Vanuatu: the serious side of paradise

A SUPPLEMENT TO EUROMONEY/AUGUST 1996

Time to get better known

When prime minister Maxime Carlot Korman took power in Vanuatu in February, he inherited what should in theory be one of the brightest economic stars in the Pacific. Vanuatu not only plays host to the longest-established offshore financial centre in the region, but also boasts some of the biggest tourist attractions. These factors together with political stability have ensured steady growth.

Last year, GDP rose by an estimated 2.5%. This year, according to the Reserve Bank of Vanuatu, it is projected to increase by 3%. There is plenty of other potential. More than 2,500 companies are now registered under the favourable terms of the International Companies Act. Together with offshore banking, insurance and the trust business, these directly contribute over Vt280 million ($200 million) to government revenue.

Nevertheless Vanuatu remains heavily reliant on overseas aid. Last year, according to the Reserve Bank of Vanuatu, it totalled Vt3.5 billion, some 15% of GDP. This year it is likely to be at a similar level. And although the budget is balanced, financial constraints could hinder development.

“Vanuatu has fantastic potential, but it hasn’t been promoted enough,” says Garry Tunstall, managing director of ANZ, Vanuatu’s largest bank in terms of assets. “We are a magical tourist destination. The finance centre could also be the tip of the iceberg.”

Formerly known as the New Hebrides, the 84 islands that make up Vanuatu (“Land Eternal”) were until 1980 jointly governed by the French and British under a system which involved two official languages, two police forces and two administrations. Vanuatu’s common law is based on the British model but it has two languages of administration which rank as official ­ French and English ­ and a third official language, Bislama.

Since independence on July 30 1980, Vanuatu has been administered by a democratically-elected government. After national elections in November last year, the previous ruling party, the Union of Moderate Parties, formed a new government under prime minister Serge Vohor. But following the decision by a coalition partner to switch sides, he resigned. A new coalition is now in place headed by the previous prime minister, Maxime Carlot Korman.

This administration has got off to an inauspicious start to its four-year term, with the prime minister facing two lawsuits, one over a political issue and the other relating to an expatriate lawyer who was asked to leave the country. On top of this there is the possible fallout from a $100 million swindle said to have been inflicted on the government by an Australian posing as an investment manager. On the promise of high returns, senior government leaders were persuaded to issue letters of credit that are now circulating internationally. The expected profits never came through. In a report on the incident, national ombudsman Marie-Noëlle Ferrieux-Patterson urged the president to sack the reserve bank governor, the finance minister and the finance secretary, and to reprimand Korman.

Nevertheless the government has set itself ambitious goals. These include rapid growth through stimulation of investment in export-oriented ventures and commercialization of the public sector.

“The government would like to see Vanuatu placed at a world-class level,” says attorney general Oliver Saksak. “Up till now they have been in the process of settling down. But in future they will be implementing laws and policies to strengthen the economy.”

Those policies are likely to have continuity with the National Development Plan (1992-96), which sought to strengthen the key agricultural sector. The government will also be looking to encourage foreign investment in tourist facilities as well as developing the financial services industry, which is in need of an overhaul.

Vanuatu already has laws favourable to foreign enterprise, including exemptions from income tax, corporate tax, estate duty, gift duty and capital gains tax, and there are no restrictions on repatriation of funds. The challenge will be to build on this legislation to compete with other offshore jurisdictions.

“The absence of taxes, duties and controls, coupled with state-of-the-art communications and highly-developed professional services, makes Vanuatu an ideal centre for foreign investors to base their surplus funds for investment or to base offshore companies forming part of a wider international or financial network,” says a recent report by accountants Stafford & Associates. “The Vanuatu government is extremely active in its support of the Financial Centre Association [a local professional body] because of its importance to the Vanuatu economy and is committed to making the country the Pacific’s foremost tax haven.”

