pacific private sector development initiative: annual progress report 2010

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Pacific Private Sector Development Initiative

Annual Progress Report 2010


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Pacific Private Sector Development Initiative

Annual Progress Report 2010


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This report was prepared by Paul Holden, Melissa Dayrit,Jeremy Cleaver, Laure Darcy, Terry Reid, Chris Russell,

Erik Aelbers, and Olga Santos, under the supervisionof Kanokpan Lao-Araya and Eugenue Zhukov of theAsian Development Bank (ADB) Pacific Liaison andCoordination Office, Sydney, Australia. It was supportedby the Pacific Private Sector Development Initiative,an ADB technical assistance facility cofinanced by theAustralian Agency for International Development.

Every effort has been made to ensure the accuracy of thedata used in this publication.

2011 Asian Development Bank

All rights reserved. Published in 2011.Printed in Australia.

ISBN 978-92-9092-373-2Publication Stock No. RPS113694

Cataloging-In-Publication Data

Asian Development Bank.

Pacific Private Sector Development Initiative: Annual progress report 2010.Mandaluyong City, Philippines: Asian Development Bank, 2011.

1. Private sector. 2. Pacific. I. Asian Development Bank.

The views expressed in this publication are those of the authors and do not necessarily reflect the views and policiesof the Asian Development Bank (ADB), its Board of Governors, or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for anyconsequence of their use.

By making any designation of or reference to a particular territory or geographic area, or by using the term countryin this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.

ADB encourages printing or copying information exclusively for personal and noncommercial use with properacknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works forcommercial purposes without the express, written consent of ADB.

Note:In this publication, $ refers to US dollars.

For more information, please contact Eugenue Zhukov (Regional Director) or Kanokpan Lao-Araya(Senior Private Sector Development Specialist)

Asian Development BankPacific Liaison and Coordination OfficeLevel 18, 1 Margaret StreetSydney, NSW, 2000, AustraliaTel +61 2 82709444Fax +61 2 82709445

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, PhilippinesTel +63 2 632 4444Fax +63 2 636 2444www.adb.org

For orders, please contact:Department of External RelationsFax +63 2 636 [email protected]


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Contents

List of Figures and Boxes iv

Foreword v

Abbreviations vi

Executive Summary vii

The Pacific Private Sector Development Initiative during Its First 4 Years of Operation vii

Promoting Womens Economic Empowerment in the Pacific vii

Highlights of Activities in 2010 vii

Linkages and Partnerships x

Outlook x

Introduction 1

Key Features of the Pacific Private Sector Development Initiative 2

Overall Objectives 2

Methodology 2

Management Structure 2

Financial and Portfolio Overview 3

Portfolio of Activities 5Access to Finance 5Business Law Reform 7

State-Owned Enterprise Reform and PublicPrivate Partnerships 10Analytical Work, Advocacy, and Outreach 13Gender: A Crosscutting Theme 14

Monitoring and Evaluation Framework 16

Linkages and Partnerships 19Mainstreaming Private Sector Development in Asian Development Bank Operations 19Fostering External Partnerships 19

Outlook 20

Appendixes

1 Pacific Private Sector Development Initiative Activities by Country 22Fiji 22Papua New Guinea 22Samoa 24Solomon Islands 25Timor-Leste 26Tonga 27Vanuatu 29

2 Initiatives and Projects by the Pacific Private Sector Development Initiative in 2010 31

3 Seminars and Workshops Supported by the Pacific Private Sector Development Initiativein 2010 36


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Figures and Boxes

Figures

1 Commitments and Disbursements by Country, 2010 32 Commitments and Disbursements by Focus Area, 2010 43 Pacific Private Sector Development Initiative Activities by Gender Classification 154 The Monitoring and Evaluation Framework for PSDI 17

Boxes

1 Access to Credit through Secured Transactions Reform 6

2 Secured Transactions Reform Expands Opportunities for Growing Sandalwood 73 Promoting Financial Literacy 74 Company Law Reform Makes It Easier to Set Up a Business in the Pacific 85 Benefits from the Innovative Company Law Reform Sponsored by the Pacific Private

Sector Development Initiative 96 The Pacific Private Sector Development Initiative Uncovers the Hidden Costs of State-Owned

Enterprises 117 Pacific Private Sector Development Initiative Helps Identify What Is Necessary for

State-Owned Enterprise Reform 128 Sasape MarinaA Privatization Success Story in Solomon Islands 13

A1.1 The Pacific Private Sector Development Initiative Expands Business Opportunities inPapua New Guinea 23

A1.2 Pacific Private Sector Development Initiative Assistance Helps Timor-Lestes FirstPrivate SectorOriented Commercial Bank 27


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v

Robert WihtolDirector GeneralPacific Department

The fourth annual progress report of thePacific Private Sector Development Initiative(PSDI) documents continuing excellentprogress in promoting private sector devel-

opment in the region. As the Asian DevelopmentBanks Strategy 2020 and Pacific Approach 20102014 both emphasize, private sector developmentis an increasingly important part of ADB operations.PSDI is a central pillar of the Pacific Departmentsefforts to promote private sector development inthe region. It is attracting widespread attention

because of its novel structure and the innovativereforms that have been implemented through itstechnical assistance. Sound analytical work, exten-sive discussion, and close involvement of stake-holders in the pursuit of mutual policy goals havebecome hallmarks of PSDIs success.

This report documents the second phase of PSDI,which was approved by the ADB Board of Direc-tors in December 2009. It was made possible bygenerous cofinancing from the Australian Agencyfor International Development (AusAID), whichbrings the total funding for this phase of PSDI to$12 million and extends its tenure through 2013.

PSDI has received strong positive feedback fromADBs Pacific developing member countries (DMCs)on the usefulness and success of the reforms it hassupported. It has encouraged closer collaborationand cooperation between ADB and countries inwhich PSDI reforms have been implemented. Notonly have PSDI-supported reform initiatives beenwelcomed, they have been included among thepolicy commitments of countries receiving ADBeconomic support grants and loans. It is especially

encouraging that a number of countries have usedPSDI-support to take reforms beyond the formalcommitments that they made.

A key feature of PSDI is the close cooperation withdevelopment partners, which facilitates alignmentof policies and coordination of reform efforts. Insome countries, private sectororiented reformshave been jointly implemented, with PSDI fundingone part of the reform and another developmentpartner funding the remainder. In addition, the PSDIteam has worked closely with AusAID, which has,on a number of occasions, provided supplementarytechnical assistance funds to ensure the success ofparticular initiatives. PSDI has also obtained addi-

tional resources from ADB stand-alone technicalassistance projects, which has leveraged its fundingfor important reform initiatives.

The additional funding has enabled PSDI to broadenits country scope and to continue to innovate indesigning reforms to promote private sector develop-ment. In 2010, gender was introduced as a broadcrosscutting theme and a comprehensive monitoringand evaluation framework was developed to trackprogress and evaluate the impact of reforms.

Several seminars and workshops were fundedto build capacity in the region and inform PacificDMCs of successful reform efforts. The close rela-tionship between PSDI personnel and stakeholdershas led to increasing demand for further assistanceacross the region.

I would like to thank the Pacific DMCsand privatesector stakeholders for their enthusiasm and coop-eration in embracing the concepts embodied inPSDI, AusAID for its strong support for the program,and the PSDI team for the high quality of their work.This combination of expertise and effort has played

a major role in PSDIs achievements so far. I lookforward to the further evolution and extension ofthis innovative initiative.

Foreword


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vi

Abbreviations

ADB Asian Development BankAusAID Australian Agency for International DevelopmentCSO community service obligationDMC developing member countryIMfTL Instituio de Microfinanas de Timor-LesteM&E monitoring and evaluationNBV National Bank of VanuatuPNG Papua New GuineaPPP publicprivate partnershipPSA private sector assessment

PSDI Pacific Private Sector Development InitiativeRMI Republic of the Marshall IslandsSOE state-owned enterprise


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vii

The Pacific Private SectorDevelopment Initiative during ItsFirst 4 Years of Operation

The Pacific Private Sector Development Initiative(PSDI) commenced in 2006. It is a regionaltechnical assistance facility of the AsianDevelopment Bank (ADB), cofinanced by the

Australian Agency for International Development(AusAID). Its aim is to alleviate poverty in the Pacific

region through promoting private sectorled growth.PSDI aims to reduce constraints to private sectordevelopment by identifying and removing factors thatraise transaction costs, discourage investment, andhinder the formation and growth of businesses. It hasfocused on improving access to finance, reformingbusiness laws, and improving the delivery of infrastruc-ture services through assisting state-owned enterprises(SOEs) to become more efficient; promoting publicprivate partnerships (PPPs); and helping govern-ments to privatize selected SOEs. During 2010, twosignificant additions were made to PSDI core areas:a comprehensive monitoring and evaluation (M&E)framework, which integrates financial controls withinitiative tracking and results assessments, and acrosscutting gender strategy, which promotes positiveimpacts on womens economic empowerment.

