February 03, 2010

By Bill Jaynes
The Kaselehlie Press

Peilapalap, Pohnpei, FSM- The Foreign Investment bill reviewed in the last issue of The Kaselehlie Press was not the bill that is currently being reviewed by the Pohnpei Legislature's Committee on Resources and Development. We were given the bill that Pohnpei's Governor John Ehsa transmitted for consideration over a year ago. Since that time the bill has undergone some signify cant changes as most bills do as they are considered by lawmakers.

The bill as it currently stands is under review by the Committee on R&D chaired by Senator Peter M. Lohn and will likely face even more changes before L.B. No. 56-08 goes to the Legislature for a second reading. The copy of the bill that we have is L.D. 1. There will likely be at least an L.D. 2, meaning that there will likely be further changes before the bill is removed from the committee and goes to the legislature for its second reading.

The legislature received input from Pohnpei citizens including business owners and the Committee on R&D took the bill back to committee for further consideration, more public hearings, and possible refinement.

There have been rumors and stirrings amongst Pohnpei constituents that the motivation behind the proposed bill was to deal with the concerns of the Joint Economic Management Committee regarding Pohnpei's current investment climate as a result of the law passed three years ago. JEMCO did not appropriate any Compact of Free Association funds for Private Sector Development in Pohnpei.

FSM's business climate has been rated by some international organizations as being poor in the extreme. A World Bank survey undertaken within the last two years that ranked island nations on a scale based on the ease of doing business ranked the FSM as being tied for dead last with Timor Leste. To be sure, the World Bank survey did not evaluate only Pohnpei's Foreign Investment law. Pohnpei is only one state in the FSM. The World Bank also considered other factors like communications capabilities, and the average amount of time it takes to get a collection proceeding through the court system, amongst other considerations.

Long discussions have taken place wherever Pohnpeians gather, including on the Micronesian Seminar Forum, a public Internet bulletin board, debating whether or not JEMCO and the United States Government have overstepped their bounds in terms of Pohnpei's sovereignty. Some MicSem posters have said that they would like to see the Foreign Investment law remain exactly as it is as a matter of showing Pohnpei's self determination. Others say that it's time to move beyond the practice of protectionism so that consumers and the Pohnpei's economy can benefi t.

Pohnpei's R&D committee, in its standing committee report on the current incarnation of the Foreign Investment Bill did not mention the issue of JEMCO's concerns.

The committee changed the opening Section of Chapter 7 of Title 37 of the Pohnpei Code relating to Foreign Investment to read as follows:

"The Legislature finds that a positive, healthy and vibrant climate for investment in this state is essential for the economic development of Pohnpei. It is with these thoughts in mind that a new chapter on foreign investment is being enacted into law. The intent and purpose of this new law is to strengthen Pohnpei's economy with dynamic, balanced and fair minded policies on investment and to enhance the government's abilities to encourage, promote and guide investment along productive lines that are urgently needed for the successful development of this state."

While 56-08 L.D. 1 does incorporate some elements of the Governor's original bill, there are some substantial changes.

The committee report says that the proposed law brings forward from the existing law the provision on who is required to obtain a permit with a few changes. The current requirement for large stockholders of permitted businesses to obtain duplicate permits in their own names is deleted. This, they said, was to make the law more consistent with the National Foreign Investment Permit law and an FSM Supreme Court ruling that requires businesses to acquire a business permit and rules out the requirement for personal permits in the national Foreign Investment Permit (FIP) law.

The Governor's bill designated that the Office of Economic Affairs should be the authority to handle the issuance of Foreign Investment Permits. The R&D committee report noted that the 2006 amendments on Foreign Investment sought to distance that office from the permitting process reasoning that the Office of Economic Affairs should be a facilitator and advocate for business development.

The current R&D report agrees with the 2006 reasoning that the foreign investment permitting process has more of a regulatory function and is not quite compatible with the promotional activities to be exercised by an office dedicated to business advocacy. Since many of the new companies who might be applying for a FIP would likely need to be in contact with the Registrar of Corporations, they say, combining the two functions in one bureau which is already functioning out of the Attorney General's Office makes for more of a one stop permitting approach to forming new businesses.

