Solomon Islands WT/TPR/S/45
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II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
1. The Solomon Islands gained political independence from the United Kingdom in July 1978,
having been internally self-governing since January 1976.  It is a constitutional monarchy with the
British Sovereign, represented by a Governor-General, as Head of State.  The national Government is
elected every four years by universal adult suffrage;  it is headed by the Prime Minister, who appoints
the Cabinet.
(1) T HE INSTITUTIONAL FRAMEWORK
2. Legislative authority is vested in the single-chamber Parliament under the 1978 Constitution,
which provides for separate powers between the legislature, executive and the judiciary.  There are
47 Members of Parliament representing the same number of constituencies.  The Prime Minister is
elected by and from Members of Parliament.  Under the Constitution, independent Members of
Parliament must form an officially recognized group of independents.  A product of the political
system has been a large number of short-lived coalition governments.1
3. The Solomon Islands comprises nine provinces (the islands of Western, Isabel, Malaita,
Guadalcanal, Central, Honiara, Makira, Choiseul and Temotu), each including a three-mile sea zone.
Each province is governed by an elected provincial assembly.  A provincial executive, under theProvincial Secretary, is responsible for administering each province.  Provincial governments are
accountable to Parliament and the national Government, through the Minister of Provincial
Government and Rural Development, who may suspend a provincial government under certain
circumstances, including for financial mismanagement.
2  Provincial legislation, enacted by the
assemblies through ordinances, requires assent by the Minister.  Assents must be given unless matters
are seen by the Minister to conflict with national government policy or to be outside the assemblies
powers.
4. The current legislation lists "matters" on which provincial assemblies may legislate.  It also
specifies the powers (Schedule 4) and functions (Sch edule 5) of provincial governments.  Although
provinces have very limited taxation powers, they may pass ordinances in areas affecting trade-related
policies.  These include functions under the Cocoa Act, such as issuing and renewing export licences
as well as providing agricultural grants and subsidies, and protecting and maintaining both reef andfresh water fisheries.  By virtue of certain sectors of the Forest Act, they also subsume some
functional responsibilities over natural resources, including approval of timber agreements affecting
customary land and the control of forests for water conservation.  Moreover, services listed in
Schedule 6 that may be devolved to provincial governments include trade and industry, environment,
transport, health, forestry and tourism.
5. Provincial governments each operate a Provincial Fund, and rely heavily on specific and
general grants from the national Government.  Provincial executives have limited borrowing powers.
They can borrow from the national Government only for the purpose of providing a working balance
in the Provincial Fund, to finance devolved functions, or for purposes of recurrent expenditure.
6. The legal system of the Solomon Islands is based on English common law.  Below the Court
of Appeal are the High Court, which is concerned predominantly with constitutional matters;
                                                     
1The current Government, for example, consists of six political groups that together form the Solomon
Islands Alliance for Change.  These are the People’s Alliance Party, the Liberal Party, the United Party, theLabour Party, the National Party, and the Independents.
2Other circumstances include actions by provincial governments that prejudice national or public
interest.  No provincial government has been suspended.WT/TPR/S/45 Trade Policy Review
Page 20
magistrates courts;  and local courts, which mainly handle matters of customary law and land tenure.
Decisions are appealable to the customary land appeals courts.  A trade disputes panel also exists.
(2) STRUCTURE OF TRADE POLICY FORMULATION AND IMPLEMENTATION
7. The principal ministries responsible for international trade matters and other economic
policies are the Prime Minister’s Office; Foreign Affairs and Trade; Finance; Commerce,
Employment and Tourism; Agriculture and Fisheries;  Forests, Environment and Conservation; Mines
and Energy; and National Development Planning, which is responsible for development planning and
aid-coordination activities.  Domestic and international trade policy formulation is handled by the
Commerce Ministry, while the Ministry of Foreign Affairs and Trade directly deals with agencies
such as the WTO and UNCTAD, and with governments on regional and international trading
arrangements.
8. Responsibilities for trade in services also involve the Ministries of Transport, Works,
Aviation and Communication; Health and Medica l Services; and Education and Human Resources
Development.  Foreign investment approvals are handled by the Solomon Islands Foreign Investment
Board.  Major ministries, along with their key functions and responsible statutory authorities, are
summarized in Table II.1.
Table II.1
Main ministries responsible for trade-related policies
Ministry Major economic functions Relevant statutory authorities
Office of the Prime Minister Coordination of ministers; public service, policy and
structural reform programme; cabinet, national
parliamentBroadcasting Corporation
Ministry of Finance Budget; banking; treasury; loans and guarantees; audit;
statistics; price control; customs and excise; insurance;credit unions; inland revenue; macroeconomic policyCentral Bank; National Provident Fund;
Investment Corporation; DevelopmentBank; Credit Union League; Central
Tender Board
Ministry of Foreign Affairs and
TradeBilateral and multilateral relations; treaties and
conventions; international trade links; international tradepromotionNone
Ministry of Mines and Energy Mines and minerals; energy; water resources Electricity Authority
Ministry of Agriculture and
FisheriesResearch; livestock; quarantine; fisheries; agriculture;
farm development and management; aquaculture andland useLivestock Development Authority
Ministry of Transport, Works,
Aviation and CommunicationSmall marine fleet; water supply and sewerage; civil
aviation and airport services; telecommunications;
spectrum licensing; televisionWater Authority; Postal Corporation
Ministry of Forests,
Environment and ConservationForestry; research; licensing; timber marketing;
environmentNone
Ministry of Commerce,
Employment and TourismInvestment;  consumer affairs; business; industries;
tourism; trade relationsCommodities Export Marketing
Authority; Ports Authority; Visitors’
Bureau
Ministry of NationalDevelopment PlanningDevelopment planning and coordination; national
development plan; aid management; policy monitoring
and valuationNone
Ministry of Lands and Housing Customary lands None
Source: Government of Solomon Islands.
9. In the past, coordination of trade policies has been a problem:  without a formal policy
framework, it has been undertaken by the Commerce Ministry on an ad hoc  basis through
inter-departmental consultations.  This has often resulted in a less than coherent decision-makingSolomon Islands WT/TPR/S/45
Page 21
process, as different departments pursued separate policies.  The current Government is keen to
establish a more coordinated approach to trade and economic policy formulation and implementation.
10. The Central Bank plays a significant role in managing the country’s monetary and exchange
rate policies.  In principle, the Central Bank is independent from the Government.  However, the
responsible minister, the Minister of Finance, has statutory powers under the Central Bank Act to
issue policy directives to the Bank, after consultation with the Governor.  Final responsibility forsetting monetary and exchange rate policies therefore rests with the Government.  The Governor, who
is appointed by the Minister, may be removed by the Government in accordance with the procedures
contained in the Act.
3
11. As well as its supervisory functions over the financial system, the Central Bank plays an
important general advisory role to the Government on monetary and banking matters, and economicpolicy in general.  In recent years, the Bank had become an outspoken critic of the previous
Governments’ fiscal excesses, and repeatedly highlighted the dangers to the economy posed by the
continuation of such macrostabilization policies.
4  It is also the major source of economic statistics on
the Solomon Islands’ economy;  the Statistical Office in the Finance Ministry has very limited
resources.5  The Bank produces important regular public reports and commentaries on the state of the
economy, including annual reports, and quarterly reviews and updates.