The structure and implementation of PSDI is uniquein the region and has resulted in significant reformsto the business environment in Pacific countries. PSDIreform initiatives are based on a rigorous foundationof analytical work, extensive consultation with govern-ment and private sector stakeholders, the implementa-tion of reform initiatives, extensive follow-up to ensure

that the initiatives are effective, and a comprehensiveM&E framework to track and assess the impact of the

reforms. PSDI is flexible and can respond to opportuni-ties when they arise. The PSDI model has evolved intoa uniquely effective instrument for assisting Pacificeconomies with private sector development.

Promoting Womens EconomicEmpowerment in the Pacific

Womens contributions to poverty reduction,

economic growth, and private sector development areincreasingly recognized globally. Womens economicempowerment became a major crosscutting themeof PSDI during 2010. A gender focus was adopted,with the aim of reaching out more consistently to givewomen the opportunity to better take advantage ofPSDI initiatives. The enhancement of gender-relatedoutcomes in PSDI commences with planning, whereall initiatives are reviewed with respect to the extentto which they enhance economic opportunities forwomen. While there is no specific core gender area,many PSDI reforms have a major impact on promotingthe entry of women into formal business, whichis where they tend to have the greatest impact onproductivity and growth.

Highlights of Activities in 2010

Access to Finance

Access to formal and informal financial servicesremains very low across the Pacific, particularly inrural areas. As a result, people face real difficulties in

saving in a secure way for investment and unex-pected expenses, efficiently transferring funds for both personal

and commercial purposes, borrowing to facilitate entrepreneurship, and securing their assets through other financial

products, such as insurance.

The lack of facilities also greatly increases the trans-action costs for payment of salaries and receiving

Executive Summary

The structure and

implementation of PSDI

is unique


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viii Executive Summary

remittances. Improving access to financial services,particularly by improving outreach to rural areas andoutlying islands, will enhance welfare, encourageeconomic growth, and contribute to poverty reduc-

tion. Expanding access to finance is, therefore, a keyfocus area for PSDI.

One of the main obstacles to increasing financialservices to rural areas has been the high cost ofestablishing formal banking networks, but tech-nological advances built on the rapid increase inmobile telephone coverage in the Pacific can changethis. Mobile phone networks facilitate communica-tions between bank branches and could lead to thewidespread availability of payment facilities andother financial services for the poor.

Highlights of PSDI initiatives in improving accessto finance and financial services include thefollowing:

One of the worlds most extensive programs ofsecured transactions reform, allowing movableproperty to be used as collateral for loans byboth businesses and consumers in the Pacificregion. In 2010, PSDI supported the imple-mentation of registries in Solomon Islands andVanuatu as well as the upgrade of the registriesin the Republic of the Marshall Islands (RMI)and the Federated States of Micronesia.

Legal drafting and consultation on the laws anddesign of the registries is ongoing inPalau, Papua New Guinea (PNG), Samoa,and Tonga.

Support for existing microfinance institutions,especially in PNG, Timor-Leste, and Vanuatu,to develop their capacity and expand outreachto rural areas.

Assistance for the development of new productsand the use of new technologies to lower thecosts of extending rural financial access in Fiji,PNG, Timor-Leste, and Vanuatu.

Business Law Reform

Businesses in many countries in the region areconstrained by outdated and inappropriate lawsand regulations. Laws are either missing or aredeficient in key legal areas such as company forma-tion, contracting, dispute resolution, and insolvency.Some key PSDI-supported reforms for 2010 includedthe following:

In Solomon Islands, commencement of theCompanies Act 2009 and the Companies (Insol-vency and Receiverships) Act 2009. These lawsare particularly focused on small and medium-sized enterprises.

Further consultation on the Vanuatu companiesbill and companies (insolvency and receiver-ships) bill.

Procurement of electronic company registries forSolomon Islands, where it will go live in 2011,and Vanuatu, where implementation awaits thepassage of related legislation. A manual registrywas designed for use in Solomon Islands whilethe electronic registry was being developed andtested. Reregistration of existing companiescommenced on 1 July 2010.

An extensive review of the Customs and Excise

Act in Solomon Islands, which commenced inNovember 2010. Implementation of new laws and regulations as

a key component in ensuring that legal reformsare effective.

State-Owned Enterprise Reform andPublicPrivate Partnerships

In the Pacific economies, SOEs are major providers ofgoods and services, particularly in infrastructure. Inmany cases, SOEs providing these services are inef-ficient and are a major impediment to growth and

productivity. Reforming SOEs is a key focus area ofPSDI. First, where feasible, PSDI initiatives assist govern-ments with privatization. Second, SOE restructuringand enhanced commercialization is being pursued toincrease accountability and efficiencies and reduce thestrain on state budgets. Third, PSDI programs providetraining and support for governance reforms and SOEdirector training. Fourth, PPPs are being introducedto increase private sector participation in the deliveryof core infrastructure and services, creating invest-ment opportunities and improving the service deliverycapacity of both the state and its SOEs. Highlights of

Implementation of new laws

and regulations is a key

component in ensuring that

legal reforms are effective


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Executive Summary ix

PSDI interventions in the area of SOE reform and PPPsinclude the following:

In Tonga, by the end of 2010, independent

directors had replaced all of the elected officialsand public servants on 10 of the 13 SOE boards.The Legislative Assembly passed an amendmentto the Public Enterprise Act in October 2010that provides a more robust framework for thecommercial management of SOEs.

In Solomon Islands, the full privatization ofSasape Marina was completed, with a consor-tium assuming ownership of the companysassets and planning a major rehabilitation of thecompanys core slipway operations.

In the RMI, a draft SOE policy was preparedthat can now serve as a blueprint for a future

SOE act. In PNG, there was progress in developing a

community service obligation (CSO) frameworkas a first step in SOE reform. A draft PPP bill wasfinalized, although it could not be submittedto Parliament due to the suspension of mostparliamentary sessions in 2010. Several oppor-tunities for PPP projects have been identified inthe transport, power, and health sectors, whichwill be further developed in 2011.

In Timor-Leste, a draft PPP policy was preparedat the request of the Ministry of Finance, andthe Council of Ministers is expected to endorse

the policy in early 2011.

Analytical Work, Advocacy, and Outreach

One of the strengths of PSDI is that it carries outextensive in-depth analytical work on which reforminitiatives are based. All such work is thoroughlydiscussed with relevant stakeholders and govern-ments in the region to agree upon a program ofreform. This is often incorporated into ADB countrystrategies so that PSDI reforms and more generalreform implementation under ADB programs aretightly integrated. Some highlights of analytical andadvocacy work under PSDI are as follows:

An in-depth analysis of the performance ofSOEs, Finding Balance 2011: Benchmarking thePerformance of State-Owned Enterprises in Fiji,Marshall Islands, Samoa, Solomon Islands, and

Tonga, was completed at the end of 2010. Thiswas a follow-on to the successful 2009 publi-cation, Finding Balance: Making State-OwnedEnterprises Work in Fiji, Samoa, and Tonga. Forthe 2011 edition, SOEs in the RMI and SolomonIslands were added.

Breaking Down the Barriers to Business in thePacific: Private Sector Reform Stories, which tellsstories of Pacific people whose lives have beentransformed by ADB private sector developmentreforms, was published.

The Pacific PSD Quarterlynewsletter was launchedin November 2010. Each edition will discuss

aspects of PSDI-focused reforms in the region. Training workshops on SOE reform and PPPs,

attended by more than 400 participants, wereheld to raise awareness of the benefits of PPPsand to assist SOE directors and potential direc-tors to improve the functioning of SOE boards.

As part of the extensive program of businesslaw reform, workshops and training sessions,attended by over 400 participants, were heldon the functioning of new secured transac-tions laws and registries in Solomon Islands andVanuatu, as well as on the implications and usesof the new Companies Acts in Solomon Islands

and Tonga. A private sector development policy and coor-

dination advisor continues to lead the advocacyprocess in PNG, in addition to helping imple-ment and coordinate PSDI-related activities.

Numerous articles, opinion and editorial pieces,and interviews addressing private sector devel-opment issues and PSDI-sponsored activitieswere publicized in regional and local media.

