CP: Solomon Islands: Economic and Financial Reform Program...H. Everett, Financial Sector Specialist (Public Finance), PARD Y. Kim, Counsel, Office of the General Counsel S. Lee, Principal

Concept Paper

Project Number: 46497 December 2012

Solomon Islands: Economic and Financial Reform Program

CURRENCY EQUIVALENTS (as of 1 October 2012)

Currency unit – Solomon Islands dollar (SI$)

SI$1.00 = $0.14011 $1.00 = SI$7.1374

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund CEWG – core economic working group DMF – design and monitoring framework ERSP – Economic Recovery Support Program MOFT – Ministry of Finance and Treasury NDS – National Development Strategy SOE – state-owned enterprise TA – technical assistance

NOTES

(i) In this report, "$" refers to US dollars.

Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Regional Director A. Iffland, Pacific and Liaison Coordination Office, PARD Team leader K. Lao-Araya, Senior Private Sector Development Specialist, PARD Team members S. Ataata, Development Coordinator to Solomon Islands, PARD

M. de Villa, Associate Project Analyst, PARD H. Everett, Financial Sector Specialist (Public Finance), PARD Y. Kim, Counsel, Office of the General Counsel S. Lee, Principal Social Development Specialist, PARD M. Lucich, Senior Economics Officer, PARD

Peer reviewer A. Sumbal, Central and West Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

I. THE PROGRAM 1

A. Rationale 1 B. Impact, Outcome, and Outputs 2 C. Program Costs and Financing 2 D. Indicative Implementation Arrangements 3

II. DUE DILIGENCE REQUIRED 3

III. PROCESSING PLAN 4

IV. KEY ISSUES 4

APPENDIXES

1. Basic Program Information 5

2. Problem Tree 7

3. Design and Monitoring Framework 8

4. Initial Poverty and Social Analysis 11

5. List of Technical Assistance 14

6. Policy Matrix 15

I. THE PROGRAM A. Rationale

1. The proposed Economic and Financial Reform Program continues efforts by the Asian Development Bank (ADB) to promote public sector management reform in Solomon Islands in coordination with the government and other development partners. Solomon Islands was one of the countries most affected by the global economic crisis. ADB and other development partners jointly supported the Government of Solomon Islands in the first phase of recovery from the crisis. ADB is a member of the core economic working group (CEWG), a joint coordination group of the government and key development partners that was established in March 2009.1

2. Through the CEWG, key development partners committed to support the implementation of the government's reform agenda, which focuses on public financial management, corporate governance of state-owned enterprises (SOEs), and private sector development with an overall aim to improve the quality of public service delivery. The previous program, i.e., Subprogram 2 of the Economic Recovery Support Program (ERSP),2 was approved by ADB in 2011. The policy matrix of the previous program contained both tranche release triggers and post-monitoring policy actions. The prior actions for this proposed program have evolved from the previous program’s post-monitoring policy actions. Lessons from the previous program, as indicated in the completion report, have been incorporated in the design of the proposed program.3

3. The Solomon Islands economy rebounded strongly, aided by the ERSP, which ADB coordinated with other development partners and the government through the CEWG mechanism. Significant challenges remain, however, including transition to borrowing and the phasing-out of the Regional Assistance Mission to Solomon Islands. 4 To help ensure the country’s medium-term transition from emergency recovery to a sustainable social and economic development based on the National Development Strategy (NDS), 2011–2020, the government has embarked on a comprehensive reform program drawing on the progress of previous reforms undertaken for economic recovery. These reforms are set out in the government’s economic and financial reform program, which has been coordinated through the CEWG. This proposed program supports the reform agenda.

4. The proposed program is provided in conjunction with structural reforms over the medium term. The grant proceeds are structured to be released in a single tranche based on targeted reform actions, which have been built on previous reform actions supported by ADB under the government’s comprehensive reform program.

5. The outputs of the proposed program are (i) better public financial management; (ii) greater economic efficiency of private and SOE operations; and (iii) broader access to social services, with a goal to foster a sustainable transition away from dependence on foreign aid and

1 The CEWG members include the Central Bank of Solomon Islands, the Office of the Prime Minister, the Ministry of

Development Planning and Aid Coordination, the Ministry of Finance and Treasury (MOFT), ADB, World Bank, European Union, Australia, New Zealand, and the Regional Assistance Mission to Solomon Islands.

2 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Grant to Solomon

Islands for Subprogram 1, Economic Recovery Support Program. Manila; ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Grant to Solomon Islands for Subprogram 2 Economic Recovery Support Program. Manila.

3 ADB. 2012. Completion Report: Solomon Islands Economic Recovery Support Program. Manila.

4 Deployed in 2003 after the 1998–2003 Ethnic Tensions, RAMSI is a partnership between the Government of

Solomon Islands and fifteen contributing countries of the Pacific region with a mission to help Solomon Islands lay the foundations for long-term stability, security and prosperity through support for improved law, justice and security; for more effective, accountable and democratic government.