12. Excise and trade taxes (import tariffs and export taxes) are set by the Ministry of Finance and
administered by the Department of Customs and Exci se.  Income and other direct taxes, such as the
sales and goods taxes, are the sole responsibility of the Ministry of Finance.  The Minister has
legislative powers to authorize exemptions, remissions and concessions on trade and excise taxes and
income taxes.  Price controls are administered by the Price Control Unit, also located in the Finance
Ministry.
13. The Solomon Islands has no independent statutor y body to review, or advise the Government
on, economic policies, including the provision of government assistance.  Most policy advice to the
Government comes from the Central Bank, or from international agencies, such as the IMF and the
Forum Secretariat.  The Trade Division of the Commerce Ministry undertakes regular reviews of trade
policies and devises long-term trade strategies.
14. The Government interacts with the private sector mainly through regular consultations with
the Chamber of Commerce.  They meet regularly to discuss trade as well as economic policy issues,
and the Chamber is represented on the Policy and Structural Reform Committee.  The Government
also has dialogue with private-sector participants on major policy issues, such as the negotiations that
led to the Solomon Islands' accession to the WTO.
                                                     
3The Government must demonstrate to a judicial tribunal that the Governor is guilty of serious
misconduct.  Central Bank Directors can only be replaced  during their five-year term for serious misbehaviour
or insanity.
4This has created at times a fair degree of tension between the Government and the Central Bank.
Indeed, the previous Government had indicated that it wa s prepared to take steps to limit the Bank’s autonomy
by changing the Act to enable easier removal of the Bank’s Governor and Directors.  However, these were never
implemented and are no longer under consideration.
5Official GDP and other national account data have not been produced for recent years, and there are
significant weaknesses in the quality of fiscal and balance-of-payments data.  The authorities are aware of thesedeficiencies and intend to devote more resources to compilation of key statistics.  These deficiencies should beborne in mind when referring to the statistics used in this report.WT/TPR/S/45 Trade Policy Review
Page 22
(3) IMPLEMENTING THE STRUCTURAL REFORM PROGRAM
15. The Government has implemented an organizational structure to support its Policy and
Structural Reform Program (PSRP).  The key ministries responsible for the formulation and
implementation of the PSRP are National Development Planning, the Prime Minister’s Office and
Finance.  The Central Bank also plays an important role.  Although trade policy reforms feature as an
important component of the Government's PSRP, neither the Ministry of Commerce, Employment
and Tourism, nor the Ministry of Foreign Affairs and Trade appear to play a major direct role in the
policy reform formulation and implementation process.  The structure of the PSRP is summarized in
Chart II.1.
Chart II.1
Structure of comprehensive reform programme
Macro
EconomicMicro
EconomicStructural Adjustment
ProgrammeEconomic Reform
Commercialization &
Strategic Management
Approach to
Public ServiceState Owned
Enterprises
(SOEs)Enabling
LegislationInstitutional FrameworkPublic Sector ReformMedium Term Development Strategy (MTDS)
(1999-2003)Comprehensive Reform Programme (CRP)
Source : Government of Solomon Islands, Policy and Structural Reform Programme , October, 1997.
16. The organizational structure organizational struct ure of the PSRP is shown in Chart II.2.  The
Policy and Structural Reform Committee, a cabinet sub-committee chaired by the Prime Minister or
his deputy, is responsible for reviewing policy reforms before they are considered for Cabinet
approval (Box II.1).  It is supported by the Policy and Structural Reform Unit located in the Prime
Minister’s Office.  A Ministerial Task Force, comprising the Prime Minister's Office and theMinistries of Finance and National Development Pla nning, as well as the Central Bank, works closely
with the Unit to coordinate the whole programme .  It reviews and directs the PSRP formulation
process to ensure that the proposed policy reform measures meet the Government’s objectives.Solomon Islands WT/TPR/S/45
Page 23
Chart II.2
Management structure of PSRP
Source :   Government of the Solomon Islands, Policy and Structural Reform Programme , October, 1997.NDPCCCabinet
Policy & Structural Reform Committee
(PSRC)
Policy & Structural Reform Unit
(PSRU)
Technical secretariat
Task Force 1 Task Force 2
 Box II.1:  The Policy and Structural Reform Committee (PSRC)
 
 The PSRC was established in the Office of the Prime Minister, in November 1997, to oversee the formulation,
design and implementation of the Policy and Structural Reform Program.  It is supported by the Policy and
Structural Reform Unit, which operates as a technical secretariat.  Chaired by the Prime Minister, the PSRC
comprises the Ministers of Finance (deputy chairman), Commerce, Employment and Tourism, and National
Planning and Development, as well as th e Governor of the Central Bank.  The private sector is represented by
the Chairman of the Chamber of Commerce.  Its main roles are to:
 - ensure economic restructuring towards sustainable economic growth;
 - streamline the public service to make it more efficient, effective and responsive to public
needs;
 - increase public-sector accountability and transparency;
 - improve commercial performance and profit ability of public enterprises;  and
 - strengthen private-sector growth in collaboration with the Chamber of Commerce.
 The planning and research stages are expected to ta ke about six to seven m onths.  Implementation of
government decisions are expected to start from mid-1998.  Planning of wider policy and structural changes,
coordinated by the Planning ministry and the PSRC, will be formulated  in a comprehensive medium-term plan.
17. Two task forces were established by the Government to examine areas of reform (Box II.2).
Task Force 1 is concerned with economic reform, including macroeconomic stabilization policiesaimed at achieving external and internal financial balance as well as microeconomic reforms for
enhancing productivity and competitiveness.  According to the Government’s policy statements,
macroeconomic reforms in key monetary and fiscal policies (including such areas as balance ofWT/TPR/S/45 Trade Policy Review
Page 24
payments, exchange rates, multilateral trade and government budgetary and borrowing requirements)
are to be implemented by the Ministry of Finance and the Central Bank.
Box II.2:  Ministerial task forces 1 and 2
Task Force 1 (TF1) is chaired by the Permanent Secretary of the Ministry of Finance, and includes
representatives from the Central Bank (the secretar iat) and the Ministries of  National Devel opment Planning,
and Finance.  Task Force 2 (TF2) is chaired by the Permanent Secretary of the Public Service, and includes
representatives of the Finance and Planning Ministries.
Several policy statements produced by TF1 in Novem ber 1997, mainly on public finances, were approved by
the PSRC and submitted to Parliament.  These set the future path the Government intends to follow.  TF1 also
reviewed the Government’s revenue performance and conc luded that revenue losses, as a consequence of lack
of tax compliance and enfo rcement as well as from exemptions an d remissions, represented some 40-60% of
potential revenues.
As a result of the work of TF2, the Government has approved a number of projects aimed at improving the
public service.  These include reviews of services to be provided by individual ministries;  service standards,
size and structure; management, a ccountability and performance; pay and conditions; training and skill
development; and laws and regulations.  These are expected  to be completed by June 1998 and will provide
the basis for a comprehensive reform of the public service .
18. Microeconomic reforms covered by Task Force 1 involve sectoral and general trade and
investment, including tax and tariff  policies.  Key issues are the enhancement of transparency of
investment policies, the acceleration of tariff reductions for goods traded among Forum island
countries (FICs) and in specified sectors yet to be determined, and duty remissions.
