Working Group 4
CLARIFYING THE RESPECTIVE ROLES OF GOVERNMENT, PRIVATE SECTOR AND CIVIL SOCIETY TO ACHIEVE STRONGER GROWTH, GREATER EQUITY AND SUSTAINABILITY
[Terms of Reference]

BACKGROUND

The long-term performance of the Fiji Islands economy has been disappointing, with average growth rates declining each decade since independence. Between 2001 and 2006, the economy’s performance has been, at best, uneven. A fiscal expansion shortly after the events of 2000 helped to maintain consumption but at the cost of increasing government debt. As a result, the country enjoyed positive economic growth with an average annual growth of 2.6 percent over the past 7 years.  But this expansion, initially designed to “kick-start” the economy, was not sustainable. A growing balance of payments problem and declining foreign exchange reserves forced a change of approach in mid-2005: the government opted for fiscal consolidation and greater emphasis on its export strategy.

For decades Fiji’s economy has been characterized by the growing dominance of the public sector, over reliance on a single commodity (sugar), and the pursuit of a highly import-dependent tourism sector. While these policy thrusts were justified to some extent at the time, experience has shown that growth based on expansionary public expenditure and reliance on the export of a few primary commodities has not been sustainable. There is clear evidence to show that these strategies have not worked in Fiji: the outcome has been a low per capita GDP, a low growth rate, a weak agricultural base with declining output and capacity utilization, large budget deficits and deterioration in the social and infrastructure facilities, low productivity in the real sector, and a high level of unemployment. 

The main point to note is that the economy seems to be caught in a low income equilibrium growth trap. The growth rates which have been achieved are well below Fiji’s potential and well below the levels of growth needed to provide employment for the growing workforce and to help the poor out of poverty. In 2007, the domestic economy is expected to have contracted by 3.9 percent.  The contraction for 2007 is thought to have been sectorally broad-based, with the exception of the electricity & water sector, which was projected to grow by 2.3 percent.  The major sectors expected to have contributed to the economic decline were the community, social & personal services; building & construction; wholesale & retail trade, hotels & restaurants; and finance, insurance, real estate & business services sectors. From 2008 the Fiji economy is forecast to return to low levels of growth - 2.2 percent in 2008, 1.6 percent in 2009 and 2.0 percent in 2010.

There are many reasons for this poor performance – which means that there is no single “golden bullet” to fix the problem. Some of the explanations relate to short-term economic management problems, mainly inappropriate and internally inconsistent policies e.g. an expansionary fiscal policy being offset by tightening monetary policy. But arguably the more important reasons can be attributed to deeper institutional deficiencies and structural adjustment issues e.g. the inability of Fiji’s commercial legislation to support sophisticated financial arrangements and adequately protect patents and copyright; the slowness to adjust to changing external trade conditions; and long established domestic policies which impede the access of entrepreneurs to all the assets (such as land, finance, skilled labour and foreign exchange) they need to run successful businesses. Their difficulties are also exacerbated by government policies that interfere with the ability of entrepreneurs to take normal business decisions (e.g. to raise capital, borrow overseas, change product prices, negotiate deals with foreign partners, etc) without having to receive prior permission from government officials or Ministers. There are some good reasons for government surveillance of private sector activities e.g. to regulate monopolies, for environmental protection, public safety and good town planning. One issue for consideration is: where should that line – between private sector initiative and government interference - be drawn?

There may well be scope for a more mutually profitable interaction between the government and both the private sector and civil society; by way of (a) public private partnerships for the funding and construction of infrastructure and (b) through joint government/NGO projects designed to improve NGO participation in the design and monitoring of service delivery projects or even of encouraging NGO delivery of government funded services. The first task, however, is to clarify the appropriate roles for the government, the private sector and civil society.