Enhancing Monitoring and Evaluation

To better track the progress and results of PSDI,a new M&E framework was developed in 2010.It encompasses all phases of the initiatives underPSDI that promote private sector development inthe Pacific region. The framework integrates finan-cial planning and budgeting; identification of focusareas for reform; the planning and implementationof reform initiatives; and the evaluation of outputs,outcomes, and impacts. It incorporates a dynamicfeedback mechanism that identifies problems as

Reforming state-owned

enterprises is a key focus area

of PSDI


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x Executive Summary

they arise in order to better focus initiatives onaccomplishing their goals.

Linkages and PartnershipsPSDI continues to promote partnership and coopera-tion between private sector development donorsin the region. Regular consultations with AusAID,both in Canberra and through country posts, haveincreased. Private sector development donor groupmeetings are held regularly between ADB, AusAID, theEuropean Investment Bank, the International FinanceCorporation, the New Zealand Aid Programme, andthe multi-donor Pacific Financial Inclusion Programmeto communicate progress, coordinate interventions,and share lessons learned. The Pacific Infrastructure

Advisory Center is colocated with PSDI at the ADBPacific Liaison and Coordination Office in Sydney,Australia, and provides significant collaboration oppor-tunities given PSDIs expertise, experience, and rela-tionships in the area of CSOs, SOEs, PPPs, and privatesector participation in infrastructure.

Outlook

The demand for PSDI-supported analyses andreforms continues to grow. Furthermore, the earlieranalytical work on which the first phase of reformefforts was based is now being updated to reflectinitiatives that have been completed and to iden-tify new priorities. The relationships that PSDI hasestablished with stakeholders in the region continueto strengthen, which in itself has set up a positivefeedback loop from discussion to reform to localadvocacy for further reform.

Although reform of the secured transactions frame-work is complete in the RMI, the Federated States ofMicronesia, Solomon Islands, and Vanuatu, implemen-tation continues. Reform is also under way in Palau,

PNG, Samoa, and Tonga. As the results of these initia-tives are disseminated, interest is growing from othercountries that have not yet requested assistance.

Further improvement in the availability of financialservices in the area of microfinance will be promotedthrough mobile banking initiatives in PNG, Timor-Leste, and Vanuatu.

The extensive program of business law reform isbeing continued and expanded. It is expected thatthe electronic company registry in Solomon Islandswill go live in the first half of 2011. Once Vanuatu

has passed its new Companies Act, an electroniccompany registry will be installed.

Substantial progress in SOE reform and PPPs hasbeen made in PNG and Tonga, and it is expectedthat new SOE reform programs will get underway in earnest in several other countries in 2011.Pioneering work on the economic impact of SOEsthat commenced in 2008 will be extended with thepublication of the updated study in 2011.

A crosscutting gender focus was implementedduring 2010 to ensure that gender considerations

become a strong feature of PSDI. These have beenincorporated into the new M&E framework that wasdeveloped for PSDI during the year. All initiatives arenow measured for their gender impact.

During 2011, work will continue on a regionalcontracting framework, with extensive analysis thatwill be disseminated at workshops in the region andsubsequently used as a foundation for developinga contracting code. Initial response from the legalcommunity to this work has been enthusiastic.

Continuity of consultations and ongoing dialogue

with government and private sector stakeholdershas led to a high degree of trust, which has greatlyfacilitated the prioritization and implementation ofreform efforts. As these initiatives come to fruition,the foundation for private sectorled growth in theregion continues to strengthen.

Further improvement in the

availability of financial services in

the area of microfinance will bepromoted through mobile banking

initiatives in Papua New Guinea,

Timor-Leste, and Vanuatu


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1

In response to the widespread recognition of theimportance of the private sector for growth, theAsian Development Bank (ADB) has made promotingprivate sector development a focus of its operations

in the Pacific region. It has implemented a significantamount of technical assistance, private sectororientedgrants, and, where feasible, investments through itsPrivate Sector Operations Department.

The Pacific Private Sector Development Initiative(PSDI), which commenced in 2006, reflects ADB

efforts to assist its Pacific developing member coun-tries (DMCs) to foster a dynamic and entrepreneurialprivate sector. PSDI is an ADB regional technicalassistance facility, cofinanced with the AustralianAgency for International Development (AusAID).It aims to alleviate poverty in the Pacific throughpromoting private sectorled growth. PSDI focuseson reducing constraints to private sector develop-ment by identifying barriers to investment and entre-preneurship that raise transaction costs, discourageinvestment, and hinder the formation and growthof businesses. Extensive analytical work has identi-fied poor access to financial services, inefficient and

high-cost infrastructure and state-owned enterprises(SOEs), and outdated and unsuitable business lawsas the main barriers to growth.

During its first 4 years of operation, PSDI hasfocused its reform efforts in these areas. It hasimplemented measures to improve access tofinancial services, both through legal reform andexpanding the availability of microfinance. It haspromoted business law reform and registries. It hasassisted Pacific DMCs in improving the delivery ofinfrastructure services through assisting SOEs tobecome more efficient, promoting publicprivatepartnerships (PPPs), and helping governments toprivatize selected SOEs.

Introduction

In 2010, two significant additions were made toPSDI core areas: a comprehensive monitoring andevaluation (M&E) framework, which integratesfinancial controls with initiative tracking and resultsassessments, and a crosscutting gender strategy,which promotes positive impacts on womenseconomic empowerment.

Although the PSDI technical assistance programcommenced in 2006, it is in its second round offinancing. An additional $12 million in resources

was approved in 2009 with funds released begin-ning in 2010.

The structure and implementation of PSDI is uniquein the region and beyond and has resulted insignificant reforms to the business environment inPacific countries. PSDI reform initiatives are based ona rigorous foundation of analytical work, extensiveconsultation with government and private sectorstakeholders, implementation of reform initiatives,extensive follow-up to ensure that the initiatives areeffective, and a comprehensive M&E framework totrack and assess the impact of the reforms. PSDI is

flexible and can respond to opportunities when theyarise. The PSDI model has evolved into a uniquelyeffective instrument for assisting Pacific economieswith private sector development reform.

ADB has made promoting

private sector development a

focus of its operations in the

Pacific region


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2

Overall Objectives

P

SDI is an ADB regional technical assistancefacility, cofinanced by AusAID. It aims toalleviate poverty in the Pacific region through

promoting private sectorled growth. Thestructure and implementation of PSDI is unique inthe region and has resulted in significant reforms tothe business environment in ADBs Pacific DMCs.

Methodology

PSDI reform initiatives are based on a rigorousfoundation of analytical work, extensive consultationwith government and private sector stakeholders,a comprehensive implementation of reforminitiatives, extensive follow-up to ensure that the

initiatives are effective, and a comprehensive M&Eframework to track and assess the impact of thereforms. PSDI aims to reduce constraints to privatesector development by identifying and removingfactors that raise transaction costs, discourageinvestment, and hinder the formation and growthof businesses. During its first 4 years of implemen-tation, PSDI has focused on increasing access tofinance; enhancing the framework for business law;and improving the delivery of infrastructure servicesby assisting SOEs to become more efficient, bypromoting PPPs, and where appropriate, by assistinggovernments to privatize selected SOEs. In 2010,womens economic empowerment was added asa crosscutting theme, and a comprehensive M&Eframework was developed.

Key Features of the Pacific

Private Sector DevelopmentInitiative

Management Structure

The ADB Pacific Liaison and Coordination Officein Sydney, Australia manages PSDI. The regionalmanagement team of the ADB Pacific Depart-

ment, led by the director general who is based inADB headquarters in Manila, provides strategicguidance. A team of private sector developmentexperts with extensive experience in PSDI focus areasdrives the analysis and implementation of reformin Pacific DMCs. The implementation of reformactivities is closely coordinated with all ADB officesin the region. In particular, PSDI operations areprogrammed, designed, and implemented in collab-oration with the ADB South Pacific SubregionalOffice in Suva, Fiji, for operations in the CookIslands, Fiji, Samoa, and Tonga; ADBs Special Officein Timor-Leste; and the ADB resident mission in Port

Moresby, Papua New Guinea (PNG).

In 2010, womens

economic empowerment

was added as a

crosscutting theme, and a

comprehensive monitoring

and evaluation frameworkwas developed


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3

Financial and Portfolio Overview

ADB approved PSDI on 21 November 2006for $8.7 million, cofinanced by AusAID with$7.6 million. The technical assistance budgetwas increased with additional cofinancing

from AusAID in the amount of $0.3 million in 2008,$0.2 million in 2009, and $0.6 million in 2010,bringing the total budget amount to $9.8 million.1InDecember 2009, with funds from the first phase ofPSDI (PSDI 1) about fully committed, ADB and AusAIDapproved an additional $12.0 million for the secondphase of PSDI (PSDI 2) through to 2013. A number of

activities that had commenced during PSDI 1 but notcompleted by the end of 2009 continued with addi-tional funding from PSDI 2.