19. Task Force 2 is responsible for public-sector reform.  Its role is to examine ways of improving
the budgetary process by introducing greater accountability and transparency into government
decision-making.  The functions of core ministries are to be examined, along with the Medium Term
Development Plan (1999-2003), which is being formul ated by the Ministry of National Development
Planning to serve as the blueprint for the PSRP.  This will be coordinated by the National Planningand Consultative Committee which comprises representatives from the core ministries, private sector,
and women’s groups.  An outline of the Plan was released in April 1998;  it aims to strike a balance
between growth and fair distribution.  Listed as the key areas of reform are public finances, the public
service, state-owned enterprises, private sector development (domestic and foreign investment) and
macroeconomic policies.
(4) P
OLICY OBJECTIVES
20. The Government’s guiding principle in economic reform is to promote private-sector-led
development by redirecting resources away from the public sector.  An integral part of this is the
PSRP, which seeks to improve the efficiency of public sector provision of services and cut its size.
Monetary and fiscal policies are to be harnessed to achieve low inflation and interest rates, an
increasing employment rate, a stable exchange rate and a reduced balance-of-payments deficit.  The
Government intends to regenerate the securities market by promptly settling all outstanding securitiesdebts.
21. The Government believes that there is a need to reform tariff and tax structures, including the
granting of duty remissions.  With this in mind, it is undertaking a comprehensive review of the tax
system, with a view to broadening its base and to reduce tax rates, focusing in particular on tax and
duty exemptions, remissions and concessions (Chapter III).Solomon Islands WT/TPR/S/45
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22. The authorities regard private investment, both domestic and foreign, as an important catalyst
for growth.  Therefore, the Government is keen to remove administrative obstacles to investment, to
improve the transparency of investment policies, and to create an atmosphere designed to restore
business confidence.
23. A major objective of the Government’s reform programme is to implement sustainable
management policies over its key natural resources, such as forests, marine, mineral and agriculturalcommodities.  Economic self-reliance is to be achieved through  implementation of policies aimed at
promoting sustainable development.  Implementing effective control over the exploitation of such
resources, by curtailing the issuance of licences, is seen as an important priority.
24. Government policy is no longer geared towards import substitution strategies.  This approach
dominated economic policies from independence until the late 1980s and early 1990s.  According toauthorities, since then there has been a progressive move by successive governments towards
export-oriented policies, and this is the main trade policy objective of the present Government. The
major objectives of trade policy are to develop an open, outward-looking and export-oriented
economy that generates rapid rates of growth and higher living standards.
25. A national policy exists to encourage export-related investment.  A range of income and other
tax concessions are available under the Foreign Investment Act as investment incentives.
(5) L
AWS AND REGULATIONS
26. International trade matters are generally the responsibility of the national Government.  Laws
are enacted by Parliament and become operative after receiving assent from the Governor-General.  In
addition, relevant ministers issue enabling regulations:  regulations may in some cases also approved
by Parliament.  Trade and related agreements with foreign countries are the responsibility of the
Prime Minister’s Office, the Ministry of Foreign Affairs and Trade, and the Ministry of Commerce,Employment and Tourism.
27. The main laws governing merchandise trade in the Solomon Islands are the Customs and
Excise Act 1978, the Agricultural Quarantine Act 1982, and the Agricultural Quarantine Order 1986.
Other relevant legislation includes the Price Control Act, the Income Tax Act, the Goods Tax Act and
the Sales Tax Act.  There are also a number of sector-specific Acts, such as the Fisheries Act 1972,the Forest Resources and Timber Utilisation Act 1969 and the Mines and Mineral Act 1990.  Foreign
investment is subject to the Investment Act 1990 and Investment Regulations 1996.
28. Financial services are governed mainly by the Central Bank Act 1976, the Banking Act 1996,
and the Insurance Act 1985.  Other legislation covering services are the Postal Corporation Act 1996,
the Tourist Authority Act 1996 and the Television Act 1995.
29. The Government intends to review and revise a substantial number of laws affecting
trade-related policies in its initial four-year term (Table II.2).  It also plans to introduce legislation in
new areas, such as for cereals and timber marketing.WT/TPR/S/45 Trade Policy Review
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Table II.2
Legislative reform programme affecting trade-related policies
Ministry Legislation to be reviewed or amended within first 4-year term
Office of Prime Minister Public Service Act 1988
Ministry of Lands and Housing Customary Land Records Act;  Land and Titles Act
Ministry of Finance Central Bank Act;  Development Bank Act;  National Provident Fund
Act;  Public Finance and Audit Act;  Insurance Act;  Income Tax Act;
Goods Tax Act;  Sales Tax Act;  Customs and Excise Act; Price ControlAct;  Foreign Exchange Act; Banking Act;  Government Loan andSecurities Act;  Credit Union Act
Ministry of Agriculture and Fisheries Livestock and Development Authority Act;  Fisheries Act
Ministry of Mines and Energy Mines and Minerals Act;  Electricity Act;  Rivers and Waters Act
Ministry of Forests,  Environment and Conservation Forest Resources and Timber Utilization Act
Ministry of Commerce,  Employment and Tourism Investment Act
Source: Government of Solomon Islands.
(6) TRADE AGREEMENTS AND ARRANGEMENTS
(i) Multilateral agreements
30. With minor exceptions, the Solomon Islands accords MFN treatment to all trading partners.
It accepted the WTO Agreement in June 1996 and became a Member of the World TradeOrganization on 26 July 1996.  It was previously a de facto GATT contracting party since
independence in 1978, because of its past protectorate status with the United Kingdom.  As it became
a GATT contracting party on 28 December 1994, before the 1995 deadline expired, it is deemed an
original Member of the WTO under Article XI of the Marrakesh Agreement.  In December 1995, it
was granted observer status until 31 December 1996, pending formal acceptance of the WTOAgreement.
6  The Solomon Islands is not a signatory to any of the WTO Plurilateral Trade
Agreements.
31. The Solomon Islands bound its entire tariff under the Uruguay Round at ceiling rates
generally well above existing applied rates, mainly at a rate of 80%.  The Solomon Islands’ sector-
specific commitments under the General Agreement on Trade in Services (GATS) on market accessand national treatment cover a limited number of services.  These are professional legal, accounting,
architectural and engineering services; general construction work for buildings and for civil
engineering services;  insurance and banking;  and tourism and travel-related services provided by
hotels and restaurants.
7
32. Horizontal GATS commitments were made by the Solomon Islands on two modes of supply.
Commercial presence by foreign service providers is subject to normal approval and registration
requirements for all foreign investors by the Foreign Investment Board.  These are based on an
economic needs test.  Externally incorporated firm s must register their name with the Registrar of
Companies in the Solomon Islands.  Foreign nationa ls and foreign-owned firms may not own land but
may lease from government or land-holding groups.  Fo reign investors must also have a debt to equity
ratio of no more than two to one.  This "thin capitalization" requirement is considered necessary to
                                                     
6Like other least-developed countries, the Solomon Islands was given an additional year, until
15 April 1995, to submit its schedules on goods and services.  Although the Solomon Islands exceeded thisdeadline, its schedules were formally approved by the WTO General Council in December 1995.
7GATS/SC/117, 1 April 1996.Solomon Islands WT/TPR/S/45
Page 27
combat potential transfer pricing by multinational enterprises.8  The temporary movement of skilled
personnel is also to be limited to where such skills are unavailable locally, and to initially two years,
with extension subject to immigration and labour requirements.
