TUVALU

Country Operations Business Plan 2016–2018

STRATEGIC ANALYSIS

August 2015

CONTENTS

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background 1

B. Highlights of Previous Programming Approach 2

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities 3

B. Implementation Issues 5 APPENDICES TO LINKED DOCUMENT

1. Data Tables 7

Table 1: Progress towards the Millennium Development Goals 7

Table 2: Country Economic Indicators 10

Table 3: Country Poverty and Social Indicators 11

Table 4: Country Environment Indicators 12

Table 5: 2015 Country Performance Assessment Ratings 13

Table 6: Country Portfolio Indicators 14

Table 6a: Portfolio Amounts and Ratings 14

Table 6b: Disbursements and Net Transfers of Resources 15

Table 6c: Project Success Rates 16

Table 6d: Portfolio Implementation Status 17

2. Development Coordination 18

Table 7: Development Coordination Matrix 18

3. Sector Assessments 20

(I) Public Sector Management 20

(II) Transport (Maritime) 24

4. Risk Assessment and Management Plan 26

5. Country Cost-Sharing Arrangements and Eligible Expenditure Financing 28

Parameters, 2016–2018

ABBREVIATIONS

ADF Asian Development Fund

CPS country partnership strategy

DPs development partners

GDP gross domestic product

IFMP Improved Financial Management Program

IMF International Monetary Fund

MDGs millennium development goals

NBT National Bank of Tuvalu

PEs public enterprises

PFM public financial management

PRM policy reform matrix

RETA regional technical assistance

SPFMP Strengthened Public Financial Management Program

TA technical assistance

TEC Tuvalu Electricity Corporation

TTF Tuvalu Trust Fund

VAT value-added tax

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background

1. Tuvalu is ADB’s smallest and most geographically remote member. It comprises eight low-lying atolls with a total land area of 26 square kilometers (km2). More than half the population of 10,800 (2013) resides on the main island of Funafuti—an area of only 2.8 km2. As the result of the smallness and remoteness, the economy is narrowly-based and highly dependent on external sources of income and imports. The public sector accounts for around two-thirds of gross domestic product (GDP) and there is limited scope for economic diversification or for private sector development. Tuvalu is extremely vulnerable to the effects of climate change, including cyclones, droughts and sea-level rise. 2. Tuvalu uses the Australian dollar as the official currency, which implies that macroeconomic policy for stabilization is reliant on fiscal policy. Achieving fiscal sustainability is the key challenge for the country. It requires prudent management of volatile and often unpredictable external revenue sources, such as fishing license fees; licensing royalties for the commercial use of the “dot.tv” internet domain name; earnings from Tuvaluans working abroad as seafarers and seasonal workers; and development assistance. To help smooth the volatility of revenue, the Tuvalu Trust Fund (TTF) was created in 1987. Statutory provisions governing the Fund provide for an automatic distribution of funds above the maintained value of the TTF to its associated buffer fund—the Consolidated Investment Fund (CIF). The CIF in turn provides an additional revenue for the government.1

3. The economy had recovered from the 2008–2009 global economic crisis, but still remains subdued with real gross domestic product (GDP) increasing slightly from 1.2% in 2012 to a projected 2.0% in 2015.2 Government revenues have rebounded since 2012, in part due to higher remittances; increasing fishing license fees ($13 million, or 40% of GDP in 2014); and strong TTF investment performance. With higher revenue government has been able to build up the value of the CIF from $3.7 million in 2008 to $20.4 million at the end of 2014.3 Despite the recent improvement, the country’s fiscal medium-term fiscal prospect continues to remain vulnerable due to several risks stemming from financial market volatility (volatile investment return to the TTF and hence transfer to the CIF), commodity price fluctuation, uncertain aid environment, frequent natural disasters, and a high external debt level. 4. To improve the fiscal outlook and restore good fiscal management, in 2012, the government—supported by the ADB, the governments of Australia and New Zealand, and the World Bank—embarked on a comprehensive public sector management reform program delivered via the Policy Reform Matrix, which outlines three phases of time-bound reforms linked to technical assistance (TA) and a coordinated program of budget support. The PRM explicitly targets a sustainable fiscal framework and contains reform actions in six areas viz: public financial management, fiscal policy, public administration, PE performances and rationalization, and health and education management. 5. Little progress has been registered in poverty reduction over the past two decades although the country’s average income, per captal Gross National Income (GNI) of $5,650 in 2012, is high by Pacific Island standards. The proportion of households falling under the Basic

1 The desired balance to be kept in the CIF Account is four years projection of no income from the TTF Account. 2 IMF. 2012. Article IV. Washington. Real GDP growth fell from 7.6% in 2008 to -1.7% in 2009 and -2.9% in 2010, eventually

improving to 1.1% in 2011. 3 Statutory provisions governing the Tuvalu Trust Fund provide for an automatic distribution of funds above the maintained value to

the Consolidated Investment Fund. These transfers help to supplement the government’s budget during economic downturns. Due to poor investment returns, there was no transfers from the TTF to the CIF between 2009 and 2012.

