tourism industry has also experiencedrapid growth. Visitor arrivals have increasedsteadily, and the country appears to have beensuccessful in attracting relatively high-spendingtourists. Te airline industry was recently openedto competition, bringing downward pressureon airfares and substantially increasing capacity.Te number of tourists arriving by air roseby nearly 14% in 2007, and by over 16% in

2008. Remarkably, despite the global economicslowdown, tourist arrivals by air in January 2009

were 28% higher than in January 2008. Over thepast few years, there has been a very large growthin the number of cruise ships visiting Vanuatu:the number of arrivals has tripled over the past5 years. Anecdotal evidence suggests that theserose by nearly 40% in 2008 after increasing by60% in 2007. A growing number of tour ship

visitors later return as tourists, which bodes wellfor future tourism growth.

Agriculture is another important component ofthe economy, constituting about 20% of GDP.Some 60% of the population is engaged in amix of subsistence and cash-based agriculture.

An important part of future economicdevelopment will involve bringing a much largerproportion of the population that is primarilyin subsistence activities into cash-orientedagricultural development.

Some agricultural subsectors are performing well, although there is considerable variationin the growth of different types of outputs. Tecattle industry, in particular, has been expandingrapidly, largely because of a growing smallholdersystem of raising cattle. Furthermore, substantialinvestments are being made to improve thequality of breeding stock. Vanuatu beef isexported to countries throughout the region,including Australia and New Zealand. Kavaexports are also growing rapidly. In othersubsectors, however, agriculture is stagnating,often as a result of government interference.

P e r c e n t a g e

0

5

10

15

20

25Figure 2: Gross Fixed Capital Formation (% of GDP)

GDP = gross domestic product.Source: Asian Development Bank.

Year

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

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Figure 3: Real Gross Domestic Product and SectorGrowth (Annual Percentage Change)

GDP = gross domestic product.Source: Reserve Bank of Vanuatu Quarterly Report.

Real GDP

Forecast

Agriculture Industry Services

Year

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8



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d a t i o n s2. Improved Economic Policy and

Institutions

Te recent strength of Vanuatu’s economy hasits roots in improved economic policy andin a gradual improvement in the quality ofinstitutions. In particular:

• Tere has been much more political stability and continuity than there was in the 1990s andthe early years of the 21st century.

• Macroeconomic management has been

sound. Ination has been controlled, asmonetary aggregates—while rising—have beencontained despite booming growth.

• Te scal accounts have improved markedly, with budget surpluses recorded in someyears. In addition, the debt-to-GDP ratio hasdeclined by one third.

• Improved policies toward the private sector have signaled that the government intends tomake Vanuatu a country in which investors canhave condence. Key improvements include:

- Competition in the airline industry. Vanuaturecently opened its air transport market tointernational airlines, creating competitionthat has resulted in signicantly lowerairfares and higher tourism arrivals. Recentgures illustrate the extent of this increase:international tourist arrivals were nearly 30%higher in January 2009 than in January 2008.Tese results reinforce the wisdom of openingthe country to additional foreign airlines,and demonstrate the benets of greatercompetition. In another positive step—and asa result of the pressures placed on the airlineby greater competition—the governmentis considering options for restructuring Air

Vanuatu.

- Competition in the telecommunicationssector. Te government issued a licenseto a foreign mobile telecommunicationsoperator to provide services in competition

with elecom Vanuatu, the state-ownedtelecommunications company. Tis has led

to a signicant increase in coverage and adecrease in prices.

- Strengthened regulation of existing monopolies. A Utility Regulatory Authority Act was passedrecently. Tis Act establishes a new regulatoryauthority to monitor the power and waterconcessions.

- Some divestiture.Te government has reducedthe state’s holdings in the abattoir.

- An extensive commercial legal reform program. Te government has passed a new personalproperty securities law and is close to havingthe supporting electronic registry in place.It is engaged in extensive reform of the lawsgoverning business, including the Companies

Act, the rustee Act, and the bankruptcyframework. Once completed, these initiatives

will result in Vanuatu having a moderncommercial legal framework that is tailored tothe needs of the country and the structure ofbusiness transactions.

B. Constraints to Sustained Growth

Despite recent economic expansion and somepositive reform initiatives by the government, Vanuatu faces a number of signicant

constraints to sustained growth.In many sectors, the cost of doing business isextremely high. Infrastructure services are high-cost and often inefficient. Unnecessary regulation

Te recent strength of Vanuatu’s

economy has its roots in

improved economic policy and

in a gradual improvement in

the quality of institutions.



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d a t i o n s and interference are still all too common. Teconstraints summarized below undermine

Vanuatu’s competitiveness and restrict privatesector growth.

Infrastructure services are poor or high-cost orboth. In almost every area, costs are among thehighest in Pacic island countries. Infrastructureinvestment by government has been too lowto provide an adequate foundation for privatesector development. Te regulatory frameworkfor infrastructure is weak and requires substantialupgrading. Tere are major constraints in thefollowing areas:

• Maintaining transportation infrastructure. Tedomestic shipping industry urgently needsupgrades to its legislation, regulation, andsafety as well as increased services to outlyingislands and some upgrades to wharf facilities;the commercial ports have the highest costsin the Pacic even though their efficiency isamong the lowest; and the road network isinadequate and poorly maintained.

• Providing air services. Airports are in goodcondition, but high airport charges andlimited capacity are depressing Vanuatu’scompetitiveness as a tourist destination. Inaddition, the national air carrier, Air Vanuatu,remains a drain on the country’s budget.

• Lowering telecommunications costs . While

telephone charges have fallen sharply withthe arrival of competition, internet chargesfor businesses are still among the highest inthe world. However, government recently

announced the issuance of three new licensesfor the provision of internet and other

telecommunication services, which should leadto better service and lower prices.

• Generating power. A private monopolygenerates electricity. Power is reliable incommunities that have access to it, but ratesare high, and the availability of electricityoutside major urban centers is very limited.

• Delivering water and sanitation services. Consumers in Vanuatu have good access to

water and sanitation services, but costs arehigh. However, growth pressures are beginningto be felt in urban centers, especially Port

Vila, where informal settlements, increasedpopulation, and much greater traffic volumesare beginning to overwhelm existing facilities.Heavy rain now leads to urban ooding andthreatens sanitation and the water supply.

Weak governance and intrusive stateinterventions are reducing productivity.Te most pressing problems are due to thegovernment’s actions in the following areas:

• Operating state-owned enterprises. Vanuatu’sstate-owned enterprises (SOEs) are performingpoorly, which reduces efficiency andproductivity in the economy. Te code ofgovernance for the SOEs does not encouragetransparency or accountability, and theframework for monitoring their performancedoes not function effectively.

• Regulating and controlling agriculturalcommodities. Te Vanuatu CommoditiesMarketing Board (VCMB) is inefficient andunaccountable; it has an adverse impact on theindustries it regulates. Te VCMB has beencriticized by stakeholders, and there is said tobe substantial political interference.

• Operating the Agricultural Development Bank.Recently formed, the bank poses risks to

Vanuatu’s nancial system, in part because it is

Infrastructure investment by

government has been too low to

provide an adequate foundation

for private sector development.



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d a t i o n snot subject to the regulatory authority of theReserve Bank or the Vanuatu Financial Services

Commission (VFSC). Furthermore, it appearsthat the personnel managing the bank haveno background in banking and no expertise inagriculture.

• Providing a framework for competition.Government policy does not promotecompetition effectively. As a result, manycritical services are provided by unregulatedmonopolies, and consumers’ rights are not

well protected.• Legislating wages and employment conditions.

New amendments to the Employment Act will add substantially to the cost of employing workers in Vanuatu, and are likely to have aparticularly negative effect on small businesses,including those owned by ni-Vanuatu.

Te commercial legal framework is complex,

outdated, and difficult for most users to access. Itdoes not encourage business transactions. Manylaws governing commerce are based on outdatedlegislation that has long since been modied.Signicant reform initiatives are underway,however. Panels of local and internationalconsultants are working with the government toprepare various bills for submission to Parliament,including a new Companies Bill, a rustee Bill,and a Bankruptcy Bill. Considerable progress

has been made with the circulation of discussionpapers on both company and insolvency lawreform. A draft Companies Bill has also beencirculated for feedback and consultations areongoing. Te VFSC and the Chamber ofCommerce are actively involved in facilitating theconsultation process. In early 2009, Parliamentrepealed legislation that could have conicted withthe Personal Property Securities Act. Parliment will receive the Companies and Insolvency Billsfor consideration in late 2009. Despite this recentprogress, constraints in the legal frameworkcontinue to create problems in the following areas:

• Starting and running companies.Provisions inthe existing Companies Act make it difficult

and costly to establish and operate a business.• Closing down companies. An outdated and

overly complex bankruptcy regime makes itdifficult to wind up an insolvent company.

• Operating trusts. Te current legal frameworkfor trusts does not fully protect the rights ofbeneciaries.

• Using and enforcing contracts.Te laws

governing contracting do not provide a robustframework for entering into contracts, settlingcontract disputes, or enforcing contracts.

• Complying with burdensome regulations.Regulations for starting and running businessesare burdensome and involve substantialduplication of effort, which leads to delays andraises costs.

• Accessing information about the legal system. Teonly complete, reliable source of informationabout Vanuatu’s legal system—a regionalonline database—is not being kept up-to-date

with recent reforms.

Access to nance and nancial services isbecoming increasingly important to sustainlong-term growth. New investment will need tobe supported by expanded access to credit andnancial services. Major constraints exist in thefollowing areas:• Expanding access to credit and nancial services. Although private sector credit has been risingrapidly, the overall data contain some large

Te commercial legal framework

is complex, outdated, and difficult

for most users to access. It does not

encourage business transactions.



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d a t i o n s transactions that distort the picture. Manybusinesses report difficulty in accessing credit,

and the costs of borrowing rose during the rstquarter of 2009. Furthermore, lending hasbeen too focused on property and construction.

An additional problem is that non-propertyrelated lending is directed primarily at largerms, while smaller rms struggle to ndnancing. Access to nancial services is beingextended by the National Bank of Vanuatu’spioneering micronance and smart bankinginitiatives that could signicantly expandaccess to nancial services among previouslyunreached populations.

• Reducing the high cost of borrowing. Interestrates remain high on lending for businessactivities and consumer loans, but are expectedto decline as the new personal propertysecurities reforms take effect.

• Reforming the personal property securities framework. Parliament recently passed the newPersonal Property Securities Act, which willimprove borrowers’ ability to pledge movableproperty as collateral, thereby reducing lendingrisks. Problems remain, however, with theregistration of security interests.

• Revisiting the Offshore Finance Centre. Althoughit still generates a signicant amount of revenue,the Offshore Finance Centre’s economic impactis declining. Without substantial restructuring,its future is uncertain at best.

• Smaller institutions such as the Vanuatu Women Development Scheme (VANWODS)have achieved substantial success in providingmicro loans and other services in recent years.Tey have begun to intermediate deposits and

increasingly provide sophisticated lendingproducts. However, as deposit taking institutions,

these organizations should come under theregulatory mandate of the Reserve Bank.

• Preparing for the impact of the international nancial crisis. Vanuatu is not likely to remainuntouched by the crisis, which could affectthe value of offshore funds, revenues fromremittances and tourism, and bank assets.

Te land leasing system is not effective.Growing tension about land lease issues iscausing conict and increasing the risks ofinvesting in property. Landowners, investors, andpolicymakers face problems in a number of areas:

• Determining land ownership and resolvingdisputes. Substantial uncertainties exist aboutthe rightful ownership of customary land.

• Leasing and the protection of landowners’rights. Land leasing has arisen as a major

area of controversy and dispute, in partbecause customary landowners’ rights arenot well protected under the current system.Landowners do not always fully understand theimplications of lease agreements. In addition,lease structures contain potentially damagingincentive problems and may be unfair to theheirs of current landowners.

• Reducing high transactions costs for leasing. High

transactions costs and delays in leasing landpose major obstacles to investment.

• Improving land administration. Land records aredifficult to access and are often unclear aboutthe status of rightful ownership.

Te analysis in this report is based on a view that“private sector development” does not refer toa specic part of the economy. Instead, private

sector development serves as an overarchingtheme that encompasses almost every aspectof productive activity. Tere is a great deal ofevidence that the most efficient way to achievegrowth is to have the supply of virtually all

New investment will need to besupported by expanded access to

credit and nancial services.



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d a t i o n sservices driven by the private sector, as longas there is competition or effective regulation.

For example, many infrastructure services canbe supplied by the private sector even if theyare funded by the government. Private sectorinvolvement in all areas of economic activity isespecially important in small island economies,although it is sometimes difficult to achieve.

A country’s business environment determinesthe health of the private sector; the health of theprivate sector, in turn, drives entrepreneurship

and investment. Te government has a centralrole to play in creating a business-friendlyenvironment. Government involvement—through actions such as nancing or providinginfrastructure, improving access to nance,and providing a modern commercial legalframework—is critical for promoting investmentand entrepreneurship. Infrastructure determineshow costly it is to communicate and transportpeople, goods, and services. Access to nanceallows investment opportunities to be funded.Te commercial legal framework affects the wayentrepreneurs respond to opportunities, the waybusinesses are organized, and the amount ofinformal activity that occurs. A healthy businessenvironment is one in which many businessesare established, but inefficient businesses are notkept alive articially.

C. Recommendations for Policy Reform Vanuatu has established a foundation forsustained economic growth. o achieve thatgrowth, however, the country needs to createa more business-friendly environment byenacting carefully targeted reforms. Tese willalso have the effect of increasingly bringingthe subsistence sector of the economy intocash-based activities.

Although the Government of Vanuatu hasshown courage and determination in pushingthrough reforms in some areas, further changesare needed. Te recommendations of this

report are not comprehensive, but insteadfocus on the priorities identied by the analysis

of the authors.

Upgrading infrastructure. Infrastructurereforms should focus on lowering costs,upgrading quality, and improving maintenance.

o do that, Vanuatu needs to strengthenregulation and promote competition. Teauthors of this report recommend that thegovernment:

• Expand the law for privately nanced

infrastructure projects to include a broad rangeof sectors, and implement the provisions of theact without delay.

• Rehabilitate the road network, and increaseexpenditures for maintenance. Contract outroad maintenance by carving out severalcompanies from the Public Works Departmentand giving them a pipeline of work for axed period.

• Review, without delay, the concessionarrangements for the Port Vila wharves.Develop a new port site in Port Vila, and seeknew operators both for the new port and itsstevedoring services.

• Urgently review regulatory issues and safetystandards for the domestic shipping industry.Create a maritime safety authority to establish

and enforce safety standards. Develop a formalarrangement to contract out shipping servicesto remote communities not currently visitedby ferries.

