Solomon Islands: Economic Recovery Support Program Subprograms 1 and 2

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1 Completion Report Project Number: Grant Numbers: 0197/0255 September 2012 Solomon Islands: Economic Recovery Support Program Subprograms 1 and 2

2 CURRENCY EQUIVALENTS Currency Unit Solomon Islands dollar (SI$) At Appraisal At Program Completion (24 September (30 July 2012) 2009) SI$1.00 = $ $ $1.00 = SI$ SI$ ABBREVIATIONS ADB Asian Development Bank CEWG core economic working group EFRP Economic and Financial Reform Program GDP gross domestic product IMF International Monetary Fund MOFT Ministry of Finance and Treasury MTFS Medium-Term Fiscal Strategy NDS National Development Strategy NTF National Transport Fund NTP National Transport Plan RAMSI Regional Assistance Mission to Solomon Islands SOE state-owned enterprise TA technical assistance NOTES (i) (ii) The fiscal year (FY) of the government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 31 December In this report, "$" refers to US dollars. Vice-President S. Groff, Vice-President, Operations 2 Director General X. Yao, Pacific Department (PARD) Regional Director A. Iffland, Pacific Liaison and Coordination Office, PARD Team leader Team members K. Lao-Araya, Senior Private Sector Development Specialist, PARD M. Lucich, Senior Economics Officer, PARD M. de Villa, Associate Project Analyst, PARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page BASIC DATA I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 2 C. Program Costs 6 D. Program Schedule and Disbursements 6 E. Implementation Arrangements 7 F. Conditions and Covenants 7 G. Related Technical Assistance 7 H. Performance of the Borrower and the Executing Agency 8 I. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 11 D. Preliminary Assessment of Sustainability 12 E. Institutional Development 12 F. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 14 C. Recommendations 15 i APPENDIXES 1. Program Framework Policy Matrix Status of Compliance with Grant Covenants 29

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5 BASIC DATA A. Grant Identification 1. Country 2. Grant Numbers 3. Program Title 4. Recipient 5. Executing Agency 6. Amount of Grants 7. Program Completion Report Number Solomon Islands 0197 and 0255 Economic Recovery Support Program Subprograms 1 and 2 Government of Solomon Islands Ministry of Finance and Treasury $10.0 million PCR: SOL 1341 B. Grant Data 1. Appraisal Date Started Date Completed 2. Grant Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Grant Agreement 5. Date of Grant Effectiveness In Grant Agreement Actual Number of Extensions 6. Closing Date In Grant Agreement Actual Number of Extensions 7. Disbursements a. Dates Grant No Sep Oct Jan Jan Mar Mar Mar Aug Feb Grant No Apr Apr Jun Jun Aug Sep Sep Feb Mar Initial Disbursement Final Disbursement Time Interval Subprogram 1 6 Apr Apr months Subprogram 2 30 Sep Sep months Effective Date Original Closing Date Time Interval Subprogram 1 31 Mar Aug months Subprogram 2 23 Sep Feb months b. Amount ($ million) Last Revised Allocation Net Amount Available Category or Subloan Original Allocation Amount Canceled Amount Disbursed Undisbursed Balance Subprogram Subprogram Total

6 ii 8. Local Costs (Financed) - Amount ($) None - Percent of Local Costs None - Percent of Total Cost None C. Program Data 1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost Local Currency Cost Total Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs ADB Financed Subprogram Subprogram Total ADB = Asian Development Bank. 3. Cost Breakdown by Program Component ($ million) Component Appraisal Estimate Actual Foreign Cost Total Program Schedule Item Appraisal Estimate Actual Other Milestones Subprogram 1 March Apr 2010 Subprogram 2 June Sep Program Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress From 31 Mar 2010 to 31 Aug 2010 Satisfactory Satisfactory From 23 Sep 2011 to 28 Feb 2012* N/A N/A *During this period, the project performance system was migrated to eoperations, under which program grants were not required to be rated.

7 iii D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members Fact-Finding (subprogram 1) Aug a, b, c, d Appraisal (subprogram 1) 24 Sep 2 Oct a, b, c, e, f, g Final Design Mission 20 Nov 4 Dec a, b, c, d, g Program Review Aug b, c, h Program Review Sep b, c, h, j, k, l, m Fact-Finding (subprogram 2) 5 15 Apr b, c, h, i Program Review 29 Nov 2 Dec b, c, h Program Completion Review July h a = economist, b = economics and finance officer, c = development coordinator, d = director, e = social sector specialist, f = young professional, g = macroeconomist, h = private sector development specialist, i = counsel, j = state-owned enterprise reform expert, k = public private partnership specialist, l = business law reform expert, m = legal implementation support expert.