By the end of 2010, 48 projects had been completedand approximately $8.5 million had been disbursedunder PSDI 1. To date, the PSDI 2 portfolio comprises29 ongoing initiatives and 8 completed projects.In addition, 29 new activities (i.e., initiatives andprojects) are planned to commence in 2011. In 2010,$4.9 million was committed in new contracts andadditional inputs from the remaining pool of PSDIfunds (PSDI 1 and 2 combined). This brings the total

committed amount (including carryovers from ongoingcontracts) to $5.2 million, which closely tracks the$5.3 million budgeted for 2010. As of 31 December2010, cumulative disbursements were $10.2 million(47% of the total PSDI budget) and commitments were$13.0 million (60% of the budget). While there wasan apparent decline in regional activities, this is dueto a reclassification of some activities from regional toindividual country initiatives.

As in the past, the country distribution of PSDI workcontinued to reflect the countries demand for

initiatives in support of private sector development.Figures 1 and 2 show commitments and disburse-ments by country and by focus area in 2010.Broadly, the difference between disbursementsand future commitments illustrates how countryresources will change in 2011 as commitmentsevolve into disbursements.

1 The additional funding was provided to support a conference on private sector participation in transport infrastructure in the Pacific,held in Cairns, Australia, in October 2008; a comprehensive microfinance assessment in Fiji; and an extensive review of the Customsand Excise Act in Solomon Islands.

Miscellaneousa

25%

Solomon

Islands26%

Vanuatu4%

Commitments

Disbursements

Othersb

6%

Tonga7%

Regional8%

Timor-Leste10%

PapuaNew Guinea

14%

Miscellaneousa

14%

SolomonIslands19%

Vanuatu7%

Othersb

7%

Tonga7%

Regional12%Timor-

Leste14%

PapuaNew Guinea

20%

a Miscellaneous = administration and core miscellaneouscosts, core undisbursed (applies only to commitments), andoutreach and miscellaneous costs

b Others = Fiji, Republic of the Marshall Islands, FederatedStates of Micronesia, Palau, and Samoa

Figure 1 Commitments and Disbursementsby Country, 2010


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4 Pacific Private Sector Development Initiative Annual Progress Report 2010

Of the countries that received PSDI support, PNG hadthe largest share at 20% of disbursements for the

year, followed by Solomon Islands at 19%. This willchange, however, with Solomon Islands obtaining alarger share of resources in 2011, partly as a resultof the reform of the Customs and Excise Act. Onthe other hand, some programs in PNG are on hold,pending decisions by government on several policyareas. The miscellaneous category in the countrycharts reflects overhead and administrative costs,which cannot easily be allocated by country.

In 2010, access to finance received 38% of disburse-ments, followed by SOE reform and PPPs (27%),crosscutting issues (21%), and business law

PPP = publicprivate partnership, SOE = state-owned enterprise

Figure 2 Commitments and Disbursements by Focus Area, 2010

reform (14%). Commitments show a substantialincrease in resources allocated to business law reform

as successes in this area have generated increaseddemand.

Commitments show a substantial

increase in resources allocated

to business law reform as

successes in this area have

generated increased demand

Access toFinance

38%

Business LawReform

24%

SOE Reformand PPPs

23%

Crosscutting15%

Access toFinance

38%

Business LawReform

14%

SOE Reformand PPPs

27%

Crosscutting21%

Commitments Disbursements


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5

Portfolio of Activities

Access to Finance

The Pacific region has one of the most under-developed finance sectors in the world, witha narrow range of available financial services,high costs, and low levels of credit to the

private sector. Improving access to financial servicescan provide opportunities for

saving in a secure way for both investment andunexpected expenses,

efficiently transferring funds for both personaland commercial purposes,

borrowing to facilitate entrepreneurship, and reducing the risks of unexpected events through

financial products such as insurance.

The low level of financial development is partly theresult of the geographical characteristics of Pacificisland countriesit is costly to provide services inremote areas. New and rapidly evolving technologieshold the promise of offsetting at least part of thesedisadvantages. PSDI has promoted rural outreachthrough the use of new and innovative business

models and the latest technological advances. It hasassisted in the development of financial productsfor the rural population. It has also promotedreform of the enabling environment for financialservices, including a focus on seeking solutions for

gender-specific constraints. Work to improve theenabling environment has included reform of thepersonal property securities or secured transactionsframeworks and registries in eight countries, pavingthe way for a much wider range of collateral to beused to secure loans. In 2010, PSDI supported theoperation of personal property securities registriesin Solomon Islands and Vanuatu. Legal drafting andconsultation on the laws and design of the associ-ated filing archives is ongoing in Palau, PNG, Samoa,and Tonga. Activities in the area of access to finance

represented approximately 38% of PSDI disburse-ments in 2010.

An efficient and low-cost outreach capability is themost effective way to improve access to financialservices, particularly through the use of technologyand innovative outreach models. For example, therapid expansion of mobile telephone coverage inthe Pacific has dramatically increased the optionsavailable for provision of financial services throughbranchless banking models. ADB technical assistanceprograms2to pilot a branchless banking programwith the National Bank of Vanuatu (NBV) have

assisted the NBV to move toward piloting a mobilephone banking system that will reduce transactioncosts, increase security, and dramatically increaseaccess to financial services in rural areas. PSDI hasalso funded assistance for identification and devel-opment of mobile phone banking opportunities inPNG, Timor-Leste, and Vanuatu.

ADB is working with financial institutions in PNG,Timor-Leste, and Vanuatu to ensure that appropriatefinancial products are available to the rural andurban poor, and in collaboration with other donorsto assist with the development of the microfinancesector in Fiji. In PNG, PSDIs efforts in 2010 comple-mented the final stages of the ADB Microfinanceand Employment Project,3which has laid the foun-dation for a nascent microfinance sector. PSDI alsofunded the design of the Microfinance Expansion

2 ADB. 2007. Technical Assistance to the Republic of Vanuatu for Expanding Access to Financial Services.Manila.3 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Independent State of

Papua New Guinea for the Microfinance and Employment Project. Manila.

Work to improve the enabling

environment has included

reform of the personal property

securities or secured transactions

frameworks and registries in

eight countries


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Box 1 Access to Credit through Secured Transactions Reform

The traditional legal framework for secured lending in Solomon Islands and Vanuatu was organized around avariety of complicated legal instruments such as the company charge, available only to registered companies, and

the registered bill of sale, the main form available to individuals. Some forms created security interests throughregistration. However, traditional registries were expensive, cumbersome, and offered little useful informationeven though much detail was collected. Among competing claims, priority depended not so much on the order ofregistration but rather on the nature of the legal form used and the type of notice that applied to the collateral.Enforcement took months or, more commonly, years, and required judicial resources. The system was risky for bothlenders and borrowers, and had an adverse effect on access to finance. This meant that unlike in countries withhighly developed financial markets, few businesses extended credit terms to their customers, borrowing againstinventories or warehouse receipts rarely occurred, purchase of equipment through leasing was unusual, andspecialized financial institutions did not exist. These conditions result in underinvestment in capital equipment andsuboptimal inventories, which impose high costs in remote countries where resupply is difficult because of distancefrom suppliers. Businesses in such countries need to hold higher inventory than do those in countries wheresuppliers are nearby. Because holding inventory generally requires financing, access to credit at reasonable cost isespecially important for productivity improvements and growth in such countries.

In 2008, with support from the Pacific Private Sector Development Initiative, Solomon Islands and Vanuatu enacted

new laws on secured lending, and by 2009, electronic registries began operation. The new laws allow securityinterests to be created in various forms of movable property, including equipment, inventory, accounts receivable,crops, livestock, and shares. Furthermore, the new framework introduces an effective system that determines thepriority of these interests and makes this information publicly accessible (i.e., through simplified priority rules andwith the aid of the online registry). Unlike traditional registries, the new registries serve mainly to provide noticeto the public to encourage further inquiry before buying or taking any security interest in property of the samenature described in the notice and, more importantly, to establish a priority date (the registration date) by whichcompeting claims to collateral may be assessed. Since registrations take place online instantaneously, this elimi-nates uncertainty regarding the exact date and time of recording of security interests. This, along with strength-ened rules for enforcement, significantly improves the capacity of creditors to assess and reduce the risks they facein terms of the repayment of loans supported by movable collateral while lowering transaction costs. All together,these should significantly improve the environment for accessing credit. Besides encouraging banks to increase thequantity and scope of their lending and perhaps reduce the cost of borrowing, an effective framework for securedtransactions also facilitates the extension of trade credit, which assists entrepreneurs to gain access to equipmentand raw materials.