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Needs Poverty Line increased from 16.5% in 2004/05 to 19.7% in 2010, with significant increases in the poverty incidence in the outer islands. Inequality worsened with the Gini Coefficient rising from 0.24 in 2004/5 to 0.34 in 2010.4 Those residing in the outer islands, the unemployed in Funafuti, those in larger families, and those households not receiving remittance income run a higher risk of poverty. High telecommunication and electricity costs also strain households’ budgets. In addition to income poverty, a large segment of society suffers from “poverty of opportunity”. Access to economic opportunities is especially limited for outer island residents because of their remoteness, impaired by a heavy reliance on irregular domestic shipping services and associated costs. Poor public service delivery and infrastructure facilities such as inadequate ports also limit entrepreneurial activities. Lack of opportunities for youth and inequality of opportunities for women in terms of finding paid employment are also important poverty concerns. Tuvalu is, however, on track to meet the majority of its non-income Millennium Development Goals (Table 1).5

6. As a category A country, Tuvalu is eligible for grant assistance from the Asian Development Fund (ADF).6 The 2014 Debt Sustainability Analysis (DSA) by IMF indicates that Tuvalu is at high risk of debt distress. External debt in 2013 is estimated at 22% of GDP, but debt and debt service ratios are projected to breach relevant thresholds over the long-run. Tuvalu’s 2014 CPA found weaknesses in the quality of macroeconomic management and coherence of its structural policies; they largely arise from capacity constraints in policy development, implementation, and management. B. Highlights of Previous Programming Approach

7. Developing effective fiscal management to complement private sector development has been a long-standing goal of ADB to Tuvalu. The Improved Financial Management Program (IFMP) grant for $3.24 million was approved in December 2008 and tranche payments made in 2009 ($1.24 million) and 2011 ($2 million). The IFMP built on previous ADB support for public enterprise reform.7 The IFMP was aimed at strengthening the governance framework for Tuvalu's public enterprises, improving the government's capacity for oversight, strengthening capacity to manage debt, and reducing the government's debt to the National Bank of Tuvalu. The IFMP was instrumental in helping the government to implement several substantive reforms although progress was slower than initially anticipated. Delays were registered with appointing an independent banking commissioner8 and operationalizing a debt risk management and mitigation policy. The nationalization of the Electricity Commission in November 2011 (although this was not signed into effect by government) was also a setback for efforts to reform the PEs. The key lessons from the IFMP were that reform can take longer than initially expected and that the evolving fiscal situation and turnover of key staff can exert an important influence on the pace and direction of public sector reforms. 8. Since 2012, ADB, World Bank, and the governments of Australia and New Zealand have maintained a coordinated policy dialogue with the Tuvalu government, backed by flexible budget

4 Household Income Expenditure Surveys (HIES) are conducted once around every 5 years. The latest HIES was conducted in

2010. 5 Government of Tuvalu. 2012. Millennium Development Goals Progress Report 2010/2011. Funafuti. 6 Since joining in 1993, cumulative loans, grants, and technical assistance (31 December 2014) amount to: 2 loan projects of $7.82

million, 2 grant projects of $5.59 million, and 21 technical assistance projects of $7.12 million. 7 ADB. 2009. Technical Assistance to Tuvalu for Capacity Development for Public Financial Management. Manila (TA 7161-TUV,

for $857,750, approved on 3 November). 8 The IMF Article IV mission in May 2014 recognizes that there is still an urgent need to establish a framework of banking

supervision and resolution. Should the Development Bank of Tuvalu’s (DBT) situation further deteriorate, the cost of addressing DBT’s distress might be significant: the budget would need to allocate resources to repay the external loans guaranteed by the government; and fresh capital may need to be injected into either DBT or any potential receiver. The financial conditions of DBT and its implications for the economy need to be assessed urgently, and a banking resolution framework should be immediately established with the assistance of development partners. A Banking Commission (including a Banking Commissioner, possibly on a part-time capacity) should be established to facilitate the development of a supervisory framework without undue delay.

