Solomon Islands: Economic and Financial Reform Program

Completion Report Project Number: 46497-001 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.

CURRENCY EQUIVALENTS Currency Unit Solomon Islands dollar (SI$) At Appraisal At Program Completion (22 October 2012) (31 August 2014) SI1.00 = $0.1413 $0.1385 $1.00 = SI$7.0793 SI$7.2202 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.

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 16 2. Policy Matrix 22 3. Status of Compliance with Grant Covenants 25 4. Gender and Development 29 i

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 $5.0 million PCR: SOL 1500 B. Grant Data 1. Reconnaissance Date Started Date Completed 2. Grant Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Grant Agreement 5. Date of Grant Effectiveness In Grant Agreement Actual Number of Extensions 6. Closing Date In Grant Agreement Actual Number of Extensions 22 October 2012 30 October 2012 18 February 2013 18 February 2013 21 March 2013 26 March 2013 24 June 2013 27 March 2013 0 31 December 2013 16 January 2014 0 7. Disbursements a. Dates Initial Disbursement 3 April 2013 Effective Date 27 March 2013 Final Disbursement 3 April 2013 Original Closing Date 31 December 2013 Time Interval 0 months Time Interval 8 month 3 days b. Amount ($ million) Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance 5.0 5.0 0.0 5.0 5.0 0 Total 5.0 5.0 0.0 5.0 5.0 0

ii 8. Local Costs (Financed) - Amount ($) 0.0 - Percent of Local Costs 0.0 - Percent of Total Cost 0.0 C. Program Data 1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 5.0 5.0 Local Currency Cost 0.0 0.0 Total 5.0 5.0 2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Recipient Financed 0.0 0.0 ADB Financed 5.0 5.0 Other External Financing 0.0 0.0 Total 5.0 5.0 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 5.0 5.0 Total 5.0 5.0 4. Program Schedule Item Appraisal Estimate Actual Other Milestones = not applicable.

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 22 30 October 2012 2 18 a, b Reconnaissance Mission a 26 November 7 December 2012 2 24 a, b Negotiation b Program Completion Review c 5 9 August 2013 1 5 c Program Completion Review c 4 15 August 2014 1 6 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 2012. 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.

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 2012 2016. 3 5. 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 2011 2020 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. 2013. 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. 2012. Solomon Islands: Country Partnership Strategy, 2012 2016. Manila. 4 Government of Solomon Islands. 2011. National Development Strategy, 2011 2020. Honiara.

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 2011. 5 6. 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 2. 1. 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. 6 9. 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. 2010. 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. 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. 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. 2012. Solomon Islands Operations Procurement Review. Washington, DC; World Bank. Solomon Islands Public Expenditure Review. 2011. Unpublished; and ADB. An Analysis of Customs Revenue Issues in Solomon Islands. 2012. Unpublished. 7 Government of Solomon Islands. 2012. Solomon Islands Budget 2013: Budget Strategy and Outlook. Budget Paper: Volume 1. Honiara.

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 2012. The framework was approved by the NDS task force in October 2012 and endorsed by the cabinet in December 2012. The first report under the new framework was prepared in 2013 which includes a comprehensive evaluation of progress towards national development objectives. 8 12. 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 2012. 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 2013. 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 2016. 14. 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 2012. 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. 2013. Implementation of the National Development Strategy: 2011 to 2020: Medium Term Priorities and Performance Evaluation. Honiara. 9 ADB. 2013. 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.

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 2014. Table 1: Debt Indicators, 2011 2015 2011 2012 2013 2014e 2015p External debt service (% of exports of 1.3 0.7 2.5 2.5 2.9 goods and services) Total external debt (% of GDP) 15.2 13.0 11.4 11.5 12.4 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 2015. 17. 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 2013. 11 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.

5 Commerce to implement a corporate governance services initiative to expand the pool of women qualified to serve on SOE boards. 12 19. 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 2013. 21. 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), 2013 2015. 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 2010 2012. 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 2012. 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 2008. 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 2002 2008, to 6% for 2009 2012, and 15% in 2012. ADB. 2014. 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.

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 2012. 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 2013. The grant agreement for the program was signed on 26 March 2013 and became effective on 27 March 2013. The grant was fully disbursed on 3 April 2013. 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. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

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. 2013. Report of the Fourth Annual Joint Review Mission. Honiara; CEWG Joint Review Mission. 2014. Report of the Fifth Annual Joint Review Mission. Honiara. 17 RAMSI s development assistance programs have now been absorbed into bilateral aid programs.

