Stimulating investment in pearl farming in ... - World Fish Center

a few thousand shell are nucleated each year are no longer commercially viable. To besuccessful, farms need to achieve economies of scale by nucleating between 100,000 and300,000 shell each year. This of course requires significantly larger amounts of start-upcapital than would be needed for a smaller farm, and increases the risk in the event ofproject failure, especially given the long lead-time (5 – 10 years) before a pearl farmingoperation could be expected to turn a profit.The banking sector in Solomon Islands is unlikely to be a source of financing for a pearlfarming venture. The relatively high risk profile, long lead-time before profitability, andlack of hard assets that can be used as loan security all make this type of projectunattractive. This reflects the experience in other countries, where the agri-businesssector is generally financed through other means.One financing mechanism used in Australia is a Managed Investment Scheme, a taxdeferredshare-farming arrangement marketed to relatively high net worth individualswho are paying the highest marginal rate of tax. Under such an arrangement, an investorwould obtain tax exemption of up to 50% by investing in the scheme, under whichrevenues are deferred for 5-7 years. At the end of this period the investors funds plusearnings are returned to him tax-free, with an effective internal rate of return of 15% perannum during the investment period (equivalent to 30% p.a. if the tax savings are takeninto account). This system has been successfully marketed to retail investors, and hasnow begun to attract the interest of institutional investors with much larger sums toinvest. Because of likely changes in tax laws, the Managed Investment Scheme approachmay no longer be available after 2008, but institutional investors are still interested in thepearl industry, even without the tax exemptions, because of its good investment return. Itseems likely that, following appropriate due diligence (meaning field pearl farmingtrials), this mechanism could be used to raise financing for a significant commercialproject in Solomon Islands.Of particular interest was the Enterprise Challenge Fund, and AusAID businesspromotion scheme available in the Pacific and South-East Asia. The Fund is able toprovide grants to businesses wanting to establish operations or expand into eligiblecountries, including Solomon Islands. Grants range from A$ 0.1 to 1.5 million, and mustbe matched by an equivalent investment from the project sponsor. Proposals are assessedaccording to a set of criteria which are shown at www.enterprisechallengefund.org, andinclude providing communities with jobs, livelihood opportunities and services. A pearlfarming investment in Solomon Islands by an established overseas from would appear apriori to be eligible for ECF support, which would. The concept note submission deadlinefor the next round of ECF bidding is 30 January 2009.Other possible sources of investment capital might include the Kula-2 Fund, a $17million fund supported by the International Finance Corporation, the Asian DevelopmentBank, and the Commonwealth Development Corporation. The Fund is managed byAureos Capital, a private equity fund manager (www.aureos.com), and invests in selectedbusiness projects, including in fisheries, in the Pacific Islands region.29