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support programs, based on a single country-led PRM supporting Tuvalu’s recovery the global economic crisis. Key public financial management reforms achieved under PRM phases 1 and 2—triggering around $8.0 million in budget support between 2012–2014 from ADB and development partners—include improved budget management and execution, rebuilding of reserves in the CIF, improved management and cost controls on the overseas medical treatment and scholarship programs, rebalanced public expenditure towards primary and secondary education and basic healthcare, implementation of a new procurement policy and supporting legislation; and policies and procedures for the divestment of selected public enterprises 9. The Strengthened Public Financial Management Program (SPFMP) was approved for $2.35 million in November 2012 and disbursed in February 2013.9 The design of the SPFMP was developed to support selected PRM phase 1 reforms, drawing on technical advice from the Private Sector Development Initiative10 and implemented with support from ADB technical assistance.11 Under SPFMP, progress was made in: (i) formulating a Public Financial Management Reform roadmap; (ii) developing a new procurement policy; (iii) preparing fiscal ratios and including these in the 2013 budget circular; (iv) developing a management contract and tendering out a contract for managing the Vaiaku Lagi Hotel; and (v) preparing the Tuvalu Philatelic Bureau, Tuvalu Post Office and Tuvalu Travel Office for merger. The design also drew on lessons from the IFMP and from ADB’s experience with policy-based lending in the Pacific. The latter emphasized the importance of promoting country ownership by ensuring that such programs (i) are realistic, relatively simple in scope, and are well within a country’s capacities; (ii) embody a long-term perspective and commitment to reform; and (iii) promote strong development partner collaboration through dialogue and the coordination of missions and TA support.12

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities

10. The Tuvalu National Strategy for Sustainable Development 2005-2015, or Te Kakeega II, aims to foster a sustainable development process and achieve a healthier, more educated, peaceful and prosperous nation.13 This is consistent with ADB's Interim Pacific Approach 2015, which extends the validity of ADB's Pacific Approach 2010-2014, and the Midterm Review of Strategy 2020.14 ADB’s operational focus on strengthening public sector management and developing the transport sector, supports the Te Kakeega II objectives of good governance, macroeconomic growth and stability, and sustainable economic infrastructure. ADB’s approach to Fragile and Conflict Affected Situations15, particularly in relation to capacity development based on country contexts, appropriate interventions based on analysis and assessments, participatory approaches and consultation, and working in coordination with development partners to address resource gaps, will guide ADB’s interventions.

9 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant to

Tuvalu for Strengthened Public Financial Management Program. 10 ADB. 2010. Private Sector Development Initiative. Manila. 11 ADB TA8100 Institutional Strengthening of the Ministry of Finance and Economic Development, approved in February 2013,

focuses on improved corporate planning processes in the Planning and Budget Department and strengthened public enterprise oversight.

12 ADB. 2011. Policy Brief: Policy-Based Programs for the Pacific Islands. Manila. 13 Government of Tuvalu, 2004. Te Kakeega II National Strategies for Sustainable Development, 2005-2015. Funafuti. 14 ADB. 2015. Interim Pacific Approach, 2015. Manila; ADB. 2009. Pacific Approach, 2010–2014. Manila; ADB. 2014. Midterm

Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila; 15 ADB. 2012. Working Differently in Fragile and Conflict-Affected Situations. Manila.