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 2011. 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 2014. 18 As a result, the government wanted to continue executing the EFRP in pursuit of Solomon Islands growth and development. 19 38. 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 2013 2018: (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. 2014. 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 2013. 20 Solomon Islands Government. 2013. Medium Term Fiscal Strategy: 2013 2018. 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. 2014. Good Practice Principles for Multi-Donor Coordinated Budget Support. Unpublished.

9 development partners for Solomon Islands since 2009. 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 1. 41. 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 2012. 23 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 2015. 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. 2012. Debt Management Strategy. Honiara. 23 IMF. 2013. 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.

10 Table 2: Policies for Social Inclusion/Equity Rating, 2012 2014 Equity of Public Resource Use a Building Human Resources Social Protection and Labor Policies and Institutions for Environmental Sustainability Gender Year Equality 2012 3.0 3.5 3.0 2.5 2.5 2.9 2013 3.0 3.0 3.0 2.5 2.5 2.8 Average 2014 3.0 3.0 3.0 2.5 2.5 2.8 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. 2014. 2014 Country Performance Assessment (CPA) Ratings. Manila; ADB. 2014. Annual Report on the 2013 Country Performance Assessment Exercise. Manila; and ADB. 2013. 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 2014. 25 46. 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 1990. Across 12 indicators for which trend data is reported, Solomon Islands have made improvements in 11. 26 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. 2013. Report of the Fourth Annual Joint Review Mission. Honiara (page 24). 25 Ministry of Finance and Treasury. 2015. Solomon Islands Budget 2015. 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. http://mdgs.un.org/unsd/mdg/host.aspx?content=data/snapshots.htm (accessed 31 March 2015).

11 48. 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 2013. 27 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 2013. 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.

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 2009 2012 (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 100.0 per 100,000 live births in 2008 to 93.0 in 2010. 28 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 2005 2006 to 84.1% in 2009 (however this data is prior to the start of the ADB program). 30 57. 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 2013. 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. 2013. Pacific Regional MDGs Tracking Report. Suva. 29 Ministry of Health and Medical Services and World Health Oprganization. 2015. MHMS 2014 Statistical Core Indicator Report. Honiara. 30 Solomon Islands National Statistics Office. 2009. 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.

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. 31 59. 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. 61 75 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 2009 2013, 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. 2014. 2013 Final Budget Outcome. Honiara. 32 Organisation for Economic Co-operation and Development. 2010. Evaluating Budget Support Methodological Approach. Paris.

14 year 49 in 2010, 31 in 2011, 77 in 2012, and 29 in 2013. 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 2014. 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.

15 70. Timing of the program performance evaluation report. The government and development partners have an established process for evaluating the EFRP (para. 28). Preparation of any program performance evaluation report should link with the existing processes. Given the number of policy-based programs undertaken by ADB in Solomon Islands, it may be appropriate to evaluate this and other program as a series in 2015 or 2016. 2. General 71. Process issues relating to the CEWG mechanism, the EFRP, and the links to ADB and other development partner budget support are set out in paras. 72 75, along with recommendations. 72. A greater focus on results. At present, the EFRP policy matrix contains significant detail on the implementation of PFM reforms, including technical and administrative measures. This dilutes the CEWG focus on the key policy issues. In addition, the EFRP does not target quantitative results, which would allow a more direct monitoring and assessment of whether reforms result in improved public investment and services. 73. The EFRP should define key quantitative result indictors and targets, along with baselines. This would help the CEWG shift from a focus on the detailed implementation of agreed measures to a more general dialogue on the extent to which government policies support the results targeted by the EFRP and budget support. In addition, the EFRP matrix could be organized in a way that clearly identifies and separates issues that should be discussed at a senior level in the CEWG from those that can be monitored and discussed at a technical level. 74. More timely approval of the EFRP policy matrix. The EFRP matrix is supposed to govern operations on a 1 July 30 June cycle, but final CEWG and cabinet agreement on the matrix is substantially delayed each year. For example, although work had already begun on several actions by this stage, the matrix intended to be in operation up to 30 June 2014 was not approved by the CEWG until March 2014, due to delays in convening the CEWG meeting. This is an important problem, because the matrix is used by ADB and other development partners to assess progress and mobilize budget support. Approval needs to be timely. 75. Better follow-up. Country ownership is critical to the EFRP s success, and policy makers need to be more engaged in the dialogue on the key policy issues raised in the CEWG and the recommendations by the joint review missions. The submission by the minister of finance and treasury of CEWG reports and minutes to cabinet would be one way to enhance government ownership. More explicit linkages to other existing development partner forums, such as the quarterly government and development partner meetings and the monthly development partner meeting, could also help bolster ownership of the EFRP process.