The Committee also expressed concern that under the Governor's proposed law, one man would be charged with making decisions regarding Foreign Investments both in situations where the issuance of a permit is clear and in cases where issuance of a permit would effectively define policy. They said that those responsibilities should not be left up to one man to decide alone.

Just like the Governor's earlier bill, the proposed law would eliminate the Foreign Investment Board entirely. The bill allows for the folding in of qualified Foreign Investment Board employees into the Attorney Generals office.

The bill would additionally establish a new Discretionary Review Panel on Foreign Investment Permits (DRP-FIP) consisting of the Attorney General, the Director of the Department of Land and Natural Resources, the Administrator of the Office of Transportation and Infrastructure, the Executive Director of the Environmental Protection Agency, and the Administrator of the Office of Economic Affairs. If, however, the DRP-FIP is considering a Foreign Investment Permit for commercial fisheries or aquaculture, the Administrator of Fisheries and Aquaculture would replace the Administrator of the Office of Transportation and Infrastructure on the DRP-FIP.

The proposed law would establish four separate classes of applications for permits:

1. Open Category (Green List) which would be a general grant of authority to do business with no special conditions which can be applied. Permits in this category would be issued by the Registrar of Corporations. Conditions that would qualify a business to be issued a Green List permit include:

a. Preferred joint venture sector which would include new businesses having no more than 40% foreign ownership.

b. Initial capitalization sector which would require a minimum of $250,000 initial investment, or $50,000 for professional services (excluding businesses in the special investment sector)

c. Special investment sector is a sector that allows for a business to have initial capitalization as in (b) above and not more than 49% ownership held by non-citizens in the company for service industries, retail trade, mineral resources and timber resources.

2. Discretionary Category (Amber List) which would be business ventures that do not meet the citizenship equity or initial capitalization requirements but that might still be good for the economy of Pohnpei. The DRP-FIP would need to meet and come to a positive consensus on permits from the Amber List.

3. Prohibited Category (Red List) would be businesses in which foreign investors would not be allowed to participate in any way shape or form. The current incarnation of the Foreign Investment bill lists no business sectors in the bill at the current time but has reserved a place for future amendments to the bill which may add Red List ventures.

4. Temporary Category would be businesses in both the Green and Amber lists that could be issued three year permits by the Registrar of Corporations without the need of DRP-FIP concurrence. No temporary permits would be allowed for a business in a sector listed in the red list. The Registrar of Corporations could apply special conditions on reporting and other restrictions.

Durations of permits in each category are as follows:

5. Temporary permits would be set in the permit as reviewed by DRP-FIP with a three year maximum limit.

The Registrar of Corporations would initially categorize applications he or she receives. The DRP-FIP would be given oversight authority and the ability to modify the Registrar's initial classification. The full process of permit issuance must be completed within 60 days. The government's decision on a permit can be appealed by the applicant for judicial review within 60 days of the decision.

The duty of permit holders to report on an annual basis is carried forward from the existing law but the 90 day deadline has been reduced to 60 days to provide consistency with the national reporting system.

The proposed law allows for exemptions for U.S. citizens as reciprocity under the Compact of Free Association treaty as amended. The exemptions apply only to the extent that citizens of the FSM are accorded the same privileges of investing and doing business within the United States. The exemptions apply to U.S. citizens or U.S. citizens joined with Micronesian citizens. There is a $10 application fee for an exemption certificate for a U.S. citizen.

U.S. citizens are encouraged to obtain an "ordinary permit" which can have a maximum term of 55 years.

The Registrar of Corporations is charged with annually reviewing the applications and reporting to the Governor and the Pohnpei Legislature on the issuance of exemption certificates and the impact of the Compact exemptions on the economy of Pohnpei.

There is a new section defining the terms of a grace period for changed circumstances. The new section is designed for normal Micronesian-owned businesses that unexpectedly find themselves subject to the foreign investment law because of such outside factors as death of the business owner and inheritance of part of the business by a non-citizen spouse, son, or daughter. The grace period is set for one year.

Holders of permits issued under previous laws would be recognized as valid under the new law. Any modifications to the existing permits would be governed by the new law.