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Vanuatu’s rocky road to prosperity

From one of Port Vila’s ritziest streets, the address of consulates, local rich-listers and senior multi-national executives, the views out over the stunning blue Erakor Lagoon are spectacular. But the road to get to these residences is spectacular for all the wrong reasons: its potholes are so huge, ubiquitous and unavoidable anything less than a 4WD would be foolhardy.

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" To listen to those for whom Vanuatu is a land of promise, the opportunity is tantalisingly close."
Andrew Cornell, BlueNotes managing editor

It is, unfortunately, an apt metaphor for where Vanuatu sits at the moment: a truly spectacular Pacific nation with wonderful people just three hours off the population centres of Australia and New Zealand – but where opportunity is frustrated by a very dodgy stretch of tarmac. Literally and figuratively.

Literally, take the main airstrip. Since Tropical Cyclone Pam severely damaged Vanuatu’s international airport just over two years ago, Australia and New Zealand’s major airlines have stopped flying to the Pacific paradise and code-sharing with Air Vanuatu, the national carrier.

Given tourism represents just less than 50 per cent of Vanuatu’s gross domestic product and Australia and New Zealand provide nearly four out of five tourists, the impact is dramatic.

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But tourism is not the only challenge – and opportunity – for Vanuatu. The figurative challenge for the nation of just under 300,000 people spread over 80 islands is to improve the 'roads' to economic prosperity – better infrastructure generally, a national branding scheme and a more efficient bureaucracy.

In an interview with BlueNotes in Port Vila, the governor of the Reserve Bank, Simeon Malachi Athy, expanded on the challenge noting in particular from the bank’s perspective, financial inclusion, corporate efficiency – including the finance sector – and stronger partnerships between government, banks, non-government organisations and outside stakeholders.

“Cyclone Pam was the most devastating we have experienced and we have recovered very well now but the challenge is really to implement the ‘People’s Plan’ (a government initiative)– that includes financial inclusion, infrastructure but it also means ongoing reform and greater transparency,” he says.

Athy says tourism is at the centre of Vanuatu’s outlook because it has such a huge multiplier effect on the economy.

To listen to those for whom Vanuatu is a land of promise, the opportunity is tantalisingly close. Celebrity long-time visitor and semi-permanent resident Steve Jacobs of the Nine Network, an unofficial ambassador for the nation, says Vanuatu is the “hidden jewel” of the Pacific.

“There are amazing business opportunities here and the tourism attractions – the culture, the people, the scenery – are incredible,” he says. “And then there’s the opportunity that’s not so obvious like the amazing beef cattle. I think the thing that stands out is how undeveloped Vanuatu is and so how much can be done.”

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Photo: Andrew Cornell

BEACHES, BEEF, COFFEE

Vanuatu is truly spectacular – one of its main islands is an active volcano – with pristine beaches so the tourism opportunity is easy to see. Less well known though are some of Vanuatu’s other, world class, products, notably beef and coffee.

The nation’s history as a French colony saw the introduction of cattle which have now become a premium, albeit still cottage-size, industry. Amazingly too the volcano island of Tanna produces remarkable Arabica coffee beans, usually found at such quality only at altitude.

Speaking with my colleague Rufus Pinto in Vanuatu on a recent trip to work with local journalists, he says Vanuatu has a young population which speaks English well, offering the resources for industries like regional call centres and labour intensive manufacturing.

Pinto, who is ANZ country head for Vanuatu , says “the crux is the need for a clear vision which we are now slowly seeing the country develop. But we must step on the pedal and accelerate the vision - not dissimilar to South Africa in the Mandela days!”

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RECOVERY

Things are happening.

Critically, the most visible sign of progress is the completion of protracted negotiations around re-building the airport. On April 1 the World Bank, which will provide funding, approved the governments preferred contractor, China Civil Engineering and Construction Company, for the $US47 million project.

Meanwhile, according to the latest Asian Development Bank annual report, after the initial emergency repairs to the airport in May last year only Virgin Australia resumed services but visitors by air recovered by 5.7 per cent in 2016 – although they remain 12.6 per cent fewer than in 2014.

Perversely, as is always the case, recovery from the disaster of Cyclone Pam actually helped the economy.

“Government spending, including activities financed by development partners, delivered a major stimulus but resulted in a budget deficit equal to an estimated 10.6 per cent of GDP, reversing a 6.4 per cent surplus in 2015,” the ADB says. “The deficit financed the initiation of major cyclone reconstruction and infrastructure projects, with considerable help from development partners.”

Although delayed, the airport redevelopment is timely as the effect of the rebuilding from Cyclone Pam is now starting to wear off, bringing the focus back to the measures needed to establish Vanuatu as a 'brand' in the same way as Fiji - and even neighbouring Noumea - have established themselves as destinations.

On that the government and private enterprise agree on some key priorities: tourism, infrastructure and the cost of doing business.

The airport project, which will not only rebuild but upgrade capacity, means Vanuatu will be more directly accessible to much larger planes and even direct flights from Asia. Cruise ships too are an emerging sector. According to the ADB, cruise ship arrivals rose by an estimated 30 per cent in 2016, outperforming 2014 by 16 per cent.

