Solomon Islands: Economic and Financial Reform Program

Transcription

1 Completion Report Project Number: Grant Number: 0339 April 2015 Solomon Islands: Economic and Financial Reform Program This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency Unit Solomon Islands dollar (SI$) At Appraisal At Program Completion (22 October 2012) (31 August 2014) SI1.00 = $ $ $1.00 = SI$ SI$ ABBREVIATIONS ADB Asian Development Bank CEWG core economic working group CPS country partnership strategy DMF design and monitoring framework DSA debt sustainability analysis EFRP economic and financial reform program GDP gross domestic product IMF International Monetary Fund M&E monitoring and evaluation MOFT Ministry of Finance and Treasury NEAP National Education Plan NDS national development strategy PFM public financial management RAMSI Regional Assistance Mission to Solomon Islands SIEA Solomon Islands Electricity Authority SIWA Solomon Islands Water Authority SOE state-owned enterprise TA technical assistance NOTES 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 Liaison and Coordination Office, PARD Team leader Team members H. Everett, Senior Country Specialist, PARD M. de Villa, Project Analyst, PARD R. He, Operations Assistant, PARD M. Lucich, Senior Economics Officer, PARD 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.

3 CONTENTS Page BASIC DATA I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 2 C. Program Costs 6 D. Disbursements 6 E. Program Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of the Recipient and the Executing Agency 7 K. Performance of the Asian Development Bank 7 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Institutional Development 12 F. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 13 C. Recommendations 14 APPENDIXES 1. Design and Monitoring Framework Policy Matrix Status of Compliance with Grant Covenants Gender and Development 29 i

4 BASIC DATA A. Grant Identification 1. Country 2. Grant Number 3. Program Title 4. Recipient 5. Executing Agency 6. Amount of Grant 7. Program Completion Report Number Solomon Islands 0339 Economic and Financial Reform Program Solomon Islands Ministry of Finance and Treasury $5.0 million PCR: SOL 1500 B. Grant Data 1. Reconnaissance Date Started Date Completed 2. Grant Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Grant Agreement 5. Date of Grant Effectiveness In Grant Agreement Actual Number of Extensions 6. Closing Date In Grant Agreement Actual Number of Extensions 22 October October February February March March June March December January Disbursements a. Dates Initial Disbursement 3 April 2013 Effective Date 27 March 2013 Final Disbursement 3 April 2013 Original Closing Date 31 December 2013 Time Interval 0 months Time Interval 8 month 3 days b. Amount ($ million) Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance Total

5 ii 8. Local Costs (Financed) - Amount ($) Percent of Local Costs Percent of Total Cost 0.0 C. Program Data 1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost Local Currency Cost Total Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Recipient Financed ADB Financed Other External Financing Total IDC Costs Recipient Financed ADB Financed Other External Financing Total = not applicable, ADB = Asian Development Bank, IDC = interest during construction. 3. Cost Breakdown by Program Component ($million) Component Appraisal Estimate Actual Foreign cost Total Program Schedule Item Appraisal Estimate Actual Other Milestones = not applicable.

6 iii 5. Program Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress a = not applicable. a = Program grants are not required to be rated. D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members Reconnaissance Mission October a, b Reconnaissance Mission a 26 November 7 December a, b Negotiation b Program Completion Review c 5 9 August c Program Completion Review c 4 15 August c = not applicable, a = senior private sector specialist, b = senior economics officer, c = senior country specialist. a Upgraded to fact-finding mission on 10 December b Negotiations took place by video conference, and no mission was fielded. c ADB participated in the fourth annual joint review mission and led the fifth annual joint review mission, which included review of the program.

7 I. PROGRAM DESCRIPTION 1. On 21 March 2013, the Asian Development Bank (ADB) approved a single-tranche policy-based grant to the Solomon Islands for the Economic and Financial Reform Program. 1 The program was designed to continue ADB s support for the efforts of the Government of Solomon Islands to reform public sector management, in coordination with other development partners. 2. The intended impact was improved public investment and delivery of services by the government. The intended outcome was for the government to provide expanded and more equitable social services while also maintaining a strong fiscal position. The impact and outcome were to be achieved through reforms to (i) upgrade public finance management, (ii) improve economic efficiency and the business-enabling environment, and (iii) broaden access to social services. 3. In March 2009, the government established a core economic working group (CEWG) of officials from the Central Bank of Solomon Islands, the Ministry of Development Planning and Aid Coordination, the Ministry of Finance and Treasury (MOFT), the Office of the Prime Minister, and development partner representatives from ADB, Australia, the European Union, New Zealand, the Regional Assistance Mission to Solomon Islands (RAMSI), and the World Bank. 2 Through the CEWG, development partners agreed to support implementation of the government s economic and financial reform program (EFRP). The reforms under ADB s program were drawn from the government s EFRP policy matrix. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. The program design was relevant at appraisal and remained relevant at program completion. The design was discussed extensively with the government and development partners and was consistent with the government s goals and ADB s country partnership strategy (CPS) for the Solomon Islands for The CPS focuses ADB s assistance on creating a more diversified and productive economy. In line with this strategy, ADB is supporting the government s national development strategy (NDS) for through assistance in three sectors: energy, public sector management, and transport. 4 ADB s assistance in public sector management aims to promote an environment that enables growth and development that is inclusive and led by the private sector. Toward this goal, ADB is supporting policy, regulatory, and institutional reforms and capacity building that (i) promote fiscal discipline; (ii) improve economic productivity through private sector development, including activities to reform state-owned enterprises (SOEs) and business law and improve access to finance; (iii) improve service delivery to the poor; and (iv) raise local awareness, understanding, and ownership of government reform programs and 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Grant to Solomon Islands for the Economic and Financial Reform Program. Manila. 2 RAMSI is a partnership between the people and government of Solomon Islands and 15 countries of the Pacific. RAMSI was deployed on 24 July 2003 at the request of the Solomon Islands government to help the country lay the foundations for long-term stability, security, and prosperity. After a transition process that began in mid-2013, RAMSI is now solely a policing mission, working in partnership with the Royal Solomon Islands Police Force. 3 ADB Solomon Islands: Country Partnership Strategy, Manila. 4 Government of Solomon Islands National Development Strategy, Honiara.