 ISSUES

The appropriate role for government

In the economic area, the appropriate role for a government is to specify property rights (that is, decide who can own or lease land and other assets), ensure that there are sensible regulations to, for example, limit monopoly powers and maintain fair wages, and provide public goods such as the Military and the Police, public health and basic education services, that only a government can provide. Government also has a responsibility to maintain an equitable income distribution, to safeguard gender equity and human rights and to ensure the sustainability of current activities so as to protect the environment for future generations. Other activities are usually best left to the private sector. At present, the Fiji government is involved in many activities that would be better left to the private sector. It is because the government has so much of its money currently “locked up” in what are essentially private sector activities (such as telecommunications, power generation, etc,) that it does not have enough funding for additional infrastructure such as roads, schools and hospitals.
On the other hand, Government has neglected some of the areas in which it should be engaged. The most significant deficiency is its inability to define property rights covering 90percent of Fiji’s land. Fiji has a major property rights problem. The problem does not lie with the ownership of the land, which will remain Fijian. It lies in the inability to apply normal market mechanisms to the leasehold interests in the land and to make more land available both for economic and social purposes (such as social housing). Because land is such an important input to most economic activities in Fiji, this is now a major impediment to growth. Problems in other areas include poorly designed regulation. The legal framework for business is weak. It operates under very dated laws that need modernising. There are inadequate opportunities for skills upgrading and the arrangements for helping the unemployed find work are very underdeveloped.
The role of government should be redefined as that of a facilitator and a catalyst to provide an enabling environment for national development. Where it is in the public interest, deregulation should be vigorously pursued, with the government playing a supervisory and regulatory role.

Private Sector

The private sector is primarily responsible for the creation of jobs and the generation of profits for further investment. It will be expected to become much more proactive in creating productive jobs, enhancing productivity, and improving the quality of life. It is also expected to be socially responsible, by investing in the corporate and social development of Fiji and by actively promoting the unity and cultural, educational, moral, and social development of the country. The tasks here are to:

Public-Private Partnerships

In response to the Government’s aim of reducing its debt, public private partnerships (PPP) provide a variety of modalities through which the private sector may help fund public infrastructure and services and manage them more efficiently. Government could enter into such partnerships for infrastructure projects that provide water, roads, sewerage and the like to citizens, to meet their essential needs. National networks and local distribution to serve the general public may be funded under PPP. There needs to be a concept of a symbiotic relationship between the public sector as enabler and the private sector as the primary engine of growth of Fiji’s economy.

Because of the focus on avoiding increases in public debt, previous experiences (outside of Fiji) in this area have shown that many private infrastructure projects in the early 1990s involved the provision of services at a substantially higher cost than could have been achieved under standard models of public procurement.  The central problem was that private investors demanded and received a rate of return that was higher than the government bond rate, even though most or all of the income risk associated with the project was borne by the public sector.

Further, other countries’ early initiatives to promote private investment in infrastructure reached the conclusion that, in most cases, the schemes being proposed were inferior to standard model of public procurement based on competitively tendered construction of publicly owned assets.

As a response to these negative outcomes was the development of formal procedures for the assessment of PPPs in which the central focus was a value for money rather than a decrease in debt.  The underlying framework was one in which value for money was achieved by an appropriate allocation of risk.

The UK Government’s Private Financing Initiative has identified a number of preconditions that are necessary for a successful undertaking:

It must be kept in mind, that certain types of projects are better suited to PPP than others and their success depends mainly on the contractibility of the service and political constraints, which may vary between countries.  Ultimately, a shared vision by both parties is necessary.

Government/Civil Society Partnerships

Civil society also has an important role to play in facilitating development. Non-governmental organizations can be powerful advocates for otherwise disempowered groups in society. They can also be a valuable source of information on issues not otherwise known to government. They can be very helpful, if consulted appropriately, in improving the design and monitoring arrangements for development projects and in other cases they can be more efficient and effective providers of government funded services than traditional government agencies. NGOs can play a major role in the country’s development if they are encouraged to work in partnership with the government (and sometimes with the private sector as well).

Macroeconomic Management

The short term strategies announced in the Revised 2007 Budget were focused on restoring macro-economic stability, securing government finances and achieving economic recovery. Resources are being directed to productive areas that will contribute to a quick recovery of the economy, and the laying down of a solid platform for fiscal and economic sustainability through responsible financial management and building exports in the medium to long term.

Foreign reserves remained at adequate levels in 2006, with year-end foreign reserves around $879.9 million, sufficient to cover 3.7 months of import payments of goods.  Foreign reserves have stabilised over the year, attributed to falling imports and exchange control policy restrictions.  At the end of October 2007, foreign reserves were at $930.6 million (provisional), sufficient to cover 4.3 months of imports of goods.