2

unsustainable logging to private sector-led economic growth. The design and monitoring framework (DMF) is in Appendix 3. Appendix 6 is the draft policy matrix, which includes (i) relevant policy actions undertaken under the previous program, (ii) prior actions for the proposed program, and (iii) indicative post-program monitoring reform actions.

6. The support for policy measures aimed at fostering inclusive growth was fully consistent with the long-term development thrust of ADB’s country partnership strategy, 2012–2016.5 The program is also aligned with Solomon Islands’ NDS 2011–2020, which emphasizes sustainable economic growth, better service delivery in rural areas, and improvement of livelihoods. To help the country shift to a more sustainable growth trajectory, the program is designed to address the national priorities in line with ADB’s strategic directions to continue support to public sector management. In line with ADB’s strategy for engaging in fragile states, the program will facilitate ADB’s long-term engagement and will further strengthen the capacity for good governance. B. Impact, Outcome, and Outputs

7. The expected impact of the program will be achievement of sustained, diversified, and inclusive economic growth. The intended outcome will be that the government maintains a strong fiscal position while delivering better and more equitable social services. The program will be structured as a one-tranche, policy-based program grant with the grant proceeds to be released at grant effectiveness. The policy actions in the proposed policy matrix (Appendix 6) were distilled from the government’s broader policy matrix, 2011–2013, which was prepared via the CEWG consultation process and endorsed by the cabinet in July 2011.

8. The three key outputs are: (i) better public financial management, (ii) greater economic efficiency of private and SOE operations, and (iii) broader access to social services. The first output is directed at achieving the medium-term goals of overall fiscal discipline, providing strategic guidance to public financial management reform, ensuring that effective expenditure controls are in use, raising the efficiency and fairness of the revenue system, and improving the allocation of public resources through stronger budgeting and planning processes. The second output, enhanced economic efficiency, will both (i) create an enabling environment for the private sector, and (ii) enhance corporate governance of state-owned enterprises. The third output will guarantee sufficient resource allocation and effective policy formulation to preserve the delivery of basic social services in health and education.

9. No technical assistance (TA) was provided for the program design. Instead, various ongoing regional TA projects and country-level capacity development TA will support specific aspects of the program.6 Other development partners have also provided both technical and financial assistance to the Government of Solomon Islands in preparing and implementing a comprehensive, medium-term economic and financial reform program.7

C. Program Costs and Financing

10. The government has requested a grant8 not exceeding $5 million from ADB’s Asian Development Fund (ADF) resources to help finance the program. The grant size was

5 ADB. 2012. Solomon Islands: Country Partnership Strategy, 2012–2016. Manila.

6 For a complete list of ADB technical assistance to Solomon Islands, see Appendix 5.

7 The World Bank provides technical assistance on public expenditure reviews, a 2008 procurement review, and

reports on health and education finance. The European Union prepared a Public Financial Management Performance Report in 2008. The Regional Assistance Mission to Solomon Islands funded resident advisors attached to government agencies to strengthen the government’s public financial management, and budget processes and systems.

8 The country's eligibility for Asian Development Fund (ADF) grants under the revised grant framework is determined

by its risk of debt distress. The latest debt sustainability analysis in the International Monetary Fund's 2009

3

determined with due consideration to (i) the relative importance of public sector management reform for ensuring sustained economic growth, (ii) the adjustment cost of the reform program based on the overall projected financing requirements for reforms, (iii) the availability of additional finance from other development partners, and (iv) the significance and complexity of the policy actions of the program. D. Indicative Implementation Arrangements

11. The Ministry of Finance and Treasury (MOFT) will be the executing and implementing agency. It will oversee policy, legal, and regulatory actions and ensure that the policy actions are carried out properly and on time. The CEWG mechanism and the government’s own processes will be used to monitor outcomes and impacts. The program will be implemented over 18 months, from April 2012 to December 2013, but monitoring will continue through 2015, when the incremental reforms are expected to have met the indicative reform targets specified under the cabinet-endorsed CEWG policy matrix, 2013–2015.

12. The proceeds of the grant will be disbursed to Solomon Islands as the recipient according to ADB’s simplified disbursement procedures and related requirements for program grants.9 The program will not finance the engagement of consulting services. As needed, a TA may be considered for financing the consulting services. The government and ADB will continuously review the program implementation by using the DMF and the policy matrix.

13. The public sector, development partners, the private sector, and civil society were consulted while preparing this concept paper. An ongoing participation and consultation plan, and other broad-based engagements with stakeholders are incorporated in the government-led reform agenda that the development partners, including ADB, support. The proposed DMF will promote continuing policy dialogue and encourage the adoption of a broader reform program.

II. DUE DILIGENCE REQUIRED 14. Public financial management. Due diligence on various aspects of public financial management reforms (taxation, public expenditure, budget and planning processes) has been and continues to be carried out in a coordinated manner by both individual CEWG partners, government agencies, and the International Monetary Fund. ADB, along with the government and CEWG partners, regularly participates in the annual review of the government’s progress in implementing its reform agenda since 2010. ADB and the World Bank plan to carry out joint due diligence related to public financial management from November 2012–January 2013, when both ADB and the World Bank will be assessing the progress of target reform actions under their respective policy-based programs. Several of the policy actions under the two programs are identical, as they are a subset of the government’s comprehensive reform agenda.