8 2 policies. The CPS calls for ADB support through the CEWG mechanism and in coordination with development partners for government-led public sector management reforms through policybased program grants or loans every other year. This Economic and Financial Reform Program followed two earlier ADB programs approved in 2010 and The program design was based on the annual EFRP policy matrix, which is developed through dialogue between the government and the CEWG development partners at a working level before a final review by the CEWG and cabinet approval. The government and development partner commitment to the process is firm, and adherence to the EFRP policy matrix, particularly in the MOFT and at the permanent secretary level, is strong. ADB drew on dialogue with both the core government ministries represented in the CEWG and stakeholders in the private sector and civil society when designing the program. The stakeholders included the Development Services Exchange (an umbrella organization for the country s nongovernment organizations), the Solomon Islands Chamber of Commerce, and the Solomon Islands Women in Business Association. B. Program Outputs 7. The intended program outputs were (i) better public finance management, (ii) greater economic efficiency for a business enabling environment, and (iii) broader access to social services. Required policy actions aimed at delivering these outputs are in Appendix Output 1: Better Public Finance Management 8. Better public finance management was to be delivered by achieving the medium-term goals of overall fiscal discipline and improved community participation in the budget process. This was to ensure effective expenditure controls to improve the efficiency, transparency, and equity of the revenue system and the allocation of public resources through stronger budgeting and planning processes Improving community awareness of the budgetary process. The program policy matrix required the government to consult civil society organizations, including women s groups, during the preparation of the 2013 budget. Through the MOFT s budget unit, the government began involving citizens throughout the country in the budget process. Consultations were conducted from May to June 2012 in almost all provinces during preparation of the 2013 budget. 10. A consultation report was released with the 2013 budget papers. 7 While the consultations tended to focus on micro-projects particular to each organization, the government considered the process was an important early step in improving participation in the budget process. The feedback was provided to the Ministries of Health and Medical Services, and Education and Human Resources Development, to be used by these ministries to inform 5 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster and Grant to Solomon Islands for Subprogram 1 Economic Recovery Support Program. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Grant to Solomon Islands for Subprogram 2 Economic Recovery Support Program. Manila. 6 The actions under this output were derived from the government s EFRP policy matrix and input from several sources. These included European Union. Government of Solomon Islands Public Expenditure and Financial Accountability Assessment. Draft (2012). Unpublished; World Bank Solomon Islands Operations Procurement Review. Washington, DC; World Bank. Solomon Islands Public Expenditure Review Unpublished; and ADB. An Analysis of Customs Revenue Issues in Solomon Islands Unpublished. 7 Government of Solomon Islands Solomon Islands Budget 2013: Budget Strategy and Outlook. Budget Paper: Volume 1. Honiara.