16 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact The Government of Solomon Islands delivering improved public investment and services Performance Targets and Indicators with Baselines The relative living standard of the most vulnerable people improves, as measured by a rising expenditure share of the poorest 20% of households. Baseline (2005 2006 survey): 7% Target (2016): 10% The literacy rate rises. Baseline (2005 2006): 77% Target (2016): 80% b Data Sources and Reporting Mechanisms Household income and expenditure surveys by the Statistics Office, MOFT Household income and expenditure surveys Assumptions and Risks Assumptions There are no major natural disasters or other external shocks. Domestic political and macroeconomic stability is maintained. Risk Political support for continuing reforms is lost. Actual Performance The household income and expenditure survey for 2005 2006, which provided the baseline, remains the most recent data available a Literacy rate Male: 88.9% Female: 79.2% Combined: 84.1% (2009, latest data available) b The maternal mortality ratio is reduced. Baseline (2005 2006): 200 per 100,000 live births Target (2016): 195 per 100,000 live births Records and reports from Ministry of Health and Medical Services Maternal mortality per 100,000 live births: 93.0 (2010) c Outcome The government maintaining a strong fiscal position while delivering expanded and more equitable social services The ratio of public debt to gross domestic product 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% IMF Article IV and staff reports, national accounts, budget documents, and Central Bank of Solomon Islands quarterly reviews and annual reports Assumption Government has the capacity and willingness to implement and sustain the policy adopted. Risk The budget is affected by an external shock. Public debt to gross domestic product: 11.5% (2014, estimated) d

Appendix 1 17 Design Summary Performance Targets and Indicators with Baselines Data Sources and Reporting Mechanisms Assumptions and Risks Actual Performance The average country performance assessment rating for policies affecting social inclusion and equity rises. Baseline (2012): 2.9 Target (2015): 3.1 ADB annual country performance assessments Average country performance assessment score for policies for social inclusion/equity: 2.8 (2014) Outputs 1. Better public finance management Public sector management and institutional assessment ratings are maintained or improved. Baseline (2011): 3.1 Target (2014): 3.5 Civil society organizations, including women s groups, are consulted during budget formulation. Baseline (2011): 0 Target (2014): 6 ADB annual country performance assessments Budget documents Assumption Development partners continue to support government reform. Risk Local capacity in government agencies cannot match the reform requirements once technical assistance provided by the Regional Assistance Mission to Solomon Islands ends. Average score for public sector management and institutions: 3.1 (2014) Number of civil society organizations consulted during budget formulation: 41, including 7 women s groups (2013 consultations for 2014 budget) e

18 Appendix 1 Design Summary 2. Greater economic efficiency for business enabling environment Performance Targets and Indicators with Baselines The SOE portfolio rate of return on equity rises by at least 10%. Baseline (2010): 3.1% Target (2014): 3.5% Fiscal support to SOEs is limited to funding available through the community service obligation framework. Baseline (2002 2009): $52 million Target (2014): $0 Data Sources and Reporting Mechanisms ADB Finding Balance report using audited statements of SOEs ADB Finding Balance report Assumptions and Risks Assumption Development partners continue to support for government reform. Risks Political interference affects the management of SOEs. Fuel prices increase sharply. Actual Performance Return on equity: 14.6% (2012, latest data available) f Net government contributions to SOEs (excluding funding available through the community service obligation framework): SI$24.57 million (2012, latest data available) f The pool of trained women with potential to become SOE board members expands. Baseline (2010): 0 Target (2014): 50 MOFT reports Number of women SOE directors: 7 of 53 directors of 8 SOEs (2013, latest available data) g The number of formal businesses managed or owned by women increases. Baseline (2011): 591 managed and 605 owned Target (2014): 620 managed and 635 owned Statistics from the Companies Registry website Number and percentage of female shareholders: 779 of 3031 (25.7%) (30 June 2014) h Number and percentage of female directors: 743 of 3316 (22.4%) (30 June 2014) h 3. Broader access to social services Access to health services improves. Baseline (2011): 67% of respondents to the annual people s survey able to Household Income and Expenditure Survey, United Nations and/or ministry reports Assumption Complementary resources (e.g., for transport and communication) or opportunities (e.g., time and community Number of people able to reach a health facility in 1 hour: 67% (2013, latest data available) i