Growing tension about land

lease issues is causing conict

and increasing the risks of

investing in property.



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d a t i o n s• Contract out management, air traffic control

services, reghting, and aviation security at

the three international airports.• Restructure Air Vanuatu, and franchise out

the domestic air routes that require operatingsubsidies (as was done successfully in Fiji).

• Continue liberalizing the telecommunicationssector, particularly internet services.

• Undertake a tariff study of the electricityindustry and open tariff negotiations with

Union Electrique du Vanuatu Limited(UNELCO), the unregulated private sectoroperator. Introduce regulation in the electricityindustry. Organize a competitive tender for theLuganville concession when it comes up forrenewal in 2010, and use this process as a modelfor tendering in other infrastructure subsectors.

• Accelerate plans to attract private sectormanagement for the smaller piped water

networks.

Improving governance and reducing the roleof the state. Te government needs to reduce itsintervention in many areas of the economy, andshould reform or abolish ineffective state-ownedinstitutions. Specically, the authors of thisreport recommend that the government:

• Restructure the state-owned enterprisesector. Establish a new legal framework for

SOEs and improve their effective oversightby providing the Ministry of Finance andEconomic Management with the authorityand information it needs to do so. Reformcorporate governance arrangements, and

prepare as many SOEs as possible fordivestiture.

• Abolish the Vanuatu Commodities MarketingBoard without delay.

• Place the Agricultural Development Bankunder the regulatory authority of the ReserveBank. Consider folding the mandate of thebank into the National Bank of Vanuatu,

which is professionally run and has thenationwide network to oversee agriculturalsector loans.

• Establish a well-functioning legal frameworkthat promotes competitive behavior. Createan institution to regulate activities and sectors

where there are natural monopolies. Enact andenforce consumer protection legislation.

• Repeal the newly passed amendments to theEmployment Act.

Modernizing the commercial legal framework. Te government should press forward with itscurrent initiatives to reform the commerciallegal framework, which will give Vanuatuone of the best legal structures in the Pacicfor establishing, running, and closing downbusinesses. In particular, the authors of thisreport recommend that the government:

• Enact the proposed new Companies Bill,

which will encourage businesses to formcompanies rather than operate as sole traders.

• Enact the proposed new Bankruptcy Bill, which will introduce modern, streamlinedprocedures for winding up companies anddealing with personal bankruptcy.

• Amend the rustee Act to provide cleardirections and controls for trustees, to ensurethat beneciaries’ rights are fully protected.

• Reform laws governing contracts to provideconsistent, modern rules governing the use andenforcement of contracts. In the medium term,make it a priority to establish laws governing

Infrastructure reforms

should focus on lowering

costs, upgrading quality,

and improving maintenance.



10


P r i v a t e



R e c o m m e n

d a t i o n sarbitration, so that alternative disputeresolution mechanisms can be used.

• Streamline regulatory procedures for bothlocal and foreign investors seeking to start andoperate businesses.

• Ensure that the database operated by thePacic Islands Legal Information Institute—

which is currently the only complete source ofinformation about Vanuatu’s legal system—iskept up-to-date with recent changes.

Expanding access to nance. Te focus shouldbe on improving access to credit, especially forsmall businesses, and on reducing the proportionof lending directed at property and construction.Te authors of this report recommend that thegovernment:

• Implement the nal phases of the newPersonal Property Securities Act, which willincrease access to credit by making it easier forborrowers to pledge movable assets as collateral,thereby reducing risks to lenders.

• Support the National Bank of Vanuatu’smicronance initiative and smart bankingprogram.

Reforming the land leasing system. Vanuatuneeds to focus on improving the land leasingsystem to make property rights in land more

secure for both customary landowners andthose leasing land. Te authors of this reportrecommend that the government:

• Establish a registry of customary landowners who wish to lease their land. Limit the periodof time during which potential owners can leclaims to land being leased to speed up theresolution of ownership disputes.

• Provide advisory services to all members of alandowning family or clan to educate themabout the implications of lease agreements andto reduce uncertainty about the validityof leases.

• Establish guidelines for lease agreements thatspecify relatively low up-front payments and

require annual payments to constitute a largerproportion of the total amount paid to avoiddisinheriting future generations.

• Establish rules and laws to clarify customarylandowners’ rights-of-way on leased property,especially their access to the sea.

• Issue guidelines for restructuring leasepayments (to base payments on a combinationof rent and royalties), to ensure thatlandowners benet from the success ofbusinesses established on their land. Clarifyprocedures for negotiating formulas that willprovide customary landowners with a share of

capital gains from subdivision.• Link lease payments to changes in the

consumer price index to eliminate the needfor leases to be renegotiated every few years(which should reduce transactions costs). Enactlegislation making it an offense for owners todemand payments or other concessions fromlessees that are not contained in the leasecontract.

• Speed up efforts to digitize land records andmake them searchable electronically. Establishan out-of-country backup of the land records.

Vanuatu needs to focus on

improving the land leasing system.



11

S u s t a i n i n g

G r o w t h : A

P r i v a t e S e c t o r A s s e s s m e n t f o r V a n u a t u

I I . U p g r a d i n g

I n f r a s t r u c t u r e

II Upgrading Infrastructure

Infrastructure services are poor or high-costor both. In almost every subsector, costs areamong the highest in the region. Substantialupgrades and cost-reduction measures areurgently needed.

Infrastructure plays a vital role in generatingeconomic growth and providing a foundationfor private sector development. Without reliableelectricity, for example, businesses have to investin costly back-up facilities. Widely available,affordable telephone services connect users inPacic island countries with remote areas in theirown countries and with distant markets abroad.Efficient road, air, and sea connections arecritical to the movement of goods and to tourism

sector development.

For many years, Vanuatu has suffered frominadequate physical infrastructure as a result ofinsufficient government investment. Costs forelectricity, water, and port services in Vanuatuare among the highest in Pacic island countries.Further problems are created by Vanuatu’sregulatory framework for infrastructure, which isineffective and needs to be strengthened.

Te country is implementing a number ofsignicant reforms, which should introducegreater competition and regulation in theprovision of infrastructure services. Te reformsare also likely to boost the amount of investment

available for infrastructure projects. In November2007, Parliament passed the Utility Regulatory

Authority Act, establishing a regulatory authorityfor power and water concessions. In addition,the government also passed the PrivatelyFinanced Airport Infrastructure Projects Act

(“PPP Act”) to facilitate private investment inairport infrastructure. Tis bill, which focuses onbuild–operate–transfer and build–operate–ownforms of contract, introduces a more predictableand transparent procurement process for public–private partnerships (PPPs), and should thereforeencourage private participation. While it islimited in application to airport infrastructure, itsprocurement process could be applicable to otherforms of concession contracts for infrastructure

services, and the Government of Vanuatu shouldseek to extend its application while making theinstitutional arrangements for executing PPPcontracts more explicit. Looking forward, it willbe important for the government to access strongproject development expertise so that a pipelineof bankable PPP projects can be prepared.

Tis chapter summarizes various aspectsof Vanuatu’s infrastructure and presents

recommendations for reform. Major constraintsexist in the following areas:

• Maintaining transportation infrastructure. Te road network is inadequate and poorlymaintained; the commercial ports have thehighest costs in the Pacic even though theirefficiency is among the lowest; and, althoughit provides good coverage and affordable rates,the domestic shipping industry has serious

safety problems.• Providing air services. Airports are in good

condition, but high airport charges andlimited capacity are depressing Vanuatu’s

Infrastructure plays a vital role

in generating economic growth

and providing a foundation for

private sector development.



12


P r i v a t e S e c t o r A s s e s s m e n t f o r

V a n u a t u


I n f r a s t r u c t u r ecompetitiveness as a tourist destination. Te

national air carrier, Air Vanuatu, remains a

drain on the country’s budget.• Lowering telecommunications costs. While

telephone charges have fallen sharply withthe arrival of competition, internet chargesfor businesses are still among the highest inthe world. However, government recentlyannounced the issuance of three new licensesfor the provision of internet and othertelecommunication services, which should lead

to better service and lower prices.• Generating power. A private monopoly

generates electricity. Power is reliable incommunities that have access to it, but ratesare high, and the availability of electricityoutside major urban centers is very limited.

• Delivering water and sanitation services.Consumers in Vanuatu have good access to

water and sanitation services, but costs arehigh. Growth pressures are beginning to be feltin urban centers, especially Port Vila, whereinformal settlements, increased population, andmuch greater traffic volumes are beginning tooverwhelm existing facilities. Heavy rain nowleads to urban ooding and threatens sanitationand the water supply. Road congestion is alsoincreasing in Port Vila due to a much greatervolume of traffic arising from vehicle purchases

and the larger volume of tourists.

A. ransportation: Inadequate and PoorlyMaintained

Te quality of Vanuatu’s transportationinfrastructure is generally poor and—evenin areas where facilities are available—maintenance is often inadequate. Teseconditions raise transport costs and add

to the costs of doing business.

1. Roads Need Construction andRehabilitation

Vanuatu’s road network is inadequate andpoorly maintained; the government should bothextend the network and increase expendituresfor maintenance. Te road network density islow, and only 20% of the roads are sealed. Sealedroads are limited to a short radius from the

urban centers of Port Vila and Luganville, whileall other roads, including the Efate ring road, aregravel. Many of the smaller outer islands haveno roads. Low expenditures on maintenancehave accelerated the deterioration of the roadnetwork. Te Public Works Department (PWD)estimates that maintenance expenditures havehistorically been less than 10% of the totalamount needed.1 As part of Vanuatu’s compact

with the Millennium Challenge Corporation,however, maintenance expenditures will increaseto Vt500 million ($4.4 million) in 2008 and

will remain at this level annually through 2011.Tis will allow signicant rehabilitation ofthe road network, which is an urgent priority.Te Australian Agency for InternationalDevelopment’s (AusAID’s) ransport SectorProgram is also supporting upgrades to the roadnetwork and is building the PWD’s capacity to

maintain it.

Box 1: Te Millennium Challenge

Corporation: Vanuatu Compact Vanuatu signed a compact with the MillenniumChallenge Corporation in 2006, pavingthe way for a $66 million grant to nancetransport infrastructure and capacity buildingat the Public Works Department of theMinistry of Infrastructure and Public Utilities.Construction of the Efate ring road has nowbegun; it will be one of several roads built orrehabilitated under this funding arrangement.

1 Te annual maintenance requirement for the road network is estimated by the PWD to be Vt1.2 billion ($10.6 million), butthe allocation in 2006 was less than Vt100 million ($0.9 million).



13



V a n u a t u



Urban road infrastructure is increasinglyinadequate. raffic congestion is rising as vehicleownership becomes more widespread, andooding is a constant problem after heavy rains.

At this point, the planning process for urbanroad construction and rehabilitation is notfunctioning satisfactorily, and no comprehensivelong-term investment plan is in place.

Te PWD estimates that 60% of maintenance(in terms of value) is performed by private rmsunder contract, which is far higher than theaverage in Pacic island countries. Most of this

work is undertaken in Espiritu Santo, Efate, andMalekula; private sector capacity outside theseislands is limited. Te remaining maintenance

work is carried out by PWD staff using donatedequipment that is over 15 years old. Te PWDbelieves that a program to contract out moreof the road maintenance work to its own staffmembers (of which there are 72), following themodel of the Samoa Ministry of Public Works,could be successful in Vanuatu. o do this,several maintenance companies would need

to be carved out of the PWD. Each company would be given a pipeline of work for a xedperiod; at the end of this period, the companies

would compete on equal footing with allservice providers. o ensure the success of sucha program, road maintenance expenditures

would need to be guaranteed at an adequatelevel, which could be achieved by pooling usercharges into a dedicated fund. Te governmentshould actively pursue both of these measures

within the context of a larger restructuring andcorporatization of the PWD. Other functionscurrently executed by the PWD—such as themanagement of three piped water networks atLuganville, Lakatoro, and Isangel—could alsobe contracted out to the private sector or toprivatized units of the PWD.

2. Ports Need Regulation and Competition Vanuatu has two commercial ports: one inPort Vila and one in Espiritu Santo. Bothare the responsibility of the noncorporatizedDepartment of Ports and Harbors (also

Figure 4: Paved Roads (% of Total Roads)

P e r c e n t a g e

Sources: Central Intelligence Agency World Factbook and World Bank World Development Indicators.

Country

S o l o m

o n I s l a n d

s

P a p u a N

e w G u

i n e a

S t. L u c

i a

F e d e r a t

e d S t a t e

s o f M i

c r o n e s

i a

P h i l i p p i n e

s

V a n u a t

u T o n

g a

T i m o r - L

e s t e F i j i

N e w Z e a l a n d

J a m a i c a S a m

o a

M a u r i t

i u s

B a r b a d

o s0

20

40

60

80

100

120



14



V a n u a t u



called the Ports Authority) of the Ministry ofInfrastructure and Public Utilities (MIPU). Portsin all other outer islands, none of which areoperated commercially, are the responsibility ofthe PWD, which is also under MIPU. Tese aregenerally in poor condition.

Te operation of the two commercial ports hasbeen contracted out to the private sector on aconcessional basis. Port Vila has three wharves.

Te main wharf takes international cargoes andcruise ships; the Ports Authority owns it butcontracts out all services to a private company,Ira Wharf and Stevedoring. Tere are twodomestic wharves: one owned outright by Ira,

which operates it as a commercial enterprise, andone owned and operated by the private sector.Both domestic wharves are run down and needto be rehabilitated. Te Espiritu Santo port isowned by the Ports Authority but operated by

the Northern Islands Stevedoring Co. (NISCO);it is also in disrepair and represents a safetyhazard to people, cargo, and ships.

Te cost of moving goods through Vanuatu’scommercial ports is the highest in Pacic island

countries, even though the ports’ efficiency isamong the lowest. High port costs are harming

Vanuatu’s competitiveness. In terms of bothcosts and delays in moving goods, Port Vilahas the worst performing port in the Pacicregion. Port Vila’s charge for clearing a 20-footcontainer is $1,000—by far the highest in theregion. By contrast, at the least expensive port(Port Moresby), the same charge is $200. Port

Vila also has the slowest turnaround time: 17

days compared to 3 days in Port Moresby. Tiscombination—high fees coupled with delayscaused by ships waiting to enter the port—substantially adds to costs, which is particularlydamaging in a small, remote island economy thatdepends on importing and exporting goods forits prosperity.

