Guard the Pearl in that Taro Leaf: Political Risk and FDI in Vanuatu

Cultural wisdom offers invaluable lessons for us. Our old folks would warn us in the garden not to pierce a taro leaf that contains refreshing water as you risk losing the precious content of that leaf. It may not be much, but put together with other droplets it does quench an early morning’s thirst.

Likewise, Foreign Direct Investment (FDI) can be likened to that pearl-looking rain drop on a taro leaf. In the world of investment promotion agencies (IPAs) and FDI we should apply the taro-leaf cultural analogy and understanding to good investments that provide refreshing ‘water’ (jobs for our citizens, tax and permit revenues, VAT, etc.) to us. Emotions have run high and patience has run thin over the past few months since Covid-19 and TC Harold struck the country, though we may need to adjust our thinking and plans accordingly to accept extreme weather patterns and pandemics as part of our ‘new normal’ into the foreseeable and predictable future.

Regional and domestic challenges

Dramatic changes due to Covid-19 have seen resources stretched to absolute limits. The tourism revival experiment via the much-hoped for Australia-NZ ‘travel bubble’ has recently been shot down by NZ PM Jacinda Arden, shifting commencement date possibly to September 2020 instead of a July start date. Fiji was supposed to be the first island country to connect to that bubble. That may now have to be derailed further beyond September till our two metropolitan neighbors are comfortable with the outcomes of their own trans-Tasman movements.

On the local private sector (PS) front we in Vanuatu have noticed quite a fare bit of hustling and bustling, shoving and pushing in certain line agencies which tantamount to throwing razor-sharp spears through those invaluable taro leaves as we briefly alluded to earlier. In our early days to attract FDI into Vanuatu, the investment regime of our country was a mucked up merry-go-round, as at a circus. Investors came and swiftly left because they couldn’t simply establish business. Now we seem to have better systems in place, but we are faced with another kind of circus – anti-investment policies. We don’t call them that, but that’s what they are.

Who Needs Who?

We cannot afford to bite the hands that feed us. We can’t take the PS and FDI for granted. I stressed this fact in the column of mid-March 2019, that when we care enough to sit down and take a long hard soul-searching look at it, we (especially in Government, who are in-charge of policy and who many times pass policies without first fully analyzing the implications on the PS) have to confess that ‘the Government needs the PS more than the PS needs it’. The ADB-lead CRP in 1997 did exactly that. It gave impetus to the whole notion of ‘private-sector-lead growth’.

Could it be that some of the younger generation of departmental leaders today have simply forgotten our pitiful past, and the dust and near-bankruptcy from which this country had to be fearfully resurrected? So many agencies of Government today operate in egocentric and self-centred silos. When they draw up policies and turn these into law, all they see is what they want. They are oblivious to and don’t see or fully realize the magnitude of the implications of their actions on other sectors. We need to be very cautious and extremely mindful of the whole notion of ‘Political Risk’.

Political Risk & Investment Retention

Normally the term political risk (PR) quickly connotes political instability and constant changes in Government. The rest of the world understands the acronym MNC to mean Multi-National Corporation, but in Vanuatu we have a better understanding of it – Motions of No-Confidence (MNC). Every Parliamentary Sitting, MNC. The next sitting, another MNC. If this were a type of commercial business, Vanuatu would probably rank among the top 10 leading economies in the world. In FDI circles, the explanation of PR goes beyond all these.

For foreign investors, PR also refers to the disruption of business operations caused by political forces which are very much linked to the general conduct of Government and cover issues such as ‘breach of contract, lack of transparency, unpredictable and arbitrary action, discrimination and general absence of regulatory transparency’ and the imposition of policies that severely implicate or curtail investment decisions – new investments and more so, expansion by existing investors. When Governments conduct themselves in the manner described above, they don’t normally think of it in terms of political risk, but that’s exactly what it is.

According to the World Bank (WB), ‘Countries’ ability to retain and encourage expansion of investment is impacted by perceptions of political risk’. Our colourful marketing collateral (websites, FB pages, pullup banners, posters, pamphlets) are meaningless until we show to investors that we care. The WB, the Multilateral Investment Guarantee Agency (MIGA) and the Economist Intelligence Unit (EIU) will confirm this. In a recent MIGA-EIU survey, political risk was identified ‘as one of the most significant constraints to foreign investment…there is a clear link between investor protection and investment retention and expansion. Without protection for investors, retention and expansion becomes virtually impossible – only very few investors with very specific objectives and plans will bear the risks associated with malfunctioning political, regulatory and legislative systems. Enhanced levels of investor protection will boost investor confidence, leading to generation of new investment and encouraging already existing investors to not only stay but also expand operations’.

The head of a prominent business in Vanuatu wrote me an email in mid-May raising very serious concerns about a certain department’s policies that were about to be imposed on FDI in Vanuatu. He wrote, ‘If this goes through believe me all investors will rethink twice before investing one more dollar in Vanuatu.’ Our policies must be very carefully thought out or we risk defeating the very objectives we intend to achieve. I believe we can do it and the Vanuatu Foreign Investment Promotion Agency (VFIPA) must play a much more proactive role in advocating for those policy changes and adjustments.

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