Appendix 1 19 Design Summary Performance Targets and Indicators with Baselines reach a health facility in 1 hour Target (2014): 70% The net primary school enrollment rate increases. Baseline (2010): 94% Target (2014): 95% Ratio of girls to boys enrolled in primary and secondary education improves. Baseline (2011): 80:100 Target (2014): 85:100 Data Sources and Reporting Mechanisms Records and reports from the Ministry of Education and Human Resources Development Records and reports from the Ministry of Education and Human Resource Development Assumptions and Risks support) allow the poor to connect with or access the social services provided. Risk Local capacity and counterpart resources are insufficient to efficiently deliver equitable social services. Actual Performance Net primary school enrollment rate Male: 88.5% Female: 89.2% (2013, latest data available) j Ratio of girls to boys enrolled in primary education: 93.5:100.0 (2013, latest data available) j Ratio of girls to boys enrolled in secondary education, years 7 9: 99.4:100.0 (2013, latest data available) j Ratio of girls to boys enrolled in secondary education, years 10 13 82.9:100.0 (2013, latest data available) j

20 Appendix 1 Activities with Milestones 1. Better public finance management 1.1 Consult with civil society organizations, including women's groups, in preparing the 2013 budget (Aug 2012). 1.2 Formulate and adopt a 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 The cabinet approves the release of a draft customs and excise bill for public consultation (Feb 2013). 1.5 Adopt a debt management strategy (May 2012). 2. Greater economic efficiency for business enabling environment 2.1 Adopt policy framework and administrative reforms to facilitate processes for women to register formal businesses (Jan 2013) 2.2 SIEA and SIWA agree on a mechanism for reducing SIWA s debts to SIEA (May 2012). 2.3 SOEs comply with the SOE Act, 2007 regarding the preparation and submission of statements of corporate objectives (Feb 2013). 2.4 Community service obligation agreements are in place for at least two SOEs (Jun 2012) 2.5 Complete the application for candidate status to the Extractive Industry Transparency Initiative international secretariat (Jun 2012). 3. Broader access to social services 3.1 Allocate no less than 22% of consolidated expenditure in the 2013 budget to delivering education services (Dec 2012). 3.2 Allocate no less than 10% of consolidated expenditure in the 2013 budget to delivering health services (Dec 2012). 3.3 Adopt a medium-term national education action plan that includes result-based targets and aims to improve gender equality in access to education services (Jun 2012). 3.4 Establish and operationalize a task force for mainstreaming gender in health policies (Jun 2012). 3.5 Conduct a consultation workshop with line ministries on the formulation of the manual for implementing a policy to streamline gender (Oct 2012). Inputs Grant ADB: $5 million Government: Government officials and staff inputs to support program design, implementation, monitoring, and reporting ADB = Asian Development Bank, IMF = International Monetary Fund, MOFT = Ministry of Finance and Treasury, NDS = National Development Strategy, SIEA = Solomon Islands Electricity Authority, SIWA = Solomon Islands Water Authority, SOE = state-owned enterprise. a The most recent household income and expenditure survey results are expected to be finalized in 2015. b Baseline data and actual performance is adult literacy rate (15+). Baseline data is from the 1999 Census and actual performance is from the 2009 Census. These are self-reported literacy rates, and tested or assessed literacy rates are substantially lower. Under the Solomon Islands Education Sector Support Program year 4 and year 6 literacy and numeracy baseline data has been established which will provide a base for measuring future improvements in student learning (Government of Australia Education Resource Facility. 2014. Solomon Islands Education Sector Support Program Independent Performance Assessment. Draft. Unpublished). c Pacific Islands Forum Secretariat. 2013. Pacific Regional MDGs Tracking Report. Suva. An improving trend is also reported in the Ministry of Health and Medical Services Statistical Core Indicator Report which reports absolute

