Karl Waldeback on Vanuatu’s struggling economy and debts to China, how to attract tourists, and why Australia is about to wreck this country with Income Tax
Karl Waldeback is the only in Vanuatu Nobel Peace Prize laureate. He received the Nobel Peace Prize in 1988, shared with thousands of United Nations peacekeepers.
Karl Waldeback, Swedish consul in Vanuatu, entrepreneur and the Director of six corporations, commercial pilot and Nobel Peace Prize laureate, in this exclusive interview for Vila Times, talks about the future of Vanuatu’s economy, potential growth in tourism, why Income Tax will wreck the country, and what we should do to bring money and investors in Vanuatu.
‘Tourism in Vanuatu will never grow significantly’
– Hi Karl. You are the founder of Treetops Lodge and a number of other tourism businesses in Vanuatu. What you can say generally about the tourism business here, do you expect a significant growth anytime soon?
I don’t think it will ever grow significantly. It will slowly grow. And the lack of fast growth doesn’t have anything to do with finance, economy and all that. It’s the special governance required of a small isolated nation, and it seems they don’t understand that.
The sad thing is – it seems like they don’t really want to understand.
They don’t know – which is natural for a new nation – and they jump to conclusions. And if those conclusions are comforting, supported by friends in the way that they run things, it becomes the only way they know. Most Ni-Vans don’t know they don’t know, which is very important. If you realize your limitations you can seek new knowledge, but they think bloody expats are just ripping them off. A lot of people in government don’t trust foreigners.
I am saying this as a general thing. Individually it’s completely different. Individually we have very beautiful people here, some of them are the nicest people in the whole world.
‘People who come here to invest, they want this country to develop. People in the government don’t really care about development or they don’t understand it’
– It is always like that, isn’t it?
No, it’s not always like that. It is more so here, because of lack of pressure on the population here. We are talking about availability of good land in comparison to the population. Vanuatu in the past supported more than one million people and probably several times that in pigs. The heritage from the condominium necessitated tolerance between the governing sides and the very diverse cultures of Vanuatu, the largest number of languages per capita in the world. In the past the pressure on land caused tribal warfare. Then together with a lot of the population dying out by introduced new diseases came Bislama and tolerance for others in a special way. The bad had in the end something good to bring.
The problem here is that people who come to invest, they want to see the country develop. The government in charge these days, they either don’t really care about development or they don’t understand it. Third world politics is all too often like that: as long as those in power have everything for a good life, all their friends are looked after, and they don’t have to do too much work as in pacify complaints from the masses, they are usually content.
They are not actually thinking so much about themselves, but more about their wantoks, their larger family, and their community. They don’t understand that much about national development.
And this is not surprising. This is how it should be, because it is such a young country. When Vanuatu gained Independence in 1980 there were seven tertiary educated Ni-Vanuatu in the government. Now the ranks of those higher educated local person have swollen to large numbers but they mostly attend Universities that are not the best, and the practical learning after graduation is lacking. There are exceptions, but few, and when they are back they have an uphill battle to convince others.
‘Little Vanuatu should in a few years be in a very comfortable situation. Unless the income tax comes’
But you asked about tourism. Vanuatu still has good prospects, and will keep on growing as before slowly, which is good. Most importantly management skills for tourism businesses – or any business – are poor. This all takes time to overcome so a slow steady growth is the way to go. No boom and bust. I think, little Vanuatu should in a few years be in a very comfortable situation. Unless the income tax comes.
‘The international Finance Centre in Vanuatu was created by the British who understood that the offshore finance centre was necessary’
– Vanuatu as an offshore financial center and the recent predictions of the ‘end of Vanuatu’s tax haven’. What you think?
Apart from the minute speck of Australian Norfolk Island, Vanuatu was the first tax haven in the Pacific, but of course the concept wasn’t invented by Vanuatu, which goes back as far as taxes itself, back to the ancient Greeks.
It was the British who introduced the International Finance Centre to Vanuatu during the early 1970’s. They didn’t do it lightly, rather examined all possibilities for the New Hebrides to be able to stand on its own legs as Vanuatu. The British civil servants were at this time very good at what they did – after all they had been administering their colonies and territories since the 16th century; they had learned a lot.
But they wanted out, the condominium was of not strategic value and it was the time to get rid of colonies. They were sincere in their desire to make Vanuatu viable, not wanting to have to support it financially after independence.
