Far-flung from each other as well as their regional neighbours, the Pacific Islands have been hammered by cyclones and threatened by climate change. But their determination to face down challenges and boost tourism in a sustainable way is indomitable, writes Brian Caplen.

Nuku Alofa

Getting your head around the Pacific Islands takes some doing. Kiribati, for example, has 33 coral atolls with a total land area of 811 square kilometres, about one-third the size of Luxembourg. On the other hand, it has an ocean area of 35 million square kilometres, about the size of India. Unsurprisingly, fish is one of its major exports, but a fickle one: sea conditions could change and they may all swim away.

The rest of the Pacific has similarly fantastic statistics and is also vulnerable to climate change and natural disasters. The Cook Islands has a population of just under 11,000 and receives 130,000 visitors a year, driving a tourism industry that accounts for 60% of gross domestic product (GDP). But a cyclone could ruin all that in a matter of hours and leave the government with a huge reconstruction bill.

Or the New Zealanders and Australians who form the backbone of Pacific tourism could change their tastes and decide to go to Queensland instead. Flying time from Sydney to Nadi, the main airport in Fiji, is nearly five hours, highlighting another tough regional fact: the various island groups are both far away from their main tourism markets and far away from each other.

Even different islands within the same group can be a long distance apart. A flight from the main island of the Cooks, Rarotonga – where the capital Avarua and the government is located – to the northernmost island Penrhyn takes four hours, slightly longer than flying from London to Athens.

Slow growth

There are other challenges apart from huge distances and cyclones. Populations are not only small but shrinking in some cases. Often the numbers of nationals living overseas are greater than those living at home. Transport and communication links can be poor, infrastructure backward and land title unclear. The political situation can be unstable: Fiji returned to democracy in 2014 but has experienced four coups since 1987. There were anti-government riots in Tonga in 2006. In Vanuatu, a number of former MPs who were sentenced to prison on corruption charges in 2015 have so far failed to get their convictions overturned. They deny the charges.

Economic growth rates of 2% to 3% are below even those of a comparable region such as the Caribbean and trail those of even Asia’s laggard countries. But it is this relative backwardness that also provides huge opportunities for investors in tourism, international finance (a report on Pacific financial centres will appear in the February issue of The Banker), IT and call centres, construction, seabed mining, fishing and commodities. The Banker visited five South Pacific islands in October 2016 to look at what is on offer and get the views of both investors and government officials. We visited Fiji, Vanuatu, Samoa, Tonga and the Cook Islands.

The International Monetary Fund's resident representative based in Fiji, Tubagus Feridhanusetyawan, says: “When there is a natural disaster in the Pacific, the resulting loss of growth is greater than when the same thing happens in other small island states. We are trying to build resilience by helping countries to build fiscal buffers so that they can recover better. Revenue is volatile and there are limited sources, but tourism keeps on growing and provides huge opportunities.” 

Tough targets

Tourism is the big opportunity in the Pacific, but the challenge is to develop it in a sustainable way without damaging the pristine tropical beaches and clear blue water that make the islands attractive in the first place. Fiji is focused on developing higher yield from the existing visitors rather than just expanding in terms of numbers. China and India have been identified as the two markets with huge growth potential at the high end, and Fiji provides huge incentives for both hotel and resort building as well as for using the country as a film location in a clever form of destination marketing.

Fiji’s minister for industry, trade and tourism, Faiyaz Siddiq Koya, says that while traditionally Australia and New Zealand are the two biggest sources of tourists, “the two growth areas for us are China and India. They are the highest spending tourists in the world.

“We have targeted a F$2bn [$960m] tourist industry by 2020. Currently we are sitting at F$1.6bn. You must remember that Fiji does everything in a sustainable manner. People say, ‘Oh, why don’t you have a million tourists?’ But you can have people spending more money with only 800,000 tourists.”

Fiji received 755,000 tourists in 2015, 9% up on the previous year with the number still growing, so that roughly speaking the country receives about the same number of visitors as its population of about 900,000.

“We do things in terms of it being sustainable for our infrastructure and inventory,” says Mr Koya. “We could open the skies and turn it into a bigger industry but we have to think of our national airline, Fiji Airways. If, say, we brought in 1.5 million tourists in 2017, we don’t want to be in a situation where everything collapses because the infrastructure is not there.”

Chinese money

China’s influence on the South Pacific is huge and growing. As well as being a source of tourists, its investors are active in the property markets and running businesses from hotels to banks. Official flows in soft loans and grants are behind a wave of new government buildings, infrastructure and convention centres. The Chinese role can be controversial, with complaints that aid packages are less generous than Western ones and that building standards are not as high. But Tonga’s minister for lands and natural resources, Lord Ma’afu, says: “We are taking Chinese investment because the big Western powers, especially the US and the UK, have become less active in the region. We don’t have any choice even though we still drive on the left [in common with the UK, Australia and New Zealand].”