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9 I. PROGRAM DESCRIPTION 1. On 16 March 2010, the Asian Development Bank (ADB) approved a program cluster for the Economic Recovery Support Program for Solomon Islands. 1 The program was designed to (i) improve fiscal management and structural reforms that would contribute to economic recovery from the 2009 global economic crisis; (ii) help overcome public financing constraints that limit the delivery of basic services to the vulnerable; and (iii) initiate a transition away from dependence on foreign aid and unsustainable logging to private sector-led economic growth through agriculture, fishing, tourism, and mining. 2. In March 2009, the government established the core economic working group (CEWG) comprising officials from the Central Bank of Solomon Islands; the Office of the Prime Minister; the Ministry of Development Planning and Aid Coordination; the Ministry of Finance and Treasury (MOFT); and development partner representatives from ADB, Australia, European Union, New Zealand, Regional Assistance Mission to Solomon Islands (RAMSI), and the World Bank. Through the CEWG, key development partners committed to support implementation of the government's reform agenda, the Economic and Financial Reform Program (EFRP). The reforms under the program were drawn from the government s EFRP policy matrix. The two subprograms had four outputs: (i) improved fiscal management, (ii) productivity-enhancing structural initiatives, (iii) support for the vulnerable, and (iv) communication and ownership of policy actions. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 3. The program design was highly relevant at appraisal and remained highly relevant at the time of program completion. The program design and implementation promoted effective and efficient public spending. The design was discussed extensively with the government and development partners, and was consistent with the government s goals. 2 The EFRP policy matrixes for 2010 and 2011 are almost identical to those of subprograms 1 and 2 of ADB's Economic Recovery Support Program, which was formulated in August 2009 at the grant fact finding. The support for policy measures aimed at fostering inclusive growth was fully consistent with the private sector development thrust of ADB s interim country partnership strategy, Private sector development was to be supported at the macro level by restoring stability and reforming state-owned enterprises (SOEs), lowering the cost of doing business, and improving access to safe and secure transport. The focus on public finance reform and private sector development, combined with support for long-term capacity development, was in line with ADB s approach for engagement in fragile environments, and with ADB s regional strategies and programs of assistance for Pacific developing member countries. 4 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster and Grant to the Solomon Islands for Subprogram 1 Economic Recovery Support Program. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Solomon Islands for Subprogram 2 Economic Recovery Support Program. Manila. 2 These are goals as set out in the policy statement made by the incoming government in 2010, the Medium-Term Development Strategy , supporting sector plans, and the annual budget of the Government of Solomon Islands. 3 ADB Solomon Islands: Interim Country Partnership Strategy, Manila. 4 ADB Responding to the Priorities of the Poor: A Pacific Strategy for the Asian Development Bank, Manila; ADB Working in Fragile Environments: A Midterm Review of the Pacific Strategy, Manila; and ADB ADB s Pacific Approach, Manila.

10 2 4. The Solomon Islands economy was among the most affected in the Pacific by the global economic crisis, and the program was a timely harmonized response. Gross domestic product (GDP) growth averaged 7.3% per annum during but contracted to 1.0% in A legacy of poor fiscal management, including cost and wage pressures, pushed public expenditures up from 29% of GDP in 2007 to 35% of GDP in Without reforms, there would have been little prospect for economic growth and less ability for government to adequately fund public services. Reforms under the program were essential to mobilizing the funds from Solomon Islands development partners to finance the needed adjustment costs. The program also played a pivotal role in fostering good governance by helping the government formulate a multiyear reform program to overcome its deficiency in fiscal management. The program was built on several years of concerted policy dialogue, the diagnostics presented in a comprehensive economic report, and an assessment of public sector financial management. 5 Extensive reviews of the country s economic and fiscal, governance, poverty, and gender situation were undertaken as part of fact finding. Key findings from other partners, most notably the 2009 International Monetary Fund (IMF) Article IV consultation and the World Bank s report on sources of growth, were also used to inform the program design. 6 The IMF concluded that new external assistance in the form of budget support was urgently needed to provide a cushion for undertaking more lasting fiscal adjustment and improving budget execution. The IMF estimated a budget financing gap for the medium term of $25 million per year (around 4% of GDP). B. Program Outputs 5. Output 1: Improved fiscal management. The fiscal management targets set out in the program (Appendix 1) were fully achieved or exceeded. The government exceeded the 2010 and 2011 fiscal targets set under the IMF Standby Agreement. It achieved a budget surplus of 7.1% of GDP in 2010 and 2.1% of GDP in 2011, and a surplus of 1.3% of GDP is projected in The government budget ended 2010 with a surplus of SI$390 million, equivalent to 2 months of spending, and with all short-term obligations met. Public debt declined from 60% of GDP in 2005 to 21% of GDP in 2011 (or 10.9% in net present value terms) due to positive economic growth combined with a freeze on public borrowing under the Honiara Club Agreement, 7 debt repayments, and the write-down of external debt arrears. The government has adhered to the Honiara Club Agreement. Following the review of the agreement, the government formulated a debt management strategy in May 2012 and replaced the Honiara Club Agreement in July 2012, which is consistent with the findings in the IMF debt sustainability assessment. A combination of recruitment freeze and a thorough examination of payroll records to eliminate redundant posts resulted in a decline in the payroll GDP ratio from 10.6% of GDP in 2009 to 9.8% of GDP in 2010 and 9.4% of GDP in Fiscal reforms were guided by a medium-term fiscal strategy, which established a multiyear framework for fiscal reform and which was annually updated to take into consideration changes in the macroeconomic and fiscal settings. 5 ADB Navigating the Global Storm: A Policy Brief on the Global Financial Crisis. Manila; ADB Taking the Helm: A Policy Brief on a Response to the Global Economic Crisis. Manila; ADB Solomon Islands 2010 Economic Report. Manila; Public Expenditure and Financial Accountability Solomon Islands Public Financial Management Performance Report. Rotterdam. 6 IMF Solomon Islands: 2009 Article IV Consultation Staff Report. Washington, DC.; and World Bank Solomon Island Sources of Growth. Washington, DC. 7 In 2005, the government signed the Honiara Club Agreement with four major creditors to Solomon Islands (Australia, the European Commission, the European Investment Bank, and the International Fund for Agricultural Development), which committed the government not to borrow until debt sustainability had been restored.