Developing the economy on other fronts is likely to prove more difficult. Vanuatu has a population of 160,000 spread over 70 inhabited islands. Its total land area is 12,173 sq km. The scattered population and land mass have made infrastructure development difficult. Many of the rural areas are served by poor roads and an intermittent electricity supply. Vanuatu’s isolation from large markets has also limited its ability to develop manufacturing.

At independence the new government inherited a country with few hospitals, schools, telecommunications or other vital social infrastructure. Worse still, the dual administration bequeathed a bloated public sector that successive governments have been unable to trim down. Although the government would like to raise educational standards, strengthen healthcare and improve infrastructure, it has been held back by lack of funds. “Politically we were ready for independence, but financially we were not,” says Kalpokor Kalsakau, a former minister of finance, now manager of Cabinet d’Affaires du Pacifique, a domestic think-tank.

Agriculture and fishing are the most significant economic sectors, providing work for more than 80% of the population. In 1994, 24,000 tons of copra were produced, representing an estimated 6% of GDP. Despite recent price declines, copra production is still the largest employer.

The country’s second-largest source of foreign exchange is beef, accounting for more than 20% of commodity exports by value in 1994. Customers include Japan, New Caledonia and Papua New Guinea. Following the completion of new abattoirs, the country is gearing up for export to the EU.

Other export commodities include cocoa, coffee and timber. The government is keen to promote manufacturing, with special emphasis on import substitution and export promotion. Key areas reckoned to have potential include soap production, food processing and timber industries. Expensive electricity and telecommunications are not compensated for by a buoyant domestic market, which is small. As a result much of the manufacturing sector has traditionally been supported by government subsidies.

“The present cost structure is not conducive to rapid expansion in the future,” says a report by Bank of Hawaii published in late 1995. “Under conditions which include artificially high wages, only those segments of industry that cater to domestic demand tend to perform well.”

Indeed the main component of government revenues is import and export duties together with business licence and company registration fees. As of 1995, these contributed around 60% of GDP and as much as 40% of total public spending. The government also earns substantial revenue from turnover taxes from hotels, licensed premises and casinos. These revenues are backed up by foreign aid, especially from Australia and France.

By pursuing stable economic policies, successive governments have placed Vanuatu in a relatively healthy financial position. After recording a budget deficit of 8.7% in 1989, the gap fell to 5.9% in 1991. Since then the government has been able to balance its budget. Inflation reached a high of 8.7% in 1988 and is currently around 3%.

Mining could have a major economic impact. Vanuatu’s location along the Pacific volcanic belt has long prompted hopes for gold and copper production. But until recently, prospecting for base and precious metals was sporadic and on a small scale. Now, following the discovery of gold deposits at other locations along the Rim of Fire, exploration has been stepped up.

Companies prospecting in Vanuatu include Placer Pacific, Aberfoyle Resources, BHP, Union Mining, Wattle Gully Mining and Minerals International. “If one or two prospectors strike, it could provide a windfall in government revenues,” says Stafford.

It could also help provide much-needed employment ­ population growth reached a high of 3.1% between 1967 and 1979, slowed to 2.4% between 1979 and 1989, but is now up again to 3.1%.

Balancing the budget is also likely to prove increasingly difficult as aid money and technical assistance decline, and demand for funds to improve roads and schools increases.

One way to preserve valuable funds would be to do away with the expensive system of two main official languages, which affects education and administration of justice. Another means of tightening expenditure would be to trim the public service, which employs more than 4,500 people.

By far the most controversial issue is taxation. Since independence, the government has relied on indirect taxes for most of its revenues. However, high indirect taxes have squeezed a small proportion of the population, while high subsidies have led to inefficiencies in other areas. “Recent studies suggest that an overhaul of the tax system is needed to include new direct personal and corporate income and sales taxes especially if the government is to achieve the goals outlined in the Third Development Plan,” says a report by Bank of Hawaii.