15. Anticorruption measures. ADB’s Anticorruption Policy (1998, as amended to date) will be explained to and discussed with the government and MOFT. The policy requirements and supplementary measures are described in the legal documents and the grant regulations.

16. Safeguards. The safeguard category is C for environment, involuntary resettlement, and indigenous peoples. No adverse environmental impacts were identified. No involuntary resettlement or impacts on indigenous people are expected. No additional public consultations for the proposed program are required, as these were included in the government’s consultation programs related to reforms during the preparation of the NDS 2011–2020 (first

Article IV Consultation determined that Solomon Islands had a moderate risk of debt distress and was therefore eligible to receive 50% of its ADF allocation as grants.

9 ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

4

half of 2011) and the 2013 national budget (second and third quarter of 2012).

17. Risks and mitigating measures. Major risks and mitigating measures are summarized in Table 1.

Table 1: Summary of Risks and Mitigating Measures

Risks Mitigating Measures

Political instability weakens fiscal discipline and policy commitment.

ADB, through the core economic working group, will continue policy engagement with the government and key development partners, guided by the post-program monitoring framework.

There will be insufficient capacity in government to implement the program.

Technical assistance will be provided in a flexible manner where possible and appropriate.

The revenue position of the government deteriorates and impedes service delivery.

More capacity-building elements are expected to be part of external assistance provided by development partners.

Excessive expenditure growth will crowd out the ability of the government to provide social services, making it difficult to achieve and capitalize on the policy actions of the program.

ADB will provide recommendations and assistance on expenditure control and management.

ADB = Asian Development Bank. Source: Asian Development Bank.

III. PROCESSING PLAN

18. The program is categorized as low risk. It will require 4 person-months of international staff and 3 person-months of national staff. No project preparatory TA or a project design advance will be required.

19. The proposed processing schedule’s targeted milestones are: (i) reconnaissance mission (26 November–7 December 2012), (ii) approval of concept paper (5 December 2012), (iii) fact-finding mission (7–11 January 2013), (iv) circulation of the report and recommendation of the President (RRP) for comments (17 January 2013), (v) staff review meeting (30 January 2013), (vi) grant negotiations (18–19 February 2013), (vii) Board circulation of the RRP (4 March 2013), (viii) Board consideration (26 March 2013), and (ix) grant effectiveness (12 April 2013).

IV. KEY ISSUES

20. ADB’s previous reform interventions through the ERSP, from 2009–2011, have resulted in a quick rebound from the adverse impact of the 2008 global economic crisis. However, all stakeholders still need to be cautious of emerging issues to ensure sustainability of the reforms. In particular, Solomon Islands exhibits characteristics of fragility, such as (i) weak institutions and governance systems, (ii) heavy reliance on imported commodities, and (iii) significant vulnerability to external shock. There are other issues that need management attention: (i) anticipated slower economic growth may reduce the government’s revenue collection; (ii) government capacity and staffing may not remain adequate to implement the proposed program, which may delay achievement of the medium-term reform targets; and (iii) there have been signs of an erosion in fiscal discipline caused by political instability, such as increased spending from the discretionary constituency fund and reduced allocation to other budget expenditure items.

Appendix 1 5

BASIC PROGRAM INFORMATION

Aspects Arrangements

Modality ADF grant-financed, policy-based program

Financing ADF grant = $5 million

COBP/ RCOBP

The program is included in the COBP 2012–20141

Classification Sector (subsector): Public sector management (economic and public affairs management)

Themes (subthemes): Economic growth (widening access to markets and economic opportunities, promoting economic efficiency and enabling business environment, promoting macroeconomic stability); private sector development (policy reforms); and gender equity (gender mainstreaming)

Targeting classification: General intervention

Gender mainstreaming category: Effective gender mainstreaming

Location impact: National (high impact), urban (high impact), rural (medium impact), and regional (low impact)

Safeguards: Category C

Risk categorization

Low risk

Partnership(s) ADB has been working closely with the Government of Solomon Islands and development partners through the government-led, multipartner CEWG, since the establishment of that group in 2009. The proposed program is a continuation of ADB’s support to public sector management reforms through the CEWG. The government and key donors (ADB, Australia, New Zealand, Regional Assistance Mission to Solomon Islands, and the World Bank) formed the CEWG in March 2009 to collaboratively assist the government in its economic recovery efforts, particularly in the key area of economic and fiscal management. The program design is anchored in the government’s own medium-term reform program, which was prepared jointly with the CEWG partners. The government has engaged with the International Monetary Fund to maintain the country’s macroeconomic and fiscal stability through two standby credit facilities (approved in June 2010 and December 2011) and a proposed Poverty Reduction Support Program (to be approved in 2013 or 2014).