Stevedoring charges at both of Vanuatu’scommercial ports are seven times higher than in

Port Moresby (Figure 5). Tese charges, whichare established by unregulated monopolies, havea signicant impact on the cost of importingand exporting. Tere is a pressing need for afar-reaching review of the ports’ concession

0

20

40

60

80

100

120

P e r c e n t a g e

Figure 5: Stevedoring Charges ($/TEU)

TEU = twenty-foot equivalent unit.Source: AusAID and Vanuatu Ministry of Finance and Economic Management.

City

A l o t a u A p i a H o

n i a r a K a v i e

n g K i m b

e L a e L a u

t o k a M a

d a n g

N u k u ’ a l o f a

O r o B a y

K o s r a e P o h n p

e i

P o r t M

o r e s b y

R a b a u l

S a n t o S u v

a T a r

a w a V i l a W e

w a k



15



V a n u a t u


I n f r a s t r u c t u r e arrangements, particularly the Ira contract,

which recently received a 50-year extension on

a noncompetitive basis. Additional stevedoringoperators are needed urgently.

In the longer term, Vanuatu should developanother port site in the vicinity of Port Vila,

which would provide competition. Te casefor establishing another port rests on severalconsiderations: (i) the very limited capacityof the existing port, (ii) inadequate containerstorage, and (ii) the unavailability of one of the

three existing wharfs for 5–8 days per month when priority is given to cruise ships.2 When thenew port is developed, it is essential that newoperators be sought for both the port and thestevedoring services.

Ongoing regulation is needed. While a new port will eventually provide competition, the currentmonopolies for the ports and associated services

will require effective regulation to bring downcosts and improve efficiency. Te regulatoryburden will be reduced when the Port Vilamonopoly is broken, but it will not disappear.

3. Issues Related to Domestic ShippingServices

Domestic shipping services in Vanuatu are 100%privately operated. Tere are 20 private shippingcompanies operating a total of 28 vessels, two

of which are owned by the government.3 Apartfrom the two government-owned vessels, which

are about 2 years old, most of the domesticshipping vessels in Vanuatu are small and old.

All inhabited islands are reached by shippingservices, although areas of some islands haveinfrequent service or no service at all. Accordingto a recent survey,4 90% of domestic users aresatised with the frequency and capacity of theservices. Oversupply of shipping capacity 5 andintense competition among service providershas led to affordable freight rates and passengerfares. Overall, the industry is protable, earning10% on equity with an average load factor of60%–65%.6 Prots, however, are at the expenseof safety, and are therefore unsustainable.

Te lack of enforcement of safety standardskeeps service quality low and the risks of existingservices high. Tere are numerous reports of

violations of international safety standards,and there is a real possibility of tragic accidentsoccurring on interisland ferries. A recentinspection found four vessels in violation ofsafety standards. Te Asian Development Bank(ADB) is working with the New Zealand Agencyfor International Development (NZAID)and the government on this issue, whichshould be an urgent priority. Te authors ofthis report recommend that the government:(i) review safety standards for the domestic

shipping industry, (ii) streamline legislationrelated to safety and economic requirementsfor maritime and shipping activities, and (iii)create a maritime safety authority to establishand enforce standards. Te government shouldalso develop a formal arrangement to contractout shipping services to remote communitiesnot currently visited by ferries.7 Tese measures

2 An upgrade of the government-owned wharf in Port Vila will begin in 2009 and will increase berthing capacity, but storagecapacity will remain a major constraint.

3 An additional nine vessels are owned by the private sector, but are not currently in operation.4 NZAID. 2008. Vanuatu Inter-island Shipping Study. Wellington.5 Capacity is 80,000 tons per year but demand is approximately 50,000 tons.6 NZAID. 2008. Vanuatu Inter-island Shipping Study. Wellington.7 orres, Ureparapara, and afea Province.

Te current monopolies for the

ports and associated services will

require effective regulation to bring

down costs and improve efficiency.



16



V a n u a t u



could also be supported by restoring Radio Vanuatu shortwave services and—wherefeasible—extending mobile phone coverage.

B. Air ransport: A Vital Lifeline

Air links with other countries serve as a vital lifeline. Increased competition amongairlines has led to lower prices, but otherparts of the air transport system—particularlyairport services—are depressing Vanuatu’scompetitiveness.

1. Airport Costs and Capacity

Vanuatu has international airports in Port Vilaand on the islands of Espiritu Santo and anna.

Tere are also 26 airelds on the outer islands, which remain under government ownership andare managed by MIPU. Te state of the airports,particularly the three international airports, isreasonable.

Airports Vanuatu Limited (AVL), a governmententity that was corporatized in 2000, managesthe international airports. AVL is also responsiblefor airport management, air traffic control,aviation rescue, reghting, and aviationsecurity at the three international airports.

Airport charges are among the highest in Pacicisland countries; this keeps airfares high anddepresses Vanuatu’s competitiveness as a touristdestination, particularly compared to Fiji.

o lower costs, the management, air trafficcontrol, aviation rescue, reghting, and aviationsecurity services should be contracted out to theprivate sector.

Te Bauereld International Airport at Port Vila

has now reached its maximum capacity at peaktimes; it will not be able to handle the increasedarrivals that are expected once additionalinternational routes are liberalized. o addressthis constraint, AVL is currently exploring

Figure 6: Total Landing and Passenger Charges ($)

$

RMI = Republic of the Marshall Islands, FSM = Federated States of Micronesia, PNG = Papua New Guinea.Source: Air New Zealand Landing and Passenger Charges 2004.

Airport

B a u e r

e l d , V a n u

a t u

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r n a t i o n

a l , P N G

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a l a u

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, R M I

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i j i

N a d i , F

i j i

B o n r i k i , K i r i b a t

i

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o a

N u k u ’ a l o f a

, T o n g a

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i , F S M

H e n d e

r s o n , S o

l o m o n

I s l a n d s0

1,000

2,000

3,000

4,000

5,000

Passenger Landing



17



V a n u a t u



options for a public-private partnership (PPP)to upgrade the Bauereld airport facilities(including hangars, aprons, luggage handling,and commercial buildings) and to extend therunways to their topographical limits. Becausetourism is so important to Vanuatu’s economy,airport capacity and cost problems are hinderingprivate sector competitiveness

2. Expansion of Air Services

Vanuatu is served by ve international airlines,

including the national carrier, Air Vanuatu.Tese airlines provide links with major marketsin Australia, Fiji, New Caledonia, New Zealand,and Solomon Islands. Air Vanuatu competesdirectly with Air Pacic’s twice-weekly Nadi–

Port Vila service and with Pacic Blue’s twice- weekly Brisbane–Port Vila service. Both of theseroutes are key international segments. PacicBlue, a low-cost airline, launched a Brisbane–Port Vila service in September 2004, and in 2years, managed to secure a one-third share of the

Australia–Vanuatu market. Pacic Blue’s successcame largely at the expense of Air Vanuatu.Overall passenger numbers have increasedrapidly as a result of the lower fares; since 2004,the number of passengers traveling between

Australia and Vanuatu has grown by 35%.International tourist arrivals were nearly 30%higher in January 2009 than in January 2008.Tese results reinforce the wisdom of openingthe country to foreign airlines and demonstratethe benets of competition.

Figure 7: Cost of Peak Mobile Calls ($ per minute)

$

FSM = Federated States of Micronesia, ST = Solomon Telekom Company Ltd., TCC = Tonga Communications Corporation.Source: World Bank.Note: Prices and exchange rates effective September 2007. In some cases operators offer per minute, per 2-minute, or per 30-secondrates. Some have introduced per second billing. Where more than one rate provided by a company (for example, mobile-to-mobileand mobile-to-landline), a simple average was taken.

Service Provider

T O N G

A : S h o r e l i n e

F S M : F S M T

e l e c o m m

u n i c a t i

o n s

P A L A U : P a l a u

T O N G

A : T C C

S A M O A : S a

m o a T e l

T I M O R - L E S T E : T

i m o r T e

l e c o m

S A M O A : D

i g i c e l

P A P U A N E W G

U N E A : D

i g i c e l

K I R I B A T I : T e l e c o

m S e r v i

c e s K i r i b a t i

F I J I : V o d a f o

n e

V A N U A T U : T

e l e c o m V

a n u a t u

S O L O

M O N I

S L A N D S : S

T

P A P U A N E W G

U N E A : T e

l k o m0.0

0.1

0.2

0.3

0.4

0.5

0.6

Competition No Competition



18



V a n u a t u


I n f r a s t r u c t u r eHowever, Air Vanuatu remains a drain

on the country’s budget and needs to

be restructured, as evidenced by thepressures placed on the airline by increasedcompetition. As the government considersrestructuring Air Vanuatu, options mayinclude forming a joint venture with aprivate partner, perhaps similar to thePolyBlue joint venture between Polynesian

Airlines and Virgin Blue in Samoa.

In addition to providing international

service, Air Vanuatu owns and operatesVanair, the country’s domestic carrier.Vanair operates 29 domestic routes, onlytwo of which are protable. It continues torequire an operating subsidy. Air Vanuatushould contract out the domestic routesthat require subsidies, perhaps using afranchising scheme such as the one usedsuccessfully in Fiji, where private operatorshave taken on domestic routes in exchangefor a performance-based subsidy.

C. elecommunications:Liberalization Underway

Vanuatu is liberalizing the telecommunicationssector and strengthening regulatory authority,but internet charges remain high, which isharming business at a time when commerciallinks with other countries are expanding rapidly.

Te arrival of competition is reducing telephonecharges in Vanuatu, and although internetcharges for businesses are still among thehighest in the world (several times those inFiji, for example), the goverrnment recentlyannounced the issuance of three new licensesfor the provision of internet and othertelecommunication services, which should leadto better service and lower prices.

In late 2007, the government reached a settlementagreement with elecom Vanuatu Limited thateffectively phased out the company’s monopolyon all telecommunications services—xed line,

mobile, internet, microwave voice, and data links.In the rst quarter of 2008, Digicel was awardedthe rst new mobile license in Vanuatu. Within6 months of operation, the company providedcoverage to 75% of the population. Costs havealso fallen signicantly, providing strong evidenceof the benets of competition. Previously,

Vanuatu’s mobile communications costs wereamong the most expensive in the region, but—asin many other countries—the mere threat ofcompetition resulted in dramatic price declines.Cheaper, more accessible mobile communicationsare providing an important boost to commercialactivity throughout the country. Te authorsof this report recommend that the governmentcontinue with telecommunications reform, withparticular emphasis on further liberalization ofinternet services.

Te amended elecommunications Act waspassed in November 2007. Te Act creates astronger regulatory authority, which is being

$

0

100

200

300

400

500

600

700

800Figure 8: Cost of Internet Connection ($ per month)

Note: Fiji and Papua New Guinea allow internet competition.

Solomon Islands, Timor-Leste, and Vanuatu do not.Source: World Bank.

Country P a p

u a N e

w G u i n

e a F i j i

S o l o m

o n I s l a n d

s

V a n u a t

u

T i m o r -

L e s t e

64-128k Residential

3,450

512k Business Service



19



V a n u a t u



established within the Ministry of Financeand Economic Management (MFEM). Atelecommunications regulatory specialist willstaff the authority for an initial 12-monthperiod, during which the government willconsider merging the responsibility fortelecommunications regulation with the dutiesof the new Utilities Regulatory Authorityoverseeing the power and water sectors.8

D. Power: Competition and RegulationNeeded

Te communities served by power concessionshave reliable service, but rates are high.Electricity outside major urban centers is verylimited. Te government should continuewith reforms that will introduce greatercompetition and improve regulation.

A private company operates concessions thatsupply reliable power to Port Vila, Luganville,

Malekula, and anna. Electricity elsewhere in Vanuatu is extremely limited—only 27% of thepopulation has access to safe, reliable power.

Vanuatu’s power sector is operated by UNELCOSuez, which also operates the water supplysystem in Port Vila. UNELCO was awarded therst power concession for Port Vila more than70 years ago. Te company supplies power tofour population centers through three different

concession contracts: one for Port Vila (whichruns until 2031), one for Luganville (whichruns until 2010), and one for Malekula andanna (which runs until 2022). Te Malekula

and anna operations are loss making and arecross-subsidized by users in other cities. Te Port

Vila and Luganville operations extend about 15kilometers from the municipal boundaries.

Te concession contracts have resulted in reliable

power supplies to the communities served. Teaverage tariffs, however, are among the highest

0

5

10

15

20

25

30

35

¢ p e r

K w

H

Figure 9: Average Electricity Tariffs (¢ per KwH)

RMI = Republic of the Marshall Islands, FSM = Federated States of Micronesia.Source: World Bank.

Country

N e w Z e a l a n d P a l a u F S M R M I F i j i

J a m a i c a

S t K i t t s

T i m o r - L

e s t e

B a r b a d

o s

S o l o m

o n I s l a n d

s

S t. L u c

i a S a m

o a G r e

n a d a

V a n u a t

u

D o m i n

i c a K i r i b a t

i T o n

g a

8 NZAID and the World Bank will fund capacity building.



21



V a n u a t u


I n f r a s t r u c t u r e Vanuatu ranks high among developing countries

in its access to water and sanitation; over 80%

of the population is served by piped networks.UNELCO Suez operates the water systemin Port Vila under a concession contract thatruns until 2014. As is the case for power, theUNELCO concession has resulted in an efficientand reliable supply of water, but at a cost toconsumers that is higher than in neighboringcountries. UNELCO recovers the full cost ofservice through the tariff, although there areclaims that these prices reect lack of effectiveregulation. In addition, the rapid increase inpopulation in Port Vila, and to a lesser extent, inother urban areas, is putting increased pressureon water, sanitation, and drainage. Heavy rainincreasingly results in urban ooding. Pressureon sanitation facilities is rising, and investmentin future water supply could be insufficient.

Te PWD operates the water supply in all other

locations. Using UNELCO’s levels of efficiencyas a benchmark, the PWD has embarked ona plan to restructure its three piped networks.Te result has been a remarkable improvementin revenue collection and an operating prot of

Vt9 million ($0.08 million) in 2007 (comparedto an operating loss in 2006). Te PWD shouldaccelerate its plan to attract private sectormanagement for these smaller piped networks.

Te rapid increase in population

in Port Vila, and to a lesser extent,

in other urban areas, is putting

increased pressure on water,

sanitation, and drainage.



22

S u s t a i n i n g

G r o w t h : A


I I I . I m

p r o v i n g G o v e r n a n c e a n d

R e d u c i n g t h e

R o l e o f t h e

S t a t e

IIIImproving Governance and Reducingthe Role of the StateTe state plays a substantial role in theeconomy. Intrusive government interventionsand weak governance of state-ownedinstitutions are reducing productivity.