33. MFN (Article II) exemptions were taken under GATS on all sectors to allow for the
possibility of providing preferential treatment to members of the Melanesian Spearhead Group
(Vanuatu, Papua New Guinea and recently Fiji).  The exceptions cover approval and registration offoreign investment and measures affecting the temporary entry of people.
34. According to the authorities, the conclu sion of the Uruguay Round has obliged the
Government to focus on open trade policies that assure a transparent business environment.  The main
benefit to the Solomon Islands is the impetus it has given the Government to create an open domestic
market.  Trade creation effects of the Uruguay Round are expected to be minimal for the SolomonIslands since most of its exports receive duty-free access to foreign markets.  The Government
believes that membership of the WTO and conformity with its rules is crucial for least-developed
countries.  It provides trade obligations that will help to promote a domestic business climate
conducive to foreign investment.
35. The authorities hope that the incorporation of agriculture into the WTO will improve world
prices for tropical oil products by constraining the use of subsidies by the European Union and the
United States.  Such subsidies are seen as a major factor behind the continually low prices received
for copra and coconut oil exports.
36. The Solomon Islands is to review many of its Acts and regulations to bring them into
conformity with its WTO obligations.  It intends, for example, to introduce a Customs Valuation
Code;  to update protection of intellectual property protection in accordance with the WTO
Agreement on Trade-Related Aspects of Intellectual property Rights; and to implement therequirements of the Agreement on Agriculture.  The Government has requested technical assistance
from the WTO and aid donors to enable the Solomon Islands to implement and enforce its WTO
commitments.
(ii) Regional agreements
(a) The Lomé Convention
37. The Solomon Islands is a signatory to the Lomé Convention between the European Union
(EU) and 70 countries in Africa, the Caribbean and the Pacific (ACP).  There are seven other Pacific
ACP States.
9  The current (fourth) Lomé Convention extends non-reciprocal trade preferences to all
ACP States, and is due to expire end-February 2000.  According to the authorities, the Lomé
Convention has been important for the development of tree crops and the export of canned tunaproducts.
38. Imports from ACP States enter the EU free of duty and quantitative restrictions, subject to a
safeguard clause and rules of origin.
10  Commodities covered by the EU Common Agricultural Policy
                                                     
8An amendment to the Income Tax Act in 1996 prevents a foreign group company from claiming
interest as a tax deduction where its inter-company debt to equity ratio is too high.  The amount of interest
deductible is based on what would be considered an "arms length" transaction.
9The others are Fiji, Papua New Guinea, Kiribati, Tonga, Tuvalu, Vanuatu and Samoa.
10The Lomé IV rules of origin require that qualifying products be either wholly obtained or
‘significantly worked or processed’ in one or more ACP States.  The latter definition is based on the productbeing sufficiently modified in the ACP State for it to be classified under a different four-digit HS tariff item.WT/TPR/S/45 Trade Policy Review
Page 28
may be excluded from preferential treatment.  The main industry dependent on preferential duty-free
access to the EU market under Lomé IV is canned tuna.  Without this the industry, as currently
structured, would be uncompetitive in the EU, it s main export market.  Other canned tuna imports
enter the EU at a tariff rate of 24%.  The Solomon Islands views continued access to these preferences
as essential to enable diversification and improvement of its production base.11  The preferences will
nevertheless be reduced over time as the EU lowers its MFN rates on fish products in accordance withits WTO commitments.
39. Of concern to the Government is the extension by the EU of Lomé tariff preferences to all
least-developed countries, including non-ACP countri es, as of 1 January 1998.  This will intensify
competition for its products in EU market from non -ACP least-developed countries, especially for
tuna products, but also for coconut products, cocoa, palm oil and timber.
40. Since becoming a member of the ACP group, the Solomon Islands has received substantial
financial assistance from the EU.  EU support to ACP States is through the European Development
Fund (EDF), the main assistance arm of the EU;  the European Investment Bank for commercial
loans; the Stabilization of Export Earnings Scheme (STABEX), which currently covers 49 agricultural
products and is aimed at reducing the effects of price or quantity fluctuations on an ACP’s exportearnings; and Sysmin, a financing facility for minerals.  Over 90% of EU aid to the Solomon Islands
occurs as grants mainly under the EDF or STABEX.  To 1996, total aid to the Solomon Islands under
Lomé IV amounted to ECU 28 million, of which EC U 7 million were STABEX funds.  A principal
recipient of this assistance has been the forestry sector through financing of reafforestation
programmes and the operation of government-owned forestry plantations in a number of provinces.
41. Renegotiation of the Lomé Convention is to  commence in 1998, and the EU has issued a
Green Paper on the future of the Lomé Convention.  The Solomon Islands together with other PacificACP States have agreed to support the expansion of the ACP to include other Pacific island countries.
This was endorsed by the South Pacific Forum (at a meeting held in the Cook Islands in 1997).
(b) The South Pacific Regional Trade and Economic Cooperation Agreement  (SPARTECA)
42. This trade and economic cooperation Agreement, concluded in 1981, provides Forum island
countries (FICs) with non-reciprocal preferential  treatment on goods exported to Australia and
New Zealand.
12  Its objectives are to achieve progressively duty-free and unrestricted access for a
wide range of products to Australian and New Zealand markets for FICs;  to accelerate FIC
development through expansion and diversification of their exports to Australia and New Zealand;  to
facilitate expansion and diversification through elimination of trade barriers;  to promote FIC exports
through promotion of investment; to promote FIC exports in Australia and New Zealand by
cooperatively marketing and promoting such products in these markets; and to promote and facilitate
economic and technical cooperation.  It includes special, but unused, provisions for the smallest FICs,
but these do not apply to the Solomon Islands.
43. Since 1 July 1986, FIC exporters have been eligible under SPARTECA for free and
unrestricted access to the Australian market, except for textiles, clothing and footwear, and sugar.13
                                                     
11Statement by H.E. Robert Sisilo, Ambassador to the EU, Ministerial Conference of the WTO,
Singapore, 9-13 December 1996.
12The FICs are the Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Republic of the
Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Solomon Islands, Tonga, Tuvalu, Vanuatu andSamoa.
13From 1981 to 1986, the FICs received duty-free and unrestricted entry on a fixed list of products and
duty-free and restricted entry on a further short list of products.Solomon Islands WT/TPR/S/45
Page 29
This limitation was removed by Australia on TCF products from 1 March 1993, and on sugar from
1 July 1997 when Australia eliminated sugar tariffs.  Rules of origin must be met, however.  These
require the last process of manufacture to be carried out in the country claiming the preference, and
for products to have at least 50% local content in that country.14  Australia or New Zealand may vary
or suspend preferential access under special safeguard provisions, and actions against dumped or
subsidized exports are handled according to each country’s national legislation.
44. Economic cooperation and development provisions were expanded in 1994 to cover
assistance in the areas of institutional capacity for export development; inter-island trade;  consumer
protection and standards;  harmonization of trade law;  and quarantine management capabilities.
Australia, for example, funds the South Pacific Trade Commissioner located in Sydney to help
promote and market FIC products in Australia.
45. The margin of preference available to FIC exporters has been eroded following the recent
reductions in Australia and New Zealand.  Cons equently, the importance of SPARTECA to FIC
exporters has declined and will continue to do so.15  According to authorities, the Solomon islands has
benefited little from this Agreement because most of its exports are geared towards the European
Union and Asia.
