2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report

Openness to Foreign Investment

The Government of Tonga welcomes business and investors. Many Tongans have lived in or visited the United States, and American products are readily recognized. Tonga's fertile soil, English-speaking, educated workforce, and tropical island climate offer advantages, though the country's distance from major markets affects the cost of imports and exports. The main productive sectors of the economy are agriculture, fisheries, and tourism. Tonga became the 151st member of the WTO in June 2007.

The last constitutional monarchy among the Pacific Island countries, Tonga held peaceful parliamentary elections in November 2010. The elections were observed by officials from the Australian and New Zealand governments, and were deemed to be free and fair. The 2010 elections for the first time allowed a majority of the parliamentary seats to be elected by the public. Of the 17 people’s representative seats, the Friendly Islands Democratic Party (FIDP) won 12. However, this was not enough to secure an outright majority and after days of political wrangling, a secret ballot produced a noble representative, Lord Siale'ataonga Tu'ivakano, as Tonga’s 15th prime minister. He is the first person to hold the job as a result of being elected by his peers and not appointed by the monarch.

A state of emergency imposed after 2006 riots was repeatedly extended through2010, until lifted by the new government in February 2011. Reconstruction of the Nuku'alofa Central Business District is underway, aided in part by government secured funds providing low interest loans for reconstruction projects.

The economy is expected to rebound in 2011 following a contraction in 2010 by 1.2 percent. Agriculture, tourism and fisheries are the main sectors in Tonga’s economy.

Customs and excise regulations that came into effect on July 1, 2008 grant exemptions from import duty on capital goods.

The Ministry of Labour, Commerce and Industries (MLCI) administers Tonga’s foreign investment policy and regulations. Foreign invested businesses must obtain and hold valid foreign investment registration certificates. The application fee is about US $50 and can be obtained by applying to the Secretary of the MLCI. Certificates are valid until the business terminates activity. If a business does not commence activity within a year after a certificate is issuance, the certificate becomes invalid.

After obtaining a foreign investment certificate, an investor must apply for a business license. The application, which must be accompanied by a valid foreign investment registration certificate, can be made to the Business Licensing Officer at the MLCI.

The MLCI also processes company registrations. A foreign company that wishes to do business in Tonga must apply for incorporation under the Companies Act 1995. The applicant must first reserve the company name at a cost of about US $30. The fee to register is about US $300. For a company to qualify as a “Tongan company,” the majority share-holder must be Tongan. Partnerships and sole proprietors need not register but must have a valid business license. The Companies Amendment Act 2009 requires all companies currently registered in Tonga to apply for re-registration under this act from December 1, 2009 - May 31, 2010. Failure to do so, will result in the company’s deregistration.

Most of the medium-large businesses have internet access, however connectivity is slow. According to the International Telecommunications Union, average internet usage is quite low, with about 8 percent of the population using the internet in 2009.

Land cannot be bought or sold in Tonga, but may be leased through formal lease arrangements. Leases are usually 50 years in duration, although the law permits terms up to 99 years. The government has designated areas for small industry development, known as Small Industry Centers, on the two island areas of Tongatapu and Vava’u. Foreign investors are prohibited from doing business in certain sectors. An updated list of these sectors can be obtained from the MLCI.

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Measure

Year

Index/ Ranking

TI Corruption Index

2010

101

Heritage Economic Freedom

2010

53.4

World Bank Doing Business

2010

9

MCC Government Effectiveness

FY2011

0.01 (52%)

MCC Rule of Law

FY2011

0.31 (71%)

MCC Control of Corruption

FY2011

-0.31 (29%)

MCC Fiscal Policy

FY2011

-1.1 (52%)

MCC Trade Policy

FY2011

56.2 (15%)

MCC Regulatory Quality

FY2011

-0.20 (35%)

MCC Business Start Up

FY2011

0.978 (72%)

MCC Land Rights Access

FY2011

0.429 (16%)

MCC Natural Resource Management

FY2011

98.51 (100%)

Conversion and Transfer Policies

The National Reserve Bank of Tonga exercises control on foreign receipts and payments. Repatriation of funds, including dividends, profits, capital gains, interest on capital and loan repayment and salaries, is permitted, with the following exceptions:

--when an industrial enterprise is partly financed by locally raised capital (including working capital), in which case the repatriation of funds will be related to the extent of foreign financing; that is, repatriation will be regulated on a pro-rata basis;

--in respect of capital gains, the amount eligible for repatriation will be restricted to the amount transferred inward through the banking system or by other approved methods; and

--expatriate employees will be allowed to remit overseas wages and salaries received in Tonga up to the amount on which income tax has been paid.