Lack of resources is already forcing the government to take a more pragmatic view of the financial services industry. “Historically the government was too busy with independence and with the immediate job of governing to come to grips with the financial industry,” says Adrian Sinclair, a partner at accountants BDO Barrett & Sinclair. “Now it realizes that if tourism and the financial industry are to contribute larger amounts to revenues, then it must provide more active support to them.”

Sinclair believes there is a broad consensus within government to promote the industry: “In the past, we have had a highly-regulated finance sector and virtually no problems. But we have not really been going anywhere. Now we have an experienced finance minister and a commissioner determined to get on with things.”

Like Sinclair, the business community in Vanuatu is pinning its hopes on new finance minister Barak Sope. Sope has considerable experience of running private businesses and is believed to be far more committed to developing Vanuatu as a financial centre than some of his predecessors. Furthermore he is backed up by the respected head of the financial services commission, Julian Ala.

Outside Australasia, most people have never heard of Vanuatu. Of those who have, few realize that it has been an offshore financial centre for 25 years. “When I visit the United States most people say Vana who?” says Juris Ozols, of law firm Juris Ozols & Associates. “That is good because we don’t get the scams of the Caribbean. But it also means we don’t get the business.”

Better marketing of tourism and more investment in it could pay big dividends. There were some 43,000 tourist arrivals in 1995 but poor government funding and limited air links have been major constraints. “Tourism offers instant capital,” says Rick Graham, manager of Iririki Island Resort. “If you spent an extra million dollars on it, you would probably get more than four million back.”

Room for growth offshore

Having lost out on business to other offshore financial centres, Vanuatu is pinning its hopes on new legislation to restore its competitive edge

Ask most people about offshore financial centres and they may come up with the British Virgin Islands or the Bahamas. Mention Vanuatu and it’s more than likely to draw a blank. Yet Vanuatu began offering offshore financial services before both of these better-known jurisdictions. And though growth may have slowed, Vanuatu continues to attract new players because of the broad scope of its offshore products. “In terms of revenue we are extremely successful,” says Julian Ala, head of the financial services commission. “Compared with other jurisdictions we are flexible, competitive and relatively low-priced.”

Since 1971, when the financial services industry was established by the British colonial administration, it has grown into a significant component of the economy, second only to tourism. Vanuatu now plays host to leading international accountants such as KPMG Peat Marwick and BDO Barrett & Sinclair, as well as eight law firms and close to a dozen trust companies. Furthermore it ranks as a pure tax haven ­ both residents and non-residents are exempt from personal and corporate income tax, estate and gift duties, capital gains tax and exchange controls.

“Vanuatu is not internationally known like the British Virgin Islands,” says Geoffrey Gee, a lawyer at Geoffrey Gee and Partners. “But we have the laws in place, we have an infrastructure that is growing and we are moving in the right direction.”

At the core of Vanuatu’s offshore legislation is the International Companies Act, which came into force in March 1993 after strong lobbying from the financial community. Under it, a Vanuatu international company (IC) can have a single incorporator as well as a single member. ICs are not required to hold annual general meetings or to lodge annual returns. Furthermore, there is no requirement to maintain a register of directors in Vanuatu. Funds may be moved freely in and out. To register under the legislation, companies or individuals are simply required to supply details of the company’s name, its objectives, its registered office and agent.

According to local officials, there are plenty of other attractions. An IC may transfer its assets to trustees acting on behalf of third parties. It may issue share warrants in registered or bearer form as well as purchasing or redeeming its own shares without court approval. Indeed the only major requirement for an IC is that it should remain solvent.

Compared with other jurisdictions, Vanuatu’s IC is also cost-competitive. Companies incorporating in Vanuatu are charged $150 on registration. Every year they pay a further government registration fee of $300. That compares with a fee of between $150 and $1,000 in the British Virgin Islands, which is at present the most popular corporate domicile. “Unlike the British Virgin Islands we have no par value or authorized capital,” says Thomas Bayer, executive chairman of Pacific International Trust Company (Pitco). “We don’t have subscribers. We have incorporators and the incorporator is deemed to be the shareholder.”

