Bougainville Copper Limited Chairman, Peter Taylor has made a presentation on foreign investment to the Pacific Forum Economic and Trade Ministers, which was held in Rarotonga, Cook Islands in October. The following is a transcript of the presentation.
The Australia Papua New Guinea Business Council (APNGBC) is an organisation whose members are by and large Australian investors and traders in PNG. The Australia Fiji Business Council and the Australia Pacific Islands Business Council work alongside the APNGBC across other Pacific jurisdictions.
I will give my views on factors that encourage a businessman like me to invest in a foreign country and make some comments on the importance of a sound regulatory regime and what it should look like.
Are foreign investors worth having?
Private investors need to make a profit. They are not charities nor should they be seen as a substitute for government services. If that is what is expected of them they probably won’t come. Their legal responsibility is to their shareholders. That is not to say there is no business case for participation in community. programs. Health and education, infrastructure, law and order, strong governance and political stability are important in attracting investment and such programs be can expect foreign investor support.
Government’s role
From a foreign and domestic investors perspective government sets policy and the regulatory framework to support it. Clear and simple is best.
While the private sector is not keen on taxes however described they expect them and, provided the tax regime is transparent and stable and within the means of the investment project to pay while still realising, a reasonable return tax in itself should not be an issue.
More difficult is the role government should play in the private sector patch. I understand that a government might look with envy at a foreign investor making a good return from local resources but government needs to be honest about its ability to achieve the same return. The record shows few can and in any event it is a distraction from what government should be doing; that is, providing the framework for the whole of community services and regulation.
Too often governments find their balance sheets are not equipped for the burden of large equity investments which may have long lead time to profit. There is also the almost certain conflict of interest that comes with being both a regulator and regulated, except in those essential areas of community need where the private sector won’t participate should government be an operator.
Economic Nationalism
It is understandable that a country and its people want to reserve domestic business opportunities for themselves. That is the case no matter how large or developed the economy but every country needs to engage with the global economy to realise its full economic potential. Put bluntly nationalism can considerably constrain economic development particularly in small economies where internal investment capital is modest.
My observation is that all too frequently it is the small economies that have the highest hurdles for foreign investors. There is often tension between nationalistic sentiment and opening up to outsiders. Some pain may be necessary in the name of economic gain and long term prosperity.
When it comes to entering new markets, it is not just a question of internal competition or even regional competition but rather global competition. The foreign investor may bring the global competitive edge that is needed locally and which sets the foundation for local investors, either stand alone or in partnership, to be globally competitive. Big business will bring new opportunities for small and medium size local businesses. I am not aware of any business globally that doesn’t source inputs from outside the enterprise and local makes sense economically in many cases.
What attracts Foreign Investors?
At one level the answer is pretty simple, profit, but the prospect of profit is not enough.
It needs to be recognised there is global competition for capital and direct foreign investment so it is not just a case of being open for business. To be a competitive destination for foreign investment, an attractive business environment and even incentives may be needed to boost investor confidence and interest.
It also needs to be recognised that an incentive is not necessarily a giveaway but can be part of a long term development strategy that will pay dividends in time. One potential disconnect here is the difference between the political cycle and the investment cycle.
My business, mineral resources, may be a little unusual in terms of the time between planning and development, five and more years is not unusual before we get any payback and project life can be decades long. We have projects for example that have been operating for more than 100 years and have underpinned the local community during that time. Government life spans are usually measured in 3-5 year cycles. Government planning and policy needs to look beyond expedient short term popularity and gains, toward long term national development.
There are three key areas where governments can work to build investor confidence and attract foreign investment. These are sound ‘macro fundamentals’, good governance and institutions, and supportive infrastructure.
Macro-fundamentals refer to the level of your country’s macroeconomic, social and political stability. Economic openness and competitive markets are crucial. Investors ask questions like: Does the host country have a balance of payment problem? What is the level of foreign debt and is the country likely to default? Are there exchange controls? Is the government prone to making ad hoc fiscal and legislative changes? Do ethnic tensions exist and if so do they or are they likely to lead to civil disturbance? What is the level of internal political conflict?
What is called “sovereign risk” is down to government. That is the risk the local government poses to the security of the investment and the remittance of profits. Just like the domestic investor, foreign investors and their lenders look for stable and resilient government with a good governance record and an effective civil service and independent judiciary. Foreign investors require other important qualities such as relaxed exchange controls and ease of employing foreign skilled labour not available locally.
Good governance and institutions are a major factor for attracting investment as they reduce the costs of doing business and limit uncertainty for investors. Key to this is having a transparent and efficient regulatory regime, legal system and taxation system.
There are a multitude of matters here that a foreign investor (and its financier) is interested in. Is facilitation payment expected (or other forms of bribes)? Is there a record of non-expropriation? What is the tax regime? Are there serious law and order issues? Are property rights protected? What is the wage regime and productivity? Is there excess “red tape”? By the way I am just as keen on asking these questions in developed economies as anywhere else.