9 3 allocations and policy proposals. The MOFT s budget unit has agreed that this process will be undertaken for every second budget in the future. 11. Strengthening budgeting and planning processes. A recognized weakness of development plans in Solomon Islands prior to the NDS was the lack of an effective monitoring and evaluation (M&E) framework. Under the program, the government was to develop and establish a results-oriented assessment and reporting framework that would monitor progress on key components of the NDS to improve planning processes. The program supported the formulation and adoption of an M&E framework for the NDS by developing results-oriented M&E capacity in the Ministry of Development Planning and Aid Coordination. An M&E unit was established in August The framework was approved by the NDS task force in October 2012 and endorsed by the cabinet in December The first report under the new framework was prepared in 2013 which includes a comprehensive evaluation of progress towards national development objectives Ensuring effective expenditure controls. The program required that the MOFT develop a procurement manual, standard bidding documents, and standard procurement contracts to constrain the corruption and leakage that undermine service delivery, allocation efficiency, and fiscal discipline. Procurement compliance was strengthened with the adoption of a procurement reform plan in July 2012 and the staffing of a dedicated procurement unit in the MOFT in October To further improve the operation of the unit, the government developed and adopted the procurement manual, standard bidding documents, and standard procurement contracts. They are now being applied across Government ministries and the documentation has proved to be adequate to conduct the procurement of works, and goods and services successfully. 13. Improving customs administration and revenue collection. Another program action required government approval of the release of a draft customs and excise bill for public consultation. The government approved the release of the draft bill in February Consultations on the bill have continued since the program ended with support of ADB regional technical assistance (TA) for private sector development under the project s business law reform work stream. 9 The final draft of the Bill has been agreed with the Ministry of Finance and Treasury. It is anticipated that the Bill will be presented to the Solomon Islands Parliament in its last legislative session of 2015 or its first session of Achieving overall fiscal discipline. The program policy matrix required the government to adopt a new debt management strategy. This action evolved from the requirement that there be no public borrowing until the 2005 Honiara Club Agreement between the country and several of its development partners was reviewed. 10 The strategy was endorsed by the cabinet in May 2012 and by representatives of the Honiara Club in July It has been incorporated into the amended Honiara Club Agreement. The strategy sets guidelines for all aspects of debt management and stipulates mechanisms for exercising prudence in borrowing 8 Government of Solomon Islands Implementation of the National Development Strategy: 2011 to 2020: Medium Term Priorities and Performance Evaluation. Honiara. 9 ADB Technical Assistance for the Pacific Private Sector Development Initiative, Phase III. Manila (TA 8378 REG, $30,500,000, approved on 6 June 2013, cofinanced by the Government of Australia and the Government of New Zealand). 10 The agreement is Minutes on Restructuring the External Debt of Solomon Islands, which was signed in Honiara, Solomon Islands, on 20 October 2005 by the delegations representing Solomon Islands, Australia, the European Commission, the European Investment Bank, and the International Fund for Agricultural Development. The agreement was a key instrument for guiding the government s achievement of overall fiscal consolidation to solve a public debt and arrears problem that began in 2000.

10 4 and the use of public debt, which has improved the government s debt position (table 1). The MOFT established a debt management advisory committee under the program. It is advising the minister of finance and treasury on new borrowing proposals and their alignment with the guidelines laid down under the strategy. The government set and is adhering to annual thresholds for public borrowing SI$150 million in 2012, SI$160 million in 2013, and SI$250 million in Table 1: Debt Indicators, e 2015p External debt service (% of exports of goods and services) Total external debt (% of GDP) e = estimate, p = projection. Source: Asian Development Outlook database. 2. Output 2: Greater Economic Efficiency for Business Enabling Environment 15. The second intended output involved creation of an enabling environment for the private sector, enhancement of the corporate governance of SOEs, and improving transparency in the resources sector. 16. Creating an enabling environment for the private sector. The program policy matrix required that the government adopt a policy paper recommending legislative and administrative reforms of the business names registration process to facilitate improved processes for registering formal businesses. This was part of a continuing government reform effort to create an enabling environment for the private sector, reduce the cost of doing business, and ensure a level playing field for all businesses. Under the program, cabinet endorsed a policy paper on reform of the business names registration process. The new Registration of Business Names Act was passed in 2014 after program completion and the development and implementation of a Business Names Registry will occur over Enhanced corporate governance of state owned enterprises. The government was required under another program policy action to settle arrears owed by Solomon Islands Water Authority (SIWA) to Solomon Islands Electricity Authority (SIEA). These SOEs along with the Minister of Finance and the Minister of Mines, Energy, and Rural Electrification signed a final debt settlement agreement on 31 May 2012 that included provision for (i) a capital injection by the government to SIWA to be passed on to SIEA; (ii) the conversion of some of SIWA s debt to SIEA into an interest-free loan; and (iii) a write-off of the remainder of SIWA s debt to SIEA. 18. To enhance the corporate planning processes of the country s eight SOEs, the program required and supported the preparation of statements of corporate objectives. This also complied with the country s 2007 SOE legislation requirement that each SOE prepare and submit this statement as a rolling 3-year document to the responsible minister every year. The SOEs all prepared and submitted their statements for In addition, the government began to collaborate through the MOFT s economic reform unit with the Solomon Islands Chamber of 11 While all SOEs submitted statements of corporate objectives in 2013, one statement did not conform to the guidelines issued by MOFT. In 2014, statements of corporate objectives were prepared by all SOEs, except for two.