Pitco was incorporated in 1972 and has become Vanuatu’s most successful financial services company, with activities ranging from trustee services and private banking to company formation and management, fund management and maritime shipping. Today, besides its operation in Vanuatu, Pitco has offices in Hong Kong, Kuala Lumpur, London and New York. “Our legislation is as competitive as the British Virgin Islands, but it has not been successfully marketed,” says Bayer.

Bayer sees other advantages. No double-taxation agreements have ever been made with other countries. And breach of confidentiality is considered a criminal act. “So long as I am assured that my client is bona fide, I can offer complete confidentiality,” says Juris Ozols, an attorney at Juris Ozols & Associates. “That is not always the case in other jurisdictions.”

Ozols, who has been practising in Vanuatu since 1992, believes that Vanuatu’s company legislation is backed up by political stability as well as highly professional service from banks, lawyers and accountants. “The International Companies Act is as flexible as any other companies act around the world that works within the common law system,” he says. “Vanuatu does not have [special] ties with any one government so it remains independent.”

Vanuatu also offers a favourable regime for banks. Under the Banking Act, exempted banks approved by the financial services commission can carry out banking transactions or money-lending operations outside Vanuatu. Exempt banks must have a minimum capital of $150,000 and a designated principal office in Vanuatu. Furthermore they must submit audited financial results to the commissioner every year.

Captive insurance also offers considerable potential. Under the Insurance Act, exempted insurers are subject to minimal capital requirements and net asset requirements. Captives may be used to underwrite 100% of risk. “The Vanuatu legislation permits exempted insurance companies to be easily formed, allowing for complete flexibility and with no restriction on the captive’s investment policy,” says a report by accountants Stafford & Associates.

Vanuatu’s financial services industry has been successful in tapping new sources of revenue but it has failed to live up to expectations. As of June 1996, only 2,500 companies were registered in Vanuatu along with 80 exempt or offshore banks. That compares with the 176,000 international business companies registered in the British Virgin Islands. “Vanuatu had a head start, but it has lost momentum,” says Bayer. “Historically the government has not put money into promoting the financial centre. Now other jurisdictions have taken the lead.”

Marketing has not been the only problem. Vanuatu’s legislation has also failed to keep up with the times. Aside from the International Companies Act, which was enacted in 1992, many of the other laws concerning the offshore business date back more than a decade. The laws may be sound, but in many cases they lack the flexibility of other jurisdictions.

Typical has been the case of the International Trust Law. In 1994, a new law was drafted to improve existing legislation, making it more attractive for overseas parties to operate trusts. But although the draft law has been widely circulated and reviewed, it has become bogged down in the Vanuatu parliament.

“Considering that the financial centre has been up and running for almost 25 years, the volume of business should be considerably higher,” says the head of one foreign institution. “But when every politician wants to debate every point, you can’t get anywhere.”

It’s a criticism that is accepted by Ala. Since taking over as head of the financial services commission in February 1994, he has lobbied hard for new legislation and for more frequent parliamentary sessions in order to accelerate the legislative process. “The political will is there, but it takes time,” says Ala, who was previously attorney general. “Over the next few years we will be more proactive.”

Ala is determined to implement changes designed to revitalize the offshore industry. Those include amendments to the Banking Act and new trust and company management legislation. “Currently our products are already on the shelf,” he says. “People want new products and if you offer them, they will buy.”

Ala’s stance is backed by the Vanuatu Financial Centre, an association created by bankers, lawyers, accountants and trust companies to present a unified voice to the government. Recently the association, which is chaired by John Ridgeway, the representative of Clayton Utz, agreed to undertake a marketing trip to Asia towards the end of the year to promote Vanuatu’s financial services capabilities. Members will visit Hong Kong, Singapore and Taiwan and other prospective centres, possibly with the finance minister.

Progress has already been made on some fronts. Following a plea from the association and the financial services commission, the government has agreed, in principle, to allocate resources to marketing the financial centre ­ something it has never done before. And although no figure has been made public, it is believed to be in the region of Vt100 million ($71.4 million) per annum.

