Greg Urwin, Secretary General of the Forum, Hon. Ministers, Director General of Ausaid, distinguished guests, ladies and gentlemen.

Good afternoon.

The world is currently undergoing a once in a generation economic boom, largely driven by China. Commodity prices are soaring, and global markets are at record levels.

These factors are driving investment, particularly into resource rich countries of which there are several in our region.

Are the Pacific Island countries getting their fair share of new investment? And if not, what can they do to create an environment where investors are prepared to put their money?

Some things are hard or impossible to change:-

Where your country happens to be located, its proximity to local markets, abundance of natural resources, whether it has a strong domestic on which to leverage.

But one thing that all countries can do is to create welcoming and investor friendly environment supported by strong and good political governance.

But before we talk about political governance, I want to talk about something that is close to all Pacific Islanders’ hearts – rugby.

A while back, I wanted to take a couple of clients to see a big rugby game, but all tickets were sold. I asked an acquaintance who was tied up with one of the clubs and he said that if I slipped him $100, he would see what he could do.

In the end someone else produced 4 tickets and off we went to the game. While we were pleased to be there, I was disappointed that the seats were behind a big pillar and our view of the game was somewhat obscured. What’s more, my team got beaten.

During the game, I noticed my competitor hosting his clients in the VIP seats in full view of the game. Later, I asked my acquaintance, how my competitor got the best seats. He replied that my competitor regularly supplied the Club President with a dozen bottles of wine.

I felt that I had been disadvantaged and that all supporters were not being treated equally.

What has a game of rugby got to do with political governance?

Well, I think that we all want a fair go. We don’t want someone else to get the inside running unfairly. Perhaps the whole world won’t be a level playing field, but, buying influence will usually disadvantage others.

The background paper for the Pacific 20/20 project written by Cedric Saldanha gives a definition of political governance essentially being about managing the state, establishing a practice of accountability to the people, and promoting a sense of nationhood. It includes the process of electing leaders to office, the interface between the political and bureaucratic arms of government, the strength of oversight bodies such as judiciary and the ombudsman and the role of civil society in influencing the quality of governance.

There have been suggestions that the local culture inhibits good political governance in the Pacific and that the processes pushed by donor countries do not take into account the cultural norms of local traditions.

At the Prime Minister’s Summit on Corporate Governance held in Fiji last year, the Fiji Prime Minister Mr Qarase stated of the region:-

Dr. John Carver, a US expert on governance, put it more simply when he said:-

In the Pacific, Samoa is generally recognised as being at the forefront of reform and good political governance and I’d like to draw on a few quotes from a lecture given by Hon.Misa Telefoni Retzlaff, Deputy Prime Minister and then Minister of Finance for Samoa, at Georgetown University in 2002.

Again quoting Cedric Saldhana’s 20/20 paper, key political issues of concern in the Pacific include:

The standard of political governance is not the same in all Pacific Island countries – some are doing better than others, but I think that most people would agree that there is room for improvement and that the current level of political governance is a hindrance to investment and economic growth.

Good political governance in itself will not guarantee foreign investment and sound economic growth, but without it, investors will be loathe to commit capital to new projects in countries.

Some countries that have worked hard on their political governance have been disappointed that foreign investment has been slow to occur. I mentioned that one country, which has seriously tackled the governance issue and which has a reputation for leading reform in the Pacific is Samoa. However, the lack of new investment in Samoa has been more to do with other factors, in particular, its location and difficulties in accessing markets etc. This not to say that there has been no investment, but the country would obviously like more.

In fact, the investment story in the Pacific is not as poor as everyone might Think, particularly for Samoa and other high remittance countries, Much of these remittances are invested into personal property and housing, Samoan investment is notably high, but growth is dragged down on the other side by huge imports, which leads to very negative net exports. Gross Fixed Capital Investment (GFCP) to GDP is lower in Fiji and PNG and this might be because other areas of economic activity are a greater contribution eg consumption.