The problem was that the island nation did not have any internationally desired resources of any size to justify investment. There were no industry, no manufacturing, no mining prospects, no natural resources of any viable size, not fisheries and no prospect to develop it, no forestry after the remnants of extensive slash-and-burn cultivation all over and cyclone damage to natural stands, no feasible export food production prospects at all, no export agriculture apart from niche beef production and copra, and on top of all that it was far away from developed countries, freight in small quantities very expensive. Tourism was established but was small with a lot of international competition. It was developing slowly but without much of an infrastructure. Add to that an untrained workforce without much education or commercial experience and absolutely no useful commercial management skills.
The international Finance Centre in Vanuatu was created by the British who understood that the offshore finance centre was necessary. Vanuatu had nothing else to offer internationally and the time was right. Economists, accountants, lawyers and other skilled and experienced people discovered a small country which welcomed their expertise. They came from Asia, Australia, America, France and other larger countries. The condominium administration received them well.
The person who was the Finance Minister for the first eight years, Kalpokor Kalpokas, served two full government terms, and he understood the importance of the concept. He had been well trained by the British who had included in the education of their people sending them to other British overseas places to learn the ropes. The Finance Centre took off and tourism was growing nicely at a moderate pace.
‘The Government lacks support or even a basic understanding of the International Finance Centre’
During the early 1980’s the Minister of finance met with his regional peers in a conference of recently independent island nations. He was struck by the financial problems everyone seemed to suffer. They didn’t know how to make a budget work, how to pay for things, there was just not enough money. Mr. Kalpokas has told me what he said: “I have sympathy for you all, and I’m embarrassed to say Vanuatu does not have those problems. Our coffers are overflowing with money – we don’t know what to do with it all, we are swimming in money.” The strategy, as introduced by the British, had worked.
“That was a long time ago, and things are different now” I hear someone say. Yes, we are in quite different times, but the fundamentals have not changed for Vanuatu. What has changed since the beginning of this century is that the governments have borrowed a lot of money to pay for development such as wharfs, foreshore improvement, roads and increased pay to civil servants and politicians. This all is to be paid for by the next generations. And it could all be paid for by the Finance Centre.
‘Australian ATO, a notorious tax organization, has been listened to. Advises have been given by those who have no experience of the problems facing small, isolated nations such as Vanuatu’
What has also changed is the government’s lack of support or even a basic understanding of the International Finance Centre. While other such centres in the world are doing very well, showing healthy growth every year, the finance centre in Vanuatu have been shrinking under increased pressure. All so called “tax havens” have been facing a lot of pressure to come clean, and the successful ones have done just that, made sure that everything is done according to international rules and regulations as introduced by bodies such as FATCA, OECD, EU etc.
Non-compliance results in grey or even black listing, where a black list will result in bank closures, and a failed nation status.
Vanuatu has for years dragged its feet in coming up with new required laws and enabling legislation. When finally getting to understand the seriousness of the issues the law makers have tended to overreact in haste, introducing poorly drafted laws which at times are addressing the issue wrongly, going too far or even missing the point, hampering the industry. International finance law is not easy, but Vanuatu has in the international industry a number of very well educated and informed individuals with a lot of experience. They have not been consulted at all. Instead the Australian ATO, a notorious tax organization, has been listened to. The Australian advise have been given by those who have no experience of the problems facing small, isolated nations such as Vanuatu. We are back to the concept of not knowing what you don’t know, jumping to conclusions under false premises.
‘Australia doesn’t understand little undeveloped nations. They don’t know, and don’t want to know’
– So I guess this is something rather obvious and already established, but still – you think the income tax is something pushed through by Australia?
Absolutely. Very strongly, they try to sneak it in underneath the nose of the people who cannot know what it really is, don’t understand that the shops will have to add tax to the prices of goods. Without a certain profit margin the shop would go bankrupt.
Australia tie certain things to aid, for example the signing of that bloody ridiculous PACER Plus, just benefiting Australia and other big economies, they don’t understand little undeveloped nations. They are thinking in terms of their own economy, but it doesn’t work the same here. They don’t know, and don’t want to know.
It is very irresponsible by Australia and ATO to put financial pressure on Vanuatu to adopt a financial model for a very large, diverse and resourceful economy. These two countries are vastly, enormously different. To avoid setting the economy back 20 years real analysis and knowledge is required.
‘Australians don’t understand how much a largely unenforceable income tax will wreck this place’
– Let’s clarify another thing. What is their [Australia’s] main motive, main interest in doing what they are doing? Primarily, what they intent to achieve?