If members have their way, the passage of key legislation may also be speeded up. “We are now pursuing legislation with new vigour,” says Adrian Sinclair, partner at BDO Barrett & Sinclair. “We virtually have the go-ahead from the finance minister and we have never had quite that relationship before.”

Other revisions could also be in the offing. In the medium term, company-management legislation is under consideration which would give the government greater regulatory control over financial providers. In the longer term, there may even be new legislation for mutual funds and other new products designed to put Vanuatu on a par with other jurisdictions.

“Our message to investors is this,” says Sinclair. “We have been around for a long time. We have a good reputation and an experienced group of people. We have between two and four hours’ time difference with Asia. Our legislation is competitive even as it stands now. And we will see to it that our legislation is more competitive in the near future.” Vanuatu also has efficient telecommunications. It now has worldwide direct-dial telephone and fax services, telex and telegraph services and Internet connections.

But although the authorities are undoubtedly keen to increase the number of international companies registered in Vanuatu, they remain wary of misuse of the jurisdiction. “We go for quality not quantity,” says Ala. “We want to attract the best companies and we pride ourselves on being the best centre in the Pacific.”

The commitment of the regulatory authorities to maintaining the country’s high standing was demonstrated in 1994 when a money-laundering incident was uncovered. The funds, which had been laundered through a real-estate transaction in Australia, were quickly confiscated following a decision of the Vanuatu supreme court.

Knowing the client remains a key principle that is embraced by banks, trust companies and legal firms alike. Due diligence is carried out before any company incorporation takes place and is then applied repeatedly throughout the relationship. The four commercial banks have introduced new account-opening requirements despite opposition from professionals fearing loss of business.

“If our clients go wrong and we have not taken proper steps, we suffer,” says Gee. “The government is very concerned about due diligence and that is one reason Vanuatu has never had a major problem with scandals or money-laundering.”

A tighter rein on banks

The recent closure of Olilian Bank and concerns about new commercial banking licences have prompted revisions of Vanuatu’s regulatory system. This could lead to stronger, more transparent banking

In many ways the Reserve Bank of Vanuatu operates like any other central bank. Its responsibilities include overseeing the banking system and currency issuance, monitoring the economy, fixing the value of the vatu against an undisclosed basket of currencies and holding deposits for commercial banks. But it is not the formal regulator and does not award banking licences.

Those responsibilities are the purview of the financial services commission and the finance ministry. Under the Banking Act, they grant new commercial banking licences, and regulate both onshore and offshore banks. This may be changing. Following an IMF visit, moves are under way to amend the laws so that each institution has specific roles. Under the new regulations, which are expected to be approved by the end of the year, the reserve bank will supervise commercial banks and the financial services commission will supervise offshore banks.

“The amendments will clarify our respective roles,” says Legesse Tickeher, director of the research department at the reserve bank. “In the past there has been a slight overlap between the various regulatory authorities. The aim is to address those issues and to strengthen the banking system.”

In the wake of recent troubles, other changes may also be in the offing for commercial banking. These could include higher capital requirements, possibly leading to more detailed capital adequacy regulations at a later stage. The changes stem in part from the closure of Olilian Bank, whose licence was revoked in July 1995 after it failed to fulfil statutory regulations laid down by the Banking Act. Awarded a commercial banking licence by the finance ministry in February 1995, Olilian operated for just six months.

Critics claim that Olilian Bank should never even have been granted a licence in the first place and that it used depositors’ money to run the bank. “At no stage did Olilian Bank fulfil [reasonable] capital requirements,” says one banker. “The promoters simply ingratiated themselves with the right people.” Following the collapse, the bank’s Taiwanese owner absconded. With liquidation under way losses may exceed Vt11 million ($7.9 million).

“It was an extremely unfortunate incident,” says Julian Ala, who as head of the financial services commission is responsible for handling the liquidation. “In my view Olilian Bank was just fraud.”