11 5 Commerce to implement a corporate governance services initiative to expand the pool of women qualified to serve on SOE boards Enhanced transparency in the resources sector. The government fulfilled another required policy action by applying to make Solomon Islands a candidate country under the Extractive Industries Transparency Initiative (EITI). At the time of program design, the reopening of the Gold Ridge mine had the potential to raise community tensions which created a need for the government to work with the mining companies and local communities to find ways to make the reporting of mining revenues more transparent. 13 This was to be facilitated by government participation in the EITI, the global standard to promote openness and accountable management of natural resources. Solomon Islands produced its first two EITI reports covering the 2012 and 2013 financial years on 28 June 2014, two days ahead of its 30 June deadline. As of 31 December 2014, Solomon Islands was classified as an EITI candidate country i.e., one implementing the EITI but not yet meeting all requirements. 3. Output 3: Broader Access to Social Services 20. Increased budget allocation to health and education. Budget support provided under the program enabled the government to increase spending on the social services that matter most to the poor, the vulnerable, and women. The program required minimum budget allocations for education and health, and the government met and exceeded these benchmarks. It allocated 23.7% of consolidated expenditure in the 2013 budget for delivering education services, and 16.0% for health services. This raised overall social expenditure from 34.0% in 2012 to 39.7% in Gender equity in education. The government adopted policy plans and processes under the program to improve equitable access to social services. The program required that the government adopt the medium-term National Education Action Plan (NEAP), The plan was adopted and includes result-based targets for more equitable access to education services. It also involves a participatory assessment of the implementation of the previous NEAP for The new NEAP builds on earlier progress by expanding access to early childhood education, secondary education, and technical and vocational education and training. Particular emphasis was put on improving access for girls to senior secondary, technical, and vocational education and training, as well as to tertiary education. The new NEAP also includes gender equity targets and measures to promote the enrollment of girls in secondary school and technical colleges. 22. Gender mainstreaming of health policies. Another program policy action completed by the government was the establishment and operationalization of a task force for mainstreaming gender in health policies. The national health task force, comprising permanent secretaries and key stakeholders, was established to oversee gender-mainstreaming activities in the health sector and held its first meeting in September In November 2012, a gender 12 This work has continued after program completion with support of ADB s regional Pacific Private Sector Development Initiative TA as part of the project s economic empowerment of women work stream. Refer to Appendix 1 for the number of women SOE directors, number and percentage of female shareholders, and number and percentage of female directors. The Solomon Islands SOE portfolio has undergone a dramatic turnaround since It is now the most profitable portfolio in the Pacific and in the benchmarking sample in ADB s 2014 Finding Balance assessment. Average return on equity of the portfolio increased from 12% in , to 6% for , and 15% in ADB Finding Balance 2014: Benchmarking the Performance of State- Owned Enterprises in Island Countries. Manila. 13 In April 2014, mining operations were suspended at the Gold Ridge mine.

12 6 focal point was added in the Ministry of Health and Medical Services to serve the task force. The task force is responsible for (i) coordinating the gathering of sex-disaggregated data and gender analysis from government ministries and stakeholders, (ii) building the capacity of human resources to ensure that plans and budgets are gender sensitive, and (iii) undertaking gender auditing and stocktaking of health sector policies. Appendix 4 details the achievements and qualitative results of the program that relate to gender. C. Program Costs 23. ADB provided a grant of $5 million from ADB s Special Funds resources to help finance the program. The grant size was determined with due consideration of (i) the relative importance of economic and financial reform for ensuring sustained economic growth, (ii) the development financing needs of the country, (iii) the availability of additional financing from other development partners, and (iv) the significance and complexity of the program s policy actions. 24. The grant proceeds of $5 million were equivalent to approximately 0.5% of the country s 2013 gross domestic product (GDP). Together with support from other development partners, it made a substantial contribution to the closing of a recurrent $9 million financing gap. This allowed a small budget surplus in 2013 to rebuild a fiscal buffer of at least 2 months of recurrent spending after the cash reserves were depleted in The rebuilding and maintenance of this buffer was important due to the volatile nature of domestic revenues. It was also a key target and recommendation of the International Monetary Fund (IMF) program for the country. 14 D. Disbursements 25. Program funding was provided as a single tranche grant and was disbursed when the government met the conditions for effectiveness, including completing the agreed prior policy actions set forth in the EFRP policy matrix. Grant proceeds were disbursed on 3 April 2013 in accordance with ADB s simplified disbursement procedures and requirements for program loans. 15 E. Program Schedule 26. The program was carried out from 1 April 2012 to 31 December The grant agreement for the program was signed on 26 March 2013 and became effective on 27 March The grant was fully disbursed on 3 April The program was closed on 16 January 2014, 16 days behind schedule. F. Implementation Arrangements 27. The implementation arrangements were satisfactory. The MOFT was the executing and implementing agency and responsible for overall program implementation. This included implementing all the required policy actions, administering the program, disbursing funds, and maintaining all program records. Program monitoring made use of the government s own processes, including the CEWG mechanism. 14 On 7 December 2012, the executive board of the IMF approved a 3-year arrangement under the Extended Credit Facility for Solomon Islands in an amount equivalent to SDR1.04 million (about $1.59 million), or 10% of the country s quota. 15 ADB Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

