Title: Continuing Reform to Promote Growth: Update of the Private Sector Assessment for Tonga

Language: English

Type: Document

Nature: Report

Published: January 1, 2012

Region: East Asia and Pacific

Country: Tonga

Keywords: Knowledge Lab, Private Sector

Document Link(s):


Document Summary:

In 2008, the Asian Development Bank (ADB) published Transforming Tonga: A Private Sector Assessment (PSA), which found that Tonga had registered negative productivity growth for an extended period. Following discussions between ADB and the government on the PSA recommendations, Tonga embarked on a far-reaching private sector-oriented reform program. It aimed at improving the Tongan business environment to encouraging private sector investment and entrepreneurship. In the area of business law reform, a comprehensive amendment to the Companies Act was passed in 2009, and an electronic registry is being installed, which will reduce the cost of starting businesses. In 2010, a Personal Property Securities Act was passed, and a supporting electronic registry was established, which will increase access to credit. The government also embarked on a program to improve the efficiency of Tonga’s state-owned enterprises. Although the reform agenda is incomplete, particularly in the area of business licensing, the reforms that were implemented should bring significant long-term benefits to the Tongan economy. ADB has supported the implementation of many of these measures.

Document Details:

Since 2007, Tonga has undertaken a number of wide ranging private sector-oriented reforms, which will assist in raising productivity and economic growth in the long-run. However, a combination of the impact of the global economic crisis and remaining constraints to private sector development has resulted in a significant erosion of business confidence.

The global economic crisis, and in particular the very substantial decline in remittances, has resulted in an estimated reduction of gross domestic product of 3 percentage points over the FY2009–FY2011. As a result, domestic demand has fallen sharply and government revenues have further declined.

The private sector acknowledges the positive impact of reform. However, low local spending and a reduction in government contracts have led to a substantial decline in demand for Tongan products, while cash flows have been put under significant strain by delays in tax refunds and more vigorous and costly enforcement of business licensing requirements.

Business licensing is imposing a combination of costs and uncertainty, particularly for foreign investors, which has had a damaging effect on investment. Until risks and costs of investment are reduced, the recovery of the economy will be slow and it will be difficult to raise the long-term growth rate.

Infrastructure services are expensive partly because of the high cost of power, which in turn arises from the high cost of fuel landed in Tonga. Although renewable energy investment is underway, this will only reduce the cost of power in the medium- to long-term.

The reform recommendations are:

  • Reform the license and permit processes involved in establishing and running businesses, both for Tongans and for foreigners. This involves repealing or streamlining several processes, namely:

    • o  Repealing the Business Licenses Act 20021 and replacing it with legislation and processes that provide for licensing businesses rather than activities, including abolishing sector licensing except for health and liquor licenses; and

    • o  Modernizing and simplifying the requirements for obtaining a business visa.

  • Restructure revenue collection and processing to speed up tax refunds, initially by allowing offsets of taxes owed by businesses against refunds owed to businesses by government;

    Editor’s Note: Subsequent to the Private Sector Development Initiative (PSDI) support in drafting the Business License (Amendment) Bill, the Tongan Parliament passed the Bill in October 2012 although, at the time of print- ing, the new Act had yet to be released for review.

  • Enact key business laws on bankruptcy, contracting, trusts, electronic transactions, and arbitration to fill in the gaps in the commercial legal framework. Complete the transition to a fully electronic company registry and amend the Companies Act to provide for community companies;

  • Although a preliminary financial analysis indicated the viability of establishing a fuel tank farm as a possible way to bring down the cost of electricity, a decision to proceed with the proposal should be based on a comprehensive evaluation, which considers the issue from all aspects including finance and the environment;

  • Continue with the commercialization and privatization of state-owned enterprises (SOEs) and develop shared services to counteract the lack of capacity and capabilities;

  • Prohibit ministries from undertaking commercial activities unless there is a clear need that is not already met by the private sector;

  • Reduce the public sector’s wage and salary bill, as a share of total public expenditure, in line with the fiscal responsibility ratios;

  • Reform the Ministry of Agriculture and Food, Forests and Fisheries to make it client- friendly. Commercialize and privatize the chemical biosecurity facilities and contract out the agricultural extension services;

  • Upgrade infrastructure through greater use of contracting out;

  • Seek to develop a credit bureau at the earliest opportunity; and

  • Use the National Growth Committee as a vehicle for meaningful engagement between the government and private sector, and use this as a joint government and private sector task force to improve international airlines and shipping services. It is essential that government representation on the committee be at the highest levels to ensure that its deliberations feed into policy discussions more generally.

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Updated: June 28, 2022