The inflation rate as at the end of August 2007 declined to 5.1 percent compared with 7.1 percent as at end of June. Inflation had continued to rise early in the year largely due to a significant increase in the prices of domestic and imported food items. This was driven by shortages of market items due to the Australian drought - leading to supply disruptions of dairy and wheat products, the effects of flooding in the beginning of the year, and the effects of the oil price hikes. In the approaching months, price pressures emanating from higher global crude oil prices and average trading partner inflation are expected to be mitigated by lower domestic inflation and a relatively weaker US dollar. Balancing the above factors, year end inflation is projected to be around 3.5 percent in 2007 and 2.5 percent in 2009.

The annual net budget deficit averaged 3.8 percent of GDP between 2003 and 2006, however, following the implementation of policies to reduce expenditure the estimated budget deficit for 2007 is just under 2 percent of GDP.  A reduction in the budget deficit to 1.5 percent in 2008 will assist in minimizing government borrowing, ultimately reducing the overall debt level as a percentage of GDP.

Increasing Investment: improving the business regulatory environment

Although investment has risen in recent years, it remains below the average of 20 percent of GDP for developing countries and below the SEEDS target of 25 percent of GDP. As a percentage of GDP, investment rose from 15.4 percent in 2000 to 18.3 percent in 2005 and was estimated to be around 18.4 percent in 2006.  Of particular concern has been the low rate of private sector investment. Over the same period, private sector investment as a percent of GDP increased from 10.2 percent to 11.9 percent, but was still less than the figure of  13.6 percent that was recorded in 1985.  For 2007, investment is expected to be around 14.0 percent of GDP, much lower than 2006 levels.

As mentioned above, the uncertainty generated by political crises has had a discernible effect on the Fijian economy.  In particular, the lack of certainty and stability has had a strongly negative effect on investment, particularly from the private sector.  Without the effective involvement of private sector interests and capital in the economy, Fiji will struggle to achieve any momentum in developing further.

In addition, the lack of quality infrastructure can also be viewed as a disincentive to invest.  Whether this is the lack of transport or telecommunications facilities, these factors are creating barriers to the efficient and profitable operation of businesses in Fiji and thus preventing domestic or foreign direct investment.  Despite this, even when investment decisions are made, businesses are faced with a complex bureaucratic and regulatory environment.  Further efforts need to be made to streamline regulations and procedures, deregulating industries to allow for new investment in the industry and reforming commercial legislation to ensure that legal arrangements in Fiji can support more sophisticated financial arrangements and provide adequate protection for patents and copyright.

Increasing Exports

Government recognizes that growth in exports is essential for economic recovery and development. This is particularly important given the loss of preferential market access for our garments and sugar in foreign markets.

While the ultimate aim of the Export Strategy is to stimulate Fiji exports in the face of advancing globalization, there are likely to be a number of barriers that will affect the achievement of this objective.  External factors that Fiji has no direct control over include the distance required for produce to reach markets, quarantine regulations imposed by trading partners, environmental issues such as freak weather events and pests and disease that affect agricultural produce.  However, through the Export Strategy Fiji may be able to address supply-side constraints that result in missed target yields and below standard produce. 

Critically, Fiji, like many other small island nations has specialized in a rather limited range of goods, which are predominantly natural resource based.  Inherent in this type of specialization is a vulnerability to fluctuating world market prices.  In order to guard against uncertain export earnings, diversification of exports into non-traditional areas have been encouraged.  In addition, any efforts to increase the value-added of products will not only lead to higher prices on the world market, but also have positive implications for the domestic labour force and capital stock. 

Areas that have been identified for further investigation include: forestry, marine products, agro business, mineral water, audio visual industry and information communication and technology.

Land

Indigenous Fijians own about 90 percent of all land in Fiji. Native land is held by the Native Lands Trust Board on behalf of the landowners. This land cannot be bought or sold. Land that has been registered can be leased by the NLTB; the remainder is held under customary tenure. The ultimate owners of the land are collective groups (most commonly Yavusa (tribes) and mataqali (clans) although land can be owned in the name of the titular heads of tribes e.g. chiefs who hold the hereditary titles, agnate descendants of a member of a tribe (qele ni kawa) or family units (tokatoka). The social norms governing access to land, seafoods and hunting/foraging are governed by the decision-making structures within individual Yavusa and mataqali in which Chiefs play a major role. Within this framework, an individual’s access to land rights is usually acquired at birth, not through purchase or inheritance. Where land rights are transferred by inheritance, many factors come into play. These include the needs of individuals, the harmony of conflict between potential heirs and heritors, the extent to which heirs had used the land, who provided for the elders in their declining years, what payments were made at customary events/feasts, and other considerations.