13 7 28. At the request of the CEWG, ADB participated in periodic joint missions to review performance of the EFRP with other development partners. 16 The reviews (i) assessed progress against the EFRP policy matrix to inform development partner decisions on the provision of budget support, (ii) provided recommendations on the development of the next EFRP matrix, and (iii) analyzed and commented on the CEWG purpose and process. 29. The government continued to keep ADB informed of the outcome of policy discussions with other multilateral and bilateral agencies that had implications for program implementation, as well as providing ADB with the opportunity to comment on any resulting policy proposals. G. Conditions and Covenants 30. The program used ADB s policy-based program modality and was based on the development policy letter of 15 February 2013 and the policy matrix (Appendix 2). All 13 of the policy actions identified in the EFRP policy matrix were achieved. 31. All of the covenants under the grant agreement were complied with (Appendix 3). No covenants were modified, suspended, or waived during the program period. H. Related Technical Assistance 32. ADB provided no country-specific TA. RAMSI s Financial and Economic Management Strengthening Program made a significant contribution to the ADB program. Advisors, largely from central agencies of the Government of Australia, helped develop and implement a number of reforms aimed at strengthening the government s financial management processes and systems. 17 In addition, support was provided under the ADB s regional TA under two phases of the Pacific Private Sector Development Initiative. I. Consultant Recruitment and Procurement 33. The program did not finance the engagement of consultants. J. Performance of the Recipient and the Executing Agency 34. The performance of the recipient and the executing agency is rated satisfactory. The government led the CEWG and the work of designing and implementing the EFRP on which the ADB program was based. The government s leadership was instrumental in mobilizing support from development partners. The MOFT (i) ensured that the program was executed in accordance with the grant agreement, (ii) coordinated with other government agencies, (iii) facilitated information exchange, (iv) monitored program performance, and (v) participated in the joint review missions. Coordination between the government agencies was good, and ADB was invited to participate in regular policy dialogue on all aspects of the reform effort. ADB regional TA was used effectively by the responsible agencies (para. 32). K. Performance of the Asian Development Bank 35. The performance of ADB is rated satisfactory. ADB staff at headquarters and the Pacific Liaison and Coordination Office in Sydney, along with the Solomon Islands Development 16 CEWG Joint Review Mission Report of the Fourth Annual Joint Review Mission. Honiara; CEWG Joint Review Mission Report of the Fifth Annual Joint Review Mission. Honiara. 17 RAMSI s development assistance programs have now been absorbed into bilateral aid programs.

14 8 Coordination Office in Honiara, played a key role in helping the government design its policy reform program and in working through the CEWG process to mobilize harmonized reform support from other development partners. ADB staff monitored the progress of reform activities and ensured that all program policy actions were completed. 36. ADB participated in all CEWG meetings during the program period to sustain effective policy dialogue with the government and make sure that reform implementation would continue after the program ended. ADB participated in the joint review missions. Through its Private Sector Development Initiative regional TA, it also maintained an active role in supporting the activities to deliver greater economic efficiency for a business enabling environment. III. EVALUATION OF PERFORMANCE A. Relevance 37. The program is rated relevant. Its impact and outcome were consistent with the government s development strategy, ADB s strategy for Solomon Islands, and ADB s strategic objectives at the time of approval and evaluation. The program was also fully aligned with the government s EFRP. The policy measures carried out under the program responded to the challenges faced by the government. At the time of program design, the government was expecting growth to moderate from the high rates experienced in 2010 and GDP growth was 7.9% in 2010, 10.6% in 2011, 4.8% in 2012, and declined to 2.9% in 2013 and -0.2% in As a result, the government wanted to continue executing the EFRP in pursuit of Solomon Islands growth and development The government s EFRP is based on three pillars public financial management (PFM), budget reform, and economic growth. It builds on progress achieved since 2009 and aims to achieve the two overarching financial and economic policy objectives of the government s medium-term fiscal strategy for : (i) structural reform to make Solomon Islands a reliable place to do business and invest and allow industries to grow; and (ii) an affordable and sustainable budget process that limits debt to a manageable level, improves decision making, and focuses on achieving the development goals of Solomon Islands. 20 The EFRP was built around three themes from the NDS: (i) strengthening the government s budget preparation and planning systems to ensure that resources are applied to sustainably and effectively support better quality services for Solomon Islands, (ii) improving the quality of budget execution so that resources intended for the delivery of services achieve their intended purpose, and (iii) improving the environment for private sector investment. The ADB program was designed in line with these three themes. 39. The program was also relevant to the government s need for budget support. Multidonor budget support is increasingly recognized as an effective way to move economic reforms forward and support service delivery in Pacific island countries. 21 The CEWG process has underpinned a significant increase in mostly sector-specific budget support by CEWG 18 Asian Development Outlook database and IMF Staff Report for the 2013 Article IV Consultation and Second Review under the Extended Credit Facility Arrangement and Request for Modification of Performance Criterion. Washington DC. 19 Development policy letter from the minister of finance and treasury to the President of ADB, 15 February Solomon Islands Government Medium Term Fiscal Strategy: August 2013 Update. Honiara. 21 ADB, Australian Department of Foreign Affairs and Trade, New Zealand Ministry of Foreign Affairs and Trade, Pacific Financial Technical Assistance Centre, and the World Bank Good Practice Principles for Multi-Donor Coordinated Budget Support. Unpublished.