The third factor that attracts investment to your country is supportive infrastructure. Whether you want to develop your mining industry, tourism, fisheries, or anything else, you need workable transport systems and reliable power, telecommunications and water supplies. As I mentioned earlier, there is scope for government and private investors to work together to deliver infrastructure projects.
A country I admire is Singapore. It is welcoming of foreign investment without time consuming and cumbersome processes. Its foreign investment regulatory regime is clear and simplified. The government investment agencies do not try to pick winners in foreign investors. They are open to all. They let the market determine whether a business plan succeeds or fails. They provide clear rules governing investment that appeal to potential investors. There is a very low level of corruption and an independent judiciary that has the added element of a panel of foreign judges on that branch of the High Court that hears international commercial disputes.
Government agencies have little expertise in assessing a business plan. Unfortunately in most Pacific islands jurisdictions there is too much emphasis on picking winners and this discourages investment.
Of course it is important to ensure that foreign investors, like all businesses, comply with national labour laws, tax laws, and environmental laws and so on. So it is important to have appropriately equipped specialist agencies to enforce this. But investment agencies are not compliance agencies.
The pool of investment capital within the Forum countries is relatively small; even the larger economies of the region recognise that they cannot internally fund all the infrastructure and development needed to realise their economic potential. This is the case for Australia, New Zealand and PNG which are the biggest economies of the Forum. More foreign investment is needed for all Forum economies. To attract more foreign investment we need to find ways to improve the investment climate in the region.
Are Australia and New Zealand a threat?
If you look at Australia’s trade and investment with the region compared to the rest of the world, the levels of Australian trade and investment are relatively very low.
The Australian Government is pursuing a number of new Free Trade Agreements with countries to its north and this is where the more significant trade and investment opportunities exist from a national perspective. This is not to say there are no opportunities for greater trade and investment in the Pacific, I think there are many.
Just as business expects a return on investment I hope each of our governments expects a return on the investments they make on behalf of their constituents, whether domestic or regional.
Government spending is usually focused on providing services rather than investing for profit and I am not suggesting governments should be running businesses best left to the private sector, but they should invest in infrastructure and services that attracts private investment. The return to government is employment and taxes and local development. A longer term view is needed for many investments which equally apply to the private sector and governments. Governments need to plan beyond the term of the electoral cycle.
Private sector investment has a big part to play in developing the region and foreign investment is needed to supplement domestic investment to ensure local private sector development opportunities are maximised. Governments and development agencies recognise the limitation of their effectiveness in developing sustainable economic growth alone and are increasingly looking to partner with the private sector to leverage outcomes by pooling strengths to achieve greater sustainable economic growth.
Local Community
Communities want a safe environment, employment, good health and education services, reliable power and water supply and functioning infrastructure, so do foreign investors.
It is sometimes argued that foreign investors take away local business and employment opportunities. The opposite is true. If in-country skills are available there is no justification financially or otherwise to employ foreign workers. A foreign investor should be bringing something that can’t be provided locally and this may mean the need, at least initially, for some foreign expertise but this provides an opportunity for skills transfer that will eventually allow locals to displace foreigners.
It is also likely that a new foreign funded enterprise will create small to medium local business opportunities. I have seen studies that suggest for every job a large foreign funded project creates at least five to six (some agencies put it as high as eleven) local jobs are created by the “churn” in economic activity.
It is also likely that foreign investment will either itself contribute additional infrastructure or will provide sufficient new economic activity to fund it through taxes.
I am personally a fan of tax offset schemes where the foreign investor can offset some tax liability against the provision of community infrastructure. Often the foreign investor has the management skills and equipment to deliver a project faster and more cost effectively than government.
If you accept that foreign investment can help to realise economic development opportunities what needs to be done to attract it?
Governments need to think seriously about the quality of their investment environment and how they can attract investment to contribute to their ongoing growth.
Here are a few suggestions which I believe will assist growing domestic private sector investment as well as attracting foreign investment.
- Governments should concentrate on getting the regulatory framework right.
- Government is the regulator and revenue collector and should avoid taking equity in projects that ties up capital better invested in infrastructure and services.
- Governments should foster a culture of savings and wealth creation through superannuation. These funds need to be managed independent of political input. That includes any mandated investment in government enterprises.
- Publicly funded infrastructure should be managed independent of political interference.
- State owned enterprises should be open to private sector competition. Irish telco Digicel in PNG is an example of what private sector competition can do for lowering prices and improving service.
- Future or Sovereign Wealth Funds are good hedge to smooth out the impact of economic cycles.
- SMEs are the big employers and need access to the banking sector. Government can help facilitate this by taking some of the risk.
What are my take away messages?
Firstly, be open for business and be attractive to foreign investment, be prepared to put long term economic development above short term domestic politics, think and act regional if not global, keep an open mind on a new stage of regional economic development.