(c) The South Pacific Forum
46. Solomon Islands, along with other FICs, Australia and New Zealand, is a member of the
South Pacific Forum.  It was established in 1971 to develop a collective response to 13 regional
issues;  its Secretariat is located in Suva.  Forum leaders meet annually, most recently in the Cook
Islands in September 1997.  Economic ministers from Forum member countries now also meet
annually;  the first Forum Economic Ministries Meeting (FEMM) was held at Cairns, Australia, in
July 1997.
47. The 1997 FEMM adopted an Action Plan whereby Ministers made commitments to develop
individually comprehensive national economic reform strategies.  The Action Plan provided for
adoption of principles of best practice for public accountability; open, liberal and transparent
investment policies, consistent with the APEC non-binding investment principles; and to work
towards a common goal of free and open trade and inve stment on a unilateral basis.  Ministers agreed
to rationalize and progressively reduce tariffs, while recognizing the specific requirements of some
smaller FICs, in accordance with several guiding principles, and to introduce administrative reforms
to facilitate trade.16  They also agreed to consider the acceleration of tariff reductions for agreed
sectors, and for goods and services typically traded within the region.
48. Economic ministers, recognizing that preference margins under agreements such Lomé and
SPARTECA are diminishing, also agreed to implement, to the extent practicable, domestic measures
                                                     
14Also counted as local content are inputs from any or all FICs, as well as from Australia and
New Zealand (up to 25% of the required 50% minimum).  In July 1994, New Zealand reduced the local-contentrequirement to 45% for garments imported from Fiji, while Australia agreed to include more marketing andpackaging elements in the calculation of local content for these products.
15The main FIC exports that still benefit substantially in the Australian market from SPARTECA are
garments from Fiji and automotive wire from Samoa.
16These guiding principles for tariff improvements are:  not to use protective tariffs;  to use a standard
general rate;  to provide a duty drawback system to exporters;  to use ad valorem  rates, unless serious valuation
problems exist;  to levy tariffs on c.i.f. and not f.o.b. or current domestic value (CDV);  and to levy a similarexcise duty on those goods that have high tariffs for social, health or environmental reasons.WT/TPR/S/45 Trade Policy Review
Page 30
consistent with WTO and APEC principles and obligations, and to report on policy changes taken to
achieve this objective.
49. The FEMM Action Plan was endorsed by leaders at the Forum meeting in the Cook Islands in
September 1997.  They reaffirmed their commitment to free and open trade amongst the Forum island
countries through tariff reform and by ensuring investment transparency, and supported the creation
of a Free Trade Area between Pacific Island nations.  The Forum, which holds observer status in theAsia Pacific Economic Cooperation (APEC), is to play an important role in assisting nations to
achieve these objectives.
50. The Forum Economic Action Plan was reviewed at the FEMM held at Fiji in July 1998.
Ministers agreed to further develop a framework for achieving a free-trade agreement among Forum
members that would be WTO consistent and pay due regard to the benefits from both preferential andnon-preferential approaches.  Telecommunications, energy and transport sectors were also endorsed
for further consultations on progressing non-preferential tariff reductions.  Ministers also agreed to
implementing domestic measures consistent with WTO and APEC principles and obligations.  In
preparation for the next round of WTO trade negotiations, members supported the formation of
alliances to focus on agricultural liberalization; fishing subsidies;  trade and environment;  trade inservices;  government procurement;  trade and competition policy;  and investment policy.  The South
Pacific Forum would also seek observer status in the WTO.
51. The Government of the Solomon Islands generally supports the notion of a regional free-trade
area among the Pacific island countries.  However, it has no set policies on what form this should
take, and is closely following developments within the South Pacific Forum.  It also supports the
regional trade initiatives being undertaken within the FEMM, and believes that many of the domestic
reforms being considered at home are consistent with its objectives.
(d) Melanesian Spearhead Group (MSG)
52. The MSG, comprising the three founding members of Solomon Islands, Papua New Guinea
and Vanuatu as well as New Caledonia and Fiji since September 1996, was formally launched in 1988
to promote political cooperation among members.  In 1993, the MSG Trade Agreement was formed
between the founding members;  Fiji has recently negotiated membership.
17  It initially covered
duty-free entry of only three commodities, one from each member:  tea from Papua New Guinea, beef
from Vanuatu, and canned tuna from the Solomon Islands.  Safeguard provisions allow any member
to suspend obligations should imports increase so as to cause serious damage to existing industries
producing like or directly competitive goods, or against dumped or subsidized goods.  Moreover,
parties may abrogate their obligations should they decide to develop new industries.18
53. There are a number of other clauses in the MSG that allow parties to rescind obligations, such
as the commitment not to impose quantitative restrictions on specific imports.  These may be imposed
under balance-of-payments difficulties.  Quantitative export restrictions are prohibited, unless
necessary to prevent circumvention via the re-export of goods (Grynberg and Kabutaulaka, 1995).
54. Members are committed in principle to extendin g the coverage of the Agreement to ensure
that duties and other trade restrictions are eliminated between the parties.  The Solomon Islands, along
                                                     
17Membership of the MSG does not automatically extend to the MSG Trade Agreement, which is only
between founding members.  Although any member of the MSG or South Pacific Forum is eligible to join the
Trade Agreement, membership must be negotiated.
18This aspect of the Trade Agreement obviously creates a high degree of uncertainty among members,
and is likely to discourage trade.Solomon Islands WT/TPR/S/45
Page 31
with Vanuatu, has for some time been pushing for the Agreement to be broadened.  In 1995 the Heads
of Government agreed to extend the product coverage to 150 tariff lines, thereby encompassing
products, such as edible fruit and nuts, coffee, coconut-milk powder, jams, Portland cement and
certain wooden furniture.
55. The MSG Trade Agreement has had a negligible impact on trade within the South Pacific
region.  The value of trade between the MSG States is small.  Exports of canned tuna from theSolomon Islands to Papua New Guinea have not benefited greatly from the arrangements.
Nevertheless, the Solomon Islands’ Government is keen to expand trade among MSG members.
(e) Other agreements
56. The Solomon Islands is a signatory to several plurilateral fishing agreements with
neighbouring States on dividing access to highly migratory fish species within its water and theinternational waters of the Western Pacific.  Examples include the Palau Arrangement and the Nauru
Agreement.
(iii) Bilateral agreements
57. The Solomon Islands is not party to any bilateral trade agreements.
(iv) Generalized System of Preferences (GSP)
58. The Solomon Islands is a beneficiary of GSP schemes run by industrialized economies.
However, the authorities believe that certain schemes, such as those operated by Japan and the
United States, have provided little benefit.  Most exports by the Solomon Islands to Japan and the
United States would attract low MFN rates or be duty free in most cases.
(v) Other agreements and arrangements
59. The Solomon Islands is a member of several multilateral organizations that have a bearing on
its economic policies and development.  These include the International Monetary Fund, the WorldBank, the Asian Development Bank and UNCTAD.  The Solomon Islands is heavily indebted to
several of these international institutions.
(7) T
RADE DISPUTES
60. The Solomon Islands has not been a party to any formal dispute within the WTO, either
directly or as an interested third party.
61. There are no formal dispute settlement procedures in regional arrangements involving the
Solomon Islands.