In the case of Fiji tourism, one of the most significant and largest Chinese investments is being carried out under the One Belt, One Road programme (despite Fiji being nowhere near the Silk Road which inspired the initiative) and brings together Guangdong Silkroad Ark Investment, the developer, and US hotel operator Wyndham. The F$500m resort will have 370 rooms on a 668-square-metre site as well as a 1000-seat convention centre. The project is backed by the Guangdong provincial government.

One of the pioneers of bringing Chinese visitors to Fiji is Tony Whitton, managing director of local companies Rosie Holidays and Ahura Resorts. His company was the first to organise tourist charter flights out of Beijing and Shanghai and more recently scored another first with the arrival of 1200 high sales achievers from China on an incentive trip.

“Currently Chinese visitors are 10% of the total but it’s a huge potential market and one that can keep on growing,” he says. “Fiji is the superpower of the region [in terms of tourism] and all the big hotel brands are here.” These include Sheraton, InterContinental, Hilton and Westin.

Air time

This is in stark contrast to other islands, where a Catch 22 situation often arises: the big hotel operators will not come until there are sufficient airline routes, and the airlines refuse to put on routes until they see the hotels. Top hotel brands are considered vital for doing well in the all-important US market.

The Cook Islands has partly solved the airline problem by underwriting Air New Zealand’s losses on direct routes from Los Angeles and Sydney. Finance minister Mark Brown says that while NZ$12m ($8.6m) was allocated in the budget, better than expected performance and lower oil prices have brought this down to just over NZ$6m. The agreement expires in 2018 and the government is asking for expressions of interest to see if there is a more favourable deal to be made.

The Cook Islands has a derelict and abandoned Sheraton from a failed 1990s project, but no major brand name hotel, a situation it wants to change. “We need 250 to 300 more rooms and a branded hotel for the US market,” says Karla Eggleton, director of sales and marketing for the Cook Islands Tourism Corporation.

In Samoa, where the Sheraton does have a presence, prime minister Tuilaepa Lupesoliai Neioti Aiono Sailele Malielegaoi is concerned about the lack of flights and is considering relaunching the national airline on international routes under the name Samoa National Airline. “What we want to do is get more flights and more visitors coming to Samoa,” he says (see interview with Samoa’s prime minister on page 101).

In Tonga, a big hotel investment has been made by Fiji’s Tanoa Hotel Group, chaired by one of the country’s leading businessmen, YP Reddy. This shows that there are opportunities for intra-Pacific investment flows, especially from the larger economies such as Fiji and Papua New Guinea to the smaller ones. One of the region’s largest banks, Bank of South Pacific, is headquartered in Port Moresby, Papua New Guinea’s capital, and is chaired by Sir Kostas Constantinou, whose business interests include hotel projects such as the refurbishment of Fiji’s heritage Grand Pacific Hotel and Samoa’s newly opened Taumeasina Island resort.

On location

An agreement by Tanoa to refurbish Tonga’s Dateline hotel in a prime seafront position in the capital Nuku’alofa was concluded with the government in August 2015 and opened in late 2016. Tonga’s finance minister ‘Aisake Value Eke explains that the hotel was previously run down and needed a $10m refurbishment. “The government has provided a 99-year lease and duty and tax exemptions on the imported capital equipment,” he says. “After four years of operation the government will receive 2% of gross revenues after agreed deductions for the management fee. The hotel used to be run by the government but it was not successful, and then a Chinese investor ran it for a few years but the government terminated the agreement.”

On the question of investment incentives, few countries are more generous than Fiji, where the government pays 47% of the costs of making a film. This has attracted filmmakers from Hollywood, Bollywood and China. Reality TV shows such as CBS’s Survivor and Fox’s Kicking & Screaming have been filmed in Fiji, helping to promote the country as a tourist destination. But nothing has succeeded as spectacularly as when Chinese reality TV show Where Are We Going, Dad? was shot in Fiji and broadcast to 75 million viewers, about three times the audience a US reality TV show usually attracts. This led to a 40% boost in numbers of Chinese tourists after it was broadcast in February 2015.

“The benefit for Fiji is money spent here, which gives a multiplier of 2.8 times, and the promotion of Fiji as a tourist destination,” says Dallas Foon, CEO of Film Fiji, whose previous job was the rather less glamorous one of running a poultry farm. Now he spends much of his time reading film scripts to make sure they pass Film Fiji’s suitability test.