Project,4which will seek to further increase ruraloutreach and efficiency in PNGs microfinancesector. In Timor-Leste, PSDI has supported theongoing development of a local microfinanceinstitution and its transformation into a small,financially sustainable commercial bank. In 2010,PSDI supported assessments of the microfinance andmicroinsurance subsectors in Fiji in order to presentroad maps for the development of each subsectorthat can be used by multilateral and bilateral donorsand other stakeholders. PSDI then undertook anin-depth study of options for development of micro-insurance in Fiji, the first such activity in the Pacific.In 2011, PSDI will assist with implementing therecommendations of this study.

4 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grant forthe Papua New Guinea Microfinance Expansion Project. Manila.

Activities to promote financial inclusion are oftenintegrated in PSDIs other access to finance activities.For example, financial literacy training and capacitydevelopment are a key part of interventions in PNG,Timor-Leste, Vanuatu, and elsewhere, as are theestablishment of efficient regulatory frameworks andlegislation to support financial inclusion. Following asuccessful financial inclusion workshop in SolomonIslands in late 2010, PSDI will conduct a reviewof the legal and regulatory environment for bothmicrofinance and mobile phone banking in SolomonIslands in early 2011.

ADB has recently increased its private sector invest-ment activities in the Pacific, with an emerging focus


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Portfolio of Activities 7

on financial services. In 2010, PSDI supported thedevelopment of potential investments in small finan-cial institutions in both PNG and Vanuatu, throughwhich ADB can provide additional support forincreasing access to finance. PSDI will continue tosupport the identification and execution of private

sector investment opportunities in financial services.

Business Law Reform

Business laws in Pacific island countries are outdatedand inappropriate in the key areas of company forma-tion, contracting, dispute resolution, and insolvency.These are uncertain, poorly enforced, increase trans-action costs for business, and do very little to providethe legal platform necessary to support a robust and

developing private sector. They are rarely used bythe majority of the population and do not foster theeconomic inclusion of community groups, womensgroups, associations of small farmers, and local

entrepreneurs. PSDI has been actively addressing theurgent need to not only update these laws, but alsoto tailor them to support island economies. Substan-tial progress was achieved in 2010.

Company Laws

New company laws enacted in 2009 in SolomonIslands and Tonga significantly improve the legalframeworks that support private sector developmentin the Pacific. These new laws reduce the costs ofcompany formation, facilitate access to finance, andencourage the transition from informal to formal

business. In Solomon Islands, the new Companies Actand the Companies (Insolvency and Receiverships) Actwere enacted by Parliament in March 2009. The keychallenge in 2010 was to finalize the drafting andconsultation on the supporting regulations. This wascarried out with excellent stakeholder support. TheMinister of Commerce issued the regulations in June,and they went into effect on 1 July 2010. The actscover all types of companies and associated companyoperations, but the focus is on smaller companies,which are prevalent throughout the region.

The Companies Act supports a simple approach

to formation, administration, and disclosure forcompanies. It introduces the single shareholdercompany as well as the concept of communitycompanies to encourage a wide range of commu-nity groups to use the company vehicle to supporttheir business activities. Community companies willbe able to hold community assets so that thesecan be used to access finance and create greateraccountability and security for future generations.

Box 2 Secured Transactions Reform ExpandsOpportunities for Growing Sandalwood

The Vanuatu Women in Development Scheme(VANWODS), a Vanuatu microfinance institution,has the idea to secure loans to sandalwood treegrowers using the sandalwood trees as collateral.This illustrates the power of the reform by providingan innovative way of securing credit while circum-venting the legal difficulties surrounding the use ofcustomary land as collateral for loans.

The director of VANWODS explains, We willsprout seeds we have stockpiled, and deliver theseedlings to the VANWODS mamas(members) intheir different centers. We will have 35 mamas percenter, and we will be giving away 3,500 seedlingsper center100 seedlings per mama. The seedlingswill be cared for by the various mamas, and after

5 years we will provide loans to the mamas if theywould like to expand their businesses using sandal-wood trees as collateral. At this time, the securityintent in the trees will be registered in the personalproperty securities registry.

Box 3 Promoting Financial Literacy

Since the launch of the financial literacy programin Vanuatu sponsored by the Pacific Private Sector

Development Initiative, training officers from theNational Bank of Vanuatu (NBV) have conductednumerous training workshops and produced a radioshow about financial literacy. According to a seniorNBV official, people now understand the logic ofsaving and that to access credit, it is necessary tofirst open a bank account.

ADB has recently increasedits private sector investment

activities in the Pacific,

with an emerging focus on

financial services


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Introducing this type of company as part of thecompany law creates a system of public notice andremoves many of the current inadequacies and risksassociated with the traditional trust vehicle, which is

commonly used.

The Companies (Insolvency and Receiverships) Act2009 and associated regulations in Solomon Islandssimplify the current law in the important area ofcorporate insolvency. The new act codifies manyexisting practices and makes the application of insol-vency procedures much more straightforward.

In Tonga, the Legislative Assembly passed theCompanies (Amendment) Act in September2009, with the act and new electronic registrycommencing in the first week of December

2009. The registry component of this reform wassupported by the International Finance Corpora-tion (IFC). PSDI provided follow-up support during2010 to ensure that the act was working as plannedand that there were no additional transitional issuesto be accommodated.

In Vanuatu, PSDI is supplementing a separate andnow completed ADB technical assistance project5that provided institutional strengthening to theVanuatu Financial Services Commission, the non-bank regulator. This work is designed to enhancethe corporate governance and supervisory capacity

of the commission. The support included drafting acompanies bill, a companies (insolvency and receiv-erships) bill, an insolvency (cross-border) bill, and apersonal insolvency bill.

The companies bill provides a more appropriateframework for a small island economy and supports

5 ADB. 2006. Technical Assistance to the Republic of Vanuatu for Financial Services Commission on Institutional and Legal Reforms.Manila.

Box 4 Company Law Reform Makes It Easier toSet Up a Business in the Pacific

The costly and arcane regulations in most Pacific coun-

tries often discourage the setting up of businesses. Forexample, business licensing and registration usuallyinvolve complicated requirements and processes that,in many cases, require the services of a lawyer. Thisadded expense puts formalization beyond the reachof small businesses. In addition, many important stepsin the process can only be done in capital cities. Thosefrom more remote areas must incur considerablecosts in terms of time and transportation if they areto formally register businesses. In many cases, thecost of meeting the various requirements can exceedprospective annual revenues of new businesses.

The new company laws supported by the PacificPrivate Sector Development Initiative in Solomon

Islands, Tonga, and Vanuatu provide for simplifiedand automated incorporation processes, whichsignificantly reduce the monetary and time costsof establishing a business in these countries. Forexample, while companies are still free to adopttheir own rules on matters such as the appointment,removal, and powers of directors; rules for meetings;and shareholder rights, doing so is no longer manda-tory under the new companies acts. Companies cansimply adopt the model rules already contained inthe new acts, eliminating the need for lawyers andthus reducing costs. In Solomon Islands, the cost fora local company to register, including name reserva-tion, registration fee, company seal, and stamp duty,was reduced from a minimum of SI$2,350 (US$316)

under the old Companies Act (1948) to SI$1,250(US$168) under the new act. And whereas it used totake about 4 months under the old act and registry,now the registration process can be completed ina day. Moreover, the provisions for online applica-tion make company incorporation considerablymore convenient. The new processes also directlyidentify reporting and disclosure failures. This ensuresthat records are kept up to date, improves enforce-ment, and reduces administrative costs.

The companies bill supports

the private sector by including

company types appropriate forVanuatu, together with improved

incorporation, administration, and

reporting requirements

the private sector by including company types appro-priate for Vanuatu, together with improved incorpo-ration, administration, and reporting requirements.

The companies (insolvency and receiverships)bill supports a simplified approach to corporateinsolvency. A number of iterations of the proposedlegislation were distributed during 2009 and 2010,


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with widespread consultations taking place.The change of government in 2010 resulted inmodifications of some company law policies thatthe bills had to accommodate, which has resulted inconsiderable delay due to the infrequent parliamen-tary sittings over the year. The bills are receiving afinal vetting by the state law office, with a plannedintroduction to Parliament in 2011.

Company Registries

New or improved company registries will be intro-

duced alongside the new company laws. An impor-tant and innovative feature will be extending registryoutreach to make them accessible to people in therural and provincial areas and to cater to manycommunities living on remote islands. The newregistries will form an integral component of theimplementation of the new acts in each country.

