Tourism has been entirely developed by the private sector.

Courtesy Villa Hotels

The Maldives demands ingenuity from its people. Scattered across tiny islands, poor in resources, just surviving requires inventiveness. In time, the challenges of living in the archipelago have produced an idiosyncratic, resilient group of entrepreneurs. They have evolved from working in a subsistence economy into the nation’s present dynamic private sector – one that now plays a crucial role in the socio-economic development of the nation.

“President Gayoom made a momentous decision that proved to be a catalyst for future economic growth – he democratized the tourism industry,” says Mohamed Latheef, Vice President of the Maldives Chamber of Commerce. His introduction of taxation and leasing rules for tourist resorts sent a clear message to the private sector that the industry was open to any person with access to the necessary resources – “that the tourism industry was neither the domain of a particular family or of any particular elite.”

Today the level of success that businesses have achieved in the Maldives is astounding. In a country of over a quarter of a million people, there are more than 10 companies now who can boast a turnover in the several millions of dollars.

Tourism is the greatest contributor to the Maldives’ GDP, and its transformation from an industry primarily developed in an ad hoc manner to a well-planned and profitable one has surprised many. “We never expected to see such rapid progress,” says Minister for Planning and Development Ibrahim Hussein Zaki. He continues, “This has been a good experience for us. It has inspired us to empower the private sector, to move forward to total privatization and the further opening of the economy.”

There is a strong consensus in that the success of tourism in the Maldives has largely depended on the pioneering vision of a versatile group of entrepreneurs, and equally on the enterprise of their foreign partners and investors. “The industry has remained profitable, stayed environment-friendly and increased in its added value. It has greatly helped national economic growth and has contributed to social development,” says Minister of Tourism Hassan Sobir. He adds that “the role of the government has been one of planning, facilitating, regulating and monitoring, and integrating tourism into the overall concerns of the economy and the society.”

Minister of State for Finance and Treasury Mohamed Jaleel agrees, saying that if the Maldives is today the fastest growing country among developing nations, it is thanks to its national development strategy. The government has concentrated on delivering the social aspects of its infrastructure: services, and investment in education and health. At the same time, its partnership with private business has been able to grow in importance.

The social aspect of the Maldives’ progress is integral to the whole because of the scattered nature of its population. Industries like telecommunications and energy need government help to make it out to the more far-flung communities. Jaleel speaks of a “tripartite balance” between public entities, the government and the private sector. “But obviously,” he warns, “this is not a static situation: it is dynamic, and that has prompted us to revisit and remodel our policies to the needs of the future.”

Making competition work
According to Latheef, the country’s dependence on external funding has left its policy-makers with obligations to external stakeholders, whether multilateral or bilateral partners. Such obligations are often positive: one is the creation of a liberal and competitive economic environment in which the dominant player is the private sector. “The government must now focus on creating and enabling a legal, institutional and policy framework within which the private sector can operate,” he says. He insists that the process will entail both the downsizing of the government and the greater empowerment of non-government people in the economic planning and decision-making process.

Minister Jaleel explains that laws being drafted at the moment will help to create a more rational structure for corporate governance and private sector development. He stresses the latter’s participation in the government's Sixth National Development Plan. “This country’s economic model has been a very pragmatic partnership between the government and the private sector,” he adds.

Latheef agrees that an increasingly liberal policy environment, changes in the nation’s legal framework and rapid development in physical and social infrastructure are changing “for the better” the relationship between the government and the private sector. “There is very little doubt about the government’s stated desire to involve private participation in the country’s economic development,” he says, while adding that in the past decade, the government has also successfully encouraged the non-profit private sector to take part in the development of self-initiated projects. “Many of these efforts are centered on community life, thereby taking the concept of public-private partnership to grassroots levels”.

In terms of scope and dimension, Vision 2020 is the most ambitious undertaking of its kind in the history of the Maldives. “It is a monument to a collective effort at national stocktaking and crafting of a roadmap for the nation’s future,” Latheef says. Vision lays strong emphasis on public-private partnerships as the cornerstone for socio-economic development. “Calling private sector participation one of two keys to economic development and identifying the private sector as the engine of growth is good. Taking committed, practical steps to ensure that the vision is realized would be even better,” he adds.

Government involvement
Despite its stated commitment to private sector-led liberal trade, the Maldivian government is still deeply involved in business – “often with an unfair edge over the private sector,” Latheef says. According to the World Bank, state-owned enterprises (SOE’s) “benefit from various government policies which give them an unfair competitive advantage vis-à-vis the private sector.”

However the private sector lacks the financial resources to undertake some of the services currently provided by SOE’s – including services crucial to business development such as electric power and other utilities. Equally critical is the fact that state-owned enterprises’ dividends provide the government with a high percentage of its revenue, thereby easing off any potential financial pressure on the private sector. Moreover, there are no income or corporate taxes in the Maldives.

However, the unfair advantage enjoyed by SOE’s – especially in the retail and wholesale trade that can be handled by the private sector – remains an area of concern. “While many businessmen do not object to the SOE’s involvement in business (even in retailing and trading) they do take objection to rent subsidy and unfair monopolistic advantages some SOE’s have over them,” explains Latheef.

Mohamed Maniku, Managing Director of the State Trading Organization, the state-owned importing and distributing company, replies that the question of monopoly and subsidy is less of an issue today and the state is becoming more transparent in terms of governance. He emphasizes that his company has been moving away from those areas where the private sector is involved, to the point where today it only accounts for about 15 to 20 percent of the country's total imports. (In terms of oil and basic food items it still accounts for 80 percent.)

He insists they are competing with other companies on a level playing field: “Yes, we are the main importers and distributors of fuel in this country, but because we have the infrastructure, we are in a position to do it better than the rest. That is the reason why we are in business: our long-term experience,” he says.

However, the government has been gradually divesting its stake in SOE’s, hoping to promote capital markets development and corporate governance. Today only three public companies have floated their stocks – Maldives Transportation and Construction Company (MTCC), Bank of Maldives (BML) and State Trading Company (STO).

Maniku believes that public sector involvement in the development of the capital market is vital “so private sector business can see the real benefits of it, not only as a new means to raise funds for future investments but also in bringing a culture of corporate accountability to shareholders into Maldivian business.” Jaleel adds that businesses need to change their practices somewhat to make privatization work for them, researching, restructuring, and generally changing their mindset to deal with the challenges of a free market.

The new atmosphere of change and privatization has also turned people’s attention to corporate governance. Bandhu Ibrahim Saleem, former Managing Director of MTCC and present Managing Director of Island Aviation Services (a 100-percent government-owned company that he expects will be next on the list of public offerings), says concepts such as corporate management and accountability are gaining importance. “For MTTC,” he says, “going public has prompted the company to be more competitive and efficient, better managed, and to have better corporate governance.”

The government is willing to help companies as far as it can, and then to leave them to survive on their own with an appropriate regulatory framework. “Ultimately what we would like is for the government to withdraw from all business and for the private sector to take a prime role in delivering the development efforts that we are already undertaking,” says Minister of Planning and Development Hussain Ibrahim Zaki. “As soon as we have the policy framework, the legal framework, the macroeconomic framework into place, it will happen,” he adds.

With more state owned enterprises getting ready to hang out their shingles and market themselves to potential shareholders, the Maldives’ corporate culture is getting ready to undergo wide-reaching change. Once it has been achieved, though, businesses know they can expect the benefits of competing with the world on real terms.