Use of a PBA A PBA will be used, reflecting a greater focus on (i) country ownership (through the government-led process); (ii) reliance on country systems (through strengthening of public financial management, budget process, and national development strategy systems); (iii) a comprehensive program and budget framework in Solomon Islands; and (iv) development coordination through the CEWG, which is considered to be a best-practice mechanism for policy coordination in the Pacific. The program encompasses the following features: (i) leadership by the Government of Solomon Islands; (ii) a single comprehensive program and budget framework; (iii) a formal process for development coordination and harmonization of development partner procedures for reporting, budgeting, financial management, and procurement; and (iv) efforts to increase the use of local systems for program design and implementation, financial management, monitoring, and evaluation.

Parallel PIU No parallel PIU will be established and used.

Department and division

Pacific Department / Pacific Liaison and Coordination Office

Mission leader K. Lao-Araya, Senior Private Sector Development Specialist, PARD; S. Ataata,

1 ADB. 2012. Country Operations Business Plan, 2012–2014: Solomon Islands. Manila.

6 Appendix 1

Aspects Arrangements

and members Solomon Islands Development Coordinator, PARD; M. de Villa, Associate Project Analyst, PARD; H. Everett, Financial Sector Specialist (Public Finance), PARD; Y. Kim, Counsel, OGC; S. Lee, Principal Social Development Specialist (Gender and Development), PARD; M. Lucich, Senior Economics Officer, PLCO.

ADB = Asian Development Bank, ADF = Asian Development Fund, COBP = country operations business plan, PBA = programmatic based approach, PIU = project implementation unit, PLCO = Pacific Liaison and Coordination Office. Source: Asian Development Bank.

PROBLEM TREE

Reduced prospect for

sustained economic

growth

Political

fragility

Insufficient delivery of

and inequitable

access to basic public

services

External

shock and

risks

Social

problems

caused by

unemployment

High poverty

incidence

Low living

standards

Weak

coordination

among relevant

agencies

Low

economic

productivity

Weak performance

and low

accountability of

state-owned

enterprises

Weak

performance in

revenue

collection

Insufficient

consultation with

stakeholders

Low voice by

marginalized

groups (women,

poor people in

rural area)

Inadequate

infrastructure and

resources for the

poor to access

social services

Lack of

commercialization of

state-owned

enterprises

Outdated laws

and poor human

capacity to

promote private

sectorNarrow economic

and tax bases

Outdated revenue

legislation and

weak collection

capacity

Low human

capital

Weak capacity

for public

procurement

App

end

ix 2

7

8 Appendix 3

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms Assumptions and Risks

Impact The Government of Solomon Islands effectively achieves sustained, diversified, and inclusive economic growth

Logging exports as a percentage of GDP reduced Baseline (2011): 22% Target (2016): 15%

Relative living standard of most vulnerable members improved, as measured by a rising expenditure share of the poorest 20% of households Baseline (2005–2006 survey): 7% Target (2016): 10%

National accounts, budget documents, CBSI quarterly reviews and annual reports, household income and expenditure surveys

Assumptions Global economy continues recovery

No major natural disasters

Risks Loss of political support for continuing reforms

Outcome The Ministry of Finance and Treasury maintains a strong fiscal position while delivering expanded and more equitable social services

Public debt to GDP is maintained at a sustainable level with no deterioration from the IMF assessment of moderate risk of debt distress Baseline (2012): 20.5% Target (2014): no more than 30%

Literacy rate increased Baseline (2005–2006): 77% Target (2014): 80%

Maternal mortality ratio reduced Baseline (2005–2006): 200 per 100,000 live births Target (2014): 195 per 100,000 live births

Ratio of girls to boy enrolment rate in primary and secondary education Baseline (2011): 80:100 Target (2014): 85:100

IMF Article IV and staff reports, national accounts, budget documents, CBSI quarterly reviews and annual reports, household income and expenditure surveys, the NDS, records and reports from Ministry of Health and Medical Services and Ministry of Education and Human Development

Assumptions Government has capacity and willingness to implement and sustain the policy adopted

Risks Budget affected by external shock

Appendix 3 9

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms Assumptions and Risks

Outputs 1. Better public

financial management

Public sector management and institutional assessment rating maintained or increased Baseline (2011): 3.1 Target (2014): 3.5

Civil society organizations, including women’s groups, consulted during budget formulation Baseline (2011): 0 Target (2014): 6

Budget documents, IMF Article IV and staff reports ADB Finding Balance report using audited statements of SOEs

PEFA reports

Assumptions Continued support for reform by the future government

Risks Local capacity in government agencies cannot match the reform requirements once technical assistance provided by RAMSI ends.

2. Greater economic efficiency

Rate of return on equity of the the SOE portfolio raised by at least 10% Baseline (2010): 3.1% Target (2014): 3.5%

Fiscal support to SOEs limited to funding made available through the CSO framework Baseline (2010): $x Target (2014): $0

Increase in pool of trained women with potential to become SOE board members Baseline (2011): x% Target (2014): y%

Increase number of formal businesses managed or owned by women Baseline (2011): x% Target (2014): x+5%

World Bank Group’s Doing Business Survey report

ADB Finding Balance report using audited statements of SOEs

Assumption Strong political commitment to SOE reforms

Risk Political interference in the management of SOEs

Fuel prices increase sharply.