In Solomon Islands, the creation of an electronicInternet-based registry (renamed Company Haus)commenced with an ADB contractor in July 2010.The project team met throughout the second half of2010, in time for a first release launch of the registry

at www.companyhaus.gov.sb in December 2010.A 9-month reregistration process for all existingcompanies also commenced in July 2010.By 31 December 2010, more than 300 companies

had reregistered and 152 new companies had regis-tered under the new system. Funding under PSDIhas been set aside for a similar electronic registry forVanuatu, but this cannot be released until the newCompanies Act is passed by Parliament.

Trust Laws

There are significant problems with the currentuse of trusts in many Pacific DMCs. The trust is acommon vehicle used by various groups, but itssuccess depends on qualified and able trusteesdealing with the trust property in the interest of the

beneficiaries. In many of these countries there is asignificant lack of well-qualified trustees, placinggroups that depend on well-functioning trustsat a severe disadvantage. This problem is beingaddressed by the new company laws, which willprovide other options that may be used for similarpurposes. Reforms in this area have commencedunder PSDI. New trust legislation is being draftedin Solomon Islands and Vanuatu, which will replacethe outdated laws and many of the equitablerules with which most trustees are unfamiliar. Thenew trust laws will provide codified and updatedduties for trustees. The new trust law in Solomon

Islands will be considered by Parliament in 2011.In Vanuatu, the trustee bill has been distributed asan exposure draft and will be finalized sometime in2011. It is planned that the bill will be considered byParliament in 2012.

Contracting Frameworks

There is widespread and enthusiastic support forreform of contracting frameworks in Pacific DMCs.A diagnostic study was completed in 2009, and thenext phase of reform will commence in 2011.It will include drafting a code that will be extensivelydiscussed throughout the region. Contract codes willsubsequently be developed for each country, but witha strong regional flavor. During 2010, the concept ofa contract code was discussed with various privatesector development steering committees to ensurethat both private and public sector stakeholders arefamiliar with the reform. This initiative should leadto a more conducive contracting environment andimproved enforcement of contractual obligations.

Box 5 Benefits from the Innovative CompanyLaw Reform Sponsored by the PacificPrivate Sector Development Initiative

A Solomon Islands community leader and WestGuadalcanal organic farmer, John M., attended anADB Companies Act information session, returnedto his community, and briefed others about whathe had heard. The group has subsequently decidedto form a community company to initiate someprojects that will benefit the entire community.After receiving organic farming training from aprogram funded by the Australian Agency forInternational Development (AusAID), he now growstomatoes, cucumbers, beans, and cabbage. He hasbusiness plans to supply a local hotel with produce.He is confident his community will benefit from theformation of his new organic vegetable company.

In Solomon Islands, more than

300 companies had reregistered

and 152 new companies had

registered under the new system


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Implementation Programs

A key theme of the legal reform promoted underPSDI is the implementation of the laws that are

being adopted by Pacific DMC governments.Implementation is a crucial component of the legaland regulatory reform process. If the new laws areto work as desired, significant resources must beallocated to implementation. The implementationprogram has commenced in Solomon Islands. TheCompanies Act 2009 commenced on 1 July 2010,and with it came an extensive implementationprogram in several key areas supported by ADB.Establishment of a new companies office, calledCompany Haus, formed part of the reforms, withPSDI assisting in training a new company registrarand staff, developing business processes, and oper-

ating a transitional paper-based registration system.

Extensive public awareness campaigns were launchedand have received both radio airtime and newspapercoverage. About 20 training seminars were deliv-ered, tailored to various stakeholders including thechambers of commerce, small business associations,women in business associations, community groupsengaged in commerce, banks, lawyers, and provincialareas. Various fact sheets have also been producedand made available to stakeholders and the generalpublic at no charge. Frequent users of the registryreceived training through seminars and one-on-one

office visits. This has greatly enhanced stakeholderacceptance of the new registry, and these activitieswill continue in 2011 in Honiara and key provinces.Similar implementation programs are planned forSamoa, Tonga, and Vanuatu.

Competition Frameworks

The rudimentary laws in many Pacific countriesdo not discourage monopolistic practices and inmany cases are supportive of price controls, withlittle regard for modern principles that encouragecompetitive markets. The Pacific Islands ForumSecretariat conducted a large regional analysis thatwas used as the basis for drafting a model lawto support a regional approach for establishing acompetition framework. PSDI provided commentson this report and approach and advocates a moreextensive assessment of current laws and initiatives.While a regional approach to these issues might bethe most appropriate way of promoting competi-tion, it is unclear whether Pacific DMCs will accept

measures that could interfere with their ability toimplement their own competition policies. Never-

theless, there is significant demand for improvedcompetition frameworks in the region. The mosteffective method to promote this will be joint initia-tives from donors and Pacific policy makers workingtogether to ensure a coordinated response. PSDIcould support work on this issue in 2011.

Customs and Excise Reform

Under PSDI, an extensive review of the outdatedCustoms and Excise Act has commenced in SolomonIslands. The current act is having a serious nega-tive impact on the private sector. Because customs

and excise duties in Solomon Islands account forabout one-third of total government income, theact must not only be modernized but also supportefficient revenue collection. The review is seen as asignificant priority for the government. A team hasbeen assembled to review the current act and drafta new act and regulations. There will be significantconsultations during 2011, with a view to having abill ready for consideration by Parliament in the firstsession of 2012.

State-Owned Enterprise Reform

and PublicPrivate Partnerships

SOEs continue to act as a drag on the economicgrowth of Pacific DMCs. PSDIs analytical work hassought to quantify the degree to which SOEs crowdout the private sector and absorb scarce publicinvestment resources on which they provide verylow returns. Reforming SOEs and opening up theirmarkets to competition, including those that can be

PSDIs analytical work has

sought to quantify the degree to

which state-owned enterprisescrowd out the private sector and

absorb scarce public investment

resources on which they provide

very low returns


22/50


served through PPPs, remains a key focus area forPSDI. Over the course of 2010, PSDI supported theimplementation of SOE reforms in Solomon Islandsand Tonga; developed approaches for SOE reform in

the Republic of the Marshall Islands (RMI), PNG, andVanuatu; developed a draft community service obli-gation (CSO) policy and implementation approachfor PNG; prepared a PPP policy for Timor-Leste; andcompleted new analytical work to advocate for SOEreform throughout the Pacific. This work has raisedawareness of the benefits of SOE reform and PPPsand led to sustained demand for technical assis-tance, which will be pursued in 2011.

State-Owned Enterprise Reform

In Tonga, PSDI continues to support the SOE ration-

alization program. In 2010, this program resultedin the restructuring of five additional SOE boards sothat independent directors had replaced all electedofficials and public servants on 10 of the 13 SOEboards by the end of 2010. An amendment to thePublic Enterprise Act was also passed that prescribesa more robust process for managing CSOs andstrengthens the transparency and reporting require-ments, enhancing the governance of SOEs.

In 2010, Tonga became the first Pacific DMC topublish the operational and financial results of itsSOEs in local newspapers. Three training programs

were undertaken to support the SOE reforminitiative in 2010, covering such topics as directorperformance reviews, directors duties and obliga-tions, and comparative SOE performance. Tongassustained SOE reform efforts have had a powerfuldemonstration effect on other Pacific countries, illus-trating that reform is both possible and beneficial insmall island economies.

In Solomon Islands, the full privatization of SasapeMarina was completed in late 2010, with the newowner pledging to rehabilitate and expand thecompanys slipway operations at its Tulagi site. Thetransaction relieves the government of funding theongoing losses of the SOE and sets the stage forrenewed employment at the site. The ADB EconomicRecovery Support Program for Solomon Islands6supported further SOE reforms. These includedspecific measures to help implement the SOE Act

6 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster and Grant forSubprogram 1 of the Solomon Islands: Economic Recovery Support Program.Manila.

Box 6 The Pacific Private Sector DevelopmentInitiative Uncovers the Hidden Costs ofState-Owned Enterprises

The Pacific Private Sector Development Initiativessecond comparative study of state-owned enter-prise (SOE) performance in the Pacific reveals thatSOEs continue to place a significant and unsustain-able strain on the economies of Fiji, the Republicof the Marshall Islands (RMI), Samoa, SolomonIslands, and Tonga. It estimates that SOEs costthese countries more than 2% of gross domesticproduct per year by absorbing large amounts ofscarce capital stock, on which there are very lowreturns. This low productivity acts as a drag on eachcountrys economic growth. SOEs often crowdout the private sector and absorb funds that couldotherwise be invested in such high-yield socialsectors as health and education. From FY2002

to FY2009, the SOE portfolios average return onequity was 0.7% in Fiji, 13.2% in the RMI, 0.2%in Samoa, 13.9% in Solomon Islands, and 6.0%in Tonga. In each country, this rate is substantiallybelow the profitability target set by the governmentand/or the commercially established risk-adjustedreturn. In the RMI and Solomon Islands, the chronicoperating losses of the SOEs require regular capitalinfusions from the central budget, further weak-ening the governments fiscal positions. In mostcases, the SOEs poor performance is due to weakgovernance arrangements, conflicting mandates,the absence of hard budget constraints, and lack ofaccountability. SOEs do not operate with the sameefficiency incentives as private sector firms; there

are few consequences for poor financial perfor-mance and few rewards for profitability. While allfive countries recognize the need for SOE reform,results have been mixed. Progress appears to bedirectly correlated to each governments effec-tiveness in protecting SOEs from undue politicalinfluence. This reality underscores both the vitalnature of political commitment and the sensitivitiessurrounding SOE reform.