(8) FOREIGN INVESTMENT POLICIES AND PROCEDURES
62. The Government believes that foreign direct investment (FDI) can make an important
contribution to the country’s economic development.  The Policy and Structural Reform Programrecognizes the importance of private-sector-led growth, and targets foreign investment policies and
their enhanced transparency as high priorities for reform.  The Government encourages foreign
investment proposals that are compatible with national aims and objectives.WT/TPR/S/45 Trade Policy Review
Page 32
63. FDI in the Solomon Islands has been insignifican t in recent years, largely due to a loss of
confidence by overseas investors in previous policies and the poor condition of the economy
generally.  The current poor macroeconomic outlook (Chapter I) combined with investment policies
of the previous government that were, at times, opaque and unpredictable, have stifled capital inflows.
Having peaked at SI$173.1 million in 1991, private capital inflows almost dried up, falling to
SI$I0.7 million in 1996.  Since 1991, there has been a net exodus of long-term investment from theSolomon Islands, while direct investment has declined sharply to SI$11.6 million in 1996 (Table II.3).
Table II.3
Foreign investment, 1989-96
(SI$ million)
1989 1990 1991 1992 1993 1994 1995 1996
Private (net) 59.4 70.4 73.1 37.4 18.9 2.5 -39.8 0.7
   Long term 33.3 31.6 34.5 -6.7 -55.6 -4.4 -46.7 -20.5
   Direct investment 23.4 26.2 39.0 41.4 72.3 1.7 4.6 1.6
   Other 2.7 12.6 -0.4 2.7 2.2 5.2 2.3 19.6
Source: Asian Development Bank (1998),  Economic Report on Solomon Islands 1997.
64. Many aspects of current legislation appear highly restrictive, including the substantial list of
areas prohibited to foreign investors (including expatriate Solomon Islanders).  In addition, the
structure of investment incentives and the proce dures for approval appear to lack clarity and
transparency.  Uncertainty about the future shape of investment conditions, currently under review, is
likely to compound the discouragement to foreign investors.
65. The current Government is committed to reviewing existing policies with the aim of
facilitating and encouraging foreign investment, especially in processing industries so as to create
additional employment.  Foreign investment is also seen as an important means of developingdomestic industries to replace imports and to facilitate the transfer of skills.  At the same time, the
Government is keen to encourage more participation in projects by Solomon Islanders through either
joint or 100% locally owned ventures.  It is also  examining the operations of the Solomon Islands'
Investment Corporation with a view to privatizin g several of its public investments (Chapter III).
(i) Legislative framework for FDI
66. FDI proposals are screened under the provisions of the Foreign Investment Act 1990 and the
Investment (Amendment) Act of 1996.  This legislation was reviewed in April 1997, and new drafting
guidelines prepared to amend the 1990 Act.  The Government is expected to introduce legislative
changes in 1998 (as contained in the draft Investment Regulations 1998) aimed at simplifying the
current non-transparent and discretionary foreign investment approval process.  The establishment ofa new investment promotion agency is also being considered.
67. All foreign investment proposals must be approved by the Foreign Investment Board, chaired
by the Prime Minister.  The Foreign Investment Di vision of the Ministry of Commerce, Employment
and Tourism provides the Board’s secretariat.  As well as approving foreign investment and
technology agreements and monitoring compliance w ith  those agreements, the Board also reviews
and advises the Government on foreign investment policies and procedures.  The Board’s secretariat
is also responsible for providing support services to prospective investors, including securing any
licences or authorities, approvals and permits required to implement the investment project.  FDI
proposals are also subject to exchange control approval, where applied.
68. The Board’s assessment process has paid particular attention to the extent to which the
proposal strengthens the technical and marketing expertise of the private sector, and involves the useSolomon Islands WT/TPR/S/45
Page 33
of local raw materials and domestic value added; net export income from the project; import cost
savings; employment generation; regional development; net economic benefit; inter-industry linkages;
and technology, training and skill development.  According to the authorities, approval may take as
little as 30 days, with final decisions required within 45 days.  However, complex cases may take
considerably longer, particularly where regional and land-related issues are involved.
69. Only indigenous Solomon Islanders can own land. Non-Solomon Islanders, including
expatriate Solomon Island citizens, may only lease registered land from the Government, normally on
a 75-year lease.19  About 90% of land in the Solomon Islands is customarily held under communal
ownership.  Such ownership is recognized by the Government.  The remainder is held privately under
registered title;  ownership is registered in a land registry in Honiara and guaranteed by law.
70. A negative list (Schedule III of the Investment Regulations, 1996) prohibits foreign
investment in a wide range of activities in agriculture, forestry, fishing, manufacturing, construction,
motor-vehicle repairs, wholesale and retail trade, hotels and restaurants, transport, storage and
communications, real estate, machinery and equipment rental, and recreational and sporting areas
(Table II.4).  These activities are reserved wholly for indigenous people.  The Board is also
developing project profiles for a list of desired in vestment sectors, such as tourism and fisheries, but
progress is slow owing to financial constraints.  Foreign investors may have to meet certain domestic
performance requirements, such as value added, processing of local raw materials and local
participation of the workforce.
Table II.4
Sectors reserved exclusively for Solomon Islanders, 1998
Sector Activity
Agriculture, hunting,
& related activitiesSmall scale growing of crops, market gardening & horticulture; of farming of animals other than poultry &
pigs; of poultry farming (raising of broilers & egg production only); of growing of crops combined with
farming of animals (mixed farming); orchid growing or farming
Forestry, logging &
related serviceactivitiesGathering of uncultivated natural products including forest materials,  blatt & rubber like gums, herbs, flowers
& plants, wild fruits, cork, larks, resins & balsam, rattan, vegetable hair & eel grass, acorns & horse chestnuts,mosses, lichens & cut evergreens;  small scale sawmilling & timber  processing (investment below
SI$1 million); of logging operations (investment below SI$1 million); portable sawmill or chainsaw milling
operations (investment below SI$0.3  million)
Fishing, operation offish hatcheries & fishfarms, service
activities incidental to
fishingFishing on a commercial basis on coastal & inland waters (within 3 miles of shoreline) including rivers &
lakes; taking of marine & fresh water crustaceans & molluscs, hunting of aquatic animal sea urchins & otherechinoderms & other aquatic invertebrates, gathering of marine materials such as natural pearls, sponges, coral
& algae;  pearl farming; small scale live fish farming, fish hatcheries & fish farm service activities;  crocodile
farming (under 1,000 head)
Wildlife Hunting or collecting of non-protected fauna, including insects, reeds, root butterflies, shells, animal teeth,
tusks, feathers, birds, forest animals, declared sedentary organisms & similar products living or dead
Manufacturing Manual screen printing; handicrafts of all kinds; jewellery; commercial reproduction of artefacts; processing by
sun drying or smoking of copra; processing of coffee through to green beans; small scale food processing;
fibreglass products; processing of peanuts; all other activities with investment below SI$ 0.2 million
Construction industry Erection of fences; plumbing; electrical; general maintenance & repair work; painting of buildings
Construction work-related activitiesvalued up to
SI$0.5 millionConstruction contracts including maintenance work; supplies service & management; all field/activities of
engineering studies, investigations, designs, project management, supervision & related consultancies; allactivities of land surveying, development, landscaping, & land valuations; any other activity related to
construction or engineering consultancy
Table II.4 (cont'd)
                                                     
19Perpetual estates owned by non-Solomon Islanders were converted to 75-year, fixed-term government
leases in 1977.WT/TPR/S/45 Trade Policy Review
Page 34
Sector Activity
Sale, maintenance &
repair of new or usedmotor vehicles &
motor cycles, retail
sale of automotivefuel, lubricants &
accessoriesWholesale & retail sale of used motor vehicles & motor cycles, except by a dealer authorised by an overseas
manufacture to sell new motor vehicles & cycles & where the sale of used vehicles is incidental to thewholesale & retail of new items; maintenance & repair work of motor vehicles & cycles, except by a dealer
authorised by an overseas manufacturer to sell new items when these activities are incidental to selling new
items; retail sale of automotive fuel, lubricants & accessories, except by authorized dealers
Wholesale & retailtrade – includeswholesale by
commission agents,
commodity brokers &auctioneers & all other
wholesalers who trade
on behalf & on theaccount of othersWholesale & retail sale of flora & fauna; copra, cocoa, chillies, coffee & nuts, except by growers & processors;
of handicrafts & artefacts, except through hotels & re sorts; of fresh water crustaceans & molluscs, aquatic
animals, sea squids & tunicates, sea urchins or other echinoderms & aquatic invertebrates & other marine
materials such as natural pearls, sponges, coral & algae; of non-protected fauna, including insects, shells,
animal teeth, tusks, feathers, declared sedentary organisms & similar products & living or dead fauna;wholesale of general goods & retail sale in general stores with shop space of below 200 sq. metres or
investment of below SI$0.5 million;  retail sale of newspapers, magazines, books & stationery; carried out from
a motor vehicle, caravan & motorcycle; via stalls & markets;  to take away prepared foods, cakes forimmediate consumption; wholesale & retail sale of worn clothing, footwear and any other goods; repair of
electrical household goods, footwear; watches, clocks jewellery; hair salons & boutiques
Hotels & restaurants Motels, resthouses, inns (below 100 rooms);  sale of prepared foods & drinks for consumption on premises e. g.