15 9 development partners for Solomon Islands since This support grew from SI$109 million in 2008 to SI$396 million in 2010 to help the government deal with the impact of the global economic crisis. Budget support has remained at relatively high levels SI$248 million in 2011; SI$323 million in 2012; and SI$413 million in 2013, including the $5 million disbursed under this program (footnote 18). Solomon Islands was also able to significantly increase domestic revenue mobilization during this period due to the reforms supported by the CEWG, and its overall resource envelope expanded significantly. B. Effectiveness in Achieving Outcome 40. The program is rated effective in achieving its envisaged outcome, which was to ensure that the government maintained a strong fiscal position while delivering expanded and more equitable social services. The program outcome was to be measured through targets to (i) maintain the ratio of public debt to gross domestic product at a sustainable level, with no deterioration in the IMF assessment of a moderate risk of debt distress; and (ii) raise the average country performance assessment rating for policies affecting social inclusion and equity. Actual performance against the targets and indicators are in the design and monitoring framework (DMF) in Appendix Ratio of public debt to gross domestic product. The ratio of public debt to GDP has been steadily declining, and the DMF target of no more than 30% in 2014 was achieved 30% represents the government s ceiling for public debt under its debt management strategy. 22 Total external debt as a percentage of GDP was 19.8% in 2010, and this was estimated to decline to 11.5% in 2014 and remain reasonably stable through to end of 2018 (footnote 18). 42. The government takes a conservative approach to debt management. Due to the uncertainty of government commitments and spending patterns, MOFT s economic reform and debt management units stress-test the portfolio. MOFT has established a debt management advisory committee that reviews new borrowing proposals, keeping in mind the borrowing ceiling. 43. According to the IMF s debt sustainability analysis (DSA) in 2013, Solomon Islands continued to face a moderate risk of debt distress i.e., no change in rating from the DSA in Under the 2013 DSA baseline scenario, all external public and publicly guaranteed debt indicators remained below the policy-relevant thresholds. However, alternative scenarios and stress tests resulted in a significant rise in debt indicators over the projection period. The shock scenario results underscore the importance of caution in external borrowing and of structural reform measures to broaden the export base in a country that is heavily reliant on imports, development partner assistance, and foreign direct investment. 44. Policies affecting social inclusion and equity. ADB s country performance assessment process establishes a social inclusion and equity rating for government policies by measuring performance in the following areas: (i) gender equality, (ii) equity of public resource use, (iii) building human resources, (iv) social protection and labor, and (v) policies and institutions for environmental sustainability. The baseline score for 2012 was 2.9, and the DMF target was 3.1 for By 2014, the score for four criteria remained the same; however there was a small decline in the score for equity of public resource use (Table 2). 22 Government of Solomon Islands Debt Management Strategy. Honiara. 23 IMF Staff Report for the 2013 Article IV Consultation and Second Review under the Extended Credit Facility Arrangement and Request for Modification of Performance Criterion Debt Sustainability Analysis. Washington, DC.

16 10 Table 2: Policies for Social Inclusion/Equity Rating, Equity of Public Resource Use a Building Human Resources Social Protection and Labor Policies and Institutions for Environmental Sustainability Gender Year Equality Average a This criterion assesses the extent to which the pattern of public expenditures and revenue collection affects the poor and is consistent with national poverty reduction priorities. The decline between 2012 and 2013 resulted from a reduction in each of the three sub-criteria making up this score to more accurately reflect the performance of the Solomon Islands against the sub-criteria. Source: ADB Country Performance Assessment (CPA) Ratings. Manila; ADB Annual Report on the 2013 Country Performance Assessment Exercise. Manila; and ADB Annual Report on the 2012 Country Performance Assessment Exercise. Manila. 45. While the 2015 country performance assessment rating for social inclusion and equity is not yet available, alternative data sources demonstrate improvement in this area. Government budget allocations have shifted significantly since the establishment of the CEWG in 2009 to focus on social sectors and broad spending priorities signaled by budget allocations seem to be consistent with the goals of the government s NDS and the objectives of CEWG budget support. 24 The budget allocation for health and medical services has risen by approximately 72% between 2010 and 2014, while the budget allocation for education and human resource development has risen by approximately 93% over the same period. Actual expenditure on health increased from approximately 10% of total expenditure to 16% over 2010 to 2014, while expenditure on education increased from approximately 16% of total expenditure in 2010 to 25% in More generally, the 2013 evaluation of progress towards national development objectives draws from a number of data sources to report progress across the eight objectives of the NDS (footnote 8). This first performance report acknowledges the incompleteness of the coverage as recent data is not available for many of the indicators. However, in health, the country is already comparable with other medium-status countries (in terms of the Human Development Index) and health-related indicators for vulnerable children and women, as well as of general health outcomes, reflect this level of achievement and on-going rate of progress. In education, the report notes there has been some progress in education-related indicators (although progress has been slow, particularly over the last few years). This assessment is confirmed by the Millennium Development Goals Country Progress Snapshot which provides an overview of progress achieved at the country level since Across 12 indicators for which trend data is reported, Solomon Islands have made improvements in C. Efficiency in Achieving Outcome and Outputs 47. The program is rated efficient, since program reforms were carried out efficiently and successfully with few delays or impediments. 24 CEWG Joint Review Mission Report of the Fourth Annual Joint Review Mission. Honiara (page 24). 25 Ministry of Finance and Treasury Solomon Islands Budget Budget Strategy and Outlook. Budget Paper: Volume 1. Honiara. Figures represent both recurrent and development budget and expenditure. 26 United Nations. Millennium Development Goals Indicators. MDG Country Progress Snapshot: Solomon Islands. (accessed 31 March 2015).

