Getting your head around the Pacific islands takes some doing. Kiribati, for example, has 33 coral atolls with a total land area of 811 square kilometres – about one third the size of Luxembourg. On the other hand, it has an ocean area of 35 million square kilometres – about the size of India. Unsurprisingly, fish is one of its major exports but a fickle one – sea conditions could change and they may all swim away.

The rest of the Pacific has similarly fantastic statistics and is also vulnerable to climate change and natural disasters. The Cook Islands has a population of just under 11,000 and receives 130,000 visitors a year, driving a tourism industry that accounts for 60% of GDP. But a cyclone could ruin all that in a matter of hours and leave the government with a huge reconstruction bill.

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Or the New Zealanders and Australians who form the backbone of Pacific tourism could change their tastes and decide to go to Queensland instead. Flying time from Sydney to Nadi, the main airport in Fiji, is nearly five hours – illustrating another tough regional fact: the various island groups are both far away from their main tourism markets and far away from each other.

Great distances

Even different islands within the same group can be a long distance apart. A flight from the main island of the Cooks, Rarotonga (where the capital, Avarua, and the government are located), to northernmost island Penrhyn takes four hours – slightly longer than flying from London to Athens.

There are other challenges apart from huge distances and cyclones. Populations are not only small but shrinking in some cases. Often the numbers living overseas are greater than those living at home. Transport and communication links can be poor, infrastructure backward and land title unclear.

The political situation can be unstable – Fiji returned to democracy in 2014 but has experienced four coups since 1987. There were anti-government riots in Tonga in 2006. In Vanuatu, a number of former MPs who were sentenced to prison on corruption charges in 2015 have so far failed to get their convictions overturned. They deny the charges.

Economic growth rates at 2% to 3% are below even those of a comparable region such as the Caribbean and fall far behind those even in Asia’s laggard countries. But it is this relative backwardness that also provides huge opportunities for investors in tourism, international finance, IT and call centres, construction, seabed mining, fishing and commodities. fDi visited five South Pacific locations in October 2016 – Fiji, Vanuatu, Samoa, Tonga and the Cook Islands – to look at what is on offer and get the views of both investors and government officials.

Building resilience

The IMF’s resident representative based in Fiji, Tubagus Feridhanusetyawan, says: “When there is a natural disaster in the Pacific, the resulting loss of growth is greater than when the same thing happens in other small island states. We are trying to build resilience by helping countries to build fiscal buffers so that they can recover better. Revenue is volatile and there are limited sources but tourism keeps on growing and provides huge opportunities.”

Tourism is indeed the big opportunity in the Pacific but the challenge is to develop it sustainably without damaging the pristine tropical beaches and clear blue water that make the islands attractive in the first place. Fiji is focused on developing higher yield from existing visitors rather than just expanding numbers. China and India have been identified as the two markets with huge growth potential at the high end and Fiji provides huge incentives for both hotel and resort building as well as for using the country as a film location in a clever form of destination marketing.

As Fiji’s minister for industry, trade and tourism, Faiyaz Siddiq Koya, says, while traditionally Australia and New Zealand are the two biggest sources of tourists, “the two growth areas for us are China and India. They are the highest spending tourists in the world.”

He adds: “We have targeted a F$2bn [$952m] [tourist] industry by 2020. Currently we are standing at F$1.6bn. You must remember that Fiji does everything in a sustainable manner. People say ‘oh why don’t you have a million tourists?’ But you can have people spending more money with only 800,000 tourists.”

Fiji received 755,000 tourists in 2015, 9% up on the previous year with the number still growing, so that it is set to receive roughly the same number of visitors as its population of about 900,000.

Cut off?

As well as being the region’s tourism leader, Fiji is the hub for the South Pacific and has the best flight connections and the best internet and Wi-Fi connections due to it being on the Southern Cross Cable linking Australia and New Zealand to the US. Elsewhere, accessing the internet can be a slow and painful process.  

For these reasons, offshore contact centre specialist Mindpearl has based an operation in Fiji, and ANZ Bank has centralised back-office operations there both for the Pacific and parts of Asia. Investment Fiji chairman Truman Bradley notes that Fijians speak the Queen’s English – meaning English without an accent – making it an ideal place for call centres despite its remote location.

In Tonga, Tapu Panuve, managing director of retailer Office Equipment, has felt the business impact of being in a remote location. “We have to order goods three months in advance and last year [2015] our containers with Christmas goods didn’t arrive until January. They got offloaded in Auckland,” he says.

But with good marketing, even the disadvantages of remoteness can be swept aside, as illustrated by the success of bottled mineral water company Fiji Water, founded by Canadian businessman David Gilmour.

The governor of the Reserve Bank of Fiji, Barry Whiteside, says: “Exports of Fiji Water – currently the number one premium brand of water sold in the US – have risen by more than 60% over the past five years to about F$200m and are set to grow further with the recent addition of a third production line.”

Question of ownership

A big challenge for investors in the Pacific is that of unclear land title. The Vanuatu Investment Promotion Authority’s (VIPA) staff spends a lot of time working on this. Across the region, locals hold the majority of land according to traditional rules, which can make leasing it difficult and subject to dispute.

The manager of VIPA's promotion division, Raymond Vuti, says: “The land tenure system is our biggest obstacle and a concern for most investors. They may sign a lease with a land owner and then during a project’s development, others pop up and contest it.” VIPA works with the land ministry to try to sort out these difficulties.  

Incentives for investors vary widely, being very generous in Fiji and less so in other places. The Cook Islands takes the approach that a level playing field works best. Finance minister Mark Brown says: “Currently there are no special incentives (tax, remittances, land concessions) for foreign investors or domestic investors, for that matter. If any special initiatives are proposed then they will be made available to all investors both local and foreign.”