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11. The indicative biennial ADF country allocation is $6.91 million for 2015–2016 and $6.0 million for 2017–2018. 16 The final allocation of ADF resources will depend on the available ADF commitment authority and the outcome of the country performance assessments. ADB’s interventions will include (i) a policy-based program in 2015 to achieve PRM 3 reforms—supported by TA for Institutional Strengthening of the Ministry of Finance and Economic Development; and (ii) a maritime transport investment project in 2016 with preparatory TA work in 2015. Frontloading from the 2017–2018 biennial allocation, cofinancing, and funding from other sources will be explored to meet resource gaps for the investment project. TA of $600,000 is programmed at 2-year intervals in support of these pipeline operations. 12. Public sector management. ADB’s operations will focus on the implementation of PSM reforms supported by a program grant, valued at $2 million, to further strengthen fiscal sustainability and consolidate past reform efforts supported by ADB. ADB and other partners remain committed to implementing selected reform priorities identified in the third and final phase of the PRM, which for ADB will focus on strengthening public procurement practices, sustaining the CIF as a fiscal buffer, and ensuring sound commercial footing for public enterprises and private sector development. A PSM sector assessment is in Appendix 3(I). 13. Transport Infrastructure: The transfer of people and goods in a safer and more efficient way between ship and shore is a major concern of the government; and outer island improved shipping and port services is a priority in the Te Kakeega II. Through improving outer islands’ port facilities, the government aims to promote economic development, particularly fisheries, thereby improving the livelihoods of people in the outer islands. The government also expects to reduce people’s migration from the outer islands to Funafuti, which is currently facing problems with overcrowding, pollution, and rapid spread of diseases. Considering the role of other development partners in Tuvalu and ADB’s comparative advantage in the region, a focus on outer island maritime infrastructure, some of which was damaged by Tropical Cyclone Pam in March 2015, has emerged as a key priority for ADB in Tuvalu. A proposed Outer Island Maritime Infrastructure Project, totaling $12.91 million, will be financed by ADB for $9.41 million Additional financing from the Disaster Response Facility (approximately $3 million), government in-kind contributions, cofinancing, and potential ADF increases will be explored to meet funding gaps. A maritime transport sector assessment is in Appendix 3(II). 14. Capacity development will also be supported, both in public sector management, and in those areas of public sector service delivery critical to fostering inclusive and sustainable growth and socio-economic development. Tuvalu will also continue to benefit from regional technical assistance in line with ADB’s Regional Operations Business Plan, 2015–2017. Support from the Pacific Region Infrastructure Facility will be provided for the institutionalization and implementation of the Tuvalu Infrastructure Strategy and Investment Plan, with particular emphasis on helping Tuvalu build sustainable asset management systems for its economic infrastructure. 15. Knowledge solutions will be promoted by capturing, generating and disseminating relevant development management knowledge, in line with ADB’s knowledge solutions agenda of the Midterm Review of Strategy 2020, the new Knowledge Management Action Plan, ADB’s Public Communication Policy 2011, and utilizing the User Guide to Preparing Communications Strategies for Projects. Concerted efforts will be made to (a) generate knowledge from ADB operations in Tuvalu and (b) apply Pacific Developing Member Country-wide knowledge in designing projects and reform programs in Tuvalu. This will be done in close coordination with the ADB’s Knowledge Sharing and Services Center, the Department of External Relations, and

16 Commencing from 2015, Tuvalu will receive a minimum annual allocation of $3 million, significantly increasing ADB’s scope to

support the country’s development efforts.

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ADB’s various Communities of Practice. Lessons will be drawn from high-performance projects and programs and disseminated in policy notes, seminars, and other outreach events. B. Implementation Issues

16. Macroeconomic Management Risks. Tuvalu has a narrow economic base, virtually no merchandise exports, and an economy that is dependent on aid inflows, remittances and investment returns, and imports all of its basic necessities, all of which leave the economy highly vulnerable to shocks. In the near-term, Tuvalu has few options other than to be prepared for a volatile international financial setting. Fiscal policy must be adjusted to ensure that macro-economic stability is maintained, and for this, improved capabilities in revenue mobilization, budget-execution, audit and reporting are essential. Reducing fiscal risks that are within Government’s control, such as addressing poorly performing PEs, will also help to mitigating macroeconomic management risks. 17. Reform Fatigue. There is a risk that budget support could undermine the political will to balance the budget, to stem growth in the wage bill or to rationalize the PEs. To ensure that the reform process is sustained, ADB and other development partners have recognized and supported policy reform measures that are government driven, incremental, widely understood and supported, and have provided financial and technical support to see that reforms are effectively implemented. ADB and other development partners recognize that reforms will take time, and that positive momentum can be gained only if these trigger a virtuous cycle of resource-savings, improved service delivery and wider access to essential services. Harmonization support for policy reform also provides strong incentives to government to stay the course. 18. Capacity constraints are a major issue in almost all government agencies. ADB will provide assistance to enhance Tuvalu's capacity in (i) design and implementation of investment project, (ii) formulating policies; (iii) leading complex coordination processes involving various stakeholders and development partners; (iv) managing public finances; (v) improving service delivery; (vi) monitoring and evaluating public sector entities and services; and (vii) interacting with stakeholders. 19. The design of any policy based lending program will factor in some mitigating measures. The rebuilding of fiscal reserves will help the government weather potential external shocks. Political consensus will be reinforced through the government’s ownership and leadership of the PRM process and the subsequent reform effort. In addition, the Ministry of Finance and Economic Development (MFED) with support from ADB TA8100 have conducted a concerted outreach program to build wider support for reform among parliamentarians and in the community. Capacity constraints will be offset in part through new and ongoing TA provided by ADB and other partners. To mitigate the risk of overburdening institutions, the PRM presents a continuance of reforms that have been under implementation since 2009. Major risks to ADB’s operations and mitigating measures are described in detail in the Risk Assessment and Risk Management Plan in Appendix 4. 20. The design of the proposed outer island port project will be developed with technical support from the project design and project preparatory teams. ADB will work closely with the project taskforce and the project management unit to help minimize risks and ensure project success.