17 The CEWG mechanism helped to implement the reforms efficiently and reduce the transaction costs for the government and development partners. ADB s program covered 13 of 77 policy actions laid down in the government s EFRP and achieved all 13 by 28 February Follow-up was delayed on one action. The required development of a procurement manual, standard bidding documents, and standard procurement contracts was completed by 28 February 2013, but the documents were not issued to ministries until May 2013 and became effective only from 1 July D. Preliminary Assessment of Sustainability 49. The program is rated likely to be sustainable, primarily because the government is expected to continue the EFRP s economic and financial reforms. The preparation of an annual policy matrix aligned with the EFRP and the CEWG mechanism is now firmly established in government and development partner processes. The government has demonstrated strong ownership and commitment to the CEWG and to making further progress on the reform agenda. For these reasons, it highly probable that the program will be sustainable over the medium and the long terms. 50. The practice of ensuring a consistent budget allocation for education and health has continued. In line with the new policy matrix, the focus has moved to provincial health from health generally and to primary education from education in general. In 2014, the Ministry of Health and Medical Services was to allocate no less than 37.0% of its recurrent budget to provincial health, and this target was achieved (37.4%). Similarly, 2013 average expenditure per primary student had to be equal to the 2012 average expenditure per primary student (SI$1,769) indexed to inflation. This target was also met. 51. The gains in fiscal stability will be difficult to maintain, however. This is due to the impact floods in April 2014 had on major economic sectors. The Solomon Islands economy was later estimated to decline by 0.2% in 2014, a major reversal from the previous expectation of 3.0%. Growth is expected to recover to 3.0% in 2015, although potential long-term issues in the mining sector pose a key risk to the near-term outlook (footnote 18). Reconstruction spending will further strain already tight government resources. This adds to existing concerns about the quality of expenditure on tertiary scholarships, public wages, and constituency development funds. 52. Solomon Islands also faces important medium-term challenges. Growth since the end of civil unrest in 2003 has been driven by logging, increases in assistance from development partners, and most recently mining. Logging output is however expected to contract significantly as natural forest stocks are exhausted. After the 2014 closure of the Gold Ridge mine, mining prospects are uncertain. Major improvements in the regulatory environment for mining will likely be required before new investment can be attracted. Assistance from development partners is not expected to increase and may decline in some areas. Without sufficient drivers of overall growth, prospects for greater output, government revenue, and job creation are uncertain. The country needs to mobilize new investment and identify new sources of growth and employment if recent improvements in living standards are to be maintained. These challenges all necessitate an ongoing focus on implementing the EFRP. 27 The 13 policy actions in the program were selected based on (i) the significance of the reforms that were proposed, (ii) the linkage with ADB s existing operations in the Solomon Islands, and (iii) the alignment with the two earlier ADB programs approved in 2010 and 2011.

18 12 E. Institutional Development 53. The support of development partners for the EFRP process has bolstered institutional development, but government capacity to manage the overall reform process and design and implement specific reforms is extremely thin. The public sector lacks the resources to attract and retain staff with the necessary skills, as it does in many other areas of government activity. Weakness in the government s employment and remuneration systems aggravate the problem. 54. The substantial TA program provided primarily by RAMSI has been able to deal with capacity constraints only partially (para. 32). Despite TA from CEWG members and other development partners, such as the IMF, the capacity problem remains acute and is the major obstacle to effectively executing the EFRP, especially at the implementation level. The design of the EFRP took the weak capacity environment into account, but the reform program may need to be better aligned with available capacities. F. Impact 55. The joint review mission undertaken in 2013 concluded that the CEWG process and associated budget support have been important to bring about economic and financial stability and overall improvements in a range of social indicators during (footnote 16). 56. The DMF had three indicators to measure the impact statement; however the availability of data to measure performance against these indicators is limited. The two impact indicators for which data is available show an improvement over the baseline scores (Appendix 1). Maternal mortality declined from per 100,000 live births in 2008 to 93.0 in An improving trend is also reported in the Ministry of Health and Medical Services Statistical Core Indicator Report which reports absolute number of maternal deaths as 18 (2010), 23 (2011), 16 (2012), 15 (2013), and 13 (2014, projected). 29 The literacy rate rose from 77% in to 84.1% in 2009 (however this data is prior to the start of the ADB program) Budget support helped Solomon Islands recover relatively quickly from the fiscal crisis in 2009 and improve its performance across a range of fiscal indicators. For example, government revenue rose from 30.5% of GDP in 2009 to 34.5% in 2012 and 32.9% in Fiscal surpluses have occurred in all years since 2009, although they are now projected to drop off. Over the program period, the government has reduced inflation and gross debt, increased reserves, and strengthened the fiscal and current account position. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 58. The program is rated successful overall. Together with contributions from other development partners, the program grant proceeds of $5 million helped close the $9 million 28 Pacific Islands Forum Secretariat Pacific Regional MDGs Tracking Report. Suva. 29 Ministry of Health and Medical Services and World Health Oprganization MHMS 2014 Statistical Core Indicator Report. Honiara. 30 Solomon Islands National Statistics Office Population and Housing Census. Honiara. Note that these are self-reported literacy rates, and tested or assessed literacy rates are substantially lower. Latest data available.