3. Broader access to social services

Access to health services improved Baseline (2011): 67% of respondents to the annual people’s survey able to reach a health facility in 1 hour Target (2014): 70%

Net primary school enrollment rate increased Baseline (2008): 67% (94% in 2010) Target (2014): 99%

Household Income and Expenditure Survey, United Nations and/or ministry reports

Assumption There are complementary resources (e.g., transport and communication) or opportunities (e.g., time and community support) for the poor to connect or access the social services provided

Risk Lack of local capacity and counterpart resources to efficiently deliver equitable social services

10 Appendix 3

Activities with Milestones 1. Better public financial management

1.1 Consult with civil society organizations, including women's groups, in preparing the 2013 budget (Oct 2012)

1.2 Formulate and adopt monitoring and evaluation framework and processes for the NDS (Dec 2012)

1.3 Develop a procurement manual, standard bidding documents, and standard procurement contracts (Feb 2013)

1.4 Attorney General approves the release of the Customs and Excise Bill for public consultation (Feb 2013)

1.5 Adopt a debt management strategy (May 2012)

2. Greater economic efficiency

2.1 Adopt policy framework and administrative reforms to facilitate processes for women to register formal businesses (Feb 2013)

2.2 SIEA and SIWA agree on a mechanism for the reduction of SIWA’s debts to SIEA (May 2012)

2.3 Apply for Candidate Status to EITI International Secretariat completed (June 2012)

2.4 Community service obligation agreements are in place for at least two SOEs (June 2012)

2.5 Compliance with 2007 SOE Act regarding the preparation and submission of Statements of Corporate Objectives (Feb 2013)

3. Broader access to social services

3.1 Allocate no less than 22% and 10% of consolidated budget expenditure for delivery of education services in the 2012 and 2013 budgets (Dec 2012)

3.2 Allocate no less than 10% of consolidated budget expenditure for delivery of health services in the 2012 and in the 2013 budgets (Dec 2012)

3.3 Adopt a medium-term national education action plan that includes result-based targets aimed at improving gender equality in access to education services (June 2012)

3.4 Establish and operationalize a taskforce for gender mainstreaming of health policies (June 2012)

Inputs

ADB: grant of $5 million in 2013

Government: government officials’ and staff input to support program design, implementation, monitoring, and reporting

ADB = Asian Development Bank, CBSI = Central Bank of Solomon Islands, CEWG = core economic working group, CSO = community service obligation, EITI = Extractive Industry Transparency Initiative, EU = European Union, FMIS = financial management information system, GDP = gross domestic product, IMF = International Monetary Fund, NDS = National Development Strategy, PEFA = Public Expenditure and Financial Accountability Assessment, RAMSI = Regional Assistance Mission to Solomon Islands, SIEA = Solomon Islands Electricity Authority, SIWA = Solomon Islands Water Authority, SOE = state-owned enterprise. Source: Asian Development Bank.

Appendix 4 11

INITIAL POVERTY AND SOCIAL ANALYSIS

Country: Solomon Islands Project Title: Economic and Financial Reform Program

Lending/Financing Modality:

Policy-Based Program Grant Department/ Division:

Pacific Department/Pacific Liaison and Coordination Office

I. POVERTY IMPACT AND SOCIAL DIMENSIONS

A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy

The proposed program is closely aligned with the Asian Development Bank (ADB) country partnership strategy (CPS), 2012–2016 for Solomon Islands, which prioritizes public sector management as a key area of support. The CPS supports the country’s medium-term development strategy, i.e., the National Development Strategy (NDS) for 2011–2020, which aims to (i) alleviate poverty and ensure access to quality health care and education, (ii) improve living standards and livelihood of all communities, and (iii) have development benefits shared more evenly. The NDS was developed in close consultation with national and provincial stakeholders. The NDS was adopted by the cabinet in early August 2011 and is being implemented with assistance from ADB and the European Union.

In addition to the NDS, the government’s policy statement released in October 20101 includes gender equality

promotion as one of the guiding principles in governing the affairs of the nation, and also adopts 12 national objectives, including poverty alleviation in Solomon Islands through national action and international cooperation.

The proposed program will contribute to poverty reduction by helping protect the delivery of basic services to the vulnerable. The program comprises three outputs—better public financial management, greater economic efficiency of private and state-owned enterprise (SOE) operations, and broader access to social services for the vulnerable.

B. Targeting Classification

General Intervention Individual or Household (TI-H) Geographic (TI-G) Non-Income MDGs (TI-M1, M2, etc.) The grant proceeds will be channeled through the general national budget even though the program requires certain allocation shares proportional to the national budget to be allocated and spent on education and health, which promote poverty reduction.

C. Poverty and Social Analysis 1. Key issues and potential beneficiaries

The potential beneficiaries are the people of Solomon Islands, who benefit from broader access to social services such as maternal health and basic education.

There are strong needs for health care and primary and secondary education. This is because Solomon Islands' progress toward the Millennium Development Goals has been mixed. Human resource-related outcomes (health and education) are improving but are still poor by international standards. There are comparatively few experienced staff members to take on key public sector management roles.