They want to close all the loopholes for Australians to get money hidden overseas. But there are more than fifty other tax havens in the world, they have no influence there. They don’t want people anywhere in the world to be without identification. They want to have total control of the economy, forgetting that it is a free world. If an Australian invests his tax paid legal money overseas that is a right. Most developed countries offer legal tax breaks for investment – why should that be a taboo for Vanuatu?
But they are thinking in purely Australian terms. They don’t understand how much a largely unenforceable income tax will wreck this place. I’m not talking about the average Australian, many of who are friends of Vanuatu. No, this is about uninformed and uncaring civil servants especially at the Australian Tax Office.
‘The Government here can not even handle very-very simple VAT. How they will handle the income tax? It’s going to be a total mess’
– So at this point, it looks like it will go through or not?
It could. I don’t know, it’s maybe fifty-fifty. The Prime Minister himself for some reason is committed to income tax. The people in his circle just believe what Australians tell them. And Australians tell them how good it works in Australia. That’s all they know. And they give examples how wonderful it works for them. They don’t know, and don’t want to learn how finances and international economics work in Vanuatu where few have a taxable income.
The Government here can not even handle very-very simple VAT. And if you compare that to the income tax system, it is at least 10 times more complicated. It is a tremendous jungle of paragraphs, with all kinds of accounting requirement, allowances, and different ways of handling investments, amortisations and write-offs and so on and on. And if they can’t handle VAT, how they will handle the income tax? It’s going to be a total mess, people who have money, they will find ways not to pay tax. And the ones from outside, who were thinking of investing overseas, they will cross Vanuatu off the list.
‘What used to be a brilliant source of income for Vanuatu has for the last 15-or-so years been severely marginalized’
– Going back to the Vanuatu’s Finance Centre. You still think this is the answer for Vanuatu, today?
Yes. What used to be a brilliant source of income for Vanuatu has for the last 15-or-so years been severely marginalized while a few other international finance centres have charged ahead, behaved themselves legally and are not on any grey or black list. They are utilizing their own internal private sector expertise, and most importantly they are supported by their governments. In many of these cases there are no need for any income tax, those national economies are well off.
Australia well ahead of others is pushing hard for income tax in Vanuatu, and what has been talked about and drafted is a tax for worldwide income of individuals and companies. The country is in desperate need of investments to develop, investments that will not set their children up with a huge unpayable debt. Remember, the fundamentals of Vanuatu has not changed. There are still no national resources, industry, manufacturing, minerals, fisheries, forestry and no export agriculture of any size, and the labour situation has only improved a little. We are still far away from markets with very expensive freight to kill many good export ideas. Tourism has grown slowly, will continue to do so and cannot support everything.
The Vanuatu international finance centre has the know-how to become one of the most legal and best managed in the world. Allowing the private sector to manage this difficult operation will result in rapid growth which translates to substantial income for the government, and income source that costs nothing to the country, but trains local people to be good accountants and money managers. With a reputation as one of the best managed, government supported international finance centres investment for all kinds of things will flow in and there will be lots of new good job opportunities for the countries youth.
A successful example of a poor new country becoming rich is the USA. When it was poor like Vanuatu there was no income tax. Only after it had allowed the economy to prosper did they introduce income tax.
This is much more important in a small fragile place without its own resources. If you take away the reason for investors to come, or retirees to settle here, what is then left?
‘Give it a couple years to rebuild the industry and regulations, and money will start flowing in’
– Ok, so if you would be the Government, what would you do now?
It is time for the government to approach the international finance centre that has an organisation named Finance Centre Association of Vanuatu (FCAV), to say: “Alright guys, we haven’t talked to you seriously – sorry for that. Let’s sit down and see what we can do.” Give it a couple years to rebuild the industry, cooperate by jointly working on the relevant laws and regulations, and money will start flowing in.
What we have is an unfortunate situation, but it is understandable, because in this case the government decision and lawmakers don’t get it. It is not easy also for me and I have a degree majoring in Economics. Vanuatu is young and it takes a long time to catch up. The relevant education doesn’t just come from the schooling, the practical experience of how it works is most important. To be able to understand the modern world easily takes generations with the reinforcement of learning from skilled educations, parents and peers.
‘People in tourism may say that’s because of the airport we don’t have tourists. That is rubbish’
– Businesses here, when they complain about the [possible] income tax, Government, and all that, they say “We will move elsewhere in the Pacific, to Fiji, or Samoa.” Are those places today much better, in terms of business climate, investments etc?
It depends what businesses we are talking about. There is an income tax in Fiji. But it’s not very much. At least in Fiji they have a lot more efficiency, a lot more rational government. I know of one industry, a very big offshore industry, I’m not going to say which one, which is talking about moving there.