In Solomon Islands, the full

privatization of Sasape Marinawas completed in late 2010


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and director training on best practices for managingCSOs. PSDI continued to coordinate SOE reformefforts with those of other donors, including theRegional Assistance Mission to Solomon Islands

(development of CSO guidelines), World Bank(Solomon Islands Electricity Authority), and PacificInfrastructure Advisory Center (Solomon IslandsWater Authority), and will help to formulate afurther ADB-funded SOE reform technical assistanceproject in 2011, which will include specific perfor-mance improvement targets. SOE directors andsenior management received training in CSO policydevelopment, and ongoing support was provided tothe Ministry of Finances SOE monitoring unit onthe effective implementation of the new SOE Actand regulations.

In PNG, work progressed to develop a CSO frame-work as a first step in SOE reform. This work, whichis composed of several phases, is being implementedwith the close collaboration of key governmentdepartments, most notably the Department ofTreasury and the Department of Public Enterprises,

and is expected to significantly increase the trans-parency and accountability of the SOEs. A draft CSOpolicy was prepared in late 2010 and is expectedto be endorsed in 2011, along with implementing

guidelines and supporting legal amendments. Thesereforms will pave the way for the piloting of the newguidelines in selected SOEs.

Finding Balance 2011: Benchmarking the Perfor-mance of State-Owned Enterprises in Fiji, MarshallIslands, Samoa, Solomon Islands, and Tonga,a comparative analysis of SOE performance andreform experiences in the Pacific, was finalized andslated for publication in March 2011. The study,which updates and expands the first comparativeSOE study published by ADB in 2009 by includingthe RMI and Solomon Islands, highlights the costs

of poorly performing SOEs to Pacific economies,both in terms of budgetary burdens and foregonegrowth. It confirms the importance of stronggovernance practices and full implementation ofrobust SOE legislation in achieving good financialperformance. The study dispels some commonmisconceptions about the scope and purpose ofSOE reform.

PublicPrivate Partnerships

In Timor-Leste, the government is seeking toincrease private sector participation in the delivery of

infrastructure and related services, both as a meansto leverage the limited technical resources availablein the public sector and to accelerate infrastructuredevelopment. PSDI supported the preparation of aPPP policy, which the Council of Ministers expects toendorse in early 2011. The policy will be followedby the development of detailed implementationprocedures and support for the preparation of thefirst set of pilot PPP transactions. Once in place, thisframework should provide a more transparent and

Box 7 Pacific Private Sector DevelopmentInitiative Helps Identify What Is Necessaryfor State-Owned Enterprise Reform

Finding Balance 2011: Benchmarking the Perfor-mance of State-Owned Enterprises in Fiji, MarshallIslands, Samoa, Solomon Islands, and Tongaconcludes that the most important lessons to bedrawn from the state-owned enterprise (SOE)reform experiences of Fiji, the Republic of theMarshall Islands, Samoa, Solomon Islands, andTonga are that

political commitment is vital to successfulreform,

continued financing of poorly performing SOEsdoes not restore their profitability and oftencreates negative performance incentives,

there is a clear link between SOE performance

and a lack of effective ownership and moni-toring, the private sector has the capacity to invest in

SOEs and to deliver community service obliga-tions, and

the process of establishing SOEs will producefew benefits unless it is supported by effectiveimplementation of the full suite of supportingarrangements that most closely mimic thediscipline and incentives of a private firm.

In PNG, work progressed todevelop a community service

obligation framework as

a first step in state-owned

enterprise reform


24/50


robust mechanism for attracting private investmentin infrastructure.

In PNG, a PPP assessment was conducted for aproposed hospital development project, the largestof its kind in the country. This assessment, requestedby the Department of Health and conducted jointlywith IFC, concluded that a PPP could be structuredfor the hospital project if it were downsized. Budgetconstraints limited the Department of Healths abilityto develop the project further in 2010.

A draft PPP bill was finalized in PNG and shouldbe tabled at the next session of Parliament inmid-2011. Once passed, the PPP bill will allow theestablishment of a PPP unit and set out a process forthe preparation and competitive tendering of PPPprojects. Several opportunities for PPP projects havebeen identified in the transport, power, and healthsectors, and will be further developed in 2011.

Analytical Work, Advocacy, andOutreach

PSDI initiatives are based on a foundation of exten-sive analytical work, which serves as a basis fordiscussions with country stakeholders and enhancesPSDI credibility with the private sector in the region.

Box 8 Sasape MarinaA Privatization Success Story in Solomon Islands

In early 2007, the Solomon Islands government decided to privatize Sasape Marina Ltd. Lack of investment andmismanagement had resulted in a steady deterioration of the companys financial and operating position over the

years, with the value of the governments equity in Sasape Marina falling from SI$14 million in 1996 to an esti-mated SI$3 million in 2005the last year in which financial statements were prepared. By 2008, the company wasinsolvent and its assets were in a state of disrepair, with both of the companys slipways inoperable.

Without substantial investment, the company faced certain closure. The government, recognizing its limitedcapacity to invest in and profitably operate the slipways, turned to the private sector. It was decided that an assetsale would be the best way to achieve the governments objectives to expedite the transaction, minimize its costs,maximize sale proceeds, and have the new owner operating the facilities as soon as possible. With technicalassistance from the Pacific Private Sector Development Initiative, a competitive tender was successfully conductedin 2010, with the winning bidder putting forward a plan to substantially rehabilitate and expand the slipways. Thisinvestment will make the slipways uniquely capable of servicing and repairing large vessels for the Solomon Islandsshipping industry as well as some from neighboring Papua New Guinea.

The new owners, a joint venture between a Solomon Islands company and the National Provident Fund, will investan estimated SI$10 million at the existing site and employ up to 150 people once the new slipways are operational.This is in contrast to the 32 employees of Sasape Marina who were made redundant when the sale was completedin early 2011. With the proceeds from the sale, the Solomon Islands government was able to finance severancepayments for all staff and repay the companys outstanding debts. Within a few short months of the sale, the newowners are advertising to employ staff to assist in the rehabilitation process.

This transaction illustrates that

even insolvent state-owned enterprises (SOEs) can be attractive candidates for privatization, pre-privatization restructuring is not required to bring about a successful outcome, local investors are ready and capable of injecting new capital to revitalize state assets, and privatization ultimately leads to employment creation as assets are put to more productive use.

In Solomon Islands, moreover, this transaction has had a further positive impactproviding the current governmentwith a solid example of the benefits of privatization and the political capital to prepare more SOEs for sale.

PSDI initiatives are based on afoundation of extensive analytical

work, which enhances PSDI

credibility with the private sector

in the region


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It also ensures that reforms are demand driven andprovides a framework for ongoing policy dialogue.

Private sector assessments (PSAs) serve to identify

overall constraints to private sectorled growthand provide a framework for discussions of reformpriorities. They include economic analysis of the lawsgoverning private sector activity, estimates of thecosts of doing business, and an analysis of the costsand productivity of SOEs. They also examine thequality of infrastructure, telecommunications, andtransport, and the impact on business activity. UnderPSDI, PSAs have been completed for four countries.No PSAs were prepared in 2010, although priorwork continues to inform reform initiatives.

To increase awareness of private sector development

related reform, extensive dissemination and consulta-tion activities have supplemented the program, bothwithin individual countries and regionally.

The following are highlights of PSDI policy analysesand advocacy work in 2010:

An in-depth analysis of the performance ofSOEs, Finding Balance 2011, was completedat the end of 2010. This was a follow-on tothe highly successful Finding Balance: Making

State-Owned Enterprises Work in Fiji, Samoa,and Tonga that was published in 2009. For the

second edition, SOEs in the RMI and SolomonIslands were added. The findings will be dissem-inated extensively in 2011.

Breaking Down the Barriers to Business in thePacific: Private Sector Reform Stories tells thestories of Pacific people whose lives have beentransformed through ADB private sector devel-opment reforms.

