IN 2002, Solomon Islands’ economy was on its knees.
Since then, gross national income per person in real dollar terms has nearly doubled.
While part of this increase is due to the recovery of the economy from the upheaval that ended in 2003, a significant portion can be attributed to the Government of Solomon Islands’ commitment to encouraging private sector-led growth.
For more than 10 years, Solomon Islands has led private sector reform in the Pacific.
This vision and initiative has clearly been rewarded.
Now, to further promote growth and alleviate poverty, such reforms should be continued.
This is the core finding of the Asian Development Bank’s recently published private sector assessment for Solomon Islands, Continuing Reforms to Stimulate Private Sector Investment.
A variety of measures have been implemented that significantly improved Solomon Islands’ business environment.
These include: opening the country to vitally needed foreign investment; modernizing outdated business laws to make it easier to form companies and register businesses; installing an online business registration portal; greatly improving the operating performance of state-owned enterprises; making non-land assets easily acceptable as loan collateral to improve access to finance; and liberalizing the telecommunications sector to increase competition, improve access and lower prices.
The success of these policies is demonstrated by improvements in many areas of the economy. Foreign direct investment, which amounted to only US$6 million in 2004 averaged over US$100 million per year between 2006 and 2013, bringing vitally needed capital and expertise into the country.
The reform of the Companies Act and the installation of the online registry in 2010 led to a fourfold increase in the number of new businesses being established each year.
Improved access to finance as a result of reforms around non-land collateral has led to some lenders making more loans—Credit Corporation has increased its lending fivefold.
State-owned enterprises, which in 2008 were producing massive losses at a significant cost to the government budget, have been turned around and are now profitable.
In addition, the privatization of Sasape Marina prevented its closure and led to job creation.
The reform of the telecoms sector has resulted in improved access and service, with the network now covering approximately 80% of the country and more than half of the population owning mobile phones.
Each of these reforms are landmark successes that have laid the foundation for future growth and increased opportunity for the people of Solomon Islands.
Collectively, however, policies for improving the business environment are fragmented and not aligned to the needs of the burgeoning private sector.
This is resulting in confusion and duplication of effort.
To address this broad concern, improved formal channels of communication should be developed that will assist government and the private sector to better identify and discuss business needs and reform priorities.
An effective example of this was the Business Law Advisory Committee, which was a major contributor to the success of previous business law reforms but is no longer operational.
Further reforms, as identified in the private sector assessment, are needed to advance the improvements made to Solomon Islands’ business environment and economy over the past decade and fully realize their benefits.
Quality infrastructure is critical in providing a foundation for sustained growth, yet in Solomon Islands core infrastructure services are poor, particularly outside the main urban areas.
Fewer than 15% of the population has access to the electricity grid, and electricity tariffs are among the highest in the Pacific.
Involving the private sector more in developing and maintaining infrastructure will improve its quality while providing investment capital.
For this to happen the government will need to create the conditions that make it attractive for the private sector to invest.
While the performance of state-owned enterprises has improved markedly, many will need large capital investments in the near future.
These needs can best be met by engaging the private sector in public-private partnerships.
Barriers to women’s economic advancement prevent women from realizing their full role in the economy and represent a large lost growth opportunity.
There are both formal and informal barriers to women’s engagement in the private sector that need to be dismantled.
While access to credit has improved, Solomon Islands’ financial sector is still in an early stage of development and the number and range of financial service providers, products and services is low and focused on urban areas.
Furthermore, bank lending to the key sectors of the Solomon Islands economy—agriculture, fisheries, mining and tourism—accounts for a low proportion of total lending, and the uptake of lending using non-land collateral by commercial banks overall has so far been disappointing.
Options are available to increase financing in each area.
Other areas requiring reform include strengthening the competition framework to limit monopoly behavior and better protect consumers; improving technical and vocational training to enhance labor skills; and developing a process for more reliable leasing of customary land, that protects all parties involved.
While this is a significant reform agenda, given how well Solomon Islands has recovered from economic stagnation, and its successful implementation of numerous modernizing reforms since, there is no reason to think the benefits of these new reforms cannot also be realized to the benefit of all Solomon Islanders.
By PAUL HOLDEN*
Asian Development Bank (ADB)
*Paul Holden is the Lead Economist with ADB’s Pacific Private Sector Development Initiative and a co-author of Continuing Reforms to Stimulate Private Sector Investment: A Private Sector Analysis for Solomon Islands, which can be downloaded from http://www.adb.org/documents/reforms-private-sector-investment-solomon-islands