Te state plays a prominent role in theeconomy of Vanuatu. In many areas, however,

government interventions and policies areharming economic growth and hinderingprivate sector development. Te governmentowns 20 enterprises, has recently established the

Agricultural Development Bank, and regulatesagriculture through the Vanuatu CommoditiesMarketing Board. In addition, the government’sapproach to competition may actually discouragethe growth and competitiveness of consumermarkets. Tis chapter focuses on problems in thefollowing areas:

• Operating state-owned enterprises. Vanuatu’sSOEs are performing poorly, which reducesefficiency and productivity in the economy.

• Regulating and controlling agriculturalcommodities. Te Vanuatu CommoditiesMarketing Board is inefficient andunaccountable; it has an adverse impact on

the industries it regulates.• Operating the Agricultural Development

Bank. Recently formed, the bank poses risks to Vanuatu’s nancial system.

• Providing a framework for competition.Government policy does not promotecompetition effectively. As a result, many criticalservices are provided by unregulated monopolies,

and consumers’ rights are not well protected.

• Legislating wages and employmentconditions. New amendments to theEmployment Act will add substantially to thecost of employing workers in Vanuatu, andare likely to have a particularly negative effecton small businesses, including those owned by

ni-Vanuatu.

A. State-Owned Enterprises: Inefficient andPoorly Governed

Vanuatu’s inefficient state-owned enterprisesprovide low rates of return, reducinggrowth and efficiency in the economy. Tegovernment should improve oversight andprepare as many state-owned enterprises aspossible for divestiture.

Te government has 20 SOEs, known asgovernment business enterprises (GBEs). Teseenterprises are owned in whole or in part bythe government, and are engaged either incommercial activities or in the provision ofpublic services. Of Vanuatu’s 20 SOEs, 10 arecompanies established under the Companies

Act; the government is a minority shareholderin 5 of the 10. Te other 10 SOEs were createdthrough special acts of Parliament; 4 of these arecorporatized entities.11 Most of Vanuatu’s SOEspursue commercial activities.

All but a very few of Vanuatu’s SOEs areinefficient; this inefficiency reduces growth andraises the cost of doing business in the country.Te SOEs drain budgetary resources and reduceproductivity in the economy. Based on limitednancial data made available to an ADB-nanced review team in 2006, it appears that

11 Corporatization, which creates an SOE out of a government agency or department that previously delivered a service, is in-tended to introduce greater transparency, efficiency, and accountability. Tis method is most often used to establish SOEs thatdeliver core public infrastructure services, most notably power, water, sanitation, telecommunications, broadcasting, postalservices, airports, and seaports.



23



V a n u a t u

I I I . I m p r o v i n g

G o v e r n a n c e a n d


R o l e o f t

h e S t a t e the productivity of Vanuatu’s SOEs is low. It is

safe to assume that most SOEs that are majority-

owned by the government are earning very lowor negative rates of return on the capital andresources that they are using.

Te code of governance for Vanuatu’s SOEs doesnot encourage transparency or accountability,and the framework for monitoring theirperformance does not function effectively.

Te SOEs subject to the Companies Act arerequired to le annual nancial reports with

the Vanuatu Financial Services Commission.Since 2006, however, only three of them havesubmitted the required reports. Te SOEscreated by acts of Parliament also have reportingrequirements, which typically involve submittingannual nancial reports to the Auditor General.Most SOEs are not in compliance with this

able 1: Government Shareholding of Government Business EnterprisesGovernment Business Enterprise Government

Shareholding(%)

Shareholding Ministry

Government Business Enterprises Under theCompanies Act

Air Vanuatu 100 MFEM, MIPU, PMO

Airports Vanuatu 100 MFEM, MIPU

Global Trading and Manufacturing 31 PMO

I ra Wharf and Stevedoring 34 MIPU

Metensel Estates 99 MFEM, MAQFF

Northern Islands Stevedoring 10 MIPU

Telecoms Vanuatu 33 MIPU, MFEM

Vanuatu Livestock Development 100 MFEM, MALFFQ

Vanuatu Post 100 MFEM, MIPU

Corporate Government Business EnterprisesUnder Their Own Acts

National Bank of Vanuatu 100 MFEM

National Housing Corporation 100 MIA

Vanuatu Broadcasting and Television Corporation 100 PMO

Vanuatu National Provident Fund 100 MFEM

Noncorporatized Government BusinessEnterprises Under Their Own Acts

National Tourism Of ce 100 MTNVB

Vanuatu Financial Services Commission 100 MFEM

Reserve Bank of Vanuatu 100 MFEM

Asset Management Unit 100 MFEM

Utility Regulatory Authority 100 MFEM

Vanuatu Commodities Marketing Board 100 MTNVB

MAQFF = Ministry of Agriculture, Quarantine, Forestry, and Fisheries; MFEM = Ministry of Finance and EconomicManagement; MIA = Ministry of Internal Affairs; MIPU = Ministry of Infrastructure and Public Utilities; MTNVB =Ministry of Trade and Ni-Vanuatu Business; PMO = Prime Minister’s Of ce.Source: Ministry of Finance and Economic Management.



24



V a n u a t u




R o l e o f t

h e S t a t erequirement. Weak corporate governance also

contributes to the SOEs’ poor performance.

Directors are selected by the shareholdingministries, but the appointments are rarely madeon the basis of professional qualications. Inaddition, directors’ fees and expenses are wellabove prudent standards.12

Te accountability of the SOEs is furthercomplicated by the fact that, even though inprinciple one ministry is in charge of eachSOE, in practice the SOEs face overlapping

accountability to multiple ministries. TeMinistry of Finance and Economic Management(MFEM) has created a GBE unit that isnominally responsible for overseeing the SOEportfolio as a whole. Te unit, however, is notlegally empowered to request nancial reportsfrom the SOEs or to provide any managementor governance inputs. Vanuatu’s Parliamentshould pass a bill formally empowering the GBEunit; without such a bill, the unit will remainineffective.

Vanuatu’s SOE sector needs wholesalerestructuring. Te government should establisha new legal framework, reform corporategovernance arrangements, and implement theterms of the 1998 Comprehensive ReformProgram (CRP), which advocated privatizationof all SOEs that could be more efficiently runby the private sector. A restatement of thegovernment’s SOE ownership and divestiturepolicy, as stated in the CRP, could be a usefulstarting point. Reforms should include theremoval of civil servants and ministers from SOEboards, a transition that could begin with theelimination of sitting fees and other benets forcivil servants serving on SOE boards. As is thecase in any country embarking on SOE reform,success will require strong political will from the

highest levels of government.

While laudable progress has been made inopening up some SOE monopolies (e.g.,

telecommunications) to competition and inprivatizing the abattoir, the privatization ofother SOEs (e.g., Air Vanuatu) remains highlysensitive. Moreover, attempts by MFEM tostrengthen its SOE oversight by preparing thedraft Public Enterprise Bill have been obstructedat the political level.

MFEM’s original draft of the Public EnterpriseBill was intended to draw on the principlesof the New Zealand model used in Fiji andSamoa. Te draft bill, however, has undergonesubstantial revisions as a result of governmentconsultation. Te revised draft lacks some

essential provisions needed to make it effective,specically: (i) a requirement that SOEsoperate as successful businesses, (ii) a provisionrequiring directors to be appointed on thebasis of professional qualications and to beclear of conicts of interest, (iii) restrictions onministers serving on boards, and (iv) a processfor documenting and compensating in full anycommunity service obligations.13 In its currentform, the proposed Public Enterprise Bill

12 Te National Bank of Vanuatu stands out as an exception, largely because its directors are not appointed at the discretion ofits responsible minister, but rather are selected based on specic qualications listed in the founding act.

13 Community service obligations are noncommercial activities that governments require SOEs to carry out, even though theuser charges for these activities typically do not cover their costs.

Vanuatu’s SOE sector needs

wholesale restructuring. Te

government should establish

a new legal framework,

reform corporate governance

arrangements, and implement

the terms of the 1998

Comprehensive Reform Program.



25



V a n u a t u




R o l e o f t

h e S t a t e would only obligate SOEs to submit nancial

reports to the GBE Unit; it would not address

more substantive governance and management weaknesses. In summary, amendments tothe current draft14 of the bill will reduce theaccountability of the SOEs. Te bill is unlikelyto encourage changes in the behavior of theministers or the SOE boards that would resultin an improvement in the performance ofthe portfolio.

Given the substantial amount of capital utilizedby the SOEs and the low rates of return theygenerate, it is essential for MFEM to be giventhe authority and data it needs to performits oversight role effectively. Te governmentshould enact a more robust public enterprisebill that squarely addresses the SOEs’ currentgovernance weaknesses, outlines a framework formanaging community service obligations, andunambiguously obligates the SOEs to functionas successful and efficient businesses. Moreover,given the purely commercial nature of several

majority-owned SOEs, the government shouldprepare as many as possible for divestiture.

B. Te Vanuatu Commodities MarketingBoard: Constraining the Growth of Agriculture

Te Vanuatu Commodities Marketing Boardhas an adverse impact on the industries itregulates. It should be abolished immediately.

Te Vanuatu Commodities Marketing Board(VCMB) was established in 1982, with initial

funding from the European Union, to improvethe quality of copra and to stabilize copraprices. Te rst commodity to be controlled

was copra, followed by cocoa and kava.Te VCMB subsidized prices at levels that

were unsustainable; as a result, its resources were exhausted by 1999. At that point, thegovernment transferred kava marketing to theprivate sector, and then followed by transferringcopra and cocoa marketing. Even though theseindustries prospered under private sector control,they were brought back under the jurisdiction ofthe VCMB in 2003.

Te VCMB has been strongly criticized becauseits actions have an adverse impact on theindustries it regulates. A recent analysis of the

VCMB’s effect on the copra industry 15 reportedon the results of interviews with stakeholders.Overwhelmingly, stakeholders indicated that the

VCMB is inefficient and unaccountable, thatit imposes a substantial nancial burden on theindustries it regulates (particularly on small-scale farmers), and that it does not assist in theindustries’ development. Tere is also said to besubstantial political interference in the VCMB.

Te VCMB has not produced audited accountsin 7 years. An incomplete audit in 2007 revealedthat the board is insolvent and that it does nothave sufficient funds to pay its debts withoutimposing large additional levies on farmers. Teaudit also revealed that nancial oversight isextremely weak and that a substantial amount offunding from development partners cannot beaccounted for.

Further complications are created by governmentownership of Vanuatu Coconut ProductsLimited (VCPL), which is managed by the

VCMB. Tis arrangement leads to numerous

14 Te reviewed draft is dated 2 May 2007.15 AusAID. 2007.Strategic Review of the Coconut Industry and Commodities Marketing in Vanuatu.Canberra.

Te VCMB has been stronglycriticized because its actions have

an adverse impact on the industries

it regulates.



26

conicts of interest, discourages privateproduction of copra, and lowers the efficiency of

an industry that could be making a substantialcontribution to Vanuatu’s growth. VCMBrevenue is used to support VCPL and theactivities of its board.

After reviewing the activities of the VCMB andconducting interviews with the private sector, theauthors of this report recommend that the VCMBbe reformed or abolished as a matter of priority.

C. Te Agricultural Development Bank:Risky and Ineffective

Te recently formed AgriculturalDevelopment Bank poses risks to Vanuatu’snancial system. Te government shouldplace it under the regulatory authority of theReserve Bank and consider merging it withthe National Bank of Vanuatu.

Te Vanuatu Agricultural Development Bank Act of 2006 calls for a government-ownedlending institution to be established for thepurpose of making loans for agriculturaldevelopment. Te government has providedcapital, and the bank has established an officein Port Vila. Initially, it focused on payrollloans, but recently it has started making loansto farmers. Tere are a number of concerns,however, about the way the bank is regulated

and about the banking and agriculture expertiseof its staff.

Te history of government-owned nancialinstitutions in Vanuatu has not been auspicious.Te Development Bank of Vanuatu had to beliquidated in 1998 because of large losses arisingfrom poor lending policies, political interference,and mismanagement. Similarly, the NationalBank of Vanuatu (NBV), the government-owned

commercial bank, had to be restructured, anda substantial amount of nonperforming assetshad to be transferred out of its portfolio. NBVis now under professional management and isperforming well.

NBV’s return to protability demonstrates thatgovernment ownership is not an automatic

barrier to good performance by nancialinstitutions, but history shows that caution is

warranted. Experience—in Vanuatu and manyother countries around the world—shows that anessential feature of well-run government-ownednancial institutions is that they are managed atarms-length by professional bankers. Tis is notthe case for Vanuatu’s Agricultural DevelopmentBank. Many of the bank’s personnel havelimited or no background in banking. Tey alsolack agricultural expertise. Until recently, the

Agricultural Development Bank’s only currentactivity was providing payroll loans in Port Vila.It has now commenced making agriculturalloans in the provinces, but there are substantialconcerns regarding its expertise.

An additional—and particularly worrisome—concern is that the bank does not fall underthe Financial Institutions Act because it wasestablished by a separate act of Parliament.

As a result, it is not automatically under the

supervision of the Reserve Bank of Vanuatu.Sound principles of regulation suggest that theregulation of banking institutions should beconsolidated under one institution. For thisreason, and because of the problematic historyof government-owned nancial institutionsin Vanuatu and elsewhere, the Reserve Bankshould be appointed as the supervisor of the

Agricultural Development Bank. In addition,the government should consider folding the

Agricultural Development Bank’s mandateinto NBV, which is professionally run, and hasthe nationwide network to oversee agriculturalsector loans.

S u s t a i n i n g g r o w t h . A


V a n u a t u




R o l e o f t

h e S t a t e

Te history of government-owned

nancial institutions in Vanuatuhas not been auspicious.



27



V a n u a t u




R o l e o f t

h e S t a t e D. Establishing a Framework to Promote

Competition

Vanuatu urgently needs a strong competitionframework. Te government should establisha well-functioning legal framework thatpromotes competitive behavior, provideconsistent regulation of monopolies, andadopt consumer protection legislation.

Competition is the key to an economy thatfunctions effectively. Competition enhancesproductivity and ensures an efficient allocationof resources. In Vanuatu, as in many otherPacic island countries, government policy doesnot do a good job of promoting competition.Many vital services are provided by a single rm,either private or publicly owned, often underthe umbrella of unregulated monopoly rightsgranted by the government. In addition, thereis very limited protection of consumers’ rights.

Where there should be competition, there is

government intervention. Vanuatu needs a robust competition frameworkto ensure that monopoly power is notabused and to promote higher productivity.Competition policy should discourageanticompetitive practices such as price-xing andthe abuse of market power, and should providelegal protection for consumers.