Appendix 1 21 number of maternal deaths as 18 (2010), 23 (2011), 16 (2012), 15 (2013), and 13 (2014, projected data based on current figures and reporting completeness rate). Ministry of Health and Medical Services and World Health Organization. 2015. MHMS 2014 Statistical Core Indicator Report. Honiara. d Asian Development Outlook database and International Monetary Fund economic indicators. e Ministry of Finance and Treasury supplied data. f ADB. 2014. Finding Balance 2014: Benchmarking the Performance of State-Owned Enterprises in Island Countries. Manila. g ADB. 2014. Finding Balance 2014: Benchmarking the Performance of State-Owned Enterprises in Island Countries. Manila. To expand the number of women SOE directors, the Pacific Private Sector Development Initiative under the economic empowerment of women work stream has a pilot project to train women to become SOE board members. As at 31 December 2014, the pilot project had partially trained 12 women, out of a total of 17 participants. h Company Haus of Solomon Islands supplied data. The 2011 baseline data is consistent with the number of female shareholders and number of female directors, rather than the number of businesses managed or owned by women, and accordingly the 2014 figure has been reported on this basis. i The Australian National University and the University of the South Pacific. 2013 SIG RAMSI People s Survey Report. Canberra. The actual performance is the combined score of those surveyed that have a heath facility in their own community and those surveyed who lived less than 1 hour away from their nearest health facility. j MEHRD. 2013. MEHRD Performance Assessment Report 2006 2013. Draft. Honiara. In the MEHRD performance assessment report, the 2010 (baseline) net primary school enrollment rate was reported as 92.6% for males and 89.8% for females, rather than the DMF reported baseline figure of 94%. Source: Asian Development Bank.

22 Appendix 2 22 Appendix 2 POLICY MATRIX Policy actions completed by December 2012 Output 1: Better public financial management 1.1 Consult with civil society organizations including women groups in the preparation for 2013 budget (Completed as recorded in Permanent Secretary of Finance letter verifying consultations attaching the report on the consultation process together with a list of organizations consulted) Policy actions completed by February 2013 (Tranche release conditions) 1.2 Formulate and adopt a satisfactory monitoring and evaluation framework for the National Development Strategy (Completed as recorded in Cabinet minutes endorsing the monitoring and evaluation framework for the National Development Strategy with the strategy attached) 1.3 Develop a procurement manual, standard bidding documents, and standard procurement contracts (collectively, procurement documents), acceptable to ADB (Completed as recorded in Permanent Secretary of Finance letter verifying completion of the procurement documents attaching copies of same) 1.4 Cabinet approves the release of a draft Customs and Excise Bill acceptable to ADB for public consultation (Completed as recorded in Cabinet minutes approving the release of the draft Bill for public consultation attaching the draft Bill) Program partnership monitoring framework policy actions to be completed by December 2013 and continued thereafter (Non tranche release conditions) Continue consultations with civil society organizations in the preparation of 2014 and future budgets and key public financial management reforms. Implement recommendations of the policy paper on the monitoring and evaluation framework for the National Development Strategy. Central Tender Board awards contracts based on the procurement documents and publishes details regarding same, including the name of awardees and contract amount, on the MOFT website. Cabinet endorses the new Customs and Excise Bill to be tabled in Parliament.

Appendix 2 23 Appendix 2 23 Policy actions completed by December 2012 1.5 Adopt a debt management strategy which includes establishing a Debt Management Advisory Committee and guidelines for public borrowing and debt management (Completed as recorded in Cabinet minutes endorsing the debt management strategy with the strategy attached) Policy actions completed by February 2013 (Tranche release conditions) Program partnership monitoring framework policy actions to be completed by December 2013 and continued thereafter (Non tranche release conditions) The government operates within the framework of the debt management strategy, including setting up annual borrowing ceiling. Output 2: Greater economic efficiency for business enabling environment 2.2 SIEA and SIWA agree on a mechanism for the reduction of SIWA s debts to SIEA (Completed as recorded in signed debt settlement agreement between SIEA and SIWA) 2.4 Apply for Candidate Status to EITI International Secretariat (Completed as recorded in a notification letter from EITI Secretariat) 2.1 Adopt a policy paper recommending legislative and administrative reforms of the business names registration process to facilitate improved processes for registering formal businesses (Completed as recorded in Cabinet minutes endorsing the policy paper on reforms of the business names registration process, including its recommendations, with the policy paper attached) 2.3 Obtain compliance with the 2007 SOE Act regarding the preparation and submission of Statements of Corporate Objectives (SCOs) by all 8 state-owned enterprises (Completed as recorded in Permanent Secretary of Finance letter verifying compliance by all 8 SOEs attaching copies of the SCOs) Prepare and obtain Cabinet endorsement of amendment to the Registration of Business Names Act for tabling to Parliament. Monitor compliance with the debt settlement agreement. Publicize on the MOFT website and via press release information on the SCOs, including an outline of the nature of the SCO, the cost, and description on the government s efforts to monitor the SCO. Prepare proposal to remove barriers to EITI implementation with public consultation.