Gender Mainstreaming Reforms through PrivateSector Development discusses key reforms in theareas of business law and access to finance andhow they promote womens economic empow-erment.

The Pacific PSD Quarterly newsletter was launchedin November 2010. Each edition will discussaspects of PSDI-focused reforms in the region.

Training workshops were provided to SOEdirectors and potential directors to assist them

with improving the functioning of SOE boards.Specifically, 16 workshops and seminars havebeen conducted on SOE reform and PPPs atboth the country and regional levels, with more

than 420 participants in total. This has signifi-cantly increased awareness of the need for,benefits of, and potential scope for SOE reformand PPPs.

Implementation of legal reform included work-shops and training sessions that explained thefunctioning of new secured transactions lawsand registries in Solomon Islands and Vanuatu,as well as the implications and uses of the newcompanies acts in Solomon Islands and Tonga.A complete list of these events is in Appendix 3.

A private sector development policy and coor-dination advisor continues to lead the advocacy

process in PNG, in addition to helping imple-ment and coordinate PSDI-related activities.

Numerous articles, opinion and editorial pieces,and interviews addressing private sector devel-opment issues and PSDI-sponsored activitieswere published in regional and local media.

Gender: A Crosscutting Theme

Womens contributions to poverty reduction,economic growth, and private sector developmentare increasingly recognized globally. Currently, in

both development discourse and practice, womenare considered an integral part of developmentstrategies. A growing amount of research demon-strates the link between womens empowermentand social well-being. Yet research also indicatesthat womens economic contributions continue tolag behind their achievements in health and educa-tion, and a variety of barriers still prevent them fromfully contributing to the economy in many partsof the world. In 2009, the gender gap in womenseconomic participation was 46%.7Despite havingobtained equal legal rights and equal status in manycountries around the world, women are still discrim-inated against in many ways. Legislation to promoteequal treatment has been adopted and equalitymechanisms to monitor implementation have beenset up, but despite this, imbalances between womenand men persist.

7 World Economic Forum. 2010. The Global Gender Gap Report. Geneva.


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While PSDI initiatives are not directed specifically ataddressing gender issues, all are rated with respectto their gender components as outlined in thefollowing paragraph. Furthermore, many initia-

tives have a strong positive impact on womenseconomic opportunities. Legal reforms imple-mented in Solomon Islands under PSDI, for example,provide for flexible business structures that will helpwomen create and manage their businesses withoutunwanted interference from men. Businesses canbe incorporated and managed more easily than inthe past, while transaction costs can be kept to aminimum. New secured transactions laws in theRMI, the Federated States of Micronesia, SolomonIslands, and Vanuatu will provide greater oppor-tunities for women to access finance. In themicrofinance area, a special focus has been

placed on increasing access to microloansfor women.

In order to track the gender impact of PSDI, all initia-tives are now rated using the standard ADB gendercategories. Under this schema, a score of 1 for aninitiative implies strong gender equity, a score of 2

implies effective gender mainstreaming, and a score of3 indicates some gender benefits. The nature of PSDIreformspromoting an enabling environment for anyperson who wishes to engage in businessimpliesthat specific targeted gender interventions are relativelyuncommon. Nevertheless, PSDI is producing a stronggender impact as the following paragraph describes.

Figure 3 shows the distribution of PSDI initiatives interms of the ADB classification. More than 60% havea classification of either 1 or 2: about 6% have astrong gender equity impact, while 58% have effec-tive gender mainstreaming components. It is clear

that PSDI is doing a substantial amount to promotethe economic empowerment of women in the Pacific.

Gender Equity6%

(3/48 initiatives)

Effective GenderMainstreaming

58%

(28/48 initiatives)

Some GenderBenefits

35%(17/48 initiatives)

Figure 3 Pacific Private Sector Development Initiative Activities by Gender Classification(% of Total)


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16

PSDI has a rigorous selectionprocess for all proposed initiatives

and projects to ensure that they

conform to issues that have been

identified by analytical work

Monitoring and Evaluation Framework

PSDI developed a new M&E framework toimprove tracking of the progress and resultsof reforms. Figure 4 illustrates the process. Theframework integrates financial planning and

budgeting; identification of focus areas for reform;the planning and implementation of reform initia-tives; and the evaluation of outputs, outcomes,and impacts. It incorporates a dynamic feedbackmechanism that identifies problems as they arise inorder to better focus initiatives on accomplishingtheir goals. In addition, the M&E framework builds

in institutional memory through the M&E tool (i.e.,database), which, as an added feature, allows thestorage of relevant documents within each initiativeor project sheet.

The most important characteristics of the new PSDIM&E framework are described in the followingpoints:

The M&E framework is designed as an opera-tional management tool. It is updated regularlyso that task managers and management canuse it to monitor and evaluate their initiativesand projects and make mid-course adjustmentsif necessary.

It is easy to use. Reports show the status of aninitiative clearly, and summary reports are easyto generate.

The framework highlights important variables:for example, all initiatives and projects have agender dimension indicator showing the extentto which gender considerations are a compo-nent of the initiative or project.

The framework is long lasting. Many PSDI initia-tives are implemented over several years and

evaluation may need to continue for a numberof years beyond completion. The frameworkprovides for ongoing data collection beyond thelife of an initiative.

Quarterly progress reports are prepared thattrack developments in each focus area. Theyshow, where relevant, the evolution of initiativesand how they are progressing relative to theirgoals. By continuing to monitor and evaluateimpact in the years following the completion of

initiatives, the true development impact of PSDIreforms will be apparent.

The framework has a knowledge managementcomponent to show how the lessons learnedare being disseminated. This helps facilitate thesustainability of reforms.

The framework incorporates institutionalmemory by having a repository for all key docu-ments and an ongoing narrative that tracksinitiative and project developments. It will bepossible to determine how past projects or

initiatives evolved, what problems arose, andhow those challenges were dealt with.

Financial planning, monitoring, and evaluationare fully integrated.

The M&E framework avoids an overemphasis onmeasurement indicators, which can bias reformefforts toward initiatives that are easy to measure.Similarly, the M&E framework does not use broadermeasures of competitiveness on a cross-countrybasis, because that approach risks directing poli-cies toward improving country rankings rather thanbasing reforms on priorities identified by in-depthanalysis. The M&E framework also provides forsurveying the targeted beneficiaries to provide areality check on the effectiveness of reform initia-tives and will show where and how they might needto be modified to be fully effective.

PSDI has a rigorous selection process for all proposedinitiatives and projects to ensure that they conformto issues that have been identified by analyticalwork. Reform programs emerge from discussion anddissemination within Pacific DMCs. Currently, PSDI


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M&E = monitoring and evaluation, PPP = publicprivate partnership, PSD = private sector development, PSDI = Pacific Private SectorDevelopment Initiative, SOE = state-owned enterprise

Figure 4 The Monitoring and Evaluation Framework for PSDI

Aims of the M&E Framework:To ensure that PSDI is effectively addressing the problems thatconstrain the private sector in the Pacific. To achieve this, M&E processes and procedures areembedded in every phase of PSDI, from conceptualization of initiatives to completion andevaluation, as well as budgeting and financial control.

Stage 1: Identifying Focus Areas

Analysis, consultation, coordination, and the PSDI componentsof the country or regional strategies identify the focus areasfor PSDI

PSDI Focus Areas

Crosscutting Theme: GenderM&E Framework provides monitoring, feedback, and financial control

Access toFinance

Business LawReform

SOE Reformand PPPs

Analysis identifiesconstraints toprivate sectordevelopment.Widespreaddisseminationand feedbackconfirms thefindings of theanalysis.

Consultationsand discussionswith governmentand the privatesector result inreform prioritiesbeing identified.

Ensuresconsistencyof reforms.Implementsthe CairnsCompact.

Specifiesthe PSDcomponentof the countrystrategy.Assists indevelopingregional PSDstrategy.

Ana

lyticalWork

Consultationsand

Discussions

DonorC

oordination

PSDIStrategyforCountryand

RegionalPolicyReform

Monitoring and Evaluation Framework 17


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is primarily involved in three focus areas: access tofinance, business law reform, and SOE reform andPPPs. Gender is a crosscutting theme to ensure that,although PSDI is broadly aimed at promoting private

sector development in the region, all initiatives areclassified with respect to their impact on women.

The development of a comprehensive M&E frame-work will improve the ability to track the evolu-tion of PSDI initiatives to ensure that financial andindicative planning are closely aligned, and it willalso allow rapid realignment of initiatives to ensurethat they have maximum impact. The structure ofthe M&E framework provides management with a

powerful tool for querying PSDI programs in manydimensions, such as by country intervent

pacific private sector development initiative: annual progress report 2010

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