Obtaining foreign exchange is not difficult.

Expropriation and Compensation

Expropriation has not recently been an issue in Tonga.

Dispute Settlement

Tonga has a robust judicial system, staffed at the highest level by expatriate judges. The country's legal system is generally capable of enforcing contractual rights. Tonga has no formal bankruptcy law. There have been no high-profile investment disputes over the last five years. Legislation states that provisions of the United Kingdom’s Arbitration Act 1996 governs arbitration under Tonga’s Foreign Investment Act. Tonga ratified the Convention on the Settlement of Investment Disputes in 1990.

Performance Requirements and Incentives

Investment incentives include:

-- Guaranteed long-term space and land leasing in the Small Industries Center, a 12-acre industrial estate, located about one kilometer from the center of Nuku'alofa;

-- Residential and work visas for foreign investors and their families for as long as the enterprise is in operation;

-- Priority for electricity, telephone, and water connections.

Technical and promotional assistance from the MLCI is available to help prospective investors identify, evaluate and set up industries. Once a business license is obtained, the business can operate.

Although the Foreign Investment Act specifies activities reserved for local businesses and included a list of these activities, the government allows full ownership by a foreign investor in cases where manufacturing activities use imported raw materials for export, or where the investments are too large for local investors. Projects are considered on an individual basis. The government generally encourages joint ventures.

Right to Private Ownership and Establishment

Both foreigners and domestic investors have equal rights for incorporating/establishing entities. Foreign investment legislation contains a list of thirteen business activities reserved solely for Tongans and a separate list of business activities open to foreign investors under restricted conditions. Activities not identified on either list are open without restriction to foreign investors. Both foreigners and domestic investors have equal rights for incorporating/establishing entities. Foreign investment regulations contain a list of thirteen business activities reserved solely for Tongans and a restricted list. Foreign investment in the restricted business areas are permitted provided that investors satisfy the conditions prescribed in the regulations. The Business License Act also prohibits activities such as the storage, disposal or transport of nuclear or toxic waste, pornography, prostitution, processing or export of endangered species, production of weapons of warfare. All other areas are open to foreign investors.

Tonga’s Business Licenses Act has a separate list of activities reserved for Tongans:

1. Taxis

2. Passenger vehicles for hire

3. Used motor vehicle dealers

4. Retailing activity which consist of the distribution of grocery products (food & household provisions) for final consumption

5. Wholesaling activity

6. Baking of white loaf bread

7. Tongan cultural activities, including:
i. folktales, folk poetry, and folk riddles;
ii. folk songs and instrumental folk music;
iii. folk dances, and folk plays;
iv. production of folk arts in particular, drawings, paintings, carvings, sculptures, woodwork, jewelery, handicrafts, costumes, and indigenous textile

8. Raising of chicken for the production of eggs

9. Security business

10. Export of green and mature coconuts

11. Wiring and installation of residential and commercial buildings with capital investment of less than $500,000

12. Production / Farming of:
(a) root crops (yams, taro, sweet potato, cassava);
(b) squash;
(c) paper mulberry;
(d) pandanus ; and
(e) kava

13. Fishing activities comprising:
(a) Reef fishing
(b) Inshore fishing within 12 nm (Zone C) in water less than 1000 meters
(c) Bottom fishing in water depth less than 500m

Restricted List – Open to foreign investors upon condition:

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No.

Business activity

Condition

1.

2.

3.

4.

Commercial fishing comprising:

Tuna fishing

Bottom fishing in water deeper than 500m

Other deep water fishing not less than 100 m

Aquaculture

Agricultural supply store distributing seeds, fertilizers, chemicals.

Education facility

Medical or Health activity

Subject to their respective Resource Management Plan

(administered by the Ministry of Fisheries)

Subject to the requirements of the Pesticide Act 2002

Subject to requirements of the Education Act (Cap.86)

Subject to the requirements of the Public Health Act 1992; Therapeutic Goods Act 2001; Nursing Act 2001; Medical and Dental Practices Act 2001; Pharmacy Act 2001;Health Practitioners Review Act 2001.

CORPORATIZATION/PRIVATIZATION OF STATE-OWNED ENTERPRISES

A key aim of the government’s on-going economic reform program is to corporatize and eventually privatize agencies that perform non-core government functions.