– We have started the conversation talking about the tourism industry and its possible growth. You think Port Vila’s airport rehabilitation project will help a lot?
People in tourism may say that’s because of the airport we don’t have tourists. This is rubbish. There has been disturbance to flights due to the runway condition, but that has been relatively minor.
I don’t think the runway is the main reason. I am commercial pilot myself. I think the airlines that have left took the opportunity to cancel the routs, because they didn’t have enough passengers on the seats, didn’t make enough money. You just can’t say to the public “Sorry, we don’t fly there anymore because we are not making enough money.” So they explained and blamed the withdrawal with poor runway state.
‘It is the old story – poorly educated, poorly motivated, poorly experienced ni-Vanuatu suddenly becoming the boss.’
But the airports in Vanuatu has been run poorly. It is the old story – poorly educated, poorly motivated, poorly experienced ni-Vanuatu suddenly becoming the boss. I think last year they have some more experienced people involved. Particularly one guy from the Finance Centre in a senior position. So I think it is going better but it is not easy with a lot of forces pulling all kinds of ways.
– A lot of people have really high expectations and hopes tied to the Bauerfield project, it seems..
It will help. It has always been like that, a bottleneck is fixed and slow growth starts up again, but not rapid. Not a big substantial growth during a short time. Slow growth is healthy, because a rapid growth means a bubble and worst. We could not handle sustainable growth, we do need slow steady growth teamed with tremendous amount of learning, all the way through, including attractions. And that doesn’t come quick. There are some very good people in the tourism industry here, they are just too few.
‘Why would people come here, what can you do that is special, that is exciting, that people going to talk about when they go back?’
– But what supposed to bring people here (tourists)? I mean, you still need some competitive advantages, and here prices are too high, infrastructure is poor, attractions – none. And so on.
You ask the right question. When I was in tourism, and I have built six mini resorts around the outer islands, and that’s what I emphasised the most. I got local people to think about it. Why would people come here, what can you do that is special, that is exciting, that people going to talk about when they go back? There should be development of those special attractions and clarity as to what are the reasons for visitor to come. They do have diverse, nice, laid back cultures on different islands. Some have fantastic waterfalls or caves, and they have few volcanoes. They have small areas of unspoiled forest and a fantastic ocean with exciting marine life and so on. Visitors are not going to come just because they are nice hosts. Again it is about learning.
‘Maybe we can expect some more Chinese tourists coming. Unless some stupid people push certain stupid buttons’
– Some people say the main opportunity to develop tourism around here is to focus on the “elite” VIP segment
I think they are right calling it “niche” tourism, because most people don’t want to come here. So they have to find those few who want to come here. It’s a couple of niches. Could be some people interested in game fishing, or whatever it is. Few niches that we have to focus on.
They are talking a lot about tourists from China. What Vanuatu has to offer China that other places hasn’t? Maybe we can expect some more Chinese tourists coming. That would be fine. Unless some stupid people push certain stupid buttons or whatever.
But I can’t see a boom. If it’s a boom, it will be a bust. I can’t see it. And it shouldn’t be a boom. It should be a slow, sustainable growth.
‘What local people got from the Games, is this “can do” attitude. That is what they need’
– Vanuatu has just finished the Pacific Mini Games. Do you think the country will benefit from this considerably big regional event? Cause it seems the Government doesn’t have any clue how to get any benefit out of it.
Yes. That was good. It was not done badly. A lot of money they spent came from the organisation itself, and they had a lot of donors, so I don’t think Vanuatu Government paid that much. What local people got from the Games, is this “can do” attitude. That is what they need, because they haven’t had much of that.
– The main argument is about the facilities, financed and built by China, if that makes any sense, economically.
They built these facilities in 1993, and they were still there. So now they tore them down and built it again. Instead of using the old ones and adding.
‘It’s not just the Games. They spend money like it’s no tomorrow. Government is getting Vanuatu in a big debt’
– And, as far as I understand, now there are considerable debts to pay, right?
Of course. It’s a long term thing, with most likely not a very high interest rate. Although China has been charging high interest rate for some things. Quite high. Now it is going in future. Something for the next generation to worry about. They don’t worry about it.
It’s not just the Games. It’s the mindset. What about all the other projects? They are really getting themselves in a big debt. And they increased salaries for MPs, and salaries for the civil servants. They spend money like it’s no tomorrow. And than they say “Ok, now we have no choice, now we must put an income tax”. They don’t realise that’s going to bring them less money!
But in the short term, the “can do” feeling, that’s at least positive.