The Agricultural Landlord and Tenant Act 1966 (ALTA) governs the negotiation and grant of agricultural leases on native land. About 50 percent of all leases are ALTA leases. The ALTA legislation imposes a rigid framework, specifying the rent (6 percent of the unimproved capital value of the land) and the term (30 years, with no right of renewal). The Native Land Trust Act (NLTA) provides a less rigid legal framework for non-agricultural commercial leases. Leases can be for up to 99 years and the rental and other terms are negotiable.

Generally speaking, neither the landlords nor the tenants are happy with the ALTA framework. The landlords are unhappy about the low rental levels, which do not appear to reflect the market value of the land, and the tenants want stronger provisions providing compensation for improvements in the event that the lease is not renewed. It appears that tenants would be happy paying a higher rental and landlords would be happy to provide more reasonable terms on the issue of compensation but the law is standing in the way of a sensible and pragmatic compromise. The ALTA legislation is constitutionally entrenched (originally to safeguard the interests of indigenous Fijians) and can only be amended if a two-thirds majority concurs.

Further evidence illustrating the impracticality of the current legal arrangements for leasehold land acquisition and transfer can be found in the growing incidence of vakavanua arrangements. These are informal agreements – with nothing in writing - between mataqali and families or individuals who wish to occupy and use some land. They can run for many years – sometimes decades. The main problem with vakavanua arrangements is that they leave the tenants outside the formal property rights system and thus unable to take advantage of the benefits a legal leasehold title would give them.

In part, at least, vakavanua arrangements are a response to the surreal situation facing indigenous Fijians wishing to work their own land under a formal legal title. The irony is that though customary owners may lease their land to investors and entrepreneurs, who can in turn use the land as collateral, there appears to be no easy way for the customary owners to use the land as collateral directly. They can, of course, lease the land to themselves via the NLTB but this seems a tortuous way of making their ownership “legal”. A better way needs to be found to allow mataqali to gain direct access to the benefits of operating within the formal property rights system.

It is also important that better ways be found to ensure that more land is made available for priority agricultural, commercial and social purposes (e.g. for social housing). The unavailability of leasehold land for all these purposes is now a major impediment to Fiji’s economic and social development.

Tasks:

• Define the role of government vis-a-vis those of the private sector and civil society and make recommendations about the areas in which government should reduce its involvement and, conversely, the areas in which the government should become more involved.
• Make recommendations about the areas in which it would be advantageous for the government to work in closer partnership with the private sector and/or civil society to enhance growth (or the country’s growth capacity) either by working jointly on projects and programmes or by engaging these other sectors more closely in decision-making and conflict management. This review should encompass, in particular (but not necessarily exclusively), the infrastructure sectors (Land Transport, Marine Transport, and Water), the health sector, and the issue of social health insurance.
• Review the regulatory environment governing business activity and make recommendations on any reforms that would reduce the costs of doing business and reduce the dominance of Government in private sector decision making.
• Make recommendations on the ways in which civil society organisations might strengthen their roles as advocates for the groups they represent, gatherers of information that is useful to government (and society) but is not provided from any other sources, and co-partners with government in both decision-making about service delivery and in service delivery itself.
• Review macroeconomic policies and make recommendations, as considered appropriate and necessary, to revise macroeconomic policy settings or longer term policy targets relating to (for example) the government’s budget balance, government debt, interest rates, inflation targets, balance of payments, exchange rate regime and foreign exchange controls.
• Consider mechanisms to promote the greater compatibility, consistency and credibility of government’s economic policies (e.g. a Fiscal Responsibility Act as in New Zealand) and make recommendations as considered appropriate.
• Review structural adjustment policies (such as the government’s export strategy, regulatory policies and labour market arrangements) and make recommendations, as considered appropriate and necessary, to improve or strengthen these policies.
• Reviewing the effectiveness and adequacy of the law and resourcing of environmental management arrangements and make recommendations as considered appropriate to strengthen all the mechanisms and processes available to ensure the environmental sustainability of development activity in Fiji.
• Make recommendations on mechanisms to ensure the adequate and timely supply of leased land (without jeopardising the ownership of any of the land currently owned communally by Fijians) to meet the needs of the productive sector and the need for land for housing and, in particular, social housing, in urban areas.
• Make any other recommendations considered appropriate to clarify the role of government, the private sector and civil society and the way in which these cooperate with each other to achieve stronger growth, greater equity and sustainability.