24 Appendix 2 24 Appendix 2 Policy actions completed by December 2012 Output 3: Broader access to social services Policy actions completed by February 2013 (Tranche release conditions) Program partnership monitoring framework policy actions to be completed by December 2013 and continued thereafter (Non tranche release conditions) 3.3 Adopt a medium-term National Education Action Plan 2013-2015 that includes result-based targets aiming to improve gender equality for access to education services (Completed as recorded in the Ministry of Education and Human Resources Development letter verifying the adoption of the National Education Action Plan attaching the plan) 3.4 Establish and operationalize a taskforce for gender mainstreaming of health policies (Completed as recorded in Permanent Secretary of Women, Youth, Children, and Family Affairs appointing Director of Child Health, Ministry of Health and Medical Services to be a member of the national taskforce and minutes or reports of meetings) 3.1 Allocate no less than 22% of consolidated expenditure for delivery of education services in the 2013 budget (Completed as recorded in the gazetted 2013 Appropriations Act showing authorized expenditures for 2013) 3.2 Allocate no less than 10% of consolidated expenditure for delivery of health services in the 2013 budget (Completed as recorded in the gazetted 2013 Appropriations Act showing authorized expenditures for 2013) Maintain sufficient budget allocation to preserve the delivery of education services. Maintain sufficient budget allocation to preserve the delivery of health services. Implement, monitor, and report on the implementation of the new National Education Action Plan. Implement, monitor, and report on the implementation of taskforce recommendations. Finalize a manual for line ministries to implement the ministerial gender mainstreaming policy. ADB = Asian Development Bank, EITI = Extractive Industries Transparency Initiative, MOFT = Ministry of Finance and Treasury, SCO = Statement of Corporate Objectives, SIEA = Solomon Islands Electricity Authority, SIWA = Solomon Islands Water Authority, SOE = state-owned enterprise. Source: Asian Development Bank and Government of Solomon Islands.

Appendix 3 25 STATUS OF COMPLIANCE WITH GRANT COVENANTS Covenant Grant No. 0339 SOL (SF) Particular Covenants The Recipient shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Grant and to record the progress of the Program. Reference in Grant Agreement Section 4.02 (a) Status of Compliance Complied with. Particular Covenants The Recipient shall enable the Asian Development Bank s (ADB s) representatives to inspect any relevant records and documents referred to in paragraph (a) of this Section. Particular Covenants As part of the reports and information referred to in Section 6.04 of the Grant Regulations, the Recipient shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. Implementation Arrangements The Ministry of Finance and Treasury (MOFT), as the Program Executing Agency, shall be responsible for (a) overseeing all policy, legal and regulatory actions to be taken in connection with the Program; and (b) ensuring that all policy reforms set out in the Policy Letter and Policy Matrix are duly carried out in a timely manner. MOFT shall also be responsible for the overall implementation of the Program, including reporting to ADB, administering and disbursing the Grant Proceeds, and maintaining Program records and accounts. Section 4.02 (b) Section 4.03 Schedule 3, para. 1 Implementation Arrangements i. Schedule ii. 3, para. 2 CEWG, comprising officials from MOFT, the Central iii. Bank of Solomon Islands, the Office of the Prime Minister and Cabinet, the Ministry of Development Planning and Aid Coordination, the Ministry of Public Service, ADB, Australia, the European Union, New Zealand, the Regional Assistance Mission to Solomon Islands and the World Bank shall function as the Program coordinating committee. The CEWG shall continue to meet quarterly to monitor progress and to provide guidance and direction to the MOFT. Complied with. Complied with. ADB jointly monitored the progress of program implementation with the government and other development partner through the Core Economic Working Group (CEWG) mechanism. Complied with. Complied with. The CEWG is functioning well and considered to be a best practice model for joint government and development partner coordination in the Pacific.