11 3 6. The program included a number of measures aimed at providing high-level support and strategic guidance to public financial management reform. This included (i) establishing a multiagency public financial management working group in 2009, (ii) preparing strategies to strengthen whole-of-government financial reporting in 2009 and 2010, and (iii) creating an audit committee in To boost the role and function of internal audit within the public finance system, an international audit division of the MOFT developed a strategic development plan for risk-based audits and established a network of internal auditors, called the government s Internal Audit Network. More accurate and timely fiscal reporting is key to informing policy making. In the last quarter of each year, the budget strategy and outlook, together with the annual budget and government financial data, are publicly released on the MOFT website. Budget reform seminars were held in 2011 with line ministries to introduce results-based public financial management. The government also initiated a review of the Public Finance and Audit Act of 1978 in 2011, which is still ongoing. 7. By helping to strengthen expenditure controls, the program contributed to the process of fiscal consolidation. Budget compliance was strengthened through the introduction of new financial instructions on 1 July 2010 and training provided to line ministries by the MOFT. Development and successful implementation of a new cash forecasting framework provides biannual cash forecasts, which are updated on a weekly basis. In addition, the government upgraded its automated financial management system and integrated its budget information system with its financial management systems. An asset management framework was developed and the MOFT has initiated collection of information on all assets valued at more than SI$10,000. Revised procurement checklists were developed and provided to line ministries, and changes were also made to purchasing thresholds. The MOFT has published on its website lists of the tenders awarded in 2010 and Important developments include (i) the adoption (from fiscal year (FY) 2011) of the International Public Sector Accounting Standards for the provincial governments, and (ii) the introduction of a new payroll system (Aurion) in 2009, which helped streamline the payroll database. In 2010, the new payroll system integrated civil service pay with the government's other cash management systems. Since 1 January 2011, all employee remuneration expenses have been paid through Aurion. 8. The program-supported reforms achieved their goal of raising the efficiency and fairness of the revenue system. Tax revenue increased to 30.7% of GDP in 2011 compared to its baseline ratio of 24.0% in Customs regulations were tightened by passing new customs valuations and penalties legislation, initiating joint operations between Customs and Excise and Inland Revenue departments, and tightening controls on businesses with tax exemptions. The Customs Valuation Act, passed in 2009, reduced the scope for customs agents to challenge customer valuations, while the Penalties Amendment Act, passed in 2009, significantly updated penalties. The Customs and Excise Act was extensively reviewed in 2011 and proposals were prepared for a new act that would make it more suitable for Solomon Islands and make it compliant with World Trade Organization regulations. A resource rent tax framework was developed with the support of IMF technical assistance (TA) and was approved by Cabinet in September The government has also taken the required steps for candidature to the Extractive Industries Transparency Initiative, including appointing a senior government focal point. In January 2012, the Solomon Islands Extractive Industries National Stakeholder Group was formed, comprising extractive companies, government, and civil society (including landowner groups). 9. The program contributed to preparing the groundwork for multiyear budgeting by supporting (i) the development of a new budget system that included a fiscal framework with multiyear budget estimates, and (ii) the preparation of a new National Development Strategy