APPENDICES TO LINKED DOCUMENT

Appendix 1 7

DATA TABLE

Table 1: Progress Toward the Millennium Development Goals and Targets

Goals and Targets Country Status

Goal 1: Eradicate extreme poverty and hunger Target 1.A: Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day Target 1.B: Achieve full and productive employment and decent work for all, including women and young people Target 1.C: Halve, between 1990 and 2015, the proportion of people who suffer from hunger

Off Track Based on the first household survey (1994), the population below the national basic needs poverty line was 23.2%. Latest figures from the 2010 HIES shows that Tuvalu’s population below the national poverty line was 26.3% in 2010. Tuvalu is not on track to meet the target for 2015. Employment-to-population ratios have improved from 26.8 in 1991 to 33.5 in 2004. Much of the increase in employment is in the public sector, and is in the capital (Funafuti) where approximately 85% of the public service is located. Cases of children (under five years of age) being underweight are not significant in Tuvalu. The National Nutrition Survey reports that underweight children fell from 3.0% in 1983 to 1.6% in 2007.

Goal 2: Achieve universal primary education Target 2.A: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling

On Track Education is mandatory for ages 6–15 in Tuvalu. Net enrollment rates in primary education are reported to be over 95% for the past two decades (Tuvalu DHS, 2007). 2011 data from the Department of Education shows net enrolment at 99.8% and survival rate 99.9% from Grade 1 to Grade 5, making Tuvalu primary enrolment ratios one of the highest in the Pacific.

Goal 3: Promote gender equality and empower women Target 3.A: Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015

Mixed Tuvaluan girls and boys have equal educational opportunities. Secondary schools Gender Parity Index (GPI) is generally higher than primary education. The long term average GPI from 2000 to 2009 is 0.98 for primary and 1.07 for secondary school. The net enrolment rate for primary school was 98.1% in 2007, (97.3% for males and 99.1% for females). The primary completion rate for both sexes in 2007 (year for which latest data is available) was reported as 91.2%, up from 86.5% in 2002. 98.6% of boys and girls aged 15-24 years are literate.

Goal 4: Reduce child mortality Target 4.A: Reduce by two thirds, between 1990 and 2015, the under-five mortality rate

On Track Under-five mortality has fallen over time. In 1991 it was 68.7 (20/291), in year 2000 it was 25.4 (8/231), in year 2005 it was 46.8 (11/235) and 2009, 24.6 (5/203).

Goal 5: Improve maternal health Target 5.A: Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio

On Track Tuvalu had just three maternal deaths (1990, 2003 and 2006) between 1990 and 2009. Detection of risky

8 Appendix 1

Target 5.B: Achieve, by 2015, universal access to reproductive health

pregnancies and the increase of trained midwives contribute to the very low maternal deaths. According to the DHS 2007, 31% of currently married (or in union) women are using a method of family planning..

Goal 6: Combat HIV/AIDS, malaria, and other diseases Target 6.A: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS Target 6.B: Achieve, by 2010, universal access to treatment for HIV/AIDS for all those who need it Target 6.C: Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases

Mixed There is low HIV prevalence in Tuvalu with the first HIV case recorded in 1995 and 11 cases confirmed since. Due to the small population, Tuvalu has one of the highest HIV prevalence rates in the Pacific. All people living with advanced HIV infection are entitled to receive free antiretroviral treatment (funded by the Global Fund) in Tuvalu. Malaria is not endemic to Tuvalu. However, Tuvalu had one of the highest tuberculosis (TB) prevalence rates in the Asia-Pacific region. TB detection and treatment rates have improved in recent years and, as a result, TB-related deaths have declined from 102 deaths per 100,000 in 2002 to 23 deaths per 100,000 in2009.

Goal 7: Ensure environmental sustainability Target 7.A: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss

Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation Target 7.D: By 2020, achieve a significant improvement in the lives of at least 100 million slum dwellers

Mixed In 2008, the Environment Protection Act was finalized and approved by Parliament. Progress has also been made in areas such as conservation and marine protection through legislation. Since 1996, every island in Tuvalu has formulated and established protected areas including terrestrial, which result in regenerating forests. Despite these efforts, data from SPC indicated that the proportion of land area covered by forest fell from 43.0% in 2000 to 33.3% in 2005. The proportion of households having access to safe drinking water is high and has increased from 90.5% in 1991 to 97.6% in 2007. The increase was more significant in the Outer Islands, rising from 89.4% in 1991 to 97.2 in 2007. The proportion of households with improved sanitation facilities improved from 77.1% in 1991 to 80.7% in 2007. Between 1991 and 2007, there was a substantial decrease in the percentage of households residing in slums on Funafuti from 23.6% to 6.5%, respectively.