Against the backdrop of a deteriorating macroeconomic position and lower revenue collection, the major constraint is a lack of public funding to finance social service delivery. The program grant proceeds will provide short-term adjustment costs that will allow the government to maintain reasonable shares in the national budget to be allocated for social services. The reform program aims to ensure sustainable and inclusive economic growth with measures that usher the country through the transition period and lead to a strong public financial management system, and ensure domestic capacity for public administration and security, as the Regional Assistance Mission to Solomon Islands is winding down.

2. Impact channels and expected systemic changes

The program will contribute to poverty reduction in several ways. Poverty reduction and social development are built into the proposed program through (i) sustained, equitable, and inclusive long-term economic growth built on better public financial management and an enabling business environment; (ii) stronger service delivery in health and education; and (iii) greater job creation as the private sector grows.

3. Focus of (and resources allocated in) the PPTA or due diligence

There is no project preparatory technical assistance (TA). Due diligence was supported by ADB’s ongoing engagement in the core economic working group (CEWG) process, analyses conducted for the CPS 2012–2016, and TA for Supporting the Implementation of the National Development Strategy, Pacific Private Sector Development

1 Government of Solomon Islands, Office of the Prime Minister. 2010. The National Coalition for Reform and

Advancement Government: Policy Statement. Honiara.

12 Appendix 4

Initiative, and Pacific Economic Management. Other development partners have been closely consulted. Partners from the Australian Agency for International Development, New Zealand Agency for International Development, and the European Union have agreed to peer-review the design and documentation of the proposed program.

4. Specific analysis for policy-based lending

The policy intervention requires specific budget allocation to fund education and health services, which benefit the poor and vulnerable groups. This is coupled with the requirement for the formulation and implementation of the national education action plan (NEAP), which aims to improve human capital. In the short term, the program will assist the poor through increased allocation to health and education spending, which will directly benefit the poor through better access to government services. In the medium term, the adoption of the NEAP, which targets access to secondary education, will assist the poor and particularly girls, given the gender gap in this area. Indirectly, the program will benefit the poor through better public financial management, which will free up resources for greater social spending and for promoting economic growth. Improvements to the business climate through the program reforms will also encourage job creation by the private sector.

II. GENDER AND DEVELOPMENT

1. What are the key gender issues in the sector/subsector that are likely to be relevant to this project or program? Solomon Islands ranks low in UNDP’s 2002 gender empowerment (11

th rank out of 12 countries in the region). While

laws and policies give boys and girls the same rights, significant differences persist in female to male enrollment and completion ratios in secondary education. Women also face economic disadvantages compared to men. Because women usually don’t own land and movable assets, they don’t have assets to pledge against loans, inhibiting their access to credit. Women lack time as they have a double burden of carrying economic activities and traditional work related to their family responsibilities.

2. Does the proposed project or program have the potential to make a contribution to the promotion of gender equity and/or empowerment of women by providing women’s access to and use of opportunities, services, resources, assets, and participation in decision making?

Yes No Please explain. The proposed program will promote women’s participation in decision making by requiring that women’s groups are consulted as part of the annual budget process. It will improve women’s access to productive resources by reviewing the process and laws for the administration of business names. The proposed program will improve women’s access to education through the adoption of a new education strategy that includes outputs to improve access to secondary education, the principal area of women’s relative disadvantage in education. The proposed program is also designed to give women greater opportunities to access better-quality health care through work carried out under the gender mainstreaming taskforce chaired by the permanent secretary of health and medical services, which was established in late 2011 and put into operation in 2012.

3. Could the proposed project have an adverse impact on women and/or girls or widen gender inequality? Yes No Please explain

4. Indicate the intended gender mainstreaming category: GEN (gender equity theme) EGM (effective gender mainstreaming) SGE (some gender elements) NGE (no gender elements)

III. PARTICIPATION AND EMPOWERMENT

1. Who are the main stakeholders of the project, including beneficiaries and negatively affected people? Identify how they will participate in the project design.

All residents of Solomon Islands are potential stakeholders in this policy-based program. Specific interest groups among stakeholders include private sector entities and women, particularly in rural areas, who are potential beneficiaries of proposed policy actions. Key implementing ministries—the Ministry of Finance and Treasury, Ministry of Development Planning and Aid Coordination, and the Ministry of Commerce—are also major stakeholders.

2. How can the project contribute (in a systemic way) to engaging and empowering stakeholders and beneficiaries, particularly the poor, vulnerable and excluded groups? What issues in the project design require participation of the poor and excluded?

The consultation has been embedded in the CEWG process. The program is based on the implementation of the government’s own strategies and plans, notably through the NDS 2011–2020, which was developed through a consultative approach and provides mechanisms for ongoing monitoring and public reporting.

3. What are the key, active, and relevant civil society organizations in the project area? What is the level of civil society organization participation in the project design?