26 Appendix 3 iv. vii. Covenant CEWG may invite concerned line agencies of the Recipient as well as ADB and other donor partners and stakeholders to participate in meetings to discuss the Program and Program implementation issues. Reference in Grant Agreement Policy Actions v. Schedule vi. 3, para. 3 (a) The Recipient shall ensure that all policy actions adopted under the Program, as set forth in Attachment 2 to Schedule 2 to this Grant Agreement, continue to be in effect throughout the Program Period and subsequently. Policy Actions viii. Schedule ix. 3, para. 3 (b) The Recipient shall promptly adopt all other policies and take all other actions as described in the Policy Letter and the Policy Matrix and ensure that such policies and actions continue in effect throughout the Program Period and subsequently. Policy Dialogue xi. Schedule xii. 3, x. The Recipient shall keep ADB informed of, and the Recipient and ADB shall from time to time exchange views on, sector issues, policy reforms and additional reforms during the Program Period that may be considered necessary or desirable, including the progress made in carrying out policies and actions set out in the Policy Letter and Policy Matrix. para. 4 (a) xiii. xvi. xviii. Policy Dialogue xiv. Schedule xv. 3, para. 4 (b) The Recipient shall promptly discuss with ADB problems and constraints encountered during implementation of the Program and appropriate measures to overcome or mitigate such problems and constraints. Policy Dialogue xvii. Schedule 3, para. 4 (c) The Recipient shall participate in regular meetings of the CEWG consisting of key development partners engaged in the Recipient s public sector reforms. Policy Dialogue xix. Schedule xx. 3, para. 4 (d) The Recipient shall keep ADB informed of policy discussions with other multilateral and bilateral agencies that have implications for implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Recipient shall take into account ADB s views before finalizing and implementing any such proposal. Use of Counterpart Funds xxi. Schedule 3, para. 5 The Recipient shall ensure that the Counterpart Status of Compliance Complied with. Complied with. Complied with. Complied with. Complied with. Complied with. Complied with.

Appendix 3 27 xxiii. Covenant Funds are used to finance implementation of the Program and other programs and activities consistent with the objectives of the Program, and that necessary budget appropriations and adequate resources are allocated and released in a timely manner in order to ensure effective implementation of the Program and other activities consistent with the objectives of the Program. Reference in Grant Agreement Governance and Anticorruption xxii. Schedule 3, para. 6 The Recipient, and the Program Executing Agency shall: (a) comply with ADB s Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practices relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. Monitoring and Review xxiv. Schedule 3, para. 7 The Recipient shall ensure that MOFT is responsible for: (a) providing quarterly input to the Program Performance Monitoring System (PPMS) maintained by ADB, such input to be of a nature and scope satisfactory to ADB; (b) carrying out monitoring and evaluation of the Program jointly with CEWG members for 2 years after completion of the Program or to the end of 2015, whichever is earlier; and (c) maintaining all relevant monitoring data to evaluate the benefits of the Program. Specific indicators (including financial and performance indicators) as agreed with ADB shall be used to assist with monitoring the implementation of policy actions and their impact on budget outcomes and public enterprise performance. Monitoring and Review The Recipient shall ensure that reporting on the progress of the Program through periodic reviews at least every 6 months is made by MOFT to ADB in accordance with the performance indicators described in the preceding paragraphs. Schedule 3, para. 8 Status of Compliance Complied with. Complied with up to the point of the finalization of Project Completion Report [the covenant applies for 2 years after completion of the Program or to the end of 2015, whichever is earlier]. Complied with. 3. Monitoring and Review 5. Schedule 6. 3, Complied with. 4. The Recipient and ADB shall jointly conduct periodic reviews of the macroeconomic and fiscal conditions of the Recipient s economy and assess the impact and evaluate the benefits of the Program in accordance with the PPMS. Program reviews will take into account the views of stakeholders from the private sector and civil society identified jointly by the para. 9

28 Appendix 3 Covenant Recipient and ADB. The Recipient shall cause the MOFT to submit to ADB a Program completion report within 12 months after the Effective Date that assesses compliance with, and impact of, the agreed actions under the Program on each sector and describes lessons identified during the Program Period. Reference in Grant Agreement Status of Compliance