1. Regulation of Monopolies An effective competition framework mustinclude regulation of monopolies. Even

when unregulated monopolies are efficientin keeping costs low, they invariably result inhigher prices. Tis distorts resource allocationand reduces the rate of economic growth.Monopolies at Vanuatu’s ports, for example,have led to very high costs and high levels of

inefficiency. Effective regulation could limitthe high monopoly prots and promote higherproductivity, which would help bring downcosts and improve efficiency. Te monopolyarrangements for water, electricity, and

telecommunications in Vanuatu also createenormous problems, as many have recognized.

Despite recent advances in telecommunicationscompetition (which have resulted in sharplylower prices), as a general rule, Vanuatu’s smallsize makes monopolistic behavior more easilyattainable than in larger countries. One solutionmight be to use a transparent tendering processmodeled on the one organized for the Luganvillepower concession (Chapter II) to introducecompetition into various sectors.

Vanuatu should establish some type of regulatoryagency to oversee activities and sectors wherethere are natural monopolies. Tis will bechallenging, because economically efficientregulation requires substantial technical andaccounting expertise. Te cost of this expertise ismore or less xed; the same skills are needed toregulate monopolies in high-income countriesas in developing countries such as Vanuatu.Tis xed cost weighs more heavily on a smalleconomy like Vanuatu than it does on a largereconomy like Australia. One sensible way toeconomize on technical and accounting skills

would be to establish a general regulatory boardfor Vanuatu, charged with regulating multipleindustries. Another option would be to adoptsome form of regional regulation. Regardlessof the regulatory method chosen, the mostefficient solution would be to rely—to the

extent feasible—on competitive market forcesto ensure the lowest possible prices and thegreatest efficiency, leaving the regulatory boardto focus on key issues in areas where competitivesolutions are not possible.

2. Te Legal Framework for CompetitionPolicy

Vanuatu does not have an adequate competition

law framework. Te country needs legislationthat would allow for formal reviews of actual orpotential monopolistic behavior. Te legislationshould specify norms; violation of these norms

would trigger investigations of potential abuse



28



V a n u a t u




R o l e o f t

h e S t a t eof market positions. It should also establish rules

and enforcement mechanisms under which a

regulatory body would operate. Tis approach would require distinguishing carefully betweentraded and nontraded goods: the former aresubject to at least the threat of competition fromabroad, while the latter are not. Te authors ofthis report suggest that in Vanuatu, competitionpolicy should follow the “rule of reason” approachto evaluating market power. Tis approachemphasizes the need to have low impediments totrade and investment, which implies low tradeand regulatory barriers throughout the economy.

Tere is very little legislative protection forconsumers’ rights in Vanuatu. Te Sale of Goods

Act of 1893 provides some protection, but onlycovers contracts for the sale of goods; it doesnot cover services provided to consumers. Inmany other jurisdictions, legislation speciesfundamental consumer rights and stipulatesremedies for cases where consumers have beenmisled or deceived by commercial practices.

As part of a modern competition framework, Vanuatu should adopt and enforce consumerprotection legislation.

3. Price Controls and Price-Fixing

While price-xing is a fundamental concern ina small economy, the price control mechanisms

Vanuatu currently has in place may, in fact,discourage growth and investment. Te PriceControl Act, passed in 1988, establishes aframework for the control of prices. However,it is not specic about the types of goods thatmay be controlled, leaving wide discretion forthe Price Control Bureau, which is charged

with administering the Act. Te Act also createdthe Price Advisory Committee, which must beconsulted about any proposed legislation that

will affect or otherwise control prices. Ultimately,the regulation of prices has the adverse effectof distorting the market, eventually leading toshortages in the supply of goods. For this reason,it would be far more effective for Vanuatu to

promote effective market functioning with asystem that does not attempt to control prices

directly, but does prohibit practices (such as price-xing) that are anticompetitive and that hindermarket development.

E. Amendments to the Employment Act:Damaging to the Economy

If the new amendments to the Employment Act become law, they will have a strongnegative impact on Vanuatu’s economy. Teyshould be repealed.

Amendments to the Employment Act were passedin December 2008. Tese amendments containlabor provisions that are among the most generousin the world. Te revised Act is not yet gazetted,but if the new provisions become law, they willgreatly increase the cost of employing workers inan economy where formal employment is still ata premium. Tey will threaten the existence ofmany rms, especially small businesses, by givingthem substantial additional contingent liabilitiesin the form of severance payments. New benetsmandated by the amendments will greatly add tothe cost of employing workers. Te consequences will be far-reaching:

• Unemployment will become widespread.

• Many rms will become bankrupt.

• Women will be excluded from the workforce.

•

Te economy will lose competitiveness.• Economic growth will be sharply reduced.

• Labor will be replaced with capital equipment.

Te price control mechanisms

Vanuatu currently has in place

may, in fact, discourage growth

and investment.



29


P r i v a t e


I V . M o d e r n i z i n g t h e

C o m m e r c i a l L e g a l F r a m e w o r k

IV Modernizing the Commercial LegalFramework

Vanuatu’s commercial legal framework iscomplex, outdated, and difficult for most usersto access. Te government should press forwardwith current efforts to reform this framework.

Vanuatu’s legal complexities are at leastpartly the product of the country’s historicaldevelopment. Both the English and the Frenchhave administered Vanuatu; as a consequence,the law—including commercial law—is basedon a complicated mix of sources. Te evolutionof the legal system in the recent past has beendriven primarily by acts of Parliament and theirassociated regulations and, to a lesser extent, byprecedents derived from the decisions of courtsin Vanuatu. Te commercial legal framework is

also based on the customary laws of Vanuatu; various British and French laws, includingEnglish common law; and the principles ofequity,16 which will continue until repealed bythe Vanuatu Parliament.

Te country’s commercial legal frameworkis currently undergoing reform with ADBsupport, primarily at the behest of the VanuatuFinancial Services Commission (VFSC). Several

panels of local and international experts havebeen established to review legislation andrecommend changes to specic aspects of thelegal framework. More must be done, however,if commercial laws are to be effective and ifthey are to support private sector development.

Vanuatu needs to remove uncertainty andgaps from the legal framework. For example,government departments should exercise a

minimal amount of discretionary power whenapplying rules.

Tis chapter discusses major weaknesses inthe commercial legal framework, and presentsrecommendations for reform. Key constraintsexist in the following areas:

• Starting and running companies. Provisionsin the existing Companies Act make it difficultand costly to establish and operate a company.

• Closing down companies. An outdated andoverly complex corporate bankruptcy regimemakes it difficult to wind up an insolventcompany.

• Operating trusts. Te current legal frameworkfor trusts does not fully protect the rights ofbeneciaries.

• Using and enforcing contracts. Te lawsgoverning contracting do not provide a robustframework for entering into contracts, settlingcontract disputes, or enforcing contracts.

• Complying with burdensome regulations. Regulations for starting and running businesses

are burdensome and involve substantialduplication of effort, which leads to delays andraises costs.

• Accessing information about the legalsystem. Te only complete, reliable source ofinformation about Vanuatu’s legal system—aregional online database—is not being keptup-to-date with recent reforms.

16

Equity is the name given to a set of legal principles that supplements strict rules of common law in jurisdictions followingthe English common law tradition. Tese principles are applied in situations where the pure application of common law rules would result in an unjust or unfair result. An important distinction between the law and equity is the set of remedies eachoffers: the common law remedy is monetary damages, while equity enters injunctions directing someone either to act or toforbear from acting, as well as orders for specic performance of obligations. Often this form of relief is, in practical terms,more valuable to a litigant. For example, a plaintiff whose neighbor will not return his only milk cow, which had wanderedonto the neighbor’s property, may want that particular cow back, and not just its monetary value.



30




C o m m e r c i a l L e g a l F r a m

e w o r k A. Te Legal Framework for Companies

Provisions in the current Companies Acteffectively limit growth. Bold reformsare needed to make Vanuatu morebusiness-friendly.

A number of legal structures are available tobusinesses in Vanuatu. Te “sole trader”17 is themost commonly used structure, because it isconvenient and accessible, and because it meetsthe primary needs of small businesses (whichpredominate in Vanuatu). Sole traders face veryfew legal formalities; they need only meet therequirements of the Business Names Act of 1990and the Business License Act of 1998.

In countries with well-developed legalframeworks, the sole trader—which has noexistence separate from its owner—oftenevolves into a limited liability company. In

Vanuatu, however, this is not a common practicebecause incorporating a company under theexisting Companies Act remains protractedand expensive. Te transformation from soletrader to company should be a simple, effectiveprocedure. Vanuatu should promote this process.

Companies established by local and offshoreinternational investors are formed underdifferent acts and are subject to different rules.Te Companies Act (Cap 191) applies to alllocal companies. It was revised and consolidatedin 1988, with subsequent minor amendments.Despite its nominal modernity, the Act is basedon the 1948 United Kingdom (UK) Companies

Act and contains a number of provisionsthat compel businesses to meet outdatedrequirements. None of the amendmentsto this Act have succeeded in eradicatingprovisions that are cumbersome and costly forbusinesses. In short, the Act is not conducive

to the development of a modern commercial

company base. A further constraint is that theadministrative procedures associated with the

provisions of the Companies Act are not appliedconsistently. Te extent of this administrativediscretion deters sole traders from incorporating,preventing them from gaining the advantages ofassuming the legal identity of a company.

A panel of experts is currently reviewingthe Companies Act. In July 2008, the paneldistributed a discussion paper outlining optionsfor reform; feedback has been collected andconsidered. Te panel circulated an exposuredraft to all stakeholders, enabling them tocomment before the bill is nalized and enactedby Parliament. Te government will submitthe bill to Parliament in 2009. Te proposedCompanies Bill represents a bold reform effortthat will make Vanuatu more business-friendly.It should be passed as soon as feasible. It will

introduce a modern commercial framework that will encourage businesses to form companiesrather than operate as sole traders.

o be effective, the new Companies Act willneed to

• introduce a simplied incorporation processdevoid of administrative discretion to ensurethat companies can be formed quickly and

without great expense;

17 A sole trader, also known as a sole proprietor, is a type of business entity that legally has no separate existence from its owner.Hence, the limitations of liability enjoyed by a company or a limited liability partnership do not apply to a sole trader. Alldebts of the business are debts of the owner.

Administrative discretion deters

sole traders from incorporating,

preventing them from gaining

the advantages of assuming the

legal identity of a company.



31





e w o r k • introduce an appropriate and graduated

disclosure regime that is consistent with

regional and international best practices;• codify directors’ duties to assist directors and

ensure greater accountability;

• remove the compulsory audit requirement forprivate companies;18

• introduce a solvency test to replace thecurrent complex provisions relating to capitalmaintenance and distributions to shareholders;

and• provide an appropriate framework for

shareholders’ rights.

Tese proposed reforms will improve the costand viability of the company as a businessstructure and legal entity in Vanuatu.

B. Bankruptcy and Insolvency: Costlyand Difficult

Vanuatu’s bankruptcy regime is complex andoutdated. Te government should adopt amodern, simple approach that will provideworkable options for insolvent companies,establish legal safeguards for creditors, andallow bankrupt individuals to start again.

In addition to the challenges faced in startingand running a company in Vanuatu, it is alsodifficult and costly to close down an insolventcompany. Like much legislation governingcommercial dealings in Vanuatu, the bankruptcyregime is overly complex and outdated. It relies

on archaic English legislation, although intheory, Vanuatu’s constitution also allows French

insolvency laws to be used. In practice, however,it is unclear how the French laws apply, whichcreates further uncertainty. A new approachis needed if Vanuatu’s commercial sector is todevelop. A modern and effective commerciallegal framework should support a simpleapproach to bankruptcy: it should provide

workable options for insolvent companies to wind up, establish legal safeguards for creditors,and allow bankrupt individuals to discharge theirdebts and start again.

A specialized panel of experts is currentlyreviewing Vanuatu’s bankruptcy regime.Te panel distributed a discussion paper tostakeholders; an exposure draft is being nalizedfor circulation. In 2009, the governmentis scheduled to present a new bankruptcybill to Parliament. Te bill will introducestreamlined processes and procedures forpersonal bankruptcy and will establish a systemfor winding up companies that is simple,cost-effective, and easy to administer. Te newbankruptcy system will also provide maximumreturns to shareholders and creditors, and willfacilitate international cooperation to addresscross-border insolvency, thus making it easierfor foreign creditors to enforce their rights. Itrepresents a major advance in removing the

uncertainty of Vanuatu’s current bankruptcyregime, replacing it with a system that will meetthe country’s current and future needs.

C. Te Legal Framework for rusts

Vanuatu’s legal framework for trusts doesnot fully protect the rights of beneciaries.It should be reformed.

rusts, particularly discretionary trusts, are widely used in Vanuatu, but the legal systemdoes not fully protect the rights of beneciaries.

18 Tis requirement does nothing more than raise the cost of operating formal companies in Vanuatu. It provides a strong disin-centive for sole traders to incorporate. Te authors of this report strongly support removing this requirement.

Like much legislation governing

commercial dealings in Vanuatu,

the bankruptcy regime is overly

complex and outdated.



32





e w o r kCurrently, this area of law—which is governed by

the UK rustee Act of 1925—relies on outdated

legislation that does not reect international bestpractices. While the law nominally regulates theobligations of trustees who hold and manageproperty for beneciaries, in practice, trusteesoften fail to fulll these obligations, harming theinterests of the beneciaries.

Vanuatu’s trust legislation should be amendedto incorporate the international best practicesthat underpin the operation of trusts in

advanced economies. An expert panel hascommenced a review of the current rustee

Act, and is preparing and circulating a draft billfor consideration in late 2009. Te law shouldreect recent major advances in trust law—itshould include clear directions and controls forprofessional trustees and provide a statement oftrustees’ duties that mirrors the complex natureof modern business and investment. Ultimately,

Vanuatu’s trust framework should enhancebeneciaries’ ability to monitor and inuencetrustees’ decisions.

D. Laws Governing Contracting: Complexand Expensive to Use

Laws governing contracting are inaccessible,complicated, and not relevant to the privatesector. Vanuatu should establish a clearand consistent legal framework for usingcontracts, settling contract disputes, andenforcing contracts.

Tere is very little local, or “tailored” contractlaw in Vanuatu, and the legislation underpinningthe contract law framework does not providea robust legal environment for entering andenforcing contracts. Instead, as in the caseof most other laws affecting business in

Vanuatu, contract law is based on outdatedand inaccessible rules. Te problems are furthercompounded by delays in the execution of

judgment orders in contract dispute cases; thesedelays add to the cost of doing business.

o operate effectively, the private sector needsreliable contract laws. Clear and consistent laws

ensure that business contracts are enforced.Tis reduces uncertainty for entrepreneurs andinvestors entering into business relationships,thus encouraging new business ventures andinvestment. A modern statement of rules wouldmake contracting simpler, encourage peopleto use contracts as a business tool, and enablecontractual arrangements to be enforced rapidly.Such a statement would also have the potentialto assist in the resolution of disputes. In theevent of a breach of contract and judgment,enforcement should occur quickly to minimizeor eliminate unnecessary expenses. Vanuatu’sprivate sector would use contracts more widelyif the country had modern laws governing theuse and enforcement of contracts—the countryshould address this issue in the medium term.