The strategy appears to be working, with total film spending in 2016 set to top F$100m, more than double the amounts spent in 2015 and 2014. 

The fast track

When it comes to investment incentives, conditions vary widely across the different locations, as does the foreign direct investment promotional machinery set up to attract investors. In Fiji this is moving towards a world-class, sophisticated model but is fairly rudimentary or non-existent in other destinations.

Investment Fiji’s CEO, Godo Muller-Teut, says that investment promotion in the country used to be about who knocked on the door, but the aim now is to be proactive rather than reactive.

He sees big opportunities in tourism, including that related to sports and conventions, information and communications technology, business process outsourcing and agriculture. Mr Muller-Teut has pushed hard to reduce the time for investors to get a licence. “As little as a year ago it used to take six months. Now with the one-stop shop launched in July 2016, you can get a licence in a week,” he says.

Fiji plays a role as the hub for the South Pacific: it has the best flight connections and the best internet and Wi-Fi connections thanks to being on the Southern Cross Cable linking Australia and New Zealand to the US. Elsewhere, accessing the internet can be a slow and painful process.

For these reasons, offshore contact centre specialist Mindpearl has put an operation in Fiji, and ANZ Bank has centralised back-office operations there both for the Pacific and parts of Asia. Investment Fiji chairman Truman Bradley notes that Fijians speak the Queen’s English – meaning English without an accent – making it an ideal location for call centres despite being remote.

Bottle tops

In Tonga, Tapu Panuve, managing director of retailer Office Equipment, has felt the business impact of being in a remote location. “We have to order goods three months in advance and [in 2015] our containers with Christmas goods didn’t arrive until January. They got offloaded in Auckland,” he says.

But with good marketing, even the disadvantages of remoteness can be swept aside, as illustrated by the success of bottled mineral water company Fiji Water, founded by Canadian businessman David Gilmour.

The governor of the Reserve Bank of Fiji, Barry Whiteside, says: “Exports of Fiji Water – currently the number one premium brand of water sold in the US – have risen by more than 60% over the past five years to about F$200m and are set to grow further with the recent addition of a third production line.”

Staff at the Vanuatu Investment Promotion Authority (VIPA) spend a lot of their time working on the number one investment challenge in the South Pacific: the issue of land title. Across the region, the majority of land is held by locals according to traditional rules which can make leasing it difficult and subject to dispute. “The land tenure system is our biggest obstacle and a concern for most investors,” says VIPA’s manager of the promotion division, Raymond Vuti. “They may sign a lease with a land owner and then during a project’s development others pop up and contest it.” VIPA works with the land ministry to try to sort out these difficulties.

In Samoa, the land issue is further complicated because not only can nationals inherit land, they can also acquire rights to it through service to one of the community elders. In Tonga, the government must approve all land transactions and this can take 12 months or longer. If a bank became involved in a recovery situation through the courts, the matter would be complicated because commercial cases can, at the request of one of the parties, involve a jury, something almost unique to Tonga.

No incentive

By contrast in Fiji the situation seems more straightforward. “Indigenous land in Fiji is well documented and buyers can get a 99-year lease,” says Kevin McCarthy, country manager for Bank of South Pacific. “Recovery, in the case of a defaulted mortgage, is possible without always needing to go to court. If it does go to the court, the system works fine.”

On incentives, the Cook Islands takes the approach that a level playing field works best. “Currently there are no special incentives (tax, remittances, land concessions) for foreign investors, or domestic investors for that matter,” says Mr Brown, the country's finance minister. “If any special initiatives are proposed then they will be made available to all investors, both local and foreign.”

Meanwhile in Vanuatu there is huge opposition from the business community to government proposals to introduce both corporate and income tax at 17%.

“One of Vanuatu's great advantages for attracting foreign investment is the absence of personal income tax and corporation tax,” says local businessman Thomas Bayer, whose interests span banking, insurance and shipping. “The proposal to introduce them would take this away. The business community thinks that a better option is to improve the collection of existing taxes such as VAT and, if needed, to increase those tax rates, as they take no more administration than exists today thus the tax take increases without further government cost.” Mr Bayer has lived in Vanuatu since the 1970s and renounced his US citizenship to become a national of Vanuatu.

Ocean riches

After tourism, the big opportunity in the South Pacific is to make money from its vast stretches of ocean, either through fish and aquaculture or from seabed mining. Tonga’s finance minister, Mr Eke, says the government has issued licences to three companies exploring the seabed for minerals such as copper, zinc, gold and silver. Canadian company Nautilus Minerals is ready to go into production, says Mr Eke, and the broad framework will be that the government receives 3% in royalties of the market value of the minerals plus a 25% corporate tax and another 25% superprofits tax.