12 4 (NDS), to replace the Medium-Term Development Strategy that ended in A new budget management system, including forward budget estimates of both recurrent and investment spending, was developed and successfully implemented in The Medium-Term Fiscal Strategy (MTFS) was prepared for 2010 and was updated in 2011 and The MTFS provides a fiscal framework, including a public debt forecast, consistent with the government s macroeconomic outlook. Debt and fiscal statistics have been released on a monthly basis through the MOFT website. The Public Expenditure Analysis Section of the Budget Division of the MOFT was established in 2010, and it has developed the analytical capacity to review ministry spending patterns. 10. Output 2: Productivity-enhancing structural initiatives. The program provided support for the implementation of structural reforms that were ready to go and could quickly boost economic activity. These were also intended to contribute to diversifying the economy away from logging and foreign aid by nurturing alternative sources of private sector-led growth. The government s performance in improving the enabling environment for private sector development has exceeded what was planned at program preparation (Appendix 1). 11. The program substantially improved SOE accountability and performance, and a number of important SOE reforms have been implemented since The rate of return on equity for the SOE portfolio in 2010 was 3.15%, a considerable improvement over 24.00% in In April 2010, the regulations for the SOE Act 2007 were issued, which provide a robust framework for the governance and monitoring of SOEs. These include rules on (i) appointment and removal of SOE directors, (ii) specification of directors' duties, and (iii) economic functions and community service obligations of SOEs. All auditing of SOE accounts is up to date. Most SOEs appoint board members in accordance with provisions of the SOE Act. A few SOEs including Home Finance, Sasape Marina, and Solomon Taiyo Fish and Processing Company were privatized and the boards of the Solomon Islands Electricity Authority and Solomon Islands Water Authority were restructured. In 2011, the new MOFT SOE Monitoring Unit began work to implement the SOE regulations governing community service obligations. The monitoring unit prepared a template contract for community service obligations, signed one contract in 2011, and is finalizing two more in With continued support from ADB, the accounting and financial reporting systems of SOEs are being upgraded in order to effectively implement the community service obligation regulations. Building on previous reform actions included in the EFRP policy matrix, the government also moved in 2012 to increase water tariffs and settle arrears to return two of the largest SOEs the Solomon Islands Electricity Authority and Solomon Islands Water Authority to solvency. The government has also continued the reforms by liquidating Solomon Islands Printers and implementing a financial restructuring plan for the Solomon Islands Airlines. 12. Under the program, the telecommunications sector has been substantially deregulated, resulting in a significant increase in private participation. Greater telecommunications coverage has also been achieved, with 75% of the urban population having access to a mobile phone in 2011, compared with 23% in Mobile subscriptions tripled from 11,000 in 2007 to 30,000 in 2010, and fixed-line access rose from 7,800 in 2007 to 8,400 in The Telecommunications Act of 2009 provided for the Telecommunications Commission to open the market for competition for mobile telecommunication, starting in April The commission functions as an independent regulator and strictly enforces the provisions of government contracts with private providers. Two private mobile phone operators were licensed in 2010 and 2011, resulting in a substantial improvement in mobile service performance.

13 5 13. The program also reduced the cost of doing business through the implementation of the Companies Act 2009 and the Companies (Insolvency and Receiverships) Act The new Companies Act supports the formation of single shareholder companies and introduces the concept of community companies. Minority shareholder protections in the Companies Act have been substantially strengthened. An electronic companies registry was established in December 2010, and during the first year of operation 270 new companies were registered, compared with an average of 124 per year since Under the new laws, 962 existing companies have reregistered through the electronic registry. To register a new company now takes only 1 2 days compared to up to 3 months under the previous Companies Act (1948) and the old registry. According to the International Finance Corporation s Doing Business Report 2011, Solomon Islands recorded a significant improvement in its ease of doing business ranking with a ranking of 74 out of 183 countries in 2011 compared to 85 out of 181 countries in Efficient and safe transport is vital for private sector development, given the country s remoteness and archipelagic character. The transport system was strengthened by (i) establishing the National Transport Fund (NTF), (ii) establishing a Maritime Safety Act and subsequently a Maritime Safety Administration, (iii) updating the National Transport Plan (NTP), and, (iv) establishing the Franchise Shipping Scheme. The NTF Regulations were gazetted in June 2010, establishing the operations of the fund including payment and performance monitoring and evaluation mechanisms. In addition, the 2006 NTP has been updated to integrate planning and protection of environmental and social sustainability, and increase resilience to natural disasters. The updated NTP prioritizes infrastructure operations and maintenance. A 3-year rolling work program for the NTP has been adopted, linked to policy priorities and to financing from the NTF. The 2011 budget allocated SI$51 million to the NTF for infrastructure development. The fund will be managed by the NTF board and any unspent resources will be used for future infrastructure development. Implementation of the 3-year rolling work program for the NTP is on schedule. Appendix 1 details quantitative achievements compared to targets set in the program framework. 15. The program improved access to finance through secured transactions reform. In 2009, the new Secured Transactions Act became operational and an electronic registry to record security interests registered under the act was established. The new lending framework has had a transformational impact on lending in Solomon Islands. Loan approvals, which previously could take up to 4 weeks, are now processed in 1 2 days. There has been a significant improvement in enforcement of security interests under the new act. At present, over 9,000 security interests have been registered, compared to 124 in Output 3: Support of the vulnerable. One of the program outputs is to help maintain the delivery and improve the targeting of public spending for basic transport services, rural health services, and basic education. The government has met its commitment to ensure priority was given to spending on key social services to support the vulnerable, particularly in the health, education, and rural transport sectors. The proceeds of the first subprogram were allocated to government programs in transport (26%), education (37%), and health (37%) to boost spending over 2009 levels in these core sectors. Moreover, budget allocations for health and education in 2010 and 2011 increased steadily over 2009 levels. Government expenditure on social programs, such as health and education, is high by regional standards at around 9% of GDP. Education spending accounted for around 26% of the recurrent budget in 2011, and 8 World Bank and International Finance Corporation Doing Business Washington, DC.; World Bank and International Finance Corporation Doing Business Washington, DC. 9 Registered security interests represent loans issued using collateral.

