Government policies, agencies undermine business development
Pacific governments are littered with failed business ventures. But despite the history of failure, governments keep operating business activities in the guise of state owned enterprises or other government agencies.
Elected leaders have a tendency to verbally promote private sector development, and then do little to actually implement their words. In fact, many people in business say the most effective way for governments to support the private sector is simple: pay their bills on time. The months—sometimes years—that businesses are forced to wait on payment for legitimately provided services or goods hurts their operations despite governments’ professed support for business.
The World Bank’s annual ‘Doing Business’ report ranks Pacific nations from number 57 (Tonga) to 156 (Federated States of Micronesia) out of 189 countries evaluated for the ease of business operations. The majority of island nations are in the lower half of countries designated as more difficult for businesses activities—Solomon Islands (97), Palau (100), Papua New Guinea (113), Marshall Islands (114), and Kiribati (122). Tonga and Fiji (62) are the only two in the upper 50 percent of this World Bank review.
Some political leaders like to be the ‘private sector.’ It’s not unusual in island nations to see some elected leaders with construction companies or other businesses that enjoy government contracts. Observations of this activity from the Marshall Islands show that these business ventures rarely last. We’ve seen government leaders’ construction firms, entertainment businesses, and housing rental operations all die quiet deaths, usually after the person gets out of office and has less opportunity to gain government contracts or is unable to continue repaying government development bank loans.
While smuggling of goods and tax cheating obviously gives those not paying taxes an unfair advantage, government officials engaging in business similarly creates an uneven playing field for businesses that cannot exercise the same clout to advance their business interests.
Then there are the state owned enterprises (SOEs). A 2012 review by the Asian Development Bank of SOEs in PNG concluded that they were ‘crowding out the private sector’ and acted ‘as a drag on economic growth.’ The report noted: ‘In PNG as in the other countries, the poor performance of the SOEs is due to weak governance arrangements, conflicting mandates, the absence of hard budget constraints, and lack of accountability.’
The government-owned Air Marshall Islands is a classic example of a dysfunctional SOE. An ADB report in 2003 said: ‘The financial position of Air Marshall Islands is precarious—it has never made an operating profit and depends heavily on government subsidies.’ Ten years later, a report issued last year said there had been little change: ‘Air Marshall Islands has been a company in crisis for many years—continually operating at a loss, with government support only on a crisis-management basis, with weak management and government involvement in operations.’ Despite pleas from the Marshall Islands Chamber of Commerce and donor agencies, the government has shown little interest in either reforming the airline or letting private companies operate domestic air services. This has undermined private sector tourism development because no one can count on planes arriving or departing on schedule. The country’s flagship scuba diving destination at Bikini Atoll, for example, shut down in 2008 after a dozen years of increasingly profitable operations after many international divers were repeatedly stranded by irregular air service.
The situation for businesses is so tenuous in some places that companies are reluctant to consider construction contracts that in other locations would have multiple competitors. When Chuuk state in the Federated States of Micronesia in 2009 tendered a US$25 million road and sewer project to be funded by U.S. Compact infrastructure grants, only one company submitted a tender: Pacific International Inc. (PII), a Majuro and Guam-based construction firm used to the vagaries of operating in isolated islands. But even PII with its experience has run afoul of the FSM government agencies overseeing the construction program. After more than four years of work had the project 90 percent complete, the FSM terminated PII in November with over $3 million unpaid for work already performed. An independent engineering report issued recently said design flaws caused the project to be delayed 837 days at an additional cost of US$7.2 million, of which the FSM’s Project Management Unit (PMU) approved less than half. The additional time and cost “has come about as a result of mismanagement of the project by the PMU,’ said the report. It could not have been clearer: ‘The owner (FSM government) was found to be in default of the contract for non-payment of amounts contractually and legally due the contractor (PII) and for other reasons,’ concluded the report by J.M. Robertson, Inc., a Guam-based engineering firm. But the FSM government has lined up another contractor to finish the project and is lobbying the U.S. government to lift a ban on construction funding that was put in place because of concerns about project management. In the meantime, PII will likely take the FSM to court—but will it be able to collect the millions owed for legitimately performed work? Is it any wonder PII was the only private company to bid on the project in 2009?
The latest government business venture in the Marshall Islands is the soon-to-be-established Office of Commerce and Investment under the Ministry of Resources and Development. The government is apparently investing about half a million dollars from its increasing pot of fishing revenue to launch the new government agency whose mandate is to reinvigorate an economy long sunk in a swamp of malaise. In the late 1980s and 1990s, the government established the Marshall Islands Development Authority whose mandate was business development. It spent a lot of money with little long-term business result. Once again, with its new Office of Commerce and Investment, the government is repeating past practice and hoping for a different result.
Given that government funded initiatives have largely failed, and such efforts as micro-loans, while helpful in a modest way, are unlikely to generate large-scale employment opportunities, what might actually work?
One idea that’s largely been ignored in the islands is one promoted for many years by north Pacific business advisor C. L. Cheshire, who is based in Hawaii. Cheshire has been involved in working with and advising numerous government agencies and businesses in the region. His conclusion: the best way to spur economic expansion and job creation in the private sector is to invest in already established businesses that have the human resource and physical infrastructure, and demonstrate business experience and staying power. The idea: inject funding and expertise into existing operations to get them to develop new areas of enterprise—fisheries or agriculture or food processing, for example—or expand on successful ones, such as tourism operations.
A business plan will have a better chance of success if a successful business implements it instead of someone with no business experience, although people with ‘start up’ plans generally get funding support and interest. Unfortunately, this line of thinking usually runs into a common challenge in small islands: jealousy of success.
One thing is for certain: governments need a new way of thinking about the private sector, one that appreciates the difficulties of doing business in the islands.