The incident has taught the regulators valuable lessons. In future, they will reject applications from individuals wanting to set up banks. They will also monitor more closely newly-established financial institutions. “It has made us more wary,” says Ala.

In future, the spotlight may also fall on the award of a commercial banking licence to Dragon Bank International. This was granted by the finance ministry, despite the bank’s lack of a track record. It recently had its regional representative office licence revoked in Jakarta, Indonesia, following fraud allegations. This decision is likely to lead to further pressure to impose more stringent requirements and scrutiny on banks.

The Olilian affair and concerns about Dragon may have strengthened the credibility of Vanuatu’s more established commercial banks. ANZ and Westpac now account for more than 60% of domestic banks’ total assets and deposits. In December 1993 they were joined by Bank of Hawaii, which purchased an 80% stake in the former operation of Banque Indosuez. The Vanuatu government initially held the other 20%, but this has since been sold to Bank of Hawaii. Indosuez’s decision to withdraw from Vanuatu did not stem from poor local operating conditions but was part of a general withdrawal from the Pacific.

Besides providing retail and commercial banking services, Westpac is active in forex and trade finance. Offshore banking is important. “We are a large lender to businesses as well as providing other bread-and-butter products,” says Westpac manager Cliff Smith. “The only thing we don’t do is foreign currency loans.”

ANZ, the largest bank in Vanuatu, now employs 120 staff and is active in commercial, retail and offshore banking. The bank is also looking to strengthen its presence in other areas. “ANZ’s philosophy is to try to drill down [corner] the retail market, and we are doing so quite successfully,” says managing director Garry Tunstall.

National Bank of Vanuatu (NBV) emphasizes the provision of a more extensive retail banking network. Since being set up by the government in December 1991 as the only real home-grown Vanuatu bank, it has expanded dramatically. Within its first year of operation it managed to triple its assets. Now it has 26 branches administered almost entirely by locals. “This is not a bank with a specific mandate, but we certainly aim to provide a banking service to the whole of Vanuatu,” says Nestor Ellinopoullos, who is an adviser to the state-owned bank.

But despite considerable achievements in rural areas, the bank has not been an unqualified success. Earlier in the year rumours surfaced that it was experiencing financial problems. These followed the sacking of two staff members, including the senior loans officer. The finance minister then issued a statement confirming government support for NBV and reiterating its confidence in senior management. The government has now agreed in principle an increase in capital ­ the first in NBV’s history ­ which will enable the bank to continue expanding throughout the islands.

In the longer term there is even a possibility that NBV could be merged with the Development Bank of Vanuatu (DBV). DBV was established in 1983 soon after independence and has fostered economic development by providing financial and advisory services to agriculture, industry and tourism.

However, shortage of funds and more difficult operating conditions have led to major changes. Whereas DBV formerly lent almost exclusively to small-scale Vanuatu-owned enterprises at well below market rates and with maturities of up to 15 years, it is now moving into more mainstream commercial transactions. That has led to a major overhaul of the bank’s network. As recently as 1988, DBV had seven branches in rural areas. Now it has just two and these have since been transformed into regional offices.

A merger would create a stronger domestic institution better placed to compete with international banks. “Maybe that is the way forward,” says DBV managing director Augustine Garae. “The market is too small and we can’t compete on an even footing.”

A merger might be bad news for the indigenous population. Currently DBV continues to assess the long-term viability of projects rather than simply looking to short-term returns. It also onlends funds at 14%, a rate that is still marginally lower than its competitors’. And while the existing commercial banks are keen to expand their coverage, this is unlikely to include far-flung rural areas where returns are doubtful. “They lend almost exclusively to expatriates and to businessmen around Port-Vila,” says Garae.

