2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness to, and Restrictions Upon, Foreign Investment

The Government of Tonga welcomes business and investors, and the country’s economy relies heavily on overseas remittances. 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 to focused investors, though the country's distance from major markets affect the cost of imports and exports. The main productive sectors of the economy are agriculture, 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 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. A secret ballot produced a noble representative, Lord Siale'ataongo Tu'ivakano, as Tonga’s 15th prime minister. He is the first Tongan to become prime minister as a result of being elected by the parliament and not appointed by the monarch. Tonga is a coalition partner in Afghanistan.

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

The economy is expected to grow further, with GDP growth of approximately 1.2 percent expected over 2011/2012, supported by strong construction and tourism activity as well as increased remittance inflows. Banks’ profitability should improve and, with many losses realized, lending is likely to resume. The government’s tight budget, however, limits fiscal policy options. Tourism and agriculture are the main sectors in Tonga’s economy. Customs and excise regulations grant exemptions from import duty on capital goods.

The Ministry of Labor, Commerce and Industries administers Tonga’s foreign investment policy and regulations (MLCI-http://www.mic.gov.to/ministrydepartment/govt-ministries/labour-commerce-a-indus). 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 issued, 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.

In November 2011, the government announced an initiative to reduce the license costs for businesses with more than one business activity that apply for license renewals before the end of 2011. Conditions apply to ensure the health and safety of the public is protected. This initiative should result in reduced license costs for businesses with more than one business activity in 2012.

The MLCI also processes company registrations. A foreign company that wishes to do business in Tonga must apply for incorporation under the Companies Act of 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 of share-holders 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. However, Tonga has secured funding for a $34 million grant project which will enable the Tongan people to gain high-speed internet access. The underwater fiber optic cable will connect Tonga to the Southern Cross Cable, the main trans-Pacific link between Australia and the United States. The establishment and operation of the 827 km submarine cable system, which will run from Tonga to the Republic of Fiji, will provide Tonga's population of 100,000 with affordable, accessible, information and communication technology services.

As well as being a key step in boosting Tonga's international connectivity, the project is expected to bring significant economic and social benefits to the people of Tonga once the cable is in place by mid-2013.

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.

Major Indicators Related to Openness to, and Restrictions Upon, Foreign Investment:


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Measure

Year

Index/ Ranking

TI Corruption Index

2011

3.1/95

Heritage Economic Freedom

2011

55.8/118

World Bank Doing Business

2012

58

MCC Government Effectiveness

FY2012

0.13 (59%)

MCC Rule of Law

FY2012

0.56 (83%)

MCC Control of Corruption

FY2012

0.18 (59%)

MCC Fiscal Policy

FY2012

-1.9 62%)

MCC Trade Policy

FY2012

75.3(52%)

MCC Regulatory Quality

FY2012

0.00(52%)

MCC Business Start Up

FY2012

0.980 (85%)

MCC Land Rights Access

FY2012

0.410 (0%)

MCC Natural Resource Protection

FY2012

100.0 (82%)

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 been an issue in Tonga.

Dispute Settlement

Tonga has a robust judicial system, often 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 the provisions of the United Kingdom’s Arbitration Act of 1996 govern 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 13 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 13 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:

-- Taxis

-- Passenger vehicles for hire

-- Used motor vehicle dealers

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

-- Wholesaling activity

-- Baking of white loaf bread

-- Tongan cultural activities, including: folktales, folk poetry, and folk riddles; folk songs and instrumental folk music; folk dances, and folk plays; production of folk arts in particular, drawings, paintings, carvings, sculptures, woodwork, jewelry, handicrafts, costumes, and indigenous textile

-- Raising of chicken for the production of eggs

-- Security business

-- Export of green and mature coconuts

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

-- Production / Farming of: root crops (yams, taro, sweet potato, cassava); squash; paper mulberry; pandanus; and kava

-- Fishing activities comprising: reef fishing; inshore fishing within 12 nm (Zone C) in water less than 1000 meters; 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.

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 home 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 58 (out of 183 economies) in the “Ease of Doing Business 2011” ranking, up 4 places from 2010.

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.

Competition from State-Owned Enterprises (SOEs)

Private enterprises are allowed to compete with public enterprises under the same terms and conditions. Laws and rules do not offer preferential treatment to SOEs. State-owned enterprises are subject to budget constraints and these are enforced.

SOEs are active in the Energy, Water, Timber, Tourism, Communications, Banking, Printing, and Ports/Airports sectors. Laws do not provide for a leading role for SOEs or limit private enterprise activity in sectors in which SOEs operate. SOEs have independent boards of directors and are not obligated to consult with government, though directors would coordinate with appropriate cabinet agencies on major policy issues.

Tonga has no Sovereign Wealth Fund (SWF) or Asset Management Bureau (AMB). State-owned enterprises are required to publish annual reports and submit their books to independent audit, and comply with these obligations.

Corporate Social Responsibility (CSR)

There is a general awareness of corporate social responsibility among both producers and consumers, and foreign and local enterprises to follow generally accepted CSR principles such as the OECD Guidelines for Multinational Enterprises. Firms that pursue CSR are viewed favorably but consumers generally prioritize value for money ahead of CSR claims.

Political Violence

The parliamentary government and constitutional monarchy function without signs of political violence. The newly elected government, in January 2011, lifted a state of emergency imposed since the 2006 riots. The risk of civil disorder is low. Reconstruction of damaged buildings in the Nuku'alofa Central Business District is almost completed, aided in part by government secured funds providing low interest loans for reconstruction projects. There is no civil strife or insurrection. There are no significant border disputes at risk of military escalation. The November 2010 Parliamentary elections were free and peaceful.

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 4.9%. 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 Trade Zones

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

Tonga:
Ministry of Labour, Commerce and Industries, P.O. Box 110, Nuku’alofa, Tonga. Tel: (676) 23 688; http://www.mic.gov.to/ministrydepartment/govt-ministries/labour-commerce-a-indus

Ministry of Information & Communications: http://www.mic.gov.to/

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

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

Tonga National Chamber of Commerce and Industry: http://www.tongachamber.org/

ANZ Tonga, Taufa’ahau Road, Nuku’alofa, Tonga. Tel (676)20 500; Fax (676) 23 870; Email: anztonga@anz.com
http://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; http://www.tdb.to/

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

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


U.S. Government:

U.S. Embassy Suva, Fiji, Commercial Services: http://suva.usembassy.gov/commercial_services.html

U.S. Foreign Commercial Service, Sydney, Australia: http://sydney.usconsulate.gov/us-agencies.html

U.S. Department of Commerce, International Trade Administration: http://trade.gov/

OPIC www.opic.gov

U.S. Trade & Development Agency: http://ustda.gov/

U.S. Food & Drug Administration: http://www.fda.gov/

U.S. Foreign Agricultural Service: http://www.fas.usda.gov/

USAID Pacific Islands Office, Port Moresby, Papua New Guinea: http://pacificislands.usaid.gov/

Regional Organizations:

Pacific Islands Private Sector Organization (PIPSO) - http://www.pipso.org/

UN International Labor Organization, www.ilo.org/public/english/region/asro/suva/

Asian Development Bank – South Pacific Subregional Office, www.adb.org/SPSO/

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