Tere has been little attempt to codify Vanuatu’scommon law rules governing contracts. Te only

legislation codifying current contract rules isthe UK Misrepresentation Act of 1967, whichis outdated and inadequate. Much of the lawgoverning contracts in Vanuatu, as in otherBritish Commonwealth jurisdictions, relies onantiquated UK court judgments that are difficultto understand and to access. Key legislationis from the 19th century. Te Sale of Goods

Act, for example, dates from 1893, and theFactors Act, which deals with various aspects ofmercantile agents, dates from 1889. Clearly, thisoutdated legislation is not conducive to modernbusiness practices.

Te contract law frameworkdoes not provide a robust legal

environment for contracting and

enforcing contracts.



33





e w o r k Internationally, there has been a sharp increase in

the use of alternative dispute resolution (ADR)

mechanisms such as mediation, negotiation,and arbitration. Tese alternative methods offermany advantages over the traditional courtresolution process. Tey provide parties withmore options, allow the parties to decide who

will mediate disputes, offer greater exibility,and have much lower costs than court processes.Evidence suggests that adopting an ADR modelincreases the overall use of commercial contractsand improves enforcement.

Te adoption of an ADR model, however,requires sound legislative underpinning. Tis canbe achieved by codifying the rules that governthe formation of contracts and by adopting anarbitration act that provides a framework forarbitration procedures and clearly species thelegal status of arbitral awards. Te countries

that operate the most effective arbitrationsystems ensure that arbitral awards are bindingbetween the parties with limited or no recourseto the courts and that the enforcement ofarbitral judgments does not involve any furthersubstantive hearings on the matter. In addition,these laws provide for foreign arbitral awards tobe enforced within the country. In the mediumterm, as part of its review of the contractframework, Vanuatu should make it a priority toadopt this type of arbitration legislation.

E. Burdensome Regulations: An Obstacleto Investment

Unnecessarily burdensome regulations posean obstacle to investment in Vanuatu. Tegovernment should streamline regulatoryprocedures for investors seeking to start andoperate businesses.

Local and international investors seekingregulatory approval to open and operatecompanies in Vanuatu must comply withunnecessarily burdensome regulations.Substantial duplication of effort is required,

which leads to delays and raises costssignicantly.

Local investors starting businesses in Vanuatumust deal with several government departments,and are often required to visit the samedepartment several times. Te country hasnot yet made efforts to consolidate theseprocedures, although current efforts to reformthe Companies Act will help reduce delays andcosts. ADB and the World Bank are cooperatingto assist the government in establishing newprocedures for local investors starting companies.

Foreign investors also face obstacles whenapplying to establish businesses in Vanuatu.Foreign investment is regulated under theForeign Investment Act of 1998, which providesa framework for all international investorsestablishing companies that operate in Vanuatu.Te Act allows foreign investors to launch newbusinesses and purchase existing businesses; itprovides an effective and transparent systemfor assessing and approving foreign investors’applications. While the Act has improvedapplication procedures, in practice, there are stillsignicant duplications in the approval process.Tese duplications should be eradicated.

A 2001 amendment to the Foreign Investment Act established the Vanuatu InvestmentPromotion Authority (VIPA). VIPA’s roleincludes approving investment applications and

Local and international investors

seeking regulatory approval to open

and operate companies in Vanuatu

must comply with unnecessarily

burdensome regulations.



34





e w o r kmonitoring the activities of foreign investors.

Te Foreign Investment Act also gives VIPA a

substantial regulatory role—this regulatory rolehinders the authority’s effectiveness in promoting

Vanuatu as a place to invest. Te governmentappears to focus more on business regulationthan business promotion. Foreign investors areoften frustrated by the cost and time it takes toobtain government approvals to establish andrun businesses. Interviews with stakeholdersidentied a signicant number of potentialinvestors who became discouraged and decidedto invest elsewhere. Vanuatu should enactregulatory reforms to ensure that the documentssupplied to VIPA are sufficient to determineapproval or disapproval of an application. Tesame information should not be required byother agencies, since duplication slows theapproval process, frustrating or even deterringforeign investors from establishing businesses in

Vanuatu. Te government is working with the

International Finance Corporation to streamlinethe processing of investment applications and torationalize regulatory requirements.

F. Access to Information About the LegalSystem

Te only complete, reliable source ofinformation about Vanuatu’s legal system—aregional online database—needs to be kept

up-to-date with recent legal reforms. It is difficult for the private sector to accessinformation about Vanuatu’s legal system.Currently, the most important legal informationresource is an online service provided by thePacic Islands Legal Information Institute(PacLii). Tis website acts as a database forall current laws in Pacic island countries; itincludes legislation, court judgments, and other

related resources. While there are other websitesthat provide some legal information, none ofthem are comprehensive. Te advantage of thePacLii service is that it stores all the information

in one place. It is also the only reliable source oflegal information for users not based in Vanuatu.

If the PacLii service is to succeed, laws must beposted as soon as they are passed by Parliament,and court judgments must be posted withexpediency. Delays in posting informationcreate uncertainty about the service’s reliabilityand relevance. Tis uncertainty has a negativeimpact on the private sector, because investors,businesspeople, judges, and policymakers needongoing, up-to-date legal information, and they

depend on PacLii to provide it.

Vanuatu recently completed a full compilationof existing laws, including laws related to thecommercial sector. o date, however, thiscompilation has not been posted on the PacLii

website. Te authors of this report recommendstrongly that the government release thecompilation to PacLii as soon as possible, toensure that the site remains current and thatall users have access to a full range of legalinformation.

Te authors of this report

recommend strongly that

the government release the

compilation of laws to PacLii

as soon as possible.



35

S u s t a i n i n g

G r o w t h : A


V . E x p a n d i n g A c c e s s t o

F i n a n c e

V Expanding Access to Finance

o support new investment and keep theeconomy growing, Vanuatu’s nancialsector needs to expand access to credit andnancial services.

Financial markets in Vanuatu are dominatedby commercial banks, although there are alsosome small nance companies. Tere are fourcommercial banks. Tree of them—ANZ,

Westpac, and BRED—are foreign owned,and one—the National Bank of Vanuatu—iscurrently owned by the government. BRED,

which is owned by a French holding company, isthe most recent entrant, having been establishedin 2007. As pointed out in Chapter III, thegovernment has also established the Agricultural

Development Bank. In addition, there are somesmaller institutions, such as VANWODS, thatprovide micronance and other services.

Tere are some signicant nancial sectorconstraints to private sector development in

Vanuatu, but there are also some promisinginitiatives and reforms underway. Tis chapterfocuses on:

• Accessing credit. Although access to creditin Vanuatu is strong, lending is too focusedon property and construction. An additionalproblem is that non-property related lending isdirected primarily at large rms, while smallerrms struggle to nd nancing.

• Reducing the high cost of borrowing. Interestrates remain high on lending for businessactivities and consumer loans, but are expectedto decline as new reforms take effect.

• Expanding access to nancial services. NBVis pioneering micronance and smart bankinginitiatives that could signicantly expandaccess to nancial services among previouslyunreached populations.

• Reforming the personal property securitiesframework. Parliament recently passed thenew Personal Property Securities Act, which

will improve borrowers’ ability to pledgemovable assets as collateral, thereby reducingthe risks of lending.

• Revisiting the Offshore Finance Centre. Although it still generates a signicant amountof revenue, the Offshore Finance Centre’seconomic impact is declining. Withoutsubstantial restructuring, its future is uncertainat best.

• Preparing for the impact of the internationalnancial crisis. Vanuatu is not likely to remainuntouched by the crisis, which could affectthe value of offshore funds, revenues fromremittances and tourism, and bank assets.

A. Access to Credit

Business lending in Vanuatu is too heavilyfocused on property and construction, and largecompanies’ credit needs are met at the expense ofsmall businesses.

Te ratio of private sector credit to GDP in Vanuatu is approximately 50%. Tis ratio is oneof the highest in Pacic island countries, and itcompares well with other countries at Vanuatu’sstage of development. In 2008, credit to theprivate sector expanded extremely rapidly, risingby about 40%. However, these data hide theimpact of a small number of large transactionson private sector credit. In particular, a largeloan to UNELCO in 2008 raised the overall

expansion of credit substantially, which explainsthe fact that even though the ratio of privatesector credit to GDP was rising rapidly, manybusinesses reported difficulty in obtaining loans.

As a result of this large transaction and the



36




F i n a n c econtinued property and construction boom,and because a large proportion of cash

is being held outside the formal bankingsector, the liquidity position of the bankingsystem is very tight. Te Reserve Bank hasreduced statutory reserve requirements toprovide additional liquidity to the banks.

Over the past few years, credit expansionhas focused primarily on property andconstruction. Lending to the constructionindustry currently constitutes about one

third of total lending to the private sector(excluding mortgages). In 2003, only 16%of lending was for housing and land; by2007, this gure had risen to over 30% oftotal private sector credit.

By contrast, lending for business activitiesnot related to property and constructiondeclined in relative terms during the last4 years for which gures are available.

Between 2003 and 2007, total private sectorlending rose by 60%. If credit for propertyand construction is excluded, however, thisgure is only 28%. Tese statistics conrmndings from interviews with the privatesector—that the availability of non-propertyrelated business lending is still limited.

In light of recent developments in propertymarkets around the world, the focus of

Vanuatu’s bank lending on property is ofconcern. Essentially, the rate of expansionfor non-property related lending is muchslower than the rate of expansion of nominalGDP. Tis trend implies that the bulk ofGDP growth is occurring as a result ofactivities related to the property market.In addition, non-property related lendingis primarily directed at large rms; smallerrms are struggling to nd nancing.

P e r c e n t a g e

0

10

20

30

40

50

60

Figure 11: Domestic Credit to the Private Sector(% of GDP)

Year

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

GDP = gross domestic product.Source: World Bank.

P e r c e n t a g e

0

10

20

30

40

50

60

70

80

90

Figure 12: Property and Non-Property Lending

(% of Total)

Source: Reserve Bank of Vanuatu Quarterly Bulletin.

Year

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

Lending Excluding Property and ConstructionLending for Housing and Land



37




F i n a n c e B. Te High Cost of Borrowing

Interest rates remain high on lending forbusiness activities and consumer loans, but arelikely to decline as new reforms take effect.

Over the past 4 years, lending rates havedeclined gradually, as have spreads. Te weightedaverage deposit rate offered by commercialbanks is approximately 2% per year, but forxed-term deposits, it is over 4%. Althoughthe weighted average lending rate in Vanuatu isonly about 10%, it is heavily inuenced by thepreponderance of housing loans. During 2008,interest rates on mortgages ranged from 7% to10%. Interest rates for business and consumerloans were substantially higher, averaging 18%or more. In the rst quarter of 2009, there wasfurther upward pressure on lending rates. TeVanuatu National Provident Fund, which in thepast placed most of its surplus funds with thebanks, began investing directly in construction

and other projects. As a result, it has had fewerfunds to place with the banks, which has led tohigher lending rates to businesses and consumers.

Interest rates contain a signicant riskcomponent because of the problems in Vanuatuof pledging movable assets and recoveringthem in the event of default. Over time, theimplementation of the new Personal PropertySecurities Act (described in Section D of thischapter) should result in a decline of the interestrates charged on business borrowing.

C. Financial Services: Expanding Access

Large portions of Vanuatu’s population,particularly in rural areas, have nottraditionally had access to nancial services.

wo new National Bank of Vanuatu initiativeshave the potential to change that.

1. Micronance: A Pioneering Initiative

Te National Bank of Vanuatu is pioneeringa micronance initiative that is proving to besuccessful on a number of different levels: it is

providing greater access to nancial services ina number of islands, paving the way for othernew nancial instruments, and is expected tohave a strongly positive impact on nancialsector development in both rural and urbanareas. Following a pilot activity in anna, themicronance initiative has been expanded toreach other islands. ADB provided support forboth the pilot program and the expansion efforts.

Te micronance initiative does not requireformal collateral, but it does provide strongincentives for repayment. After a borrowerhas applied to the bank for a loan under theprogram, and once a loan officer has approvedthe application, the borrower’s chief conrms andendorses a list of collateral offered by the borrower.If the borrower does not repay the loan, the chiefmakes every effort to repossess the collateral.

In addition, the chief acknowledges that NBV will not lend to other people in the village, thuscreating community pressure for repayment.

o date, with a default rate close to zero, thisinitiative has delivered nearly $5 million incredit to people who previously had no accessto credit. It has reached a broad spectrum ofthe population—borrowers range from smallfarmers to craftspeople to traders. It has also

extended the credit chain, providing previouslydisadvantaged groups with access to credit. Withthe benet of micronance loans, for example,traders have been able to extend credit to theircustomers, many of whom are women.

Te National Bank of Vanuatu is

pioneering a micronance initiative

that is proving to be successful at a

number of different levels.



38




F i n a n c eTe success of NBV’s micronance programillustrates the feasibility of creating other

instruments to increase the funds availablefor micronance. While the current worldnancial crisis illustrates some of the dangers ofsecuritization, the vast majority of securitizedinstruments in most countries around the worldare nancially sound. If carefully structured—and once the personal property securitiesframework is fully in place in Vanuatu—micronance loans could be securitized. NBVcould, for example, issue securities backed by theloans of its micronance program, which wouldenable it to move these loans off its balance sheetand attract additional liquidity.

Some other smaller institutions such asVANWODS have achieved substantial success inproviding micro loans and other services in recentyears. Tey have begun to intermediate depositsand increasingly provide sophisticated lendingproducts. However, as deposit taking institutions,these organizations should come under theregulatory mandate of the Reserve Bank.

2. Smart Banking: Bringing Finance toRural Areas

Following the success of the anna micronancepilot, NBV is planning to introduce an innovativesmart banking initiative in several islands. Tisprogram will establish smart cards that willallow local agencies to make electronic paymentsand collect deposits. For example, it will enableteachers to receive their salaries electronically,rather than making expensive and time-consuming trips to the nearest NBV branch tocollect their pay. Te introduction of smart cardtechnology in rural areas could bring nancialservices to a signicant portion of the populationthat previously had no access to such services.

In addition, because it is expected to lead to agreater number of transactions, smart bankingtechnology has the potential to have a positiveimpact on the protability of NBV’s branches.

