2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
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.

Reconstruction of the Nuku'alofa Central Business District, damaged by riots in 2006, is complete. In 2012 the government opened the newly reconstructed Vuna wharf, which is expected to facilitate growth and drive tourism. The government also negotiated a number of grant-funded projects to improve infrastructure and sustainable livelihoods.

However, the economy remains sluggish and the government has forecast a growth of -0.2 percent in 2011/2012 and 0.4 percent in 2012/2013. This follows the end of loan funded construction and quarrying driven growth. Grants from development partners provided support for the government’s budget, but high public debt, mainly from Chinese loans, and debt servicing commitments limits government’s fiscal options. Growth is expected from the tourism sector and the export of agricultural and fisheries products. Remittances, which contribute about 30 percent of the GDP, continue to be adversely affected by economic conditions in remitting countries, mainly the United States.

The Ministry of Commerce, Tourism and Labor (MCTL) 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 50 USD and can be obtained by applying to the Secretary of the MCLT. 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 MCTL. The government is currently reviewing the license costs for businesses.

The MCTL 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 46 USD. The fee to register is about 460 USD. 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.

Most of the medium-large businesses have internet access, however connectivity is slow. According to the International Telecommunications Union, 25 percent of residents used the internet in 2011. Tonga secured funding for a $34 million grant project to 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. The project is already in progress and is expected to be completed by the end of June 2013. In addition to boosting Tonga's international connectivity, the project is expected to bring significant economic and social benefits to the people of Tonga.

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 MCTL.

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Measure

Year

Index/Ranking

TI Corruption Index

2011

3.1/95 out of 183

Heritage Economic Freedom

2012

57/109

World Bank Doing Business

2013

62

MCC Gov’t Effectiveness

FY2013

0.07 (56%)

MCC Rule of Law

FY2013

0.54 (81%)

MCC Control of Corruption

FY2013

0.23 (66%)

MCC Fiscal Policy

FY2013

-2.7 (60%)

MCC Trade Policy

FY2013

75.6 (55%)

MCC Regulatory Quality

FY2013

-0.27 (38%)

MCC Business Start Up

FY2013

0.975 (78%)

MCC Land Rights Access

FY2013

0.36 (7%)

MCC Natural Resource Mgmt.

FY2013

97.2 (91%)

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.

The World Bank Doing Business 2013 survey, ranked Tonga 54 out of 185 economies on the efficiency of the judicial system to resolve a commercial dispute. According to the survey, Tonga required 37 procedures to enforce a contract, took 350 calendar days to complete procedures at a cost of 30.5 percent of the value of the claim.

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; and priority for electricity, telephone, and water connections.

Technical and promotional assistance from the MCTL 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 and 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. Foreign investment in the restricted business areas may be 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.

Tonga’s Business Licenses Act’s separate list of activities reserved for Tongans includes: taxis, passenger vehicles for hire, used motor vehicle dealers, retailing activities which consist of the distribution of grocery products (food & household provisions) for final consumption, wholesaling activities, the baking of white loaf bread, the raising of chickens for the production of eggs, security related business, export of green and mature coconuts, wiring and installation of residential and commercial buildings with capital investment of less than $500,000, production and 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, and 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.

Restricted List – Open to foreign investors upon satisfaction of required conditions:

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No.

Business activity

Condition

1.

Commercial fishing comprising:

Subject to their respective Resource Management Plan

(administered by the Ministry of Fisheries)

Tuna fishing

Bottom fishing in water deeper than 500m

Other deep water fishing not less than 100m

Aquaculture

2.

Agricultural supply store distributing seeds, fertilizers, chemicals

Subject to the requirements of the Pesticide Act 2002

3.

Education facility

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

4.

Medical or Health activity

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 62 (out of 185 economies) in the “Ease of Doing Business 2012” ranking, falling 1 place from 2011.

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$114.1 million (TOP 198.7 million) in domestic private sector loans outstanding and assets totaling US$251.3 million (TOP 437.8million) in September 2012 according to the National Reserve Bank of Tonga

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.

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 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 complete. 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

Tonga ranked 95 out of 183 countries with an index of 3.1 out of 10 in the 2011 Transparency International Corruption index.

The Office of the Anti-Corruption Commissioner is charged with investigating official corruption. There are no international non-governmental "watchdog" organizations represented locally.

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 MCTL, there are 32 foreign companies 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:

U.S. Government:

[This is a mobile copy of Tonga]