Micronesia2008 Investment Climate Statement - Micronesia
Openness to Foreign Investment Return to top The FSM officially affirms that the nation is open to foreign investment. The FSM Federal Government Investment Policy states: “The FSM Government welcomes domestic and international investors to invest in the FSM. The Government is fully committed to facilitating the development of the private sector and is seriously focused in its efforts to provide a conducive climate for all investors by assuring that the necessary legal framework and support infra-structure are in place, that the cost of doing business in the FSM is competitive, and that the business environment is always stable and healthy.” However, each of the country’s four states has a unique foreign investment regime and attitudes toward outside business interests vary from state to state. The Foreign Investment Act of 1997 states as its purpose: “to encourage foreign investment within the territory of the FSM in a manner that serves the economic, social, and cultural interests of its citizens.” The Act, available online at www.fsmlaw.org, provides for non-discriminatory treatment of foreign investors and sets out guarantees and entitlements of foreign investors concerning compulsory acquisition or expropriation. The Act also lists the sectors in which foreign investment is not allowed (arms manufacture, minting of coins and printing of currency, and business activities relating to nuclear power or radioactivity). It also specifies that banking, telecommunications, fishing in the FSM’s Exclusive Economic Zone, air transport, and international shipping are subject to FSM National Government licensing and regulation. The states license and regulate all other sectors. Some states put additional restrictions on foreign investment. For example, foreigners cannot own retail businesses in Pohnpei. Moreover, in December 2006, Pohnpei State revised its already restrictive legislation to preclude new foreign investment in key sectors of the economy, such as manufacturing, tourism, transportation, wholesale and retail distribution. The present federal economic plan calls for privatization of public companies and support for private sector development. However, cases continue in which public corporations compete directly with private businesses. Privatization is subject to political intervention and is not necessarily transparent. Courts generally support contractual agreements, but enforcement of judicial decisions is not strong. Foreign firms doing business in the FSM have had difficulty in collecting debts owed by FSM companies and individuals, even after obtaining favorable judgments. U.S. companies and individuals considering dealing with buyers in the FSM should therefore exercise due diligence and negotiate payment arrangements that always fully protect their interests. Foreign ownership of land is not permitted, and lease terms, controlled at the state level, are often limited to relatively short periods of time. In some locales, squatters, long-standing and multiple disputes over land ownership, and the absence of property records make leasing land extremely difficult, costly and uncertain. Restrictions on land sales in some states also have the effect of driving transactions underground, so that accurate pricing information is not readily available. There is no local stock exchange. All aspects of every foreign investment proposal are screened by the FSM Federal Foreign Investment Board. Board hearings are open to the public, but deliberations are not. Established local businesses participate in foreign investment application hearings and can inhibit approval of specific applications. In some jurisdictions, there are also links between existing business interests and Investment Board membership. Because the FSM is a loose confederation in which the states have considerable autonomy, its national policy can be countered by state-level decisions. The FSM has potential for growth but needs foreign investment in order to improve its stated goal of economic self-sufficiency. Economic sustainability, including the development of a strong private sector, is a key objective of the amended Compact of Free Association. However, the nation lacks the domestic human and financial capital needed to support rapid economic development. Traditional attitudes towards business, debt, and competition complicate development prospects. The FSM still relies heavily on outside financial assistance. The FSM’s resident population of 108,000 receives over $140 million a year from the United States. There is currently little foreign investment. Two outside corporations hold near monopolies on fuel and commercial air transport. All other foreign investment is concentrated in small scale businesses located on the nation’s four main islands. Most outer islands have no foreign investment due to their isolation, small populations, and subsistence economies. These islands often have nearly cashless economies. Inquiries concerning FSM National investment policy should be addressed to: Secretary, Department of Economic Affairs Inquiries concerning Pohnpei State investment policy should be addressed to: Executive Director, Inquiries concerning Chuuk State investment policy should be addressed to: Foreign Investment Office Inquiries concerning Kosrae State investment policy should be addressed to: Foreign Investment Division Inquiries concerning Yap State investment policy should be addressed to: Division of Commerce and Industry Conversion and Transfer Policies Return to top The U.S. dollar is the FSM’s official currency. The FSM Foreign Investment Act of 1997 safeguards remittances of profits, conduct of international transactions, and repatriation of capital. There are no limitations on repatriation of funds. A previous requirement to report repatriated amounts higher than $50,000 was repealed in 2005. Expropriation and Compensation Return to top The FSM Foreign Investment Act of 1997 guarantees that there will be no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit has been issued, except for violation of laws and regulations and in certain extraordinary circumstances. Those extraordinary circumstances include cases in which such action would be consistent with existing FSM eminent domain law, cases in which such action is necessary to serve overriding national interests, or cases in which either the FSM Congress or the FSM Secretary of Economic Affairs has initiated expropriation. The Act states that the FSM National Government shall not take any action or permit any state action that has the effect of expropriation. If this occurs, the FSM National Government is responsible for prompt and adequate compensation. There have been no reported cases of expropriation by the FSM Government (see www.fsmlaw.org). Dispute Settlement Return to top Disputes concerning contractual rights are handled through the FSM court system. A decision by the Secretary of Economic Affairs regarding an application for a Foreign Investment Permit may be appealed by the applicant to the Supreme Court of the FSM. There have been instances where court judgments have not been enforced. There are no provisions under FSM Federal law for alternative dispute resolution. State laws only provide for alternative settlement routes for family or traditional disputes. A bankruptcy law came into force in January 2005. Judgments from foreign jurisdictions are not enforceable in FSM courts. The FSM has signed the Convention on the Settlement of Investment Disputes and Nationals of Other States. Performance Requirements and Incentives Return to top There are no performance requirements or incentives. Under the Compact of Free Association, U.S. citizens do not require visas, residence permits, or work permits to live or do business in the FSM. Right to Private Ownership and Establishment Return to top Foreign persons or companies seeking to conduct business in the FSM must obtain a Foreign Investment Permit. With respect to immigration related procedures, Americans enjoy under the Compact the same rights to work and invest in the FSM as FSM citizens enjoy in the United States. Businesses may operate as sole proprietorships, partnerships, or corporations. Whatever form a business may take, FSM national laws do not require local citizens to share in the ownership of the business. However, since foreigners are not allowed to own land in the FSM, foreign investors often choose to work with local partners. The law states that once approved and established, a foreign-owned business will be treated the same as a locally owned business. Protection of Property Rights Return to top Both banks operating in the FSM have some foreign shareholders and therefore are considered foreign entities. Since foreign ownership of land is forbidden, mortgages therefore are not available to foreigners. In addition, the sale of land in Pohnpei State has been blocked since the early 1980s. Transfer of title does occur informally, which results in a lack of accurate public pricing information. Squatters, who are common on government and private land, have proven to be an intractable problem. One court case, which involved squatters occupying government land leased to another party, took over a decade to resolve. Most original land records in Chuuk State were destroyed in a fire that demolished the registry building. The other three FSM states have functioning land offices. Copyrights are protected under FSM Code, Title 35. There are no trademark, patent, or other intellectual property right regulations currently in effect (www.fsmlaw.org). Transparency of Regulatory System Return to top The FSM is not a signatory to any convention on transparency in international investment. Multinational enterprises and applications for Foreign Investment Permits are subject to the approval of the National and/or State Review Board. The FSM Government is striving for transparency in its handling of investment applications, and the FSM tax system is transparent. The FSM National Foreign Investment Law and Regulations were amended in 2005 to improve transparency of the foreign investment permit system at the national level. However, practices are sometimes based more on personalities than on the law. At least one regulatory body has revisited its previous decisions or re-raised old objections to investment proposals, thus stopping projects already underway. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations are not enforced. It is sometimes difficult to obtain public records, as there are no Freedom of Information or Sunshine Laws in the FSM or its states. In addition, government audits and statistical reports are not prepared rapidly; current data are often not available. Efficient Capital Markets and Portfolio Investment Return to top The Bank of Guam (a U.S. bank) and the Bank of the FSM (an FDIC-insured Micronesian majority bank that recently opened a branch in Hawaii) are the only full-service financial institutions presently operating in the FSM. There is no stock or commodities exchange. Little credit is available locally. Banks make very few local loans because of the difficulties inherent in collecting debts and obtaining collateral that could be attached and sold in the event of default. Even automobile loans are limited due to peculiarities of the law. As a result, banks move most deposits to U.S. financial markets. As of December 31, 2006, the total assets of the Bank of the FSM were $77,683,270 and the total assets of the Bank of Guam were $784,489,000. The clearing time for checks from banks outside the FSM is usually 30 days. Both banks are considered sound. Because most businesses are family owned, there are no shares that could be acquired for mergers, acquisitions, or hostile takeovers. A secured transaction law was signed by the FSM President in November 2005. Political Violence Return to top The Federated States of Micronesia enjoys a stable, democratic form of government. Under the bilateral Amended Compact of Free Association, the U.S. Government guarantees its external security. There is no recent history of political violence. Corruption Return to top The FSM has laws prohibiting corruption, and there are penalties for corrupt acts. The FSM Department of Justice has been the entity most active in anti-corruption activities. A number of senior ex-FSM Government officials have been convicted of corruption, usually involving procurement fraud. Bribery is punishable by imprisonment for not more than ten years and disqualification from holding any position in the FSM Government. The FSM has not signed or ratified the UN Convention on Corruption. Given that many FSM Government officials also own businesses, there exists significant potential for conflicts of interest. One local NGO, Micronesian Seminar, has prepared an effective anti-corruption video that has received wide play. Transparency International’s 2006 study of the FSM notes a widespread perception that public funds are being misappropriated. Bilateral Investment Agreements Return to top No Bilateral Investment Agreement exists between the United States and the FSM. The Amended Compact of Free Association between the two nations is the only applicable guidance. Article IV (Immigration), Section 142(a) allows U.S. citizens and nationals to “be admitted, to lawfully engage in occupations, and to reside in the Federated States of Micronesia.” Section 142(b) guarantees FSM treatment of U.S. citizens and nationals no less favorable than that of citizens of other countries. Section 142(c) requires the FSM to adopt “immigration related procedures” for U.S. citizens or nationals “seeking to engage in employment or invest in the Federated States of Micronesia …no less favorable than those adopted by the Government of the United States with respect to the citizens of the Federated States of Micronesia seeking employment in the United States.” OPIC and Other Investment Insurance Programs Return to top OPIC investment coverage extends to projects in the FSM. Information concerning applying for OPIC assistance can be found at: www.opic.gov. Since the FSM uses the U.S. dollar as its currency, there are no currency exchange issues. Labor Return to top With a high percentage of the FSM’s 108,000 citizens either under age 18 or involved in subsistence agriculture and/or fishing, the labor force is only approximately 16,500, according to the Annual 2006 FSM Statistical Bulletin. Pohnpei has a minimum hourly wage rate of $2.00 for government and $1.35 for private-sector workers. The other three states have established minimum hourly rates only for government workers: $1.25 for Chuuk, $1.49 for Kosrae, and $1.60 for Yap. The minimum hourly wage for employment with the national government is $2.64. The minimum wage is enforced through the tax system, and this mechanism is believed to be effective. There are no laws regulating hours of work (although a 40 hour work week is standard practice) or prescribing standards of occupational safety and health. A federal regulation requires that employers provide a safe workplace. The Department of Health has no enforcement capability, and working conditions vary in practice. There is no law for either the public or private sector that permits workers to remove themselves from dangerous work situations without jeopardy to their continued employment. According to the 2006 FSM Statistical Bulletin, 54% of the labor force was employed in the public sector. Actual unemployment is hard to measure because many people work irregularly in traditional subsistence farming and/or fishing. The number of persons with higher-level technical skills is limited. New commercial projects may require training programs to develop needed employee skills. Many semi-skilled and professional tasks – construction, accounting, medicine – are often performed by Filipino expatriates. Foreign Trade Zones / Free Trade Zones / Free Ports Return to top There are no Foreign Trade Zones, Free Trade Zones, or Free Ports in the FSM. Foreign Direct Investment Statistics Return to top Statistics on Foreign Direct Investment are not available. Web Resources Return to top FSM Visitors Board - Welcome to the FSM Joint Committee on Compact Economic Negotiations (JCN) Office of the President: Public Information FSM Legal Information System (LIS) Micronesia and the South Pacific Program (U. Oregon) |
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