However, while GFCF for Pacific countries is reasonable, it is apparent that all Pacific countries lack a way for commercial investment to proceed and importantly, to expand.

Global investment funds, which total hundreds of billions of dollars, are flowing to emerging economies, but there is immense competition for these funds and like everyone else, Pacific Island countries need to compete hard to get their share.

The isolation, lack of infrastructure, transport and small under educated populations, not to mention preponderance to natural disasters place the Pacific Islands at a disadvantage in attracting global investment. However, these challenges can be overcome to some extent by providing an attractive governance and investment climate where investors have a clear line of sight through government regulations and processes and where corruption is not a major issue.

A recent McKinsey survey in the US showed that investors will in fact pay a premium to invest in a country or company with good corporate giovernance, averaging about 11%. Obviously these are long term investors looking for value stocks, not your quick raiders in search of fast growth, but frankly, those long term investors are the only ones worth having in a developing country faced with a sometimes volatile market.

On the flipside, the survey also showed that investors often demand a premium when investing in countries with a poor record of corporate governance.

Most fund managers, when assessing the possibility of investment in countries, such as Fiji, look first at political risk and then at the context for investment: workable exchange requirements and a legal and regulatory environment which not only encourages their involvement, but keeps their investment targets honest. (Address by Ted Kunkel to PM’s Summit on Corporate Governance – Fiji 2005).

Legitimate, well-run companies or investors look for good political governance, stability and goal posts that don’t move constantly.

It often follows that countries that are isolated from markets and which do not have a strong private sector, where international companies operate, also struggle with good political governance. It is difficult to change and adapt if there are no benchmarks on which to gauge performance or set standards of governance. This in turn inhibits the creation of an environment that is attractive to long term foreign or even, local investment.

The only likely investors are unethical, corrupt companies which prey on weak governments where they can flout regulations, avoid taxes/duties. There are many examples of these sort of companies in the region, particularly in the resources sector.

Poor political governance leads to corruption, which in turn harms legitimate businesses, particularly small local ones that do not have the capacity to stave off such attacks eg the Solomon’s Beer War which occurred a few years ago and is not unconnected to recent political violence.

Poor governance at the political level inevitably leads to a breakdown in the public service resulting in corrupt practices which in turn tends to favour unethical short term or opportunistic businesses at the expense of legitimate local ones.

One area that I constantly encounter, is who is shouldering the tax burden in the region. The often maligned large corporates, which might make large profits, pay a substantial portion of the tax take in the Pacific, through their own corporate tax and through duties and the taxes paid by their workforces.

It is disheartening when other businesses avoid their responsibilities or government inefficiency does not collect monies due. Indeed, this often causes an uneven playing field that dissuades companies from investing in those countries.

The World Bank has defined corruption as "the use of public office for private good". Samuel P. Huntington has bluntly stated that, in terms of economic growth, the only thing worse than a rigid, over-centralised, dishonest bureaucracy is a rigid, over-centralised, honest bureaucracy.

There are few examples, however, of badly managed countries attracting sustainable long term investment leading to dynamic economic growth.

Recent events in the Solomon Islands are a good example of the outcomes of many years of poor political governance, ingrained corruption at the highest levels and a public service unable or unwilling to administer what laws and regulations they did have. Even before the recent riots, the Solomon’s economy needed to grow at 4.5% for 30 years to get back to pre-2000 GDP levels.

The country now has significant challenges overcoming public perceptions, re-building infrastructure and recovering from indiscriminate harvesting of its natural resources. It is now problematical whether further investment will take place in the few projects that were showing promise in the tourism sector or at Goldridge gold mine.

Having said that, it is also poor political governance to protect inefficient local businesses. Poor governance, punitive tariffs and misdirected processes result in inefficiencies in the public service, which detract from an environment that encourages competition and investment. The recent Vanuatu – Fiji biscuit/kava war is a recent example, as are the monopolies apparent in many countries, particularly in telecommunications.