Goal 8: Develop a global partnership for development Target 8.A: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system Target 8.B: Address the special needs of the least

On Track Tuvalu is classified as a Least Developed Country (LDC) by the Committee for Development Policy under the United Nation Department of Economic Affairs and Social Affairs (UNDESA), mainly because of its low economic vulnerability index. Tuvalu is a country dependent on

Appendix 1 9

HIV/AIDS = human immunodeficiency virus/acquired immunodeficiency syndrome. Source: Government of Tuvalu: Tuvalu Millennium Development Goal Progress Report 2010/2011, Tuvalu MDG Acceleration Framework-Improving Quality of Education, 2013; Pacific Islands Forum Secretariat, 2013 Pacific Regional MDGs Tracking Report.

developed countries Target 8.C: Address the special needs of landlocked developing countries and small island developing states (through the Program of Action for the Sustainable Development of Small Island Developing States and the outcome of the twenty-second special session of the General Assembly) Target 8.D: Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term Target 8.E: In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries Target 8.F: In cooperation with the private sector, make available the benefits of new technologies, especially information and communications

overseas development assistance (ODA). On average, between 32 and 35 percent of Government core revenue is ODA budget support. Tuvalu uses a policy reform matrix to focus donor budget support assistance, and to better coordinate that assistance within the framework and objectives of the Tuvalu National Strategy on Sustainable Development (Te Kakeega II). External debt in 2013 is estimated at 22% of GDP. Tuvalu benefits from procuring drugs regionally with Fiji, Kiribati and Nauru in large volume from pharmaceutical companies in India, Australia and New Zealand. Internet was introduced to Tuvalu households in 1998-1999. In 2010, according to the Tuvalu Telecommunication Company (TTC), about 43% of the population uses internet although 9% are subscribers.

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Table 2: Country Economic Indicators

Fiscal Year Item 2011 2012 2013 2014e 2015p A. Income and Growth

1. GDP per capita ($, current) 3,505.0 3,523.6 3,536.1 3,384.5 3,151.3 2. GDP growth (%, constant prices) 8.5 0.2 1.3 2.0 2.0

a. Agriculture … … … … … b. Industry … … … … … c. Services … … … … …

B. Saving and Investment (% of GDP, current

prices)

1. Gross domestic investment … … … … … 2. Gross domestic saving … … … … …

C. Money and Inflation (annual % change)

1. Consumer price index 0.5 1.4 2.0 3.3 2.0 2. Liquidity (M2) … … … … …

D. Government Finance (% of GDP)

1. Revenue and grants 69.1 84.6 109.3 121.4 129.9 2. Expenditure and lending 78.0 76.2 81.8 86.4 130.7 3. Overall fiscal surplus (deficit) (8.9) 8.4 27.5 35.0 (0.8)

E. Balance of Payments 1. Merchandise trade balance (% of GDP) (19.4) 8.3 3.5 (2.9) (31.7) 2. Current account balance (% of GDP) (36.5) 25.5 26.2 27.3 (37.2) 3. Merchandise export ($) growth (annual %

change) 5.2 95.1 (3.0) (4.5) (6.3)

4. Merchandise import ($) growth (annual % change)

14.3 (5.1) 7.7 8.3 44.9

F. External Payments Indicators

1. Gross official reserves (including gold, $ million in months of current year’s imports of goods)

5.4 7.3 9.0 11.5 9.2

2. External debt service (% of exports of goods and services)

3.5 0.8 2.4 2.3 …

3. External debt (% of GDP) 26.0 24.4 22.2 20.2 … G. Memorandum Items

1. GDP ($ million, current prices) 39.3 39.7 38.5 37.6 35.6 2. Exchange rate (A$/$, average) 1.0 1.0 1.0 1.1 1.2 3. Population (million) 0.01 0.01 0.01 0.01 0.01

... = no available data; % = percent; $ = United States dollar; A$ = Australian dollar; e = estimate; GDP = gross domestic product; M2 = money supply; p = projection Sources: Asian Development Outlook database; International Monetary Fund Article IV Consultation Staff Reports (various years); and Tuvalu Central Statistics Division.

Appendix 1 11

Table 3: Country Poverty and Social Indicators

… = data not available, GDP = gross domestic product.