NBV is the only nancial institution in Vanuatu with the capacity to bring nancial services to

a substantial portion of the population. It has21 branches, 19 of which are in rural areas.Many of the rural branches are operated as acommunity service, since their revenues do notcover their costs. Rural branches will act as hubsfor smart banking. By providing services throughsubagents—such as local trading stores, schools,and post offices—the program will furtherincrease to nancial services. Te smart bankinginitiative also has the potential to improvenancial intermediation at the local level: asthe level of funds deposited increases, NBV’sbranches can recirculate the funds by makingmore micronance loans.

D. Te Personal Property SecuritiesFramework: Te Benets of Reform

Te recently passed Personal PropertySecurities Act will increase access to nance.By allowing borrowers to pledge movableproperty as collateral, the Act will reducelenders’ risks, especially the risks of lending tosmall businesses.

Vanuatu has enacted a new Personal PropertySecurities Act (PPSA). Te PPSA replaces

legal forms such as company charges with anapproach to commercial transactions that createsa property right called a security interest, whichmay attach to personal property regardless of theform of the transaction (e.g., pledge, assignment,

Te introduction of smart

card technology in rural areas

could bring nancial servicesto a signicant portion of the

population that previously had

no access to such services.



39




F i n a n c e

or chattel mortgage). Te PPSA calls for anelectronic ling archive, known as the personal

property securities registry (PPSR), to be created.Te purpose of the PPSR is to provide a noticeof security interests and establish the priorityof each security interest to the collateral inquestion. In the event of default, this registry

will provide essential information about whohas the right to repossess and sell the propertythat has been pledged as collateral. At the timethis report was prepared, the registry had notyet been installed, even though in principle the

PPSA requires all new registrations of securityinterests to be recorded in it. Work on installingthe registry is proceeding rapidly, however.

Te PPSA signicantly streamlines the process ofrepossession. Te person or company to whom

collateral has been pledged can seize the propertyand dispose of it in a manner that maximizesproceeds, without having to go through thecourts. Te amount realized through the disposalis then used to offset the debt, with the balancereturned to the borrower or to other securedcreditors.

Once the personal property securities frameworkis in place, it needs to be publicized so that

potential users will be aware of its new features.In particular, the Vanuatu Financial ServicesCommission (VFSC) should

• launch a public information campaign,preferably through the Chamber of Commerce,to educate potential entrepreneurs about thenew Act and the registry; and

• conduct outreach to potential offshore creditorssuch as suppliers, credit sellers, and companiesdealing with Vanuatu’s exports and imports.Tese stakeholders will have strong incentivesto use the law, but may not learn of the recentchanges unless there is targeted outreach.

Te VFSC should also establish forums to gatherfeedback from users of the PPSR on how thenew framework is functioning in general and ontheir experiences using the electronic registry inparticular. Te authors of this report stronglyrecommend that, toward the end of 2009, the

VFSC lead a team in conducting a further reviewof the functioning of the PPSA, to ensure that itis working effectively. Te review should addressthe following outstanding issues: (i) expandingthe PPSR to include notices of tax liens,

judgments, personal bankruptcies, and corporateinsolvencies; and (ii) prioritizing tax liens,

judgments, bankruptcy, and insolvency with

secured creditor rights by using the standardrst-to-le rule.

Box 2: What is a Security Interest?

Te Personal Property Securities Act allows asecurity interest to cover collateral that• is tangible or intangible, presently owned by

the debtor or acquired in the future;• changes over time, as in the case of inventory

and receivables of a merchant or thematerials used in a manufacturing process;

• includes products of the original property, asin the case of the offspring of livestock;

• arises from immovable property such ascrops or minerals; and

• includes the proceeds of the collateral,such as accounts created from the sale ofinventory, cash paid on account, insurancepayments, or replacement of the originalcollateral by like items.

Once the personal property securities

framework is in place, it needs to

be publicized so that potential userswill be aware of its new features.



40




F i n a n c eE. Looking for a New Role: Te OffshoreFinance Centre

Vanuatu’s Offshore Finance Centre generatesa signicant amount of revenue, but itseconomic impact is declining. Withoutsubstantial restructuring, its future isuncertain.

Te Offshore Finance Centre currently focuseson serving international companies incorporatedunder Vanuatu’s 1992 International Companies

Act. Tese companies, which are not permittedto conduct business locally, form the majorityof international companies currently registeredin Vanuatu. In contrast to the existing domesticCompanies Act, the International Companies

Act supports a more modern approach toincorporation and regulation. Internationalcompanies may be formed quickly and arerequired to meet a minimum of requirements.Te Act contains much less onerous reporting

requirements, as well as a solvency test regime.Te VFSC supervises the Offshore FinanceCentre. In addition to ensuring compliance

with the international company framework, the VFSC is responsible for administering variousother statutes, including the rust Companies

Act (Cap 69), the Prevention of Frauds Act (Cap70), the Mutual Funds Act of 2005, the Unit

rusts Act of 2005, and the Insurance Act of

2005. Te VFSC also administers the ProtectedCell Companies Act of 2005, which provides forthe incorporation and regulation of protectedcell companies. Te VFSC is currently draftinga foundations bill and is in the nal stages ofdrafting a company trust and service providersbill. Te latter will follow the internationalstandards adopted by the Offshore Group ofBanking Supervisors, of which Vanuatu is amember. Tere have been a number of legislativeinitiatives undertaken in this area recently;

various new bills are being introduced andseveral more are planned.

While a signicant amount of revenue is stillearned from the Offshore Finance Centre, its

importance as a percentage of GDP is falling.Tis decline is likely to continue. Te value ofoffshore centers such as Vanuatu’s is diminishedby the international nancial community’sconcerns that these centers are tax havens orpossible repositories of illegal funds. Furthermore,recent investigations and arrests of participantsin the Vanuatu center will almost certainly have adiscouraging effect on its future growth, regardlessof the merits of the ongoing cases. Given thedetermination of many high-income countries toclose down tax havens, the future of the OffshoreFinance Centre is at best uncertain, unless there issubstantial restructuring.

F. Te International Financial Crisis: CouldIt Reach Vanuatu?

Vanuatu is not likely to remain untouched bythe international nancial crisis.

Te nancial crisis that was triggered by thecollapse of the subprime mortgage market inthe United States has roiled nancial marketsaround the world. Stock markets have fallendramatically, as have property values in manycountries. Tere are concerns in Pacic island

countries that the effects of the nancial crisiscould spill over into the region. Certainly, theoffshore investments held by superannuationand trust funds in Pacic island countries have

Te value of offshore centers

such as Vanuatu’s is diminished

by the international nancialcommunity’s concerns that these

centers are tax havens or possible

repositories of illegal funds.



41




F i n a n c e lost value. Remittances and tourism revenuesare likely to fall as well, as economic activity

declines in Australia, New Zealand, and theUnited States. Declining tourism revenues, along

with shrinking revenues from remittances, couldhave an adverse impact on Vanuatu’s economy.

o date, however, Vanuatu’s tourism industrycontinues to perform well. Air passenger arrivalsin January 2009 were 28% above those of

January 2008.

Despite the crisis, however, the banking systems

in most Pacic island countries appear to besound. In Vanuatu, prudential regulation hasbeen effective. Te country’s banks have strongratings and do not appear to be under the type ofthreat that has led to the bankruptcy of nancialinstitutions in developed countries. Vanuatu may

well suffer indirectly, however, as the crisis drivesmany high-income countries into recession.

As pointed out earlier, the country’s nancialsystem has lent heavily for property purchasesand construction. If the property market declinesin conjunction with similar declines in Australiaand New Zealand, Vanuatu’s banks could ndthemselves holding substantial amounts ofilliquid assets.



42


P r i v a t e S e c t o r A s s e s s m e n t

f o r V a n u a t u

V I . R e f o r m

i n g t h e

L a n d L e a s i n g S y s t e m

VIReforming the Land Leasing System

Vanuatu’s current system for leasing land isnot effective. Growing tension over land leaseissues is causing conict and threateningfuture investment and growth. Te need forreforms is pressing.

Tis chapter focuses on the importance of

improving Vanuatu’s land leasing system tomake property rights in land more secure, bothfor customary landowners and for those leasingland. Tis issue is growing in importance.

Although a signicant amount of land hasbeen leased over the past decade, customarylandowners increasingly resent not sharing thelarge prots that lessees have realized as a resultof the property boom in Vanuatu.

Construction and property development havemade signicant contributions to Vanuatu’sgrowth, and commercial banks hold a majorportion of their assets in mortgages on landleases and property. It is therefore essential thatland ownership and land leases not be subjectto dispute and dissatisfaction. No country hasmanaged to achieve sustained prosperity withoutstable and clearly dened property rights inland. Societies with secure xed property rightsand widespread land ownership tend to haveboth greater prosperity and a more equitabledistribution of income and wealth. In Vanuatu,this issue is becoming increasingly contentiousas customary landowners express theirdissatisfaction with current arrangements.

Resolving sensitive issues related to landownership and lease arrangements in Vanuatu

will be neither easy nor rapid. In all countries,developing a system of xed property rightstakes time and extended negotiation. Despite the

challenges, there are many benets to makingthe system just and predictable, and to ensuringthat costs are low for establishing ownership orentering into leases. A strong system of xedproperty rights will

• ensure secure ownership and property rightsthat are predictable and enforceable;

• support property transactions;

• allow property to be mortgaged; and

• enable mortgages to become nancialinstruments, which will promote nancialmarket development.

Land issues in Vanuatu, as in other Pacicisland countries, are especially difficult to deal

with because land is not only communallyheld, but is also closely related to identity.19

AusAID is currently engaged in a long-termland administration project, which should

improve land records and recording of landtransactions. Nevertheless, Vanuatu should not

19 Tis feeling is encapsulated in the phrase “when you look at the person you see the land; when you look at the land you seethe person.”

Construction and propertydevelopment have made

signicant contributions to

Vanuatu’s growth, and commercial

banks hold a major portion of

their assets in mortgages on land

leases and property.



43



V I . R e f o r m

i n g t h e

L a n d L e a s i n g S y s t e m delay in tackling contentious issues related to

land leases. Unless these problems are solved,

the country’s long-term prosperity will becompromised. Te guiding principles for anychanges in land policy should be developed bythe ni-Vanuatu themselves. Regardless of howthe system evolves, however, it is important thatpredictability and certainty be attached to landholdings, land leases, and land investment.

After a brief description of the structure of landownership in Vanuatu, this chapter analyzes the

current land-related issues facing landowners,investors, and policymakers. It discussesproblems in the following areas:

• Determining land ownership and resolvingdisputes. Substantial uncertainties exist aboutthe rightful ownership of customary land.

• Leasing and the protection of landowners’rights. Land leasing has arisen as a major areaof controversy, in part because customarylandowners’ rights are not always well-protected under the current system.

• Reducing high transactions costs for leasing.High transactions costs and delays in leasingland pose a major obstacle to investment.

• Improving land administration. Land recordsare difficult to access and are often unclear

about the status of rightful ownership.• Addressing the future. Although the 2006

National Land Summit served as a rst step inreforming Vanuatu’s system of xed propertyrights in land, many of its resolutions havenot yet been implemented. Much remains tobe done.

A. Te Structure of Land Ownership

Land is held under customary ownership laws,which regulate all transactions related to landowned by ni-Vanuatu.

In Vanuatu, land has traditionally served as asource of subsistence, a source of power andstatus, and a source of identity and culture. Tetraditional land tenure system has ensured thatall family and clan members have had access toland; it is consistent with the country’s strongkinship bonds and with customs that encouragetraditional sharing of economic wealth. Tiscommunal approach has allowed Vanuatu societyto avoid deep poverty by providing an informalsocial support network. Nevertheless, thepressures of development and the growing desireof the ni-Vanuatu to participate in the country’smarket economy have led to radical changesin patterns of landholding in some parts of the

country, particularly Efate.Only ni-Vanuatu and the government canown land legally. Government holdings aresmall, representing only about 2% of total landarea—the balance is held under customary title.Customary law regulates all transactions relatingto land owned by ni-Vanuatu, including howland may be sold, exchanged, licensed to others,and inherited.

o use customary land for its own purposes,the government typically negotiates leases

with customary landowners. Te governmenthas, however, voluntarily or compulsorily

Te guiding principles for any

changes in land policy should

be developed by the ni-Vanuatu

themselves. Regardless of howthe system evolves, however, it is

important that predictability

and certainty be attached to

land holdings, land leases, and

land investment.



44



V I . R e f o r m

i n g t h e

L a n d L e a s i n g S y s t e macquired land from customary owners to use

for infrastructure, including roads and airports,

and to use for other government needs (such asoffices) in Port Vila and Luganville.

B. Problems Related to Land Ownership

Substantial uncertainties exist about therightful ownership of customary land,including competing and overlapping claimsfor land holdings.

1. Disputes About Land OwnershipUnder customary law, disputes about theownership of land are settled by the chiefs ofthe locality in which the land is situated, oftenadvised by senior members of the village. If theland under dispute straddles more than one

village, the chiefs of all the villages are involved.If the land is large in area or importance, otherchiefs may also participate in the decision

making. Although customary law does not havea formal system for appeals, if the land underdispute is important or heavily contested, theparties or chiefs may take the issue to moreinuential chiefs in the area of the island wherethe land is situated, who will judge the merits ofthe case again.

After Vanuatu’s independence, legislation alloweddisputes about the ownership of customary land

to be determined by island courts, with appealsto the Supreme Court. Te courts were deluged with such disputes, leading the Chief Justice toannounce that the Supreme Court would notaccept any more land appeals. An alternativehad to be found. In 2001, Parliament passed theCustomary Land ribunal Act, which provides aformal structure for resolving land disputes. Tisformal structure exists within the framework ofcustomary law—it is an alternative, but not a

substitute for the customary system for resolvingland disputes.

Under the Act, village chiefs are authorized toappoint tribunals to adjudicate disputes about

ownership and land boundaries. Members ofthe tribunals are required to be knowledgeableabout the customs of the area and independentof the parties to the dispute. Te Act speciestwo levels of appeal: (i) the decisions of the

village tribunal can be appealed to a tribunalappointed by the council of chiefs in the area in

which the land is situated, and (ii) a nal appealcan be brought before a tribunal appointed bythe island council of chiefs. Although this systemfunctions effectively in some areas of the country,a number of problems have arisen: adjudicatorsare often not independent, it is difficult toenforce decisions, and many stakeholders do notunderstand the procedures involved.

Tere are competing and overlapping claimsfor land holdings. Resolution of ownershipdisputes is difficult, in part because there is nostatute of limitations on claims to ownership. In

other parts of the world, successful resolutionof land ownership claims almost always involvesa cut-off point after which ownership cannotbe challenged.20 Until this problem is solved in

Vanuatu, uncertainty about land ownership willcontinue.