14 6 health accounted for 17%. Since 2005, the per capita health budget has increased at an average annual rate of over 16%, while per capita spending on education has increased by 6%. Starting in 2010, the government was able to provide universal free primary education and has improved the targeting of its social assistance programs. A public expenditure analysis unit was established in the MOFT to better track and improve the prioritization of public expenditure, and a public expenditure review covering the social sectors was undertaken in 2011 with development partner support. Actual spending on social programs in 2010 and 2011 were adversely affected by the spending reservations and recruitment freeze introduced in 2010 to help manage cash flow, although the spending reservations in the social sectors were less severe than in other sectors. Spending in the education and health sectors in 2009 exceeded the amounts budgeted (by 9% in education and 34% in health) because of inflows of sector budget support from bilateral development partners. To boost spending on rural transport, the NTF was approved in March 2010 and financing to the NTF was provided by ADB and other partners in Output 4: Communication and ownership of policy actions. Providing regular access to fiscal information was central to the government s effort to bring about genuine partnerships between stakeholders. The program targets of surveying stakeholders, releasing fiscal information, and publishing IMF reports was fully met during the program period. To foster public awareness and participation, government financial statistics, including debt statistics, were updated on a monthly basis and were publicly disseminated on the MOFT website. The IMF Article IV reports for 2009, 2010, and 2011, and progress reports on the 2010 IMF Standby Operation, were also publicly released. The 2008 MTFS was updated in August 2009, and a new MTFS was prepared in August 2010 and updated in August 2011; all were publicly released through the MOFT website. A reform communications and outreach strategy was prepared and endorsed by the Cabinet on 26 May Since 2006, wide-ranging independent stakeholder surveys were conducted annually with RAMSI support, and the government has also held extensive stakeholder consultations in both the capital and provinces as part of the preparation of the NDS and the 2012 budget. C. Program Costs 18. ADB provided program cluster grants of $10 million for two subprograms. This helped to partly offset the costs of the budget s overall financing requirement, which was equivalent to $35 million in 2010 and $42 million in The estimated adjustment costs of the fiscal reform alone were $25 million per annum. Support also financed the costs of structural reforms and protecting public spending in the education, health, and infrastructure sectors. D. Program Schedule and Disbursements 19. The grant agreement for the first subprogram was signed on 28 January 2010, became effective on 31 March 2010, and was fully disbursed on 6 April The first subprogram was closed on 11 February 2011, 6 months behind schedule, because of delays in submission of the government s accounts and completion report. The grant agreement for the second subprogram was signed on 13 September 2011, became effective on 23 September 2011, and was fully disbursed on 30 September The second subprogram was initiated 3 months behind schedule because of delays in issuing the 2011 budget and slow progress in the Cabinet s endorsement of a new medium-term development strategy, i.e., the NDS. This was also affected by the delay in the formation of the new government. Some delays had been anticipated, and the second subprogram was prepared on a flexible and responsive basis. The second subprogram was completed on 19 March 2012, 1 month later than originally planned.

15 7 E. Implementation Arrangements 20. The MOFT was the executing and implementing agency, and was supported by the Central Bank of Solomon Islands, central ministries, and line agencies. The CEWG served as the program coordinator and held quarterly meetings and annual reviews to track program progress. The CEWG was critical in serving as a forum for (i) fair and unfettered policy dialogue between the government and main development partners, (ii) mobilizing external financing and technical support, and (iii) development partners to speak with one voice on policy matters. The MOFT chaired the CEWG meetings and ensured that these focused on candid and transparent dialogue on reform progress and priorities. To ensure timely program implementation, a senior MOFT official was appointed as program director, who coordinated day-to-day program implementation. The program director also provided quarterly progress reports, minutes of the CEWG meetings, and a subprogram completion report within 6 months after the closing of each subprogram loan. Annual joint reviews of the program were undertaken to assess the reform progress and recommend future reform priorities and ways to improve the CEWG process. The annual joint reviews were undertaken by a team of technical reviewers from both government agencies and development partners. The implementation arrangements were adequate and very effective in delivering the specified outputs and outcomes. F. Conditions and Covenants 21. All of the covenants under the grant agreement were fully complied with (Appendix 2). The program used ADB s policy-based program modality and was based on the Development Policy Letter and Policy Matrix of 4 February All 42 of the policy actions identified in the Economic Recovery Support Program reform matrix were complied with. Specific program covenants, including those relating to progress in improving the mining tax regime in line with the principles of the Extractive Industry Transparency Initiative, and selecting a deputy registrar and administrative officer for the Companies Registry, were complied with, although there were modest delays in selecting the deputy registrar. No covenants were modified, suspended, or waived during the program period. G. Related Technical Assistance 22. There was no TA provided for the program design and/or implementation. Instead, support from a number of ongoing regional TA projects and country-level capacity development TA projects supported specific aspects of the program. 10 Significant technical support was also provided by other development partners. The World Bank contributed to the design and implementation of the fiscal reform pillar of the program through a series of public expenditure reviews, a 2008 procurement review, and reports on health and education finance. The European Union contributed to the identification of financial management reforms through its support for the preparation of a Public Financial Management Performance Report in RAMSI s Financial and Economic Management Strengthening Program made a major 10 ADB Technical Assistance for the Pacific Economic Management Response to the Global Crisis (Subproject 1). Manila; ADB Technical Assistance for the Pacific Private Sector Development Initiative. Manila (Cofinanced by AusAID); ADB Technical Assistance for the Pacific Private Sector Development Initiative. Manila (Cofinanced by AusAID); ADB Technical Assistance for the Transport Sector Development Project for Solomon Islands. Manila; ADB Technical Assistance for Enhancing Engagement with Pacific Developing Member Countries. Manila (Cofinanced by AusAID); ADB Technical Assistance for Strengthening Public Financial Management in Pacific Developing Member Countries. Manila; ADB Technical Assistance for Support for the Formulation of a National Strategic Plan for Solomon Islands. Manila.