With good political governance, governments shouldn’t be picking winners, rather encouraging the private sector to grow, they should leave the rest to the private sector. Intrusive government policies are not good governance.

Some Pacific countries have an Investment Board that is supposed to be a "one stop shop" to assist investors, but often sees its role as defining who should enter the market.

While these Investment Boards are at least looking for new investors, it often appears that the other government departments are doing the opposite.

Things like obtaining work permits, planning and land owner approvals etc. can take an inordinate length of time. Good political governance means better co-ordination between government departments and streamlined processes and administration.

Recent World Bank statistics compared the efficiency of many government processes across a number of countries. Some Pacific countries take over 60 days to register a new company. Compare that to Australia, where it takes 2 days. Following my recent retirement, I needed an ABN number to set myself up to do some consultancy. It took a few minutes on the internet and nobody wanted my life story or what I was going to do and to whom.

Another area of governance that is one of the hardest, if not the hardest, issue for Pacific governments is land tenure. Most land in the Pacific is crown land or native lease. This in itself is not a problem, but the uncertainty it throws up in many Pacific countries is. For example, while land can be used as security or surety for loans, and works quite well in countries like Fiji or the Cook Islands, where title is fairly clear and there is a history of recourse through the legal system, in many countries the leasehold situation is not clear and/or unable to be exercised. Many small, usually indigenous owned businesses find it difficult to secure borrowings against their land. Often the land is communally owned, which is another barrier to pledging it as security and the ability to leverage it for further investment or to bring in partners with investment funds.

These practices detract from an efficient environment and add costs to doing business thus restricting new investment.

Capital is fluid, it will flow to where business is easier to conduct and where there is transparency to guage future returns and that is usually where there is good political governance.

Despite the obvious benefits, good political governance is not easy. It takes resolve to make tough decisions that aren’t always popular at grass roots level. But eventually, good political governance has its rewards. You don’t have to look far to see that that the countries with good political governance attract the most investment and it is not confined to large populous countries.

Obviously Australia and New Zealand do well despite their relative isolation from world markets.

For a small country without a lot of natural resources, Samoa has managed to outperform because of good governance. On the other hand Indonesia with a population of over 200m and large store of natural resources, which has a record of poor governance and corruption went for many years from the late 1990s with the dismal distinction of being one of the few countries in Asia with a negative Foreign Direct Investment (FDI).

You only have to follow the investment flows around the world to understand that capital investment leading to sustainable development and good political governance go together. Pacific Island countries need long term sustainable industries and investment into those industries. Recent successes include the tourism industry in Fiji. But even there, they often flirt with investor confidence.

It is interesting living in Fiji and listening to the various parties debating their policies for this week’s election, probably the most important in Fiji’s history.

There has been some discussion on political governance, but no party stands out as having a strong platform on this issue.

I mentioned how poor or inadequate political governance results in an unsatisfactory bureaucracy, but it also inevitably leads to a break down in law and order.

Countries which earn the reputation for being dangerous places to do business, rarely achieve their potential for growth.

Other consequences and what needs to be done. .

Apart from foreign investment and sustainable growth, one other reason that poor political governance is being targeted by donor countries and the international community, is that it opens up opportunities for illegal businesses to flourish with proceeds possibly going into other nefarious activities such as drugs and terrorism.

Companies or individuals looking for somewhere to invest simply want a reasonably level playing field where the rules of engagement are known and consistent and that efficient processes apply in a safe, corruption free working environment.

So what can we do to bring about change and improved political governance?

The Pacific 20/20 report lists the steps that countries should be undertaking, but a few of the mandatory processes that the business community expects are:-

Good political governance is essential for a dynamic private sector and investment. Sustainable growth creates jobs and prosperity which in turn will lead to more political stability.

So why don’t we all push to accelerate something that will change the Pacific from being part of the Arc of Instability into a peaceful region where investment is encouraged and sustainable economic growth can provide jobs for the growing population which has such a large proportion of its working age people unable to find gainful employment at present.