Sources: UNDP. Asia-Pacific Human Development Report 2013. Bangkok; Pacific Regional MDGs Tracking Report

2013, Pacific Islands Forum Secretariat. WHO http://apps.who.int

Item Baseline Midpoint Latest Year A. Population Indicators 1. Population (000 – total) 9.5(2000) 10(2010) 11.3(2013) 2. Population growth rate (average annual %) - total 1.3(2000) 0.2(2010) 0.3(2013) 3. Population density (persons per km2) 346(1990) 362(2000) 378(2010) 4. Population living in coastal zones 99.6(1990) 99.5(2000) … B. Social Indicators 5. Adolescent birth rate (births per 1000 women

ages (15–19) 38.6(1991) 41.3(2000) 44(2005)

6. Maternal mortality ratio 1 in 242 (1990) 1 in 231 (2003) 1 in 217 (2006) 7. Infant mortality rate (per 1,000 live births) 57.3(1992) 34.6(2000) 14.8(2009) 8. Under 5 mortality rate ((per 1,000 live births) 68.7(1991) 34.6(2000) 24.6(2009) 9. Life expectancy at birth (years) 62(1990) 63(2000) 64(2009) a. Female 63(1990) 63(2000) 63(2009) b. Male 61(1990) 63(2000) 64(2009) 10. Literacy (15-24 yr old) rate (%) 98.7(1991) … 98.6(2007) 11. Primary school net enrollment (%) 99.5(1991) 9.69(2002) 98.1(2007) a. Female 100(1991) 98.5(2002) 99.1(2007) b. Male 98.5(1991) 95.6(2002) 97.3(2007) 12. Ratios of girls to boys a. Primary 1.05(1991) 1.00(2004) 0.96(2009) b. Secondary 1.05(1991) 1.29(2004) 1.12(2009) c. Tertiary 0.42(1991) 1.36(2004) 1.72(2009) 13. Prevalence of underweight children under five years of age

3.0(1983) … 1.6%(2007)

14. Proportion of population below the minimum level of dietary energy consumption

6.0(1994) 3.5(2004) …

15. Employment to population ratio 26.8(1991) 29.8(1994) 33.5(2004) a. Female 18.4(1991) 18.5(1994) 26.0(2004) b. Male 37.0(1991) 44.5(1994) 42.5(2004) 16.Youth unemployment to population ratio 75.7(1991) … 70.6(2002) a. Female 78.4(1991) … 74.3(2002) b. Male 73.1(1991) … 67.3(2002) 17. Population using an improved drinking water

source (%) 90(1990) 94(2000) 98(2010)

18. Population using an improved sanitation facility (%)

80(1990) 83(2000) 85(2010)

19. Gender-inequality index … … … C. Poverty Indicators 20. Population below Basic Needs Poverty Line (%) 23.2 (1994) 16.5 (2004) 19.7(2010) a. Funafuti 28.8 (1994) 19.7(2004) 19.8(2010) b. Outer Islands 20.4(1994) 14.3(2004) 19.7(2010) 21. Poverty Gap Index 7.6 (1994) 5.6 (2004) 6.2 (2010) a. Funafuti 9.3 (1994) 7.5(2004) 8.1(2010) b. Outer Islands 11.2(1994) 4.1(2004) 6.6(2010) 22. Poorest quintile in national consumption (%) 7.0 (1994) 10.2 (2004) 8.1 (2010 a. Funafuti … 10.7(2004) 9.8(2010) b. Outer Islands … 11.4(2004) 9.5(2010) 23. Population Gini coefficients 0.43(1994) 0.24(2004) 0.34(2010) a. Funafuti 0.37(1994) 0.24(2004) 0.27(2010) b. Outer Islands 0.39(1994) 0.21(2004) 0.28(2010) 24. Pacific Human Poverty Index 7.3(1998) 9.2(2008) … a. Rank 4 6 …

12 Appendix 1

Table 4: Country Environment Indicators Indicator Baseline Latest Year A. Energy Efficiency of Emissions 1. Energy produced (Mtoe) … … 2. Fossil Fuel energy consumption … … 3. Consumption of ozone depleting substances 0.20(2000) 0.006(2007) 4. Carbon dioxide emissions per capita (metric ton) 10.3Gg(2004) 13.0Gg(2013e) 5. Total GHG emissions (metric ton) … … 6. GHG emissions per capita (metric ton) … … B. Water Pollution: Water and Sanitation 1. % urban population with access to safe water 92(1990) 98(2010) 2. % rural population with access to safe water 89(1990) 97(2010) 3. % urban population with access to sanitation 4. % rural population with access to sanitation

86(1990) 76(1990)

88(2010) 81(2010)

C. Land Use and Deforestation 1. Forest area (% of total land area) 33.3(1990) 33.3(2010) 2. Average annual deforestation (km