16 8 contribution to the program. As part of RAMSI s whole-of-government strengthening program the Financial and Economic Management Strengthening Program advisors have been recruited largely from central agencies of the Government of Australia. These advisors have helped develop and implement a number of reforms aimed at strengthening the government s public financial management and budget processes and systems. H. Performance of the Borrower and the Executing Agency 23. The performance of the borrower during program design and implementation was rated highly satisfactory. The government led the CEWG and prepared a policy matrix that identified key fiscal measures and structural policy reforms. The government s leadership was instrumental in mobilizing support from multiple development partners. The MOFT (i) ensured that the program was executed in accordance with the grant agreement, (ii) coordinated government agencies, (iii) facilitated information exchange, (iv) monitored program performance, and (v) produced the government s completion report. Coordination among the different agencies was good, and ADB was invited to participate in regular policy dialogue on all aspects of the reform effort. The government also facilitated the annual joint review of progress in implementing agreed reforms. ADB TA was timely and used effectively by the responsible agencies. Despite economic uncertainty and periods of political instability, the MOFT was able to maintain broad-based commitment to strengthening public financial management systems and improving the private sector enabling environment. I. Performance of the Asian Development Bank 24. ADB staff at headquarters and the Pacific Liaison and Coordination Office in Sydney, and the Solomon Islands Development Coordination Office in Honiara played a key role in assisting 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 actively monitored the progress of reform activities and ensured the completion of all program policy actions. ADB staff also responded in a timely manner to requests from the MOFT for technical support. Over the program period, ADB maintained its active role in (i) leading the support for regulatory reforms to promote private sector development and transport connectivity, (ii) effective policy dialogue with the government, and (iii) ensuring reform implementation beyond the program period. ADB participated actively in all CEWG meetings and led the first joint review of the government s EFRP. The performance of ADB, rated highly satisfactory, has been commended by the government and development partners. 25. Regional TA was mobilized to support the formulation and implementation of the program s reforms, ongoing policy dialogue, national development planning, audit and procurement reform, SOE reform, commercial law reform, and transport sector reform. The assistance was highly relevant and timely. TA support was critical to the program formulation, the effective operation of the CEWG, and maintaining a constructive policy dialogue. A combination of TA delivered through a resident development coordinator posted in Honiara and by a team of intermittent consultants who provided well-defined technical services on demand proved to be highly effective. Preparation of the NDS, a critical policy measure, required more time than expected due to changes in government and adoption of a highly consultative preparation process.

