Pacific Magazine > Magazine > November 1, 2006

Federated States of Micronesia

Investors Go Home?

Foreign Investors Find It Tough

By Jessica Chapman, POHNPEI

When Lance Higgs left Canada for the Federated States of Micronesia in the late 1970s he was chasing a dream. Higgs had read an article about the country’s emergence from the U.S. Trust Territory administration and its keen interest in attracting investors.

Eager to divest his interest in deep sea salvaging and pursue business as a tourism operator in the Pacific, Higgs followed up. He subsequently registered his business and became one of the very first foreign investors in the FSM.

The proprietor of the live-aboard SS Thorfinn, Lance Higgs, warns potential investors to FSM to “come in with their eyes wide open.” [Photo: Martin Payne]

Initially establishing himself in Pohnpei as a small-scale cruise operator, Higgs later moved to Chuuk and downscaled his operation to cater exclusively to scuba divers. He has operated his vessel, the SS Thorfinn, as a liveaboard since the mid-1980s.

Over the years, however, Higgs has witnessed the FSM’s failure to make good on its early enthusiasm for foreign investment. The FSM has struggled to develop an attractive business climate.

The country’s lack of infrastructure and its remote location discourage potential business. Tightening immigration restrictions and a lack of tax incentives for investors could be contributing factors as well.

“It was a very, very risky venture to come down here with a big ship into an absolutely unknown market,” Higgs admits. However, he fell in love with the islands. It is this love, rather than profit, that has led him to persist in what he and others identify as a potentially worsening business climate.

Higgs advises caution to potential investors. “They better come in with their eyes wide open and an idea of what they’re up against.”

Statistics illustrate the uphill battle investors are up against in the FSM.

The FSM private sector (in all four states) has fluctuated little in the last five years, bringing in between $60-70 million annually. This is about equal to or slightly less than government contributions to the economy—and about one third of the country’s GDP during each of these years. There has been virtually no GDP growth rate in the FSM.

The World Bank’s “Doing Business 2007” report did, however, did find an improvement in FSM’s performance, albeit from a low base.

“There was the introduction of bankruptcy laws in Federated States of Micronesia, which makes the wheels of capitalism turn a little bit more easily,” says World Bank Senior Investment Police Officer, Alan Moody.

“The second thing was the abolition of minimum capital (to start a business)... and that is something that is happening across the world,” Moody says.

The issue of foreign investment was on the agenda of a recent Economic Policy Implementation Council (EPIC) meeting of FSM executive and legislative leaders in Pohnpei.

“We have been having several problems with states. We’ve been asked to do something,” says Valerio Hallens, FSM registrar of corporations.

“We’re starting to be worried because it’s really against the efforts to make the FSM a good place for investors,” he says.

Pohnpei’s foreign investment board has in recent months gained a reputation for an abrupt decline in the number of permit applications it approves.

Approvals have dropped from about 80 percent to 50 percent. The board’s behavior has led to legal proceedings by foreign-owned businesses.

Allois Malfitani, owner and operator of the successful Pohnpei Surf Club and a U.S. citizen, was turned down in June for a permit to open an eco-resort in Pohnpei.

His subsequent lawsuit challenges not only the board’s decision but also the FSM’s current position that U.S. citizens require investment permits to do business in the country despite its relationship with the U.S. under the Compact. FSM citizens may work in the U.S. without restriction.

Malfitani says he was surprised and disappointed by the rejection but remains hopeful that the courts will rule in his favor He admits it takes a certain passion to succeed as a businessperson—especially a foreign one—in the FSM.

“I’m doing this because I love what I’m doing and this is my life’s mission,” he says.

Tropic Helicopters has been grounded since September as the Pohnpei foreign investment board looks into its license arrangements. [Photo: Jessica chapman]

Another company, Tropic Helicopters, has also been an object of the Pohnpei board’s scrutiny. The board has issued a “cease and desist” order for the Australian helicopter maintenance operation claiming it needs a state permit rather than the national one it was issued in May 2003. In late September, business remained stalled pending a court ruling on the board’s injunction.

According to FSM Department of Economic Affairs Secretary Akillino Susaia, concerns have also been raised about Chuuk. Chuuk has only one person responsible for receiving and evaluating business permits.

Until the 1990s investors were required to obtain business permits from the national government. In 1997 some responsibility was shifted to the country’s four states.
 
States now issue permits for service industry activities, professional services and other business, including tourism operations. The national government has jurisdiction over activities with national interest such as fishing, telecommunications and banking.
 
Private sector development is one of six priority areas under the country’s amended Compact with the U.S. In a report to Congress on progress in fiscal year 2005, the U.S. Department of the Interior stressed the need for the FSM to concertedly pursue development of its private sector, including attracting foreign investors.

The national government has expressed a commitment to making it easier for foreign investment to the country, even passing a law in 2005 to further enable this. There’s speculation the government may reassert its authority over all foreign investment permits. In the meantime, says Susaia, Yap, Kosrae and Chuuk have recently passed more favorable legislation as well.