Appendix 4 29 1. Narrative Analysis GENDER AND DEVELOPMENT On 21 March 2013, the Asian Development Bank (ADB) approved a single-tranche policy-based grant for the Economic and Financial Reform Program for Solomon Islands. a The program was classified as effective gender mainstreaming and identified gender-related actions and measures in the program design to promote gender equality and women s empowerment. The program was designed to promote the participation of women in decision-making by requiring that women s groups were consulted as part of the annual budget process. The program planned to improve access by women to education through the adoption of a new education strategy that will improve access by girls to secondary school, which is the principal area of women s relative disadvantage in education. The program was also designed to give women greater opportunities to obtain better health care. This was to be achieved through the gender mainstreaming task force chaired by the permanent secretary of health and medical services, which was established in 2011 and put into operation in 2012. Under the program the government initiated, through the Ministry of Finance and Treasury s budget unit, the involvement of citizens in the budget process throughout the country. To prepare the 2013 budget, consultations were conducted from May to June 2012 in almost all provinces. The views of provincial governments, civil society organizations including women s groups, and churches, were solicited on the delivery of social services, particularly for health and education. The focus was on accessibility, quality, and gaps in the existing health and education services. The government adopted the medium-term National Education Action Plan (NEAP), 2013 2015, b which includes result-based targets to make access to education services more equitable. The new NEAP built on earlier progress by expanding access to early childhood education, secondary education, and technical and vocational education and training. Particular emphasis was on improving access for girls to senior secondary, technical, and vocational education and training, as well as to tertiary education. The new NEAP included targets that promote gender equity, including measures to promote the enrollment of girls in secondary school and technical colleges. The government established and operationalized a task force for mainstreaming gender in health policies, which reported to the national steering committee on gender equality and women s development. 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 2012. The task force monitors the implementation of the Gender Equality and Women s Development Policy and reports to Parliament annually through the Ministry of Women, Youth, Children, and Family Affairs (MWYCFA). c In November 2012, a gender focal point in the Ministry of Health and Medical Services was added 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. 2. Program Gender and Development Achievements Program gender and development features and targets Adopt a medium-term national education action plan that includes result-based targets and aims to improve gender equality in access to education services. Establish and operationalize a task force for mainstreaming gender in health policies. Conduct a consultation workshop with line ministries on the formulation of the manual for implementing a policy to mainstream gender. Achievements at project completion Medium-term NEAP adopted in 2013. Task force established and operationalized in 2012. While no manual was prepared, progress has been made on mainstreaming gender. As noted in the Country Gender Assessment, d in 2009 concurrent with MWYCFA s development of the national Gender Equality and Women s Development policy, the Secretariat of the Pacific Community (SPC) conducted a stocktake of government s gender mainstreaming capacity and made a number of practical and strategic recommendations. e

30 Appendix 4 Program gender and development features and targets Civil society organizations, including women s groups, are consulted during budget formulation. Baseline (2011): 0 Target (2014): 6 The number of formal businesses managed or owned by women increases. Baseline (2011): 591 managed and 605 owned Target (2014): 620 managed and 635 owned Adopt policy framework and administrative reforms to facilitate processes for women to register formal businesses. Achievements at project completion The stocktake exercise examined the structure and functions of the MWYCFA s Women s Development Division and conducted interviews with key informants at senior levels across government ministries. Based on the stocktake findings, a number of recommendations were integrated into the GEWD policy and the work of key ministries. Most notably the Public Service Commission has integrated recommendations on accountability mechanisms and development of technical capacity. Number of civil society organizations, including women s groups, that were consulted during budget formulation: 41, which included seven women s groups (consultations were undertaken in 2013 for the 2014 budget) f Number of female shareholders: 779/3031 (25.7%) (30 June 2014) g Number of female directors: 743/3316 (22.4%) (30 June 2014) g Under the program the government adopted administrative and legislative reforms to facilitate improved processes for women and men when registering formal businesses. a b c d e f g The administration of business name licensing, which has over 800 registrations per year, primarily from small trading businesses, was entirely paper-based and inefficient. At the time of program design, the underlying legislation was out-of-date, and office processes were slow and prone to error. Under the program, the government committed to adopt legislative and administrative reforms, including the provision of an electronic registry, to further improve processes when registering businesses. The policy action under the program required endorsement by cabinet of a policy paper on reform of the business names registration process. Subsequent to the completion of the program, the new Registration of Business Names Act, 2014 was passed. ADB. 2013. 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. Solomon Islands. 2013. National Education Action Plan 2013 2015. Ministry of Education and Human Resources Development. Honiara. Solomon Islands. 2010. Solomon Islands National Policy on Gender Equality and Women's Development. Honiara. ADB, Government of Solomon Islands, and SPC. 2014. Solomon Islands Country Gender Assessment. Manila. SPC. 2012. Stocktake of the gender mainstreaming capacity of Pacific Island govermments Solomon Islands. Noumea. Ministry of Finance and Treasury supplied data. Company Haus of Solomon Islands supplied data. The 2011 baseline data is consistent with the number of female shareholders and number of female directors, rather than the number of businesses managed or owned by women, and accordingly the 2014 figure has been reported on this basis. Source: Asian Development Bank.