Tourism needs room to breathe

With 84 islands, palm-fringed beaches and coral atolls, Vanuatu should be onto a winner with tourism. But there are capacity constraints in the air and on the ground

Linda Kalpoi’s office in Port Vila is almost within earshot of the Pacific breakers. This dramatic backdrop is just one reason the acting general manager of the National Tourism Office (NTO) should have one of the easiest jobs on earth. Vanuatu offers visitors more than 80 unspoiled islands, palm-fringed beaches, spectacular bays and coral atolls, and one of the few live volcanoes in the world to have easy access. “People come to Vanuatu because we are still an unknown exotic destination,” says Kalpoi. “We have sandy beaches and coconut palms as well as adventure tours, traditional villages and one of the world’s largest intact shipwrecks.”

But although both Kalpoi and the government of Vanuatu have been keen to promote these charms, their efforts have yielded only limited results. Last year some 43,700 tourists arrived in Port Vila, compared with 42,000 in 1992. It’s a modest upward trend, but the total is still small compared with neighbouring destinations. On average, tourists stayed 9.3 days, a marginal increase over 1992.

Shortage of accommodation is one reason for the lack of crowds. Lack of marketing and the small budget allotted to the NTO are other factors that have impeded development of the industry. For 1996, the NTO has been awarded a budget of Vt42 million ($30 million). That compares with Vt60 million in 1995. As a result, the NTO employs just 12 staff and has no offices outside Vanuatu.

But by far the biggest reason for slow growth is the limited number of flights. Bauerfield Airport, Vanuatu’s primary point of entry for tourists, is relatively small and can only accommodate Boeing 737- and 727-type aircraft without incurring runway damage.

As of June 1996, the airport was served by six operators. Air Vanuatu, the national carrier, flies to Australia six times a week and to New Zealand once a week. Air Nauru, Air Niugini, Air Pacific, Air Caledonia and Solomon Airlines also serve Bauerfield. Although Qantas and Air New Zealand have reciprocal landing rights, they have so far chosen not to exercise them.

“If the airport was improved, we could upgrade our planes to bring in more passengers,” says Rick Graham, manager of Iririki Island Resort and the head of the Vanuatu Hotels Association. “That would lead new airlines to use Vanuatu as a stopover.”

It’s a message echoed throughout the industry and even by former government officials. “Building a new airport should be a priority,” says former finance minister Kalpokor Kalsakau, who is now manager of the think-tank Cabinet d’Affaires du Pacifique. “With better airport development, we would eliminate the de facto monopoly of Air Vanuatu.”

Discussions have recently been held with the aim of breathing life back into a 16-year-old proposal to build a new airport on Espiritu Santo Island. However, donors argue that tourist traffic might not be sufficient to underwrite the costs of an international airport, which are projected at around $25 million.

“Our advice has always been that it would be unwise to raise the funds commercially to build a new international airport,” says Legesse Tickeher, director of research at the Reserve Bank of Vanuatu. “It would be difficult to service the loans.”

One option favoured by the government is to expand the existing facilities at Bauerfield. However, mountainous terrain could make take-off technically difficult for larger aircraft. Another option would be expansion on Espiritu Santo Island, although currently the airport there lacks the necessary support facilities.

According to KPMG Peat Marwick, just 24,000 visitors arrive in Vanuatu every year from Australia out of a total of 2.4 million outbound tourists, so there is clearly room for tourist expansion. More significantly a new airport would open up new markets and reduce dependence on Australia, New Zealand and New Caledonia, which have traditionally accounted for nearly 80% of the total.

Several investors have bought land. Club Mediterrannée has leased a site on a small island off Efate, although it has made it clear that it will not go ahead with development until airport facilities are improved. Another major project is planned on Kukula Island. One businessman has plans for a casino and a 500-room hotel on Moso Island.

The big projects are likely to remain on hold for the foreseeable future but there are at least some hopeful signs. In December 1993 Le Méridien purchased the Radisson Royal Palms Resort and Casino in Port Vila. The hotel has since been transformed into a four-star international resort hotel with 150 rooms. Le Lagon Park Royal, Vanuatu’s largest resort, has also completed a major refurbishment. Iririki Island Resort, which has 72 bungalows overlooking Port-Vila harbour, is undergoing renovation.