COMPOSITION

The Working Group is to comprise up to 20 members: of whom at least four are NCBBF members plus up to sixteen others from government and non-government sectors. Additional members are from the non-government sector.  The Working Group has the power to co-opt additional members as it sees fit.

TIMEFRAME

It is anticipated that the Working Group will be established and operational within a fortnight. In consultation with the Head of TASS, the Working group may request the preparation of literature reviews and commission Issues and Discussion Papers (IDPs) to assist it in its deliberations. The Working Group shall report back to the National Task Team 2 at the latest by mid-March 2008 with its report and recommendations to assist in the preparation of the State of the Nation & Economy (SNE) report.

LITERATURE REVIEW
A number of studies have been undertaken to clarify the roles of Civil Societies, Government and the Private Sector to achieve stronger growth, greater equity and sustainability.

In the role of civil societies, a report on the Fiji Civil Society Index (CSI) report by the Fiji Council of Social Services talks about current roles, at a glance the weaknesses associated with the conduct of its activities and its relevance to the government developmental priorities.  Other literature readings have pointed out the role and prominence it plays in modern day democracy.

An Asian Development Bank study on “Improving the Legal Business Environment in the Pacific Region” highlights the impediments to private sector development that are related to the legal business environment.  Emanating from the recommendations of the study, one of the current initiatives in Fiji include the promulgation of an Electronic Transaction legislation which is envisaged to come into line by the end of the 1st quarter of 2008. 

Numerous studies on the role of Government have been published and most of the issues therein are well-captured in the introductory part of the write-up, thus focusing on the need to protect property rights and improving its role as a facilitator in providing an enabling environment for private activities to flourish and prosper provided if its within the ambits of the laws of the country.

The role of the private sector in general was not very forthcoming in general, however models of the public private partnership can be explored further if need be.

The quest to increasing Exports has been a priority and the National Export Strategy document tells compelling significance on the need to broaden our export base.  Thus the Sugar National Adaptation strategy together with the Investment Approvals Process reforms administered by the Commerce Ministry will in a way complement this initiative to boost exports.

In addition, given the current times of uncertainty, priorities will have to be re-visited and re-charted to meet the country’s current pressing needs in achieving macroeconomic stability for greater economic prosperity.

REFERENCE

RESERVE BANK OF FIJI, “Relationship between Inflation and Economic Growth”, Vikesh Gokal and Subrina Hanif, Working Paper 2004/04, December 2004

RESERVE BANK OF FIJI, “The implications of evolving technology on Monetary Policy: A literature survey”, Resina Katafono, Working Paper 2004/02, December 2004

UNDP, Briefing on the Fiji National Initiative on Civic Education Project

RESERVE BANK OF FIJI, MONETARY POLICY STATEMENT, MAY 2007

FIJI’S SUGAR, TOURISM AND GARMENT INDUSTRIES: A Survey of Performance, Problems and Potentials
http://www.fijianstudies.org/dload/vol1no1/fijis_sugar_tourism_and_garment_industries.pdf

Reconciling Ethnicity and Nation: Contending Discourses in Fiji’s Constitutional Reform
Norton, R.
https://muse.jhu.edu/demo/contemporary_pacific/v012/12.1norton.html

Tax-free Manufacturing in Fiji: An Evaluation.
Haroon Akram-Lodhi
Journal of Contemporary Asia, Volume 22, Issue 3 1992 , pages 373 – 393

Economic Impact of Tourism on Fiji’s Economy: Empirical Evidence from the Computable General Equilibrium model
Paresh Kumar Narayan
Tourism Economics, 2004, 10 (4), 419–433