19 13 recurrent financing gap in the 2013 budget. The final budget outcome reported a fiscal surplus of SI$181.6 million, against a revised budget deficit of SI$259.2 million This rating is consistent with the conclusion of the joint review mission in 2013 (footnote 16). The retrospective review of the CEWG and the EFRP matrix used a framework developed and applied by the Organisation for Economic Co-operation and Development to evaluate budget support in several countries. 32 The framework identifies five levels of analysis budget support inputs, direct outputs, induced outputs, outcomes, and impacts. While the analysis it produces is at best indicative and by no means a full evaluation, the framework provides a comprehensive and established structure. The analysis and the review concluded that the CEWG process and the EFRP matrix have been successful in the areas they focused on. Although it was difficult to establish this conclusively, the joint review mission found that the economic and financial reform progress made to date would not have been possible without the CEWG mechanism and the EFRP matrix. B. Lessons 60. The annual review mission undertaken jointly by the government and development partners (i) assessed progress against the EFRP policy matrix to inform development partner decision making on the provision of budget support; (ii) provided recommendations on the development of the next EFRP matrix; and (iii) analyzed and commented on the CEWG purpose and process. The lessons and recommendations in paras are drawn from this process. 61. Country ownership. Country ownership is critical to successful implementation of the EFRP. The effectiveness of the EFRP and the CEWG mechanism has reflected the strong leadership of the minister of finance and his permanent secretary; support from the prime minister, other ministers, and senior government officials; and the commitment of development partners to support these processes. 62. Use of country systems. The CEWG process has helped to channel a growing share of development partner assistance through government systems and as a result reduce transaction costs over a narrow front of activity, and make greater use of country systems in line with development partner commitments. In , the portion of recurrent and development expenditures through budget support increased. Recurrent budget grants comprised 5.2% of total revenue and grants in 2009 and rose to 9.6% in 2013 (footnote 18). 63. Benefits of dialogue and tight focus. The tight focus of the EFRP and the ADB policy matrix has helped to strengthen ownership by the government. The CEWG policy dialogue contains three main elements: (i) discussions on the design and implementation of the EFRP policy matrix, (ii) regular CEWG meetings, and (iii) the annual joint review missions. Policy dialogue was anchored on the EFRP matrix with its objectives of strengthened PFM, budget reform, and economic growth. The CEWG has made an important contribution to harmonizing dialogue around a narrow set of issues and reducing transaction costs. 64. Progress fairly steady but slow. Implementation of the EFRP has been satisfactory but has often taken longer than anticipated, particularly in the area of legislative reform. The number of policy actions and reforms monitored through the EFRP has varied greatly each 31 Government of Solomon Islands Final Budget Outcome. Honiara. 32 Organisation for Economic Co-operation and Development Evaluating Budget Support Methodological Approach. Paris.

20 14 year 49 in 2010, 31 in 2011, 77 in 2012, and 29 in While reform actions were initially evenly divided between PFM and budget reform on the one hand and economic growth on the other, the clear focus in later years has been on public expenditure and financial management. The joint review mission assessment each year has typically shown that more than one-half of the actions planned have been completed. 33 The performance on actions related to economic growth and the business environment seem to have been stronger in most years than performance on those related to public expenditure and financial management. With the exception of 2011, the share of total actions considered to be off track i.e., no progress has been less than 10%. However, almost all legislation has been several years behind the intended timetables and therefore EFRP policy actions that include legislative reform need to have realistic timelines. C. Recommendations 65. The government still faces many challenges as it continues to implement the EFRP. Several areas merit attention and follow-up from ADB and the government. 1. Program Related 66. The EFRP has focused primarily on monetary and fiscal stability and strengthening the institutional framework for public expenditure and financial management. The main challenges now are (i) ensuring that improved financial management systems translate into improved public service delivery, and (ii) refocusing on economic growth. 67. Improving public service delivery. It is recommended that the focus now should be on ensuring that the significant progress made in strengthening the institutional framework for PFM yields actual improvements in public service delivery. In addition to completing and consolidating ongoing reforms, this urgently requires a broadening of reform efforts to overcome weaknesses and constraints beyond the MOFT that hinder the effectiveness of PFM reforms. In particular, MOFT should (i) complete PFM reforms and consolidate public finance administration; and (ii) link PFM reforms more tightly to improvements in public service delivery. 68. Refocusing on economic growth issues. The government faces severe fiscal challenges in the medium term due to the expected decline in logging revenues and slow development in the mining sector (para. 52). Export revenues depend on international commodity prices, which leaves the economy vulnerable to external shocks. The government and development partners have recognized the need to broaden the economic growth agenda and to reduce and mitigate the impediments to growth through policy change and investment. This includes investment in infrastructure and other steps to facilitate market-driven private sector activity in the sectors with the greatest potential. The operations of the SOEs also need to be improved. 69. A number of issues to foster private sector led growth have been highlighted by development partners and the private sector, especially issues around land, skills, and natural resources that require action. 34 A clearer growth strategy is needed, and policy dialogue on these issues could be incorporated into the mandate of the CEWG. 33 The large number of actions is due, in part, to the policy matrix being used as a management tool by MOFT, as well as some actions being aspirational that would only be implemented should time and resources permit. 34 The government held a successful economic growth forum on 26 March The forum brought the government and the private sector together for discussions on how to overcome barriers to economic growth in Solomon Islands and learn from economic successes of other Pacific Island countries.