Running a hotel in the current environment is no easy task. At the Windsor Hotel International, which largely caters to the business market, occupancy levels are in the region of 45%, barely high enough to break even. And while hotel owners are pinning their hopes on the airport to boost arrivals, in the short term they see little cause for celebration. “It’s an extremely tough market,” says Tony Burns, general manager at Windsor Hotel International. “There is absolutely no assistance from the government.” The high cost of food is one problem. Sales tax and import duties have also eroded margins. “We can’t even get tax exemption on uniforms.”

At the luxury Iririki Island Resort, occupancy levels run on average at 85%. Veteran hotelier Rick Graham, however, is far from ecstatic. “Business in Vanuatu is not easy. This is a small country with only limited infrastructure. To do well, you have to be exceptionally well run and operated.”

Graham says one problem is lack of government funding. Another is Air Vanuatu’s lack of capacity. “It’s a Catch-22 situation,” he says. “We are putting pressure on Air Vanuatu to expand services, but they are saying if we do that, how will we fill them?”

Jean Paul Virelala, managing director of Air Vanuatu, argues for his part that it is the hotel industry which must build the new capacity. “There have been many times when we have been inhibited by the lack of rooms,” he says. “There is no point in Air Vanuatu putting on extra capacity in the air when there is not sufficient capacity on the ground,” he says.

So far Air Vanuatu’s view has prevailed. Nonetheless the airline, which last year recorded profits of Vt206 million, is gearing up for new services. With the opening of the Blue Water Island Resort, it plans to open a new route to Sydney in July 1997. It may also lease a second plane from Qantas. “We already spend more than A$1 million [US$790,000] a year promoting Vanuatu and we don’t receive any grants,” says marketing manager Ted Drew. “We also encourage other airlines to make use of the airport.”

A draft of the tourist development masterplan published in 1994 suggests the government is pinning its hopes on big increases in hotel rooms and visitors. Using a medium-growth projection, it expects tourist numbers to reach 63,000 in the year 2000, rising to 85,000 by 2004. A high-growth projection suggests the figure could be as high as 126,000. Both look over-ambitious for the time being.

Convenience with competence

Vanuatu’s maritime centre is situated on a gently curving bay a short distance from Port-Vila. On a typical day, one large cargo vessel will be moored at the quayside together with a handful of yachts and pleasure boats. But the small number of big vessels in port is misleading. Vanuatu now has 423 vessels on its shipping register with a total displacement of 2.8 million gross tons. What is more, it is increasingly recognized as one of the most respectable of international open registries, with a central office in New York and 260 inspectors based around the world.

“Vanuatu is at the top end of the open-registry market,” says Thomas Bayer, chairman of Vanuatu Maritime Services, which has the sole concession from the government to operate the registry. “We are extremely proud of the reputation we have acquired.”

The good name is built on the rigorous safety requirements imposed on vessels sailing under the Vanuatu flag, and a record of proper manning and effective inspection. Vanuatu is a member of the International Maritime Organization (IMO) and has acceded to all its major conventions. Furthermore its Maritime Act is based on US maritime law.

Boats that register in Vanuatu are required to undergo examination based on the requirements of the US coastguards. In accordance with generally-accepted practice, they cannot normally be registered if they are more than 20 years of age.

The relatively stringent features of Vanuatu’s shipping registry have meant higher costs than in some jurisdictions. But they have not led to a slow-down in the number of applications. Despite costs that are almost triple those of Panama, Vanuatu continues to record strong growth. Says Bayer: “If you want to drive around in a BMW, it costs you more, but you get less problems. That is what we are saying about Vanuatu.”

Vanuatu offers additional advantages to shipping businesses. Through its offshore financial centre, it can provide company registration for shipowners or operators, ship management companies and, in some cases, even ship financing. “We can provide a complete package,” says Bayer. “And that is a major incentive for our clients.”