Information generation and sharing Consultation Collaboration Partnership

The proposed program is designed and implemented in partnership and collaboration with the government and other CEWG development partners. Consultation in various forms has been carried out during formulation and implementation of the NDS 2011–2020 and the 2013 national budget.

4. Are there issues during project design for which participation of the poor and excluded is important? What are they

Appendix 4 13

and how shall they be addressed? Yes No While there are measures in the program that directly affect the poor, there has been considerable consultation between the government and all stakeholders as part of the NDS and annual budget processes. One particular measure in this program is the requirement that women’s groups are included in annual budget consultation.

IV. SOCIAL SAFEGUARDS

A. Involuntary Resettlement Category A B C FI

1. Does the project have the potential to involve involuntary land acquisition resulting in physical and economic displacement? Yes No

2. What action plan is required to address involuntary resettlement as part of the PPTA or due diligence process?

Resettlement plan Resettlement framework Social impact matrix

Environmental and social management system arrangement None

The program will not involve involuntary resettlement.

B. Indigenous Peoples Category A B C FI

1. Does the proposed project have the potential to directly or indirectly affect the dignity, human rights, livelihood systems, or culture of indigenous peoples? Yes No

2. Does it affect the territories or natural and cultural resources indigenous peoples own, use, occupy, or claim, as their ancestral domain? Yes No Melanesian and Polynesian comprise the vast majority of the population in Solomon Islands. While the tribal customs, traditions, and cultural practices differ, Solomon Islanders are seen as one people or nationality. There are no ethnic or cultural minorities that are indigenous to Solomon Islands. Reforms under the proposed program are all related to improved public sector management. No investment component, so the program is not likely to adversely affect indigenous peoples. 3. Will the project require broad community support of affected indigenous communities? Yes No The proposed program will implement reforms in line with the NDS, which emphasizes the importance of caring for vulnerable groups. The NDS was formulated in consultation with all stakeholders, including indigenous peoples in rural and remote areas. 4. What action plan is required to address risks to indigenous peoples as part of the PPTA or due diligence process?

Indigenous peoples plan Indigenous peoples planning framework Social Impact matrix Environmental and social management system arrangement None

V. OTHER SOCIAL ISSUES AND RISKS

1. What other social issues and risks should be considered in the project design?

Creating decent jobs and employment Adhering to core labor standards Labor retrenchment Spread of communicable diseases, including HIV/AIDS Increase in human trafficking Affordability Increase in unplanned migration Increase in vulnerability to natural disasters Creating political instability Creating internal social conflicts Others, please specify Medium

Government agencies’ capacity constraint remains a threat to the implementation of the program. 2. How are these additional social issues and risks going to be addressed in the project design?

Technical assistance to provide capacity building in coordination with other development partners.

VI. PPTA OR DUE DILIGENCE RESOURCE REQUIREMENT

1. Do the terms of reference for the PPTA (or other due diligence) contain key information needed to be gathered during PPTA or due diligence process to better analyze (i) poverty and social impact; (ii) gender impact, (iii) participation dimensions; (iv) social safeguards; and (vi) other social risks. Are the relevant specialists identified?

Yes No The program design draws on poverty, social, and gender analyses prepared for the CPS 2012–2016 (approved in March 2012).

3. What resources (e.g., consultants, survey budget, and workshop) are allocated for conducting poverty, social and/or gender analysis, and participation plan during the PPTA or due diligence?

The program design draws on poverty, social, and gender analyses prepared for the CPS 2012–2016 (approved in March 2012). The reforms are grounded in the NDS, which was the product of an extensive consultation process involving stakeholders in all provinces.

Source: Asian Development Bank.

14 Appendix 5

LIST OF ONGOING TECHNICAL ASSISTANCE

1. Technical Assistance for Pacific Private Sector Development Initiative (cofinanced by Australia) (Approved 2006)

2. Technical Assistance for Enhancing Engagement with Pacific Developing Member Countries (Approved 2008)

3. Technical Assistance for Strengthening Public Financial Management in Pacific Developing Member Countries (Approved 2008)

4. Technical Assistance for Establishment of the Pacific Infrastructure Advisory Center (Approved 2009)

5. Technical Assistance for Pacific Economic Management (Approved 2009)

6. Technical Assistance to Solomon Islands for Transport Sector Development (Approved 2009)

7. Technical Assistance for Pacific Private Sector Development Initiative, Phase 2 (cofinanced by Australia) (Approved 2009)

8. Technical Assistance to Solomon Islands for Support for the Formulation of a National Strategic Plan (cofinanced by Australia) (Approved 2010)

9. Technical Assistance to Solomon Islands for Supporting the Implementation of the National Development Strategy (Approved 2011)

App

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15

POLICY MATRIX FOR SOLOMON ISLANDS ECONOMIC FINANCIAL REFORM PROGRAM

Relevant policy action under ERSP (Accomplished as of August 2011)

Policy Actions (To be accomplished by February 2013)

Prior Actions are in bold Post-program partnership monitoring framework

(To be accomplished by December 2013)

Output 1: Improved public financial management

Implementation of a Cabinet endorsed communications and engagement strategy developed with key external stakeholders being implemented to explain and provide for effective feedback from the private sector and civil society on key policy actions by government.