Opposition to tax

Meanwhile, in Vanuatu there is huge opposition from the business community to government proposals to introduce both corporate and income tax at 17%. Businessman Thomas Bayer, whose interests span banking, insurance and shipping, says: “One of Vanuatu’s great advantages for attracting foreign investment is the absence of personal income tax and corporation tax. The proposal to introduce them would take this away.

“The business community thinks that a better option is to improve the collection of existing taxes, such as value-added tax, and, if needed, to increase those tax rates, as they take no more administration than exists today, thus the tax take increases without further government cost.” Mr Bayer has lived in Vanuatu since the 1970s and renounced his US citizenship to become a national.

After tourism the big opportunity in the South Pacific is to make money from its vast stretches of ocean, either through fish and aquaculture or from seabed mining. Tongan finance minister ‘Aisake Eke says the country's government has issued licences to three companies exploring the seabed for minerals such as copper, zinc, gold and silver.

The Canadian company Nautilus Minerals is ready to go into production, according to Mr Eke, and the broad framework will be that the government receives 3% in royalties of the market value of the minerals plus a 25% corporate tax and another 25% superprofits tax.

Look to aquaculture

Lord Fusitu’a is MP for Tonga’s most northernmost three islands the Niuas, located 600 kilometres north of the main island Tongatapu and with a population of less than 2000 out of a country total of 103,000. He says: “Land is not the answer [in the Pacific], the future is the ocean. The future of our economy is in aquaculture. There are about half-a-dozen niche products such as sea cucumber, abalone and seaweed which, if we could sell them successfully to the Chinese market, would fund us for the next few decades.”

This would follow the development trend of Pacific islands further north where tuna fisheries account for 36% of GDP in Tuvalu, 32% in Kiribati and 10% in Micronesia. The Pacific islands supply 34% of the annual global tuna catch.

A World Bank report called Pacific Possible says: “To better capture the benefits of fisheries activities, in 2007 the eight parties to the Nauru Agreement, followed also by Tokelau, established a vessel day scheme [allowing vessel owners to purchase and trade fishing days] to limit and better manage… fishing access to their waters, resulting in a quadrupling of access fees between 2009 and 2015.”

Natural hazards

But the while the sea can be the solution for Pacific islands (with some government budgets largely financed by aid), rising sea levels and an increase in cyclones due to climate change are also significant hurdles.

The chance of a natural disaster occurring across the Pacific states is about one every five years but it is not uncommon to have two or three cyclones arrive in quick succession. Fiji is still recovering from Cyclone Winston, which hit the main island of Vita Levu in February 2015, and Vanuatu from Cyclone Pam in 2015; two of the worst cyclones on record.

Vanuatu tops the World Risk Index ranking countries’ exposure to natural hazards and their ability to deal with them. Tonga is placed third and Fiji 16th out of 171 countries. In December 2012, Cyclone Evan hit Samoa, causing loss of life as well as a 30% hit to GDP on top of an earlier 25% hit due to a tsunami in 2009.

Simeon Malachi Athy, the governor of the Reserve Bank of Vanuatu, says: “It’s a difficult time for us after Cyclone Pam. According to the post-disaster assessment, the total cost is about 60% of GDP, including damage to infrastructure, hotel facilities and lost production.” He adds that the economy has made a strong recovery, growing at more than 4% in 2016 and aided by new infrastructure projects.

For low-lying Kiribati, Tuvalu and the Marshall Islands, rising sea levels threaten their very existence and in 2014 the Kirabati government purchased 20 square kilometres of land on Fiji’s second largest island, Vanua Levu, to provide an escape option.

“All it takes is a cyclone coming through and years of prosperity can be wiped out in a couple of days,” says Cook Islands finance minister Mr Brown. The Cook Islands’ government has built three layers of resilience – a NZ$1.5m ($1m) domestic emergency response fund, a line of credit of up to $13m from the Asian Development Bank and cover from the newly established Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI).

Captive insurer PCRAFI is based in the Cook Islands and uses multilateral and donor funds as well as premiums from the at-risk countries to provide payouts when there is a natural disaster.

Funding too bureaucratic

Then there are climate change funds such as the Adaption Fund and the Green Climate Fund, which were set up to help developing countries but which, some in the region feel, are too slow and bureaucratic to be useful. “By the time we get the money, we will be underwater,” says one government official.

Kolone Vaai, co-managing director of KVA Consult, based in the Samoan capital Apia, says Samoa has successfully tapped climate change funds. "Climate change funds have become a huge source of potential development funding for South Pacific countries and some are complaining that the application process is too onerous," he says.

“Our advice is stop complaining and focus more on understanding how it all works and rationalise the government bureaucracy for implementation, monitoring and evaluation of these climate change projects. It is possible to climate-proof existing projects and make them suitable for funding.”

It is this kind of resilience that stands the Pacific islands in good stead for dealing with adversity. At the start of 2016, Qantas, Air New Zealand and Virgin Australia suspended flights and code shares to the Bauerfield International Airport in Vanuatu’s capital Port Vila over worries about the poor state of the runway. But plucky Air Vanuatu kept flying while repairs were being carried out.

The chairman of the Vanuatu Hotels and Resorts Association, Bryan Death, says that the runway problem together with Cyclone Pam have made the past two years a real struggle for the industry.

Hotel developer and estate agent Loic Bernier – who is behind the Ramada Resort Akiriki opening in April 2017, which will give Vanuatu an additional and much-needed brand name hotel – says: “The combination of Cyclone Pam and the airport issue has made doing business very tough. Luckily, we had Air Vanuatu to help us through the worst patch.”