restaurants, cafes, snackbars, lunch counters
Transport storage &communicationsTransport freight & passengers by land; coastal & inland water transport of passengers & freight in boats below
10 metres length;  travel agencies, except in conjunction with hotels & airlines; tour operator activities for bird
watching, butterfly collection, wildlife watching, game fishing & dive boat operations; customs clearance &forwarding
Real estate activities Buying, selling, renting, managing & appraising real estate;   real estate developments & house rentals
Renting of machinery& equipment withoutoperatorRenting of all kinds of land transport equipment eg railroad vehicles, cars, trucks, trailers & semi-trailers,
motor cycles, caravans & campers;  of small machines eg lawnmowers, house boats, welding, fabrication &general work construction equipment;  of vending and amusement machines; television receivers, video
recorders, tapes & records
Other businessactivitiesSign writing; labour provision & recruitment; security guards & watchmen for apartments, buildings,
residence, offices, etc; cleaning on a fee or contract basis of all commercial & residential buildings
Child day-care centres Health & social work
Recreational, cultural
& sporting activitiesMotion picture distribution; video cassette hire & sale; rental of entertainment & amusement equipment;
amusement parlours
Mining activities Small-scale alluvial gold mining
Other service activities Hairdressing & other beauty treatment; footwear repairing
Source: Government of the Solomon Islands.
71. There are no maximum foreign ownership limits pertaining to foreign investment.  However,
while the Board will consider proposals involving both joint ventures and full foreign ownership, the
proposed level of local participation will be an important factor in each case.  The Board may require
a substantial level of domestic equity from the outset, or stipulate divestment of foreign ownershipover the life of the project.  No approved foreign enterprise may acquire an interest in, or take over,
any other enterprise, or diversify into any other non-related activity, unless authorized by the Board
and stated on the Certificate of Approval for the in vestment project.  The Board must also approve
any increase in the approved share of foreign invest ment or changes to its majority shareholding.  In
addition, prior approval is needed for the foreign investor to enter into any technology or otherexternal agreement, including thos e involving foreign currency payments for royalties or provision of
professional services.   Non-resident investors cannot raise equity or long-term capital domestically,
while resident foreign investors must seek specific approval from the Central Bank for such
borrowings.
(ii) Investment incentives
72. The Foreign Investment Act also empowers the Board to negotiate investment incentive
packages tailored to individual proposals.  These incentives are mainly provided through tax
concessions, and are aimed primarily at attracting export-oriented investment.  They may include aSolomon Islands WT/TPR/S/45
Page 35
maximum ten-year tax holiday20;  accelerated capital write-off of 40% for manufacturing enterprises
in the first-year (and 5% per annum thereafter); double deduction for expenditure on apprenticeships
and tertiary education; 150% deduction for cost of inter-provincial transportation of raw materials;
150% deduction for export promotion expenditure; and duty-free entry of capital equipment and
materials for two years.
73. Tourist development projects are entitled to special additional incentives.  These include a set
five-year tax holidays; 50% outright deduction in the first year for capital expenditures (excluding
land), and 5% annually thereafter; 50% write-off for the costs of vessels built locally for tourism; and
duty-free import of capital equipment and materials for two years.
74. The FDI legislation provides foreign investors with specified rights, including entitlement to
repatriate dividends and capital; security of tenure and ownership of assets against expropriationwithout adequate compensation;  access to foreign cu rrency subject to exchange control requirements;
work and residence permits for approved foreign workers in accordance with existing labour and
immigration laws;  all rights under the Constitution and before the law; and settlement of investment
disputes according to internationally agreed criteria.
75. The Government has initiated an internal review of the incentive programme for foreign
investment with a view to streamlining the process and ensuring that incentives are better utilized.
Overseas experience suggests that incentives are an ineffective and costly means of attracting foreign
investment; they also contribute to a bidding contest among countries in the region, which tends to be
damaging to all countries (Box II.3).  Other factors are of far more importance than the availability of
incentives to foreign investors, such as economic and political stability, market prospects, availability
of adequately skilled labour at relatively low cost, adequacy of infrastructure, and the provision of
related services (e.g. telecommunications, energy and transportation inputs) at competitive prices.
(iii) Transparency issues
76. The present Government recognizes that a number of aspects of the foreign investment
regime lack clarity and appear not conductive to inve stment overseas, and it is taking steps to improve
the transparency of investment policies and procedures.  It also intends to establish a specialist one-
stop shop for investment approval, and to strengthen the role of investment promotion.
77. The development and application of a coherent foreign investment policy using clearly
defined criteria and administrative processes has in the past been hampered by a number of factors.
Although constitutionally the national Government ha s responsibility for controlling FDI, provincial
governments have on numerous occasions bypassed the Foreign Investment Board and negotiated
directly with foreign investors.  Moreover, the national Government, in the past, provided incentives
for particular firms independently of the Board.
                                                     
20The period of the tax holiday is linked to the value added of the enterprise.  Six years is granted when
the enterprise’s value added on approved products is at least 75% of its ex-factory sales; five years for 50% ormore; four years for 40% or more; and three years fo r at least 25% of value added.  Projects involving
investments of at least SI$10 million  receive a minimum five-year, maximum ten-year, tax holiday, irrespectiveof their local value added.WT/TPR/S/45 Trade Policy Review
Page 36
Box II.3:  Effectiveness of investment incentives
Incentives for investment, notably tax holidays, are commonly used in the Solomon Islands.  The main aim of
these incentives is to attract foreign direct investment (FDI) and thereby develop local industry oriented
towards exports.  While it is difficult to judge the extent  to which incentives have actually attracted FDI to the
Solomon Islands, there are grounds for doubting the effectiveness of such measures, based on evidence from
other economies.  Moreover, in some instances th e use of incentives may even be counter-productive.