“We are well advanced with a tourism master plan, we have nearly finished the waterfront project (along Port Vila’s main shore), we’ve worked on parks, a new wharf – but the airport is central,” says Adela Aru, General  Manager of the Vanuatu Tourism Office.

Not only will a world class airport bolster tourism, it will aid Vanuatu’s economic diversification (particularly agriculture).

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As Vanuatu’s economy continues to recover from Cyclone Pam in 2015, growth is expected to pick up to 4.3 per cent in 2017, and then slightly moderate to 3.8 per cent in 2018.

Growth will be driven by ongoing recovery in the tourism and agriculture sectors, with an increase in infrastructure investment and construction activities as part of the cyclone recovery providing a needed boost.

The report warns that rising public debt creates risks for the country’s improved outlook. Reform is needed to improve infrastructure management and enhance productivity to sustain faster growth.

Political change In recent history, multiple factions have led to some political instability and frequent changes of prime ministers and ministers.

The Economist Intelligence Unit noted factionalism was an ongoing challenge “partly as a result of parliament being made up of large number of parties and independents with allegiances regularly shifting between groupings”.

“This will take a toll on policy formation in 2017-18 and derail some efforts for political reform. Real GDP growth is expected to decelerate over 2017-18, averaging 3 per cent annually in those years, as many reconstruction efforts following Cyclone Pam in 2015 come to an end,” the EIU says. Political change though is well on the official agenda.

In January, Prime Minister Charlot Salwai launched ‘Vanuatu 2030’, the country’s new National Sustainable Development Plan. The plan emphasises society and the environment as well as the economy with a strong emphasis on culture.

“I like to think of the structure as a large nakamal (traditional meeting house) with the three pillars holding up the roof and the foundation is our culture and kastom,” the PM says.

According to the latest ADB Asian Development Outlook, the infrastructure push currently underway is the main growth catalyst but, while sorely needed, it alone will be insufficient to deliver the required lift to growth.

“Limited capacity for managing public investments risks undermining the benefits of the infrastructure push,” the ADB says. “The current investment pipeline amounts to over Vt10 billion each year in 2017 and 2018, equal to more than 12 per cent of GDP. By comparison, the average annual value of public investment projects implemented during 2008–2010, the most recent previous peak in public investment, amounted to only Vt3.5 billion, not much more than 5 per cent of GDP.

“The sudden scaling up could overwhelm limited project implementation capacity. Meanwhile, inadequate infrastructure planning could skew project selection, and the historical pattern of inadequate attention to maintenance threatens to undermine return on investment.”

PRODUCTIVITY

The ADB also pointed to the need for productivity improvement across the economy, noting productivity growth has been deteriorating in recent years “by an average estimated at 1.5 per cent during 2010–2014”.

“Insufficient progress in implementing reform designed to enhance private sector development and productivity appears to be the key issue,” the bank says.

This was also a key theme of Governor Athy. He says one of the collateral impacts of political instability had been a build-up in “friction” in the economy, making it harder for both local and foreign businesses to operate – with consequent productivity impacts.

One of the costs is relatively high interest rates in Vanuatu which are not entirely due to direct monetary policy.

“Some of the financial costs of doing business I can understand and they’re due to process we are looking on but some of the other costs are difficult to justify – some things are more expensive here than Samoa,” he says.

ANZ’s Pinto argues there is a huge amount of opportunity in both micro and macro reform in Vanuatu which could conceivably multiply GDP growth over the next decade.

He points to the agricultural opportunity built on incredibly fertile soils if the transportation logistics can be improved: “Vanuatu has immense potential on this front and a walk to the local markets and around the streets will capture the green growth around. And most importantly in today’s health conscious world, organic agriculture is preeminent in Vanuatu”.

For that potential to be delivered, Pinto says investment in education is critical, particularly shorter courses on particular skills.

Though low profile, the quality of Vanuatu beef is already internationally recognised in some premium markets such as Japan – the biggest export destination. Australians – including the actress Cate Blanchet and her husband Andrew Upton – are among those ramping up investment.

Another Australia, Terry Adlington, has developed the organic and Fair Trade certified Tanna coffee, defying the prevailing view that quality Arabica beans can only be grown at altitude. Farming predominantly at the base of the Mt Yasur volcano on Tanna Island, in deep, dark rich soils, Adlington is striving to provide a commercially viable industry for local farmers.

“More than 80 per cent of the population relies on agriculture, we support over 700 farms and  5,000 people, ” he says. Told by no less a figure than Ernesto Illy of Illycafe that premium Arabica needed to be grown at high altitude, Adlington has won many awards for Tanna. “We have a latitudinal compensation,” he says – meaning Tanna makes up for its sea level location by being much further from the equator but still tropical.

Tourism though is the main opportunity for Vanuatu – which is why the airport project is so critical.

If 80 per cent of the population relies on agriculture, Pinto says almost 50 per cent of GDP directly and more like 65 per cent of GDP indirectly is tourism. “There’s an opportunity for some quick wins but action is the key to success.”

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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