17 9 III. EVALUATION OF PERFORMANCE A. Relevance 26. In design and implementation, the program was highly relevant. It was fully aligned with the government s EFRP and ADB s country and corporate strategies. Through the effective workings of the CEWG, ADB was part of a coordinated approach by development partners, which was critical to success in restoring growth and fiscal balance. 27. The policy measures were highly relevant to addressing the challenges faced by the government. Without budget support, the economy could have been severely battered, with falling aggregate demand, rising payment arrears, higher inflation, and stagnant economic performance. There was also a risk that the government would resort to commercial borrowing and violate the Honiara Club Agreement. The program helped the government to swiftly address its budget shortfall while also substantially improving its management of public finances. Particularly, special measures were taken to protect spending on the social sectors and rural transport so as to protect those most vulnerable from sudden fiscal cutbacks. The 2009 economic shock reminded policy makers of the need to diversify economic activity away from being highly dependent on unsustainable logging revenues and aid inflows. Incorporating measures aimed at improving the private sector enabling environment was essential in signaling the government s commitment to inclusive growth and to a more diversified economy. In the future, however, it may be essential to expand the policies to support further diversified economy to promote other economic sectors including agriculture, fisheries, tourism, and mining. 28. The program design and implementation was also highly relevant to Solomon Islands status as a fragile state, 11 with the consequent imperative of building institutional capacity and fostering good governance. A reform agenda was supported which was incremental, feasible, and sufficient to address the immediate problems. Reforms were supported which built institutional capacity in (i) public finance, (ii) civil service management, (iii) SOE governance, (iv) regulating the transport sector, (v) business law reform, and (vi) services to businesses (i.e., registration, licensing, asset registry). Through CEWG, aid coordination was strengthened because development partners would speak with one voice on key policy matters. Fostering greater transparency and accountability to strengthen governance was emphasized through (i) regular publication of government financial accounts, (ii) automated fiscal management systems, (iii) strengthened accounting and auditing functions, and (iv) separation of the government s oversight from management responsibilities in the SOEs. 29. The relevance of the program increased over time as development partners aligned their budget support assistance with government reforms developed under the CEWG process. In June 2010, the IMF followed with its $18.3 million Standby Credit Facility, aimed at restoring macro stability, fostering structural reform, and rebuilding foreign exchange reserves. Following support provided by Australia, New Zealand, ADB, and the IMF in 2010, the European Union provided budget support under its Vulnerability Flexibility Funds equivalent to $21.3 million for the 2010 budget and $1.8 million for the 2011 budget. The governments of Australia and New Zealand also provided sector budget support (Australia to health, New Zealand to education) aligned with the government s EFRP matrix. Australia provided the equivalent of $3.0 million in 2010 and $11.2 million in 2011; New Zealand provided $3.9 million in 2010 and $7.4 million in 11 ADB Achieving Development Effectiveness in Weakly Performing Countries (The Asian Development Bank s Approach to Engaging with Weakly Performing Countries. Manila.

18 In April 2012, the World Bank approved a series of two development policy grants of $2.0 million each for release in 2012 and 2013 in support of reforms identified in the EFRP matrix. B. Effectiveness in Achieving Outcome 30. The program was rated highly effective in achieving the envisaged outcome, which was the initiation of economic recovery with extra protection for the vulnerable and the fiscal position. Although at the start of the program it was feared that the economy could stagnate or continue to decline in 2010, the economy recovered strongly, with real GDP growth of 7.1% in 2010 and 9.3% in Fiscal surpluses were achieved in 2010 and 2011, and expenditures on basic social services were protected while the affordability of basic education was improved. Progress in achieving the specific outcomes targeted for each of the Economic Recovery Support Program outputs is discussed in paragraphs Fiscal consolidation. Excellent progress was made in restoring fiscal balance. The government budget ended 2010 with a considerable surplus, in sharp contrast to the severe cash shortages at the start of The government exceeded its fiscal targets under the IMF program by achieving a fiscal surplus of 6.3% of GDP in 2010 and 3.6% of GDP in 2011 (IMF definition). Since early 2011, the government has maintained a cash buffer of 3 months of recurrent expenditure to assist with managing its cash flow. Below-budget spending, a recruitment freeze, and spending reservations at the start of 2010 also contributed to the 2010 fiscal surplus. The estimated surplus in 2011 was also induced by poor spending, especially of the development budget. This was attributed to the late budget (passed in April) and to limited project implementation capacity. With fiscal consolidation, public debt status has steadily improved. The public debt GDP ratio has declined from 60% of GDP in 2005 to 21% in A debt management unit is in place and functions effectively. A new public debt strategy has been prepared which envisions a gradual resumption of concessionary borrowing. 32. Improved public sector financial management. Significant progress has been made in improving the MOFT s financial management systems. The NDS has been prepared and serves to provide strategic guidance for setting budget priorities. Improved (automated) cash management, budget, payroll, financial management, and debt management systems are in place and operate effectively. In addition to strengthening fiscal controls, these have contributed to better integration between payroll and the budget and development and recurrent spending. Fiscal accountability has also improved as a result of tighter controls on public procurement and more frequent and timely financial reporting through the MOFT website. In addition, governance of SOEs has improved with the appointment of private sector directors to the boards of SOEs, the removal of members of parliament from the boards, and the privatization of selected smaller SOEs. Access to audited SOE financial data has revealed the breadth of SOE financial losses and has catalyzed the introduction of a community service obligation framework, utility tariff hikes, and measures to address cross-payment arrears between the power and water utilities. Preparation and annual updating of a medium-term fiscal strategy has also contributed to a gradual adoption of a multiyear budgeting process. 33. Protecting the poor. Public spending on basic services, including health, education and rural transport, was protected during the program period. Social sector spending accounted for nearly half of all recurrent spending during the program period. Education spending accounted for 22% of the recurrent budget in 2010 and 28% in 2011; health spending accounted for 17% of the recurrent budget in 2010 and 14% in Budget support from the Australian and New Zealand governments to the social sectors provided almost 25% of social sector financing and was linked to progress made in the government s reform program. The