Protection of Property Rights

Tonga has legislation protecting patents, utility models, designs and trademarks. However enforcement is weak. Counterfeit products are available on the local market. Counterfeit entertainment items are common as there is no theater in Tonga to show legitimately distributed movies.

Transparency of Regulatory System

While it remains somewhat challenging to establish a business, the government has instituted reforms to make the procedures and processes easier and quicker for investors. Tonga is placed 71 (out of 183 economies) in the “Ease of Doing Business 2011” ranking.

It is not a practice in Tonga for parliament or government agencies to publish draft bills or regulations for public comment.

Efficient Capital Markets and Portfolio Investment

Foreign investors are generally able to obtain credit on the local market. There are three international commercial banks, which together had approximately US $142 million in domestic private sector loans outstanding in September 2010.

Political Violence

The Parliamentary elections in November 2010 were free and peaceful.

In November 2006, however, political demonstrations deteriorated into a riot, leaving parts of the central business district of Nuku'alofa in ruins. The government declared a state of emergency to restore law and order to the capital, which remained in place until February 2011. The business district has been largely rebuilt, aided in part by funds obtained by Tonga’s government and used to provide low interest loans for reconstruction. Parliament-endorsed reforms began in 2010 culminating in the first elections on November 25. The reforms included increasing the number of people’s representatives from nine to a majority of 17 and direct election of the Prime Minister by Parliament.

Corruption

Corruption has not been specifically identified as an obstacle to foreign investment. Both corruption and bribery are criminalized and prosecuted and the laws appear to be impartially applied.

The Office of the Anti-corruption Commissioner is charged with investigating official corruption. There are no international non-governmental "watchdog" organizations represented locally, and the country was ranked 101 out of 178, with a score of 3.0 on Transparency International’s Corruption Perceptions Index 2010.

Bilateral Investment Agreements

Tonga is party to a bilateral investment treaty with the United Kingdom. It is not party to any other bilateral investment treaties.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) insurance is available to investors in Tonga, and OPIC can provide political risk insurance, finance, direct loans and loan guarantees.

Labor

The 2006 Census placed the unemployment rate at 9.9%. This rate does not reflect the significant number of people who are underemployed. Labor market statistics are weak. Just over 60% of people in paid employment are male. Over two-thirds of all employed people held paying jobs in the rural areas while the rest are in urban areas. About half of those employed in the rural areas work in the agriculture industry.

Wages and salaries are comparatively low. Wages, salaries and other conditions of work in the private sector are a matter of direct negotiation between employers and workers.

There are currently no trade unions in Tonga, although there is legislation permitting unions to form. The Public Servants Association operates as a de facto trade union for civil servants.

Local skilled labor is available in sufficient quantities to undertake most types of building work, except for some specialized skills and supervisory-level manpower, which is generally recruited from abroad.

Foreign-Trade Zones/Free Ports

Tonga does not operate any foreign trade zones or free port facilities.

Foreign Direct Investment Statistics

The U.S. Commerce Department's Bureau of Economic Analysis records no U.S.-sourced FDI stocks for Tonga.

According to the MLCI, over 150 foreign companies are currently registered in Tonga. Foreign businesses are largely in the retail sector, and many are owned by ethnic Chinese and Indians. The Tonga Chamber of Commerce and Industry is the country’s peak private sector organization and its membership covers businesses in all sectors.

Web Resources

Regulatory authorities

Ministry of Labour, Commerce and Industries, P.O. Box 110, Nuku’alofa, Tonga. Tel: (676) 23 688; http://mlci.gov.to/site1/

Ministry of Finance and Economic Development, Nuku’alofa, Tonga. Tel: (676) 23 066;
www.finance.gov.to
www.revenue.gov.to

National Reserve Bank of Tonga, Private Bag #25, Nuku’alofa, Tonga. Tel (676) 24-057; www.reservebank.gov.to

Banks

ANZ Tonga, Taufa’ahau Road, Nuku’alofa, Tonga. Tel (676)20 500; Fax (676) 23 870; Email: anztonga@anz.com
www.anz.com/tonga/en/about-us/anz-tonga/

Tonga Development Bank, Hala Fatafehi, Nuku’alofa, Tonga. Tel: (676) 23 333; Email: tdevbank@tdb.to; www.tdb.to

MBF Bank, Taufa’ahau Road, Nuku’alofa, Tonga. Tel (676) 24 600; Fax (676) 24 662; Email: info@mbfbank.to
www.mbfbank.to

Westpac Bank, Hala Taufa’ahau, Nuku’alofa, Tonga
Tel: (676) 23933
www.westpac.to/pacific/

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