2. Leasing When Ownership is Uncertain

Tere are instances in which people purporting

to be the rightful customary owners lease land,even though there are other claimants. Tese

In 2001, Parliament passed the

Customary Land ribunal Act,which provides a formal structure

for resolving land disputes.

20 In countries where a orrens system is in force, the government provides compensation to owners who can prove ownershiprights that were not uncovered before the cut-off date (if the original disposition of the property proves to have been incorrect).



45



V I . R e f o r m

i n g t h e

L a n d L e a s i n g S y s t e m additional claimants sometimes subsequently

dispute leases that have already been signed.

Tese cases can take years to resolve through thecourts. Further confusion in the land leasingframework arises because, if ownership of theland is in dispute before the lease is signed, theMinister of Lands has the legal power to grantleases by ministerial edict. Since a signicantportion of the land investors want to lease isin dispute (or becomes in dispute), there havebeen many cases where the minister has signedleases for land without the owners having hadan opportunity to discuss or agree to the lease.Te rent monies from such land are to be held intrust until the true owners are determined, butso far the disputes about land ownership havebeen so intense and protracted that resolutionhas rarely been reached.

o help solve this problem, the governmentshould establish a registry of customary owners

who wish to lease their land. o ensure that those wishing to lease are the rightful owners, thereshould also be an extensive publicity campaign(which would include radio and on-sitenotications) to inform all potential owners thatthe property in question is being claimed. Tegovernment should place strict limits (perhaps12 months) on the time period during whichpotential owners can come forward with claims.

At the end of this period, the land tribunalsshould make a ruling about the land’s rightful

owner. Tis ownership should then be registered,following the principles of a orrens system.

C. Leasing: Te Rights of CustomaryLandowners

Land leasing has arisen as a major area ofcontroversy. Changes are needed to allow bothowners and lessees to benet from successfulland leasing.

Under the terms of the Land Leases Act (Cap163), customary landowners have the right tolease land to foreigners with the approval ofthe government. Lease arrangements, however,often do not adequately protect the rights ofcustomary landowners. Steps need to be takento address problems in a number of key areas,described as follows.

1. Assistance for LandownersLocal lawyers and land experts have expressedconcern that landowners do not always fullyunderstand the implications of lease conditions.For example, many landowners do not appearto be fully aware that once their land is leased,they lose user rights and often rights-of-way overthe land. An additional problem arises from thecommunal nature of land ownership in Vanuatu.Often, some members of a landowning familyor clan sign leases even though other membersof the family have not been informed of thetransaction. In some cases, the family membersnot involved object when they learn about alease agreement. Tis raises uncertainty aboutthe validity of the lease. o address this issue,the Ministry of Lands should provide advisoryservices to all members of the landowning familyor clan, to ensure that everyone is fully aware of

the terms of the lease and of the implications ofthose terms.

Since a signicant portion of the

land investors want to lease is indispute (or becomes in dispute),

there have been many cases where

the minister has signed leases for

land without the owners having

had an opportunity to discuss or

agree to the lease.



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i n g t h e

L a n d L e a s i n g S y s t e m2. Protection for Future Generations

Because of the lengthy terms of land leasesin Vanuatu (rural leases typically have a 75-year term, while urban leases have a 30- to50-year term), it is important to ensure thatleases are fair not only to current generationsof the landowning family, but also to futuregenerations. So far, this problem has largely goneunrecognized. Land leases in Vanuatu typicallyinvolve a large upfront payment followed byannual rents that are often only a very small

fraction of the total value of the lease (usually1%–2% per year). Some leases contain noprovisions for rent review. Lessors often spendthe upfront lease payments on consumer goods,most of which do not last long enough to bepassed on to the next generation.

Tere is a real danger that many of the leasessigned in the past several years in Vanuatu, as inother Pacic island countries, could be contested

by disaffected relatives in coming decades. Whilein theory, the negotiation of leases should be leftto the participants, the Ministry of Lands couldhelp avoid many future problems by establishingprinciples for structuring leases. Tese principlesshould stipulate that no more than a smallpercentage of the lease payment be paidupfront and should require annual payments toconstitute a much larger proportion of the totalamount paid.

3. Access to the Sea and Rights-of-Way

An additional problem is that leases do notprotect customary landowners’ rights-of-way.Tis is a particular problem when oceanfrontproperty is leased, since the customarylandowners lose their access to the sea. Tis issueis becoming pressing, especially because when

leases were issued, many landowners were notaware that they would lose their rights-of-way.

Local newspapers contain many letters fromaggrieved landowners who resent losing seaaccess. In some areas (including the island of

anna 21), dissatisfaction has led to violence, withlessees being forced off the land they had leased.

Urgent clarication is needed to address the widespread and growing resentment over rightsof sea access. In many countries, the seashoreis considered common property, and rights of

access are guaranteed. o ensure that currentand future leases are sustainable, the governmentshould establish rules or change laws toclarify the rights and obligations of customarylandowners, lessees, and other potential users ofbeachfront property.

4. Gains From Strata itle and Subdivision

Until Vanuatu introduced the Strata itle Actin 2003, subdivision was a costly and lengthyprocess. Te Strata itle Act, which was designedto reduce delays, supersedes previous legislationrelated to subdivision. In a fashion uniqueamong Pacic island countries, strata titlelegislation is used to facilitate, but not regulate,subdivisions. Te Act allows primary leaseholdersto subdivide the land they have leased andto reap the prots accordingly.Customarylandowners, who have no formal right to object

21

Land disputes are notoriously complicated. Te discussion in this report should not be interpreted as attempting to judge therights or wrongs of any particular case. However, the sheer number of letters in local newspapers regarding land rights illustratesthe extent to which this issue has aroused passions. For example, in December 2008, one newspaper invited comments under thetitle “Losing a Grip on Paradise.” It provoked hundreds of responses, most of which reected resentment about loss of controlover land. “ o begin, a news report on the closure of a successful resort on anna. It is a cautionary tale showing what canhappen when there is conicting custom claims and yet the government enables investment to proceed. Tere are no winners.”Te Vanuatu Independent. 2008. Losing a Grip on Paradise. 14–20 December.

Te Ministry of Lands could

help avoid many future problemsby establishing principles for

structuring leases.



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V I . R e f o r m

i n g t h e

L a n d L e a s i n g S y s t e m to this practice, are unable to prevent subdivision.

Because property prices in Vanuatu have risen

sharply over the past few years, many primaryleaseholders have made substantial capital gainsthrough strata title subdivisions. Te landownershave not shared in these gains. Unsurprisingly,this situation has led to signicant resentmentby landowners. In an attempt to rectify theimbalance, the Land Leases Act was amended in2007 to specify that landowners should benetfrom capital gains that occur on leased land.Te Land Leases Act is vague about the exactprocess by which this should occur, however, andonly species a range for the compensation thelandowners might receive.

5. Fair Compensation

If customary landowners benetted from thesuccess of businesses established on land they

have leased, there would be far less conictcreated by landowners’ perceptions that theyhave been shortchanged. Te Ministry of Landsshould explore mechanisms by which thiscould occur. One option would be for leasepayments to be based on a combination ofrent and royalties (with royalties being paid asa percentage of the sales of businesses situatedon leased land). Tis approach would allowcustomary landowners to share in the prosperityof successful businesses.

Some leases require that lessees who makeimprovements to the land they have leased becompensated by the landowners for costs they

incur. Although anecdotal evidence indicatesthat clauses stipulating such compensation

payments are rare, the few that do exist have thepotential to cause uncertainty and confusion. Ifthe landowner cannot raise funds to compensatethe lessee, does the lessee have the continuingright to use the land? So far, this issue has notbeen claried.

D. High ransactions Costs for Leasing

Te high cost of obtaining a lease is a major

obstacle to investment in Vanuatu. Reformsare needed to reduce these transactions costs.

Investors in most Pacic island countries cite thecost of obtaining a lease as a major obstacle toinvestment. Vanuatu is no exception. Te processof identifying landowners and negotiatingthe terms of a lease is often time-consumingbecause of the number of people involved (dueto the communal structure of land ownership).

Uncertainty is increased by the fact that somelandowners may be living in other countries.

Once landowners have been identied and theterms of the lease have been agreed upon, thelaw usually requires investors to obtain officialapprovals. Tis involves another round of delaysand almost always compels investors to usecostly local lawyers. All leases in Vanuatu haveto be approved by the Minister of Lands. Te

Strata itle Act has sped up the process but,as described above, it leads to other potentialproblems.

ransactions costs are further increased bythe need to renegotiate lease payments. Manyleases contain provisions for lease paymentsto be renegotiated every few years, but theyrarely contain any guidance or formulas fordoing so. Tis leaves lessees involved in costly

renegotiations without any certainty about theamount of their future payments. Eliminatingthe need to renegotiate leases every few years

would help reduce transactions costs. Onemechanism would be for lease payments to be

If customary landowners benetted

from the success of businesses

established on land they have leased,

there would be far less conictcreated by landowners’ perceptions

that they have been shortchanged.



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i n g t h e

L a n d L e a s i n g S y s t e madjusted automatically as the consumer price

index changes. Such adjustments—combined

with royalty payments and shares of capitalgains for landowners—would make leases fairerto landowners and more predictable for lessees.Nevertheless, this would not address the issueof landowners using force to extort higherpayments from successful lessees. Parliamentshould enact legislation making it an offensefor owners to demand payments or otherconcessions from lessees that are not containedin the lease contract.

E. Land Administration: InadequateRecords

Land records in Vanuatu are inadequate. If theland system is to function more effectively, thecountry must improve land administration.

Lawyers in Vanuatu report that land recordsare difficult to access and are often unclear (i.e.,

it is not apparent who the rightful owners areor where land boundaries lie). Some reform isunderway. Records are being digitized and madesearchable electronically, but it will be a longprocess. Te Ministry of Lands should establishan out-of-country backup of land records, since

Vanuatu is vulnerable to typhoons and othernatural disasters.

F. Addressing the Future: Te NationalLand Summit and Next Steps

A National Land Summit held in 2006 servedas a rst step in reforming Vanuatu’s system ofxed property rights in land. Efforts continue,but much remains to be done.

Te government convened the National LandSummit in 2006 in response to growing tensionover land issues. Te purpose of the summit

was to formulate land policy for the future. Tesummit’s conclusions were encapsulated in 20resolutions that reected participants’ consensuson how land issues should be addressed,including a resolution recommending that the

Land Leases Act be amended. Tis was donein 2007 with an amendment that entitled

customary landowners to a share of the proceedsof capital gains earned through subdivision. Teamount of this share, however, was not specied.Te Act states that customary landowners areentitled to receive up to 10% of capital gainsfrom subdivision, but the exact amount is to benegotiated between landowners and lessees. Tedecision to provide landowners with a share ofthe benets of land appreciation is a positivestep, but the Act’s lack of specicity has thepotential to cause further problems. In addition,the 2007 amendment to the Land Leases Actdoes not address the issue of lessees accruingunrealized capital gains.

Another of the summit’s resolutionsrecommended placing a moratorium on new

subdivisions and halting the issuance of stratatitle leases. Tis recommendation has not beenimplemented; strata titles continue to be issued.Since the Minister of Lands must approve allleases, there is at least tacit official approval forthe practice of continuing to issue subleases.

A large project has been launched to reform landadministration policy in Vanuatu, with supportfrom AusAID. An NZAID-funded project has

also been established to assess the functioningof the customary land tribunals; the scopingmission for that project was completed in 2008.

Lawyers in Vanuatu report

that land records are difficult

to access and are often unclear(i.e., it is not apparent who the

rightful owners are or where land

boundaries lie).



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V I I . C o n c l u s i o n

VII Conclusion

Over the past 5–6 years, Vanuatu has been oneof the most rapidly growing economies in thePacic region. While the construction boomhas been partly responsible for the expansion,fundamental reforms have been implementedthat have already enhanced growth and

signicantly improved the business environmentin the country. Moreover, the government hasexpressed a strong committment to pursuingcontinued reform to promote private sectordevelopment in the country, which augurs wellfor the future.

Tis report contains a number of suggestionsfor reform. In the medium term, implementingthem will raise the sustainable growth rate. o

address the immediate binding constraints, thereport recommends implementing the followingreforms as priorities:

(i) Upgrading infrastructure is necessaryto ensure sustained long-term growth, asit has experienced under investment fora prolonged period and urgently requiresadditional resources. o the greatest extentpossible, this should be done using private

sector solutions, such as PPPs.

(ii) Introducing competition policy toregulate power and port charges to reducemonopoly prots in these areas, especiallysince Vanuatu has the highest electricity andport charges in the region. In the longerterm, these monopolies should be addressed

by bringing in additional power providers(including for alternative energy) andconstructing another harbor near Port Vila.

(iii) Rationalizing the SOE portfolio,including divestiture, PPPs, and upgradedgovernance will raise productivity andenhance the long term sustainable growthrate of the economy.

(iv) Reviewing the land leasing system toensure the sustainability of current andfuture leases, particularly as signicanttensions are developing in this area.

(v) Proceeding with commercial legal reform by bringing legislative drafts to Parliamentand passing them into law as soon asfeasible. Tis will help Vanuatu become abetter place in which to do business.

While the global nancial crisis brings short-term uncertainty, these measures should increase Vanuatu’s ability to weather the storm and add tothe future prosperity of the country. Signicantprogress has been made over the past few yearsin implementing measures that enhance growthprospects. Te commitment of the governmentto reform continues, and if existing measuresand future plans are implemented, Vanuatu

will continue to be one of the fastest growingeconomies in the region.

Tis report contains a number

of suggestions for reform. In the

medium term, implementing

them will raise the sustainable

growth rate.



Sustaining Growth: A Private Sector Assessment for Vanuatu

Vanuatu is establishing a foundation for sustained economic growth. Te government has signaled its intentionto make Vanuatu a more business-friendly environment for private sector development, with sound macroeco-nomic management and improved policies toward the private sector, but much remains to be done. Tis reportoutlines major constraints to private sector-led growth, which are undermining Vanuatu’s competitiveness. Itrecommends high-priority reforms to address these constraints.

About the Asian Development Bank

ADB’s vision is an Asia and Pacic region free of poverty. Its mission is to help its developing member coun-tries substantially reduce poverty and improve the quality of life of their people. Despite the region’s manysuccesses, it remains home to two thirds of the world’s poor: 1.8 billion people who live on less than $2 a day,

with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclu-sive economic growth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments forhelping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants,and technical assistance.

Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines

Pacic Liaison and Coordination OfficeLevel 18, 1 Margaret StreetS d NSW 2000 A t li

vanuatu private sector assessment, 2009

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