“Land is not the answer [in the Pacific]. The future is the ocean,” says Lord Fusitu’a, the MP for Tonga’s most northernmost three islands the Niuas (600 kilometres north of the main island Tongatapu and with a population of less than 2000 out of a country total of 103,000). “The future of our economy is in aquaculture. There are about half-a-dozen niche products such as sea cucumber, abalone and seaweed which, if we could sell them successfully to the Chinese market, would fund us for the next few decades.”

This would follow the development trend of Pacific Islands further north, where tuna fisheries account for 36% of GDP in Tuvalu, 32% in Kiribati and 10% in Micronesia. The Pacific Islands supply 34% of the annual global tuna catch. A World Bank report entitled ‘Pacific Possible’ says: “To better capture the benefits of fisheries activities, in 2007 the eight parties to the Nauru Agreement, followed also by Tokelau, established a vessel day scheme [allowing vessel owners to purchase and trade fishing days] to limit and better manage… fishing access to their waters, resulting in a quadrupling of access fees between 2009 and 2015.”

But while the sea can be the solution for Pacific Islands – with some government budgets largely financed by aid – rising sea levels and an increase in cyclones due to climate change are among the biggest challenges.

The chances of a natural disaster occurring across the Pacific states are about one every five years, but it is not uncommon to have two or three cyclones arrive in quick succession. Fiji is still recovering from Cyclone Winston, which hit the main island of Vita Levu in February 2015, and Vanuatu from Cyclone Pam in 2015, two of the worst cyclones on record. Vanuatu tops the World Risk Index ranking countries’ exposure to natural hazards and their ability to deal with them. Tonga comes third and Fiji 16th out of 171 countries. Samoa was hit by Cyclone Evan in December 2012 causing loss of life as well as a 30% hit to GDP on top of an earlier 25% hit due to a tsunami in 2009. 

“It’s a difficult time for us after Cyclone Pam,” says the governor of the Reserve Bank of Vanuatu, Simeon Malachi Athy. “According to the post-disaster assessment, the total cost is about 60% of GDP, including damage to infrastructure, hotel facilities and lost production.” The governor adds that the economy has made a strong recovery, growing at more than 4% in 2016, aided by new infrastructure projects.

Wiped out?

For the low-lying islands of Kiribati, the Marshall Islands and Tuvalu, rising sea levels threaten their very existence. In 2014 the Kirabati government purchased 20 square kilometres of land on Fiji’s second largest island Vanua Levu to provide an escape option.

“All it takes is a cyclone coming through and years of prosperity can be wiped out in a couple of days,” says Cook Islands finance minister Mr Brown. The Cook Islands’ government has built three layers of resilience: a NZ$1.5m domestic emergency response fund, a line of credit of up to $13m from the Asian Development Bank and cover from the newly established Pacific Catastrophe Risk Assessment and Financing Initiative. This captive insurer is based in the Cook Islands and uses multilateral and donor funds as well as premiums from at-risk countries to provide payouts when there is a natural disaster.

Then there are climate change funds such as the Adaption Fund and the Green Climate Fund set up to help developing countries but which, some in the region feel, are too slow and bureaucratic to be  useful. “By the time we get the money we will be underwater,” says one government official.

Power to endure

Kolone Vaai, co-managing director of KVA Consult, based in the Samoan capital Apia, says that Samoa has successfully tapped climate change funds. “Our advice is stop complaining and focus more on understanding how it all works and rationalise the government bureaucracy for implementation, monitoring and evaluation of these climate change projects,” says Mr Vaai. “It is possible to climate-proof existing projects and make them suitable for funding.”

It is this kind of resilience that stands the Pacific Islands in good stead for dealing with adversity. At the start of 2016, Qantas, Air New Zealand and Virgin Australia suspended flights and codeshares to the Bauerfield International Airport in Vanuatu’s capital Port Vila over worries about the poor state of the runway. But plucky Air Vanuatu kept flying while repairs were being carried out.

Chairman of the Vanuatu Hotels and Resorts Association, Bryan Death, says that the runway problem together with Cyclone Pam have made the past two years a real struggle for the country's tourism industry.

Hotel developer and estate agent Loic Bernier, who is behind the Ramada Resort Akiriki opening in April 2017 that will give Vanuatu an additional and much-needed brand hotel, says: “The combination of Cyclone Pam and the airport issue has made doing business very tough. Luckily we had Air Vanuatu to help us through the worst patch.”


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