1.1 Consult with civil society organizations including women groups in the preparation for 2013 budget

(Accomplished in October 2012)

Continuing consult with civil society organizations in the preparation of future Budgets and key public financial management reforms.

Formulation, development and adoption of a new multi-year (medium term) development strategy

1.2 Formulate and adopt monitoring and evaluation framework and processes for the National Development Strategy

(Prior Action. Pending the cabinet endorsement of a policy paper, expected by 15 December 2012.)

Implementation of the monitoring and evaluation framework and processes for the National Development Strategy.

Government adoption of improvements in financial expenditure controls and reporting, through institution of revised Financial Instructions, including concerning procurement.

1.3 Develop a procurement manual, standard bidding documents, and standard procurement contracts

(Prior Action. Partially accomplished. A Procurement Unit within MOFT was established and staffed as of July 2012. The manual and standard documents are being developed with targeted date of finalization by mid February 2013.)

Successful tenders awarded by the Central Tender Board, including name and amount, published on the Ministry of Finance and Treasury website.

Customs Act review underway overseen by a high-level committee.

1.4 Attorney General approves the release of the Customs and Excise Bill for public consultation

(Prior Action. Pending the cabinet endorsement of a policy paper, expected by mid February 2013)

Cabinet endorses the new Customs and Excise Bill to be tabled in Parliament.

2011 Budget and MTFF are adopted in alignment with the policy of fiscal consolidation, including adherence to the Honiara Club agreement, incorporating: - 2011 Budget is a balanced budget. - 2011 Budget restrains payroll charges as

ratio to GDP at no more than the 2010 ratio.

- 2011 Budget targets a sustainable government debt not exceeding 30% of GDP.

1.5 Adopt a debt management strategy

(Accomplished in May 2012)

The government operates within the framework of the debt management strategy, including setting up annual borrowing ceiling.

16

App

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Relevant policy action under ERSP (Accomplished as of August 2011)

Policy Actions (To be accomplished by February 2013)

Prior Actions are in bold Post-program partnership monitoring framework

(To be accomplished by December 2013)

Output 2: Enhanced economic efficiency

Companies Registry operational physically and through online electronic registry.

2.1 Adopt a policy framework and administrative reforms to facilitate improved processes for women and men when registering formal businesses.

(Prior Action. Pending the cabinet endorsement of a policy paper. Expected to be accomplished in mid February 2013)

Amendment to the Registration of Business Names Act was drafted and endorsed by Cabinet for tabling to Parliament.

Solomon Islands Electricity Authority (SIEA) debt restructuring endorsed and new

appointments made to senior positions.

2.2 SIEA and Solomon Island Water Authority (SIWA) agree on a mechanism for the reduction of SIWA’s debts to SIEA

(Accomplished in May 2012)

Monitoring the compliance to the agreement.

Endorsement by the Cabinet of the

Extractive Industries Transparency Initiative (EITI) principles, and direction to

prepare a new tax regime for the mining industry for submission to Parliament by end 2012.

2.3 Apply for Candidate Status to EITI International Secretariat completed

(Accomplished in June 2012)

Legal amendments removing barriers to EITI implementation prepared in consultation with the public.

State-owned enterprise (SOE) regulations on community service obligations and appointment of Directors being implemented.

2.4 Compliance with 2007 SOE Act regarding the preparation and submission of Statements of Corporate Objectives (SCOs)

(Prior Action. Partially accomplished. All SOEs are expected to submit the SCOs by February 2013)

Information on the SCOs is publicized on the MOFT website and via press release, including an outline of the nature of the CSO, the cost, and description on the government’s efforts to monitor the CSO.

Output 3: Expanded access to social services

2011 Budget as adopted protects to the extent feasible the delivery of core social services, especially basic education, rural health and rural transport services.

3.1 Allocate and spend no less than 22% of consolidated budget expenditure for delivery of education services in the 2012 and in the 2013 budgets, respectively (Dec 2012)

(Prior Action. Partially accomplished. Expected to be accomplished by December 2012 when the national budget was approved by the Parliament)

Maintain sufficient budget allocation to preserve the delivery of education services.

3.2 Allocate no less than 10% of consolidated budget expenditure for delivery of health services in the 2012 and 2013 budgets

(Prior Action. Partially accomplished. Expected to be

Maintain sufficient budget allocation to preserve the delivery of education services.

App

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17

Relevant policy action under ERSP (Accomplished as of August 2011)

Policy Actions (To be accomplished by February 2013)

Prior Actions are in bold Post-program partnership monitoring framework

(To be accomplished by December 2013)

accomplished by December 2012 when the national budget was approved by the Parliament)

3.3 Adopt a medium-term National Education Action Plan that includes result-based targets aiming to improve gender equality for access to education services

(Accomplished in June 2012)

Implement, monitor, and report the implementation of the National Education Action Plan.

3.4 Establish and operationalize a taskforce for gender mainstreaming of health policies

(Accomplished in June 2012)

Implement, monitor, and report the implementation of the recommendations by the taskforce.