In the first place, access to  incentives is seldom among the main dete rminants of business d ecisions.  This has
been confirmed repeatedly by business surveys.  Proximity to markets, the availability of sufficiently skilled
labour at relatively low cost, adequacy of essential infrastructure and a stable economic and legal environment
are usually much more important.  Other countries' experience with evaluation of tax and non-tax incentives
suggests that the cost of such measures to the Govern ment (in terms of expenditu re or tax revenue forgone)
may exceed the investment generated.  Th eir high cost is related to the dif ficulty in ident ifying incremental
investment; that is, investment that would not have been undertaken without the incentive.
Tax cuts for foreign multinational enterprises (MNEs) that are taxed in their home countries purely on a
residence basis (that is, they receive a full credit for taxes paid abroad) may have little or no effect on the
incentive for those firms to invest in the country offering such relief.  Such cuts would provide an effective
incentive only insofar as MNEs are in an excess foreign credit position, taxes on repatriated income can be
deferred, the MNE's home country exempts foreign-source income from domestic taxes, or "tax sparing" is
allowed by double taxation treaties.
To the extent that incentives do stimulate particular types of investment, they may result in a less efficient
allocation of national resources than would be the case if the Government remained neutral and refrained
from influencing private decisions.  Any adverse effect of incentives on resource allocation would manifest
itself as lower total factor productivity (TFP).  The belief that foreign investment should be assisted because it
yields social benefits (externalities)  that are not ade quately taken into account by  private investors, would
appear to be overstated.  Most benefits of foreign investment accrue privately and hence do not need the
incentives.  Moreover, it does not provide a justification for assisting foreign over domestic investment and, since it is
usually extremely difficult to measure such externalities  precisely, there is always the likelihood that incentives
will turn out to be excessive.
Incentives are usually expensive for th e Government, involving large losses  in tax revenues.  A tax system
embodying many special incentives is also much more susceptible to tax avoidance and evasion, which further
contribute to the loss in tax revenues.  Incentives therefore tend to worsen the fiscal balance reducing national
savings and causing a deterioration in the current account balance.
Lastly, use of investment incentives may provoke countermeasures by trading partners.  Even where they do
not contravene the WTO Agreement on Subsidies and Countervailing Measures, they may be used by other
countries as a justification for countermeasures.  In particular, countries may react by adopting incentives of
their own, thus resulting in a beggar-thy-neighbour situation.  Such an "incentives race" or "incentives
shopping"' tends to be harmful to all countries concerned.   It is also likely to di sadvantage devel oping countries.
Rather than offering incentives to attract foreign investment, governments should instead focus on removing
existing impediments that deter investment.  Countries often have a mix of policies that simultaneously impede
and encourage foreign investment.  Rationalizing these policies to remove impediments is likely to be the best
approach.
In the case of taxation, the most efficient means of removing the specific obstacle to FDI posed by international
double taxation of profits earned by foreign companies in the Solomon Islands may be double tax treaties with the
governments of the countries in which foreign investors reside.  In this way, MNEs investing in the Solomon
Islands could obtain relief for taxes levied by the Solomon Islands. At present, the Solomon isl ands has a double
tax treaty with only the United Kingdom  which, according to authorities, is to be reviewed.  The Government may wish to
consider similar treaties with other foreign governments.  De velopment of a tax treaty network would obviate the need for
investment incentives, notably tax holidays, and be a more effective means attracting FDI.
Controlling the prolific use of investment incentives has been the subject of a number of recent discussions,
including among OECD Members and in the WTO 1996 A nnual Report.  In addition, although the APEC non-
binding investment principles adopted by Forum island countries under the FEMM action plan does not limit
the use of foreign investment incentives per se, they do state that members will not relax health, safety or
environmental regulations as an incentive to encourage foreign investment.Solomon Islands WT/TPR/S/45
Page 37
78. In addition, there have been reported bottlenecks and delays in obtaining the necessary
provincial approvals and the work permits usually needed to implement authorized investment
projects.  Lengthy deliberations in these areas add to investors cost and uncertainty.  Poorly defined
property rights, and prohibition on foreign ownership of land accentuate the problem.  In 1997,
foreign investment proposals numbered 155, and totalled SI$281 million;  most were related to
forestry, tourism, services, and fisheries.  No data are available on the amount of FDI actuallyundertaken.
79. It was agreed by Forum leaders in 1996 that the Forum Secretariat should assess the
transparency features of investment policies of FICs.  National policy statements submitted to the
Secretariat were assessed by the Foreign Investment Advisory Service (FIAS).
21  The criteria used by
the FIAS to assess transparency of investment legislation are public availability, consistency inapplication and the extent to which the policy statement is complete, understandable and
unambiguous.  These aspects are assessed on the basis of transparency ratings for 17 investment
categories, such as approval criteria, sectoral restrictions and provision of incentives. According to the
FIAS assessment, a score of two out of five indicates that very little of the policy category is clear or
that most elements are missing.  A score of one, two or three would suggest major improvements intransparency are possible.
80. A May 1997 transparency assessment by FIAS of its 1996 investment legislation
22 gave the
Solomon Islands an average score of 2.5 (FIAS, 1997); scores for individual categories ranged from
one to four (out of a maximum of five).  Although it was ranked equal third among the nine FICs
reviewed, the highest score of 2.8 indicated substantial transparency inadequacies among all FICs
assessed.  The Solomon Islands received a rating of two or below in eight categories (Table II.5).23
                                                     
21FIAS is a joint service of the World Bank and the International Finance Corporation.
22The Solomon Islands authorities did not submit thei r 1997 legislation for review because the policy
statement was due to be reviewed, and changes to the i nvestment legislation had been drafted for consideration.
23A Background Paper prepared by FIAS for the 1998 FEMM examined the consistency of FIC
national investment policies with APEC's non-binding investment principles (FIAS 1998).  Although theassessment of compliance lacked exactness, it suggested that the Solomon Islands did not comply with severalof these principles.WT/TPR/S/45 Trade Policy Review
Page 38
Table II.5
Transparency ratings of investment policies and practices
Investment policy category Comment Score (1-5)
Approval criteria Approval criteria listed but not the criteria or levels 2
Approval procedures Functions and role of the Review Board given 4
Approval cancellation No indication if there is an appeal process 4
Sectoral restrictions Negative list is provided but which investments are allowable in other
sectors is not clear3
Local equity requirements There is some flexibility allowed but the basis for it is not given 4
Repatriation restrictions Insufficient detail given to clarify the situation 3
Incentives award criteria Broad categories given but not criteria, criteria levels or priorities 2
Incentive s award process Insufficient detail included 2
Investment protection Availability indicated but no details given 1
Import duty exemption criteria Insufficient detail given 2
Import duty exemption process Not specified 1
Export requirements Not included in statement
Work permit approval criteria Requires the need to be demonstrated but no decision are specified 2
Training requirements Policy suggests it is necessary but no details are given 1
Exchange controls Not included in statement
Local borrowing restrictions Some clarification needed 4
Investment guarantees Broad indication provided but no specific details 3
Average 2.5
Source: Foreign Investment Advisory Service, "Pacific Island Country Foreign Investment Policies: A Further Assessment of
Transparency", May 1997.