19 11 public expenditure review, undertaken as a program measure in 2011, also served to identify areas in which better targeting of social spending is required. The NTF was initially capitalized under the program, and investments financed from the NTF, together with ongoing development partner and government projects, have focused on repairing and otherwise restoring access to transport systems in rural areas. 34. Fostering private sector-led growth. Substantial progress was made towards improving the enabling environment for private sector-led growth. The telecommunications industry has been liberalized, mobile phone tariffs have fallen sharply, and access to communications has vastly improved, with around 75% of the urban population having access to a mobile phone. New business laws have substantially simplified the business registration process and reduced the time required to register a new business. Access to finance has improved as a result of the secured transactions reforms. The launching of a franchise shipping scheme has established a model for public private partnership in providing regular transport access to the remote outer islands. The Ministry of Infrastructure Development introduced road maintenance contracts using labor-intensive methods, which helped boost private sector development in rural areas. Sound fiscal management together with implementation of the Investment Act, Companies Act, Immigration Act, and SOE Act have contributed to a more conducive business environment. 35. Communication and reform ownership. Public access to up-to-date information on the financial and economic situation has considerably improved over the program period, and this has contributed to bipartisan political support for the reform agenda. The establishment and use of the MOFT website to disseminate regular reports on the government s financial performance and fiscal strategy, combined with the adoption of highly participatory national planning and budget formulation processes, has made an important contribution to the transparency and ownership of the reform process. C. Efficiency in Achieving Outcome and Outputs 36. Program reforms were executed efficiently, with few delays or impediments. The program was executed using the government-led multidonor CEWG mechanism, which promoted coherence, coordination, and consistency among partners. The government met the preconditions for release of funds despite a tight fiscal situation, a change in government, a series of no-confidence votes, and widespread human resource shortages. Finalization of the NDS was delayed, but this was due to extra time taken for extensive public consultations and to ensure that the new government was fully committed to a development strategy that had been developed by the previous administration. There were modest delays in preparing audited accounts for the SOEs, and there were delays in recruiting and appointing staff to serve in the Companies Registry. This can be attributed to the civil service recruitment freeze of 2010 and 2011 and to rigidities in the government s personnel system, which impeded staff transfers, even within the same ministry. Concerted policy dialogue and follow-up by ADB was successful in raising and resolving these issues after the program period. 37. On balance, program outputs were achieved efficiently. The 2011 budget was fully funded and executed without arrears of any kind for the first time in many years. Expenditures on the social sectors were protected, and universal access to primary education was extended to all, without any fees, in 2010 and 2011 despite tremendous fiscal stress. Revenue reforms contributed to a remarkable increase in the revenue GDP ratio, from 25.4% of GDP in 2008 to an estimated 30.7% of GDP in 2011, allowing the government to rebuild its reserves and reduce

20 12 its debt burden. Taking these factors into consideration, the Economic Recovery Support Program (subprograms 1 and 2) is rated efficient. D. Preliminary Assessment of Sustainability 38. Progress registered during the program period has continued in 2012, and is assessed most likely to be sustainable in the years to come. Gains in fiscal stability are most likely to be maintained. The 2012 budget forecasts a small surplus. After growing by 9.3% in 2011 because of higher export earnings, the economy is forecast to grow by 5.0% 6.0% per annum in 2012 and The resumption of gold production in April 2011 has helped to diversify the economic base, as has continued strength in the production of agricultural commodities such as palm oil, copra, and vanilla. 39. Reform momentum is most likely to continue. The government s EFRP and CEWG have an established track record of not only successfully supporting a credible multiyear reform effort but also effectively mitigating risks associated with political fragility. The government has demonstrated strong ownership and commitment to the CEWG and to making further progress with the reform agenda. Now that the country has an NDS for , reform efforts have been cast within a long-term vision of what the government wishes to accomplish. In 2011, the government formulated its first 3-year rolling EFRP matrix, with a large number of new policy actions, and it is taking the lead in formulating and implementing agreed policy reforms. E. Institutional Development 40. The program and TA projects have made a significant contribution to building institutional capacity based on findings in TA review reports and input from stakeholders. Improved institutional frameworks are in place to, among other things, support continued strengthening of public sector finances, substantially improve the financial performance of SOEs, integrate the budget with long-term development plans, register companies, facilitate secured transactions, finance priority transport sector investments, and oversee the safety of maritime transport. The program has built capacities for cash forecasting, debt management, financial controls, oversight of the procurement process, internal audit, and payroll management. Participatory planning capabilities have improved during the preparation of the NDS and the national budgets. The SOE monitoring unit has come into operation and has helped introduce good corporate governance practices. The Telecommunications Commission has been established and has developed the capacities to tender for licenses and oversee private mobile phone providers. An electronic companies registry has come into effect and has significantly reduced the time needed for new companies to register. Improvements have also been made in enforcing the country s customs regulations and, by adopting a resource rent tax framework, in the ways in which forestry and mining products are being taxed. Through the CEWG process, the government has also developed a systematic approach to formulating, implementing, and tracking progress on time-bound policy reform programs. RAMSI officials have played a critical role in designing and implementing reforms. Continued emphasis on capacity development of national officials will be required, however, as RAMSI winds up. F. Impact 41. Concerted effort from the government, ADB, and other development partners has resulted in the program having a significant and positive impact on economic performance. After 12 Government of the Solomon Islands Annual Budget Honiara.