2)

3. Average annual deforestation (% change) 4. Arable land (% of total land) … … 5. Permanent cropland (% of total land) … … D. Biodiversity and Protected Areas 1. Marine protected area (% of territorial waters) 0.2(2000) 0.2(2009) 2. Mammals (number of threatened species) … … 3. Birds (number of threatened species) … … 4. Higher plants (number of threatened species) … … 5. Reptiles (number of threatened species) … … 6. Amphibians (number of threatened species) … … E. Urban Areas 1. Urban population (‘000) … 5,500 (2010) 2. Urban population (% of total population) … 50 3. Per capita water use (liters/day) … … 4. Wastewater treated (%) … … 5. Solid waste generated per capita (kg/day) … … … = data not available

Sources: UNDP. Asia-Pacific Human Development Report 2013. Bangkok; Pacific Regional MDGs Tracking Report

2013, Pacific Islands Forum Secretariat. WHO http://apps.who.int

Appendix 1 13

Table 5: 2014 Country Performance Assessment Ratings

CRITERIA TUV Pacific

(Average) A. Economic Management 2.8 3.3

1. Monetary and Exchange Rate Policies 2. Fiscal Policy 3. Debt Policy and Management

3.5 3.0 2.0

3.4 3.2 3.4

B. Structural Policies 2.7 3.2 4. Trade 5. Financial Sector 6. Business Regulatory Environment

3.0 2.5 2.5

3.8 3.0 2.8

C. Policies for Social Inclusion/Equity 3.2 3.2 7. Gender Equality 8. Equity of Public Resource Use 9. Building Human Resources 10. Social Protection and Labor 11. Policies and Institutions for Environmental

Sustainability

3.0 3.0 4.0 3.0 3.0

3.0 3.2 3.4 3.1 3.0

D. Public Sector Management and Institutions 3.2 3.3 12. Property Rights and Rules-based Governance 13. Quality of Budgetary and Financial Management 14. Efficiency of Revenue Mobilization 15. Quality of Public Administration 16. Transparency, Accountability and Corruption in the

Public Sector

4.0 3.0 3.0 3.0 3.0

3.4 3.4 3.5 3.0 3.2

E. Portfolio Performance 4.0 3.8 17. Portfolio Performance 4.0 3.8 Composite Country Performance Rating (CCPR) 10.2 11.1

14

Ap

pe

ndix

1

Table 6: Country Portfolio Indicators

Table 6a: Portfolio Amounts and Ratings (sovereign loans, as of 31 December 2014)

Sector Loan/ Grant No.

Title Net Project

Amount Total

$

million % No. % Rating Circulation No. Public Sector Management 1693

Island Development Program 3.972 50.2% 1 33.3% Successful 2003 19-03

Education 1921 Maritime Training Project 1.901 24.0% 1 33.3% Partly

Successful 2011 205-11

Education 2088 Maritime Training Project 2.046 25.8% 1 33.3% Partly

Successful 2011 205-11

TOTAL 7.919 100.0% 3 100.0%

Source: ADB

Appendix 1 15

Table 6b: Disbursements and Net Transfers of Resources (sovereign loans, as of 31 December 2014)

Disbursements and Transfers OCR ADF Total

Disbursements

Total funds available for withdrawal ($ million)a

-

-

-

Disbursement amount ($ million, cumulative) -

7.92

7.92

Percentage disbursed (disbursed amount/total available)

Disbursements ($ million, for the year ended 31Dec2014) -

-

-

Disbursement ratio b

-

-

-

Net Transfer of Resources

2010 -

0.01

0.01

2011 -

(0.43)

(0.43)

2012 -

(0.47)

(0.47)

2013 -

(0.50)

(0.50)

2014 -

(0.51)

(0.51)

ADF = Asian Development Fund, OCR = Ordinary Capital Resources

a Undisbursed balance as of 31 December 2014.

b Ratio of total ADB Sovereign loan disbursements in a given year (or period) to its undisbursed balance at the

beginning of the year (or period). The undisbursed balance as the denominator includes 1) undisbursed balance of effective loans, and 2) undisbursed balance of loans that were approved but not yet effective as at the beginning of the year.

16

Ap

pe

ndix

1

Table 6c: Project Success Rates

(1996–2014)

Source: ADB

Loan Num

Country Sector Project Name Project Type

PCR Rating PPER Rating

Approval date

1693 Tuvalu Public Sector Management

Islands Development Program

Program Successful Successful

13-Jul-1999

1921 /2088

Tuvalu Education Maritime Training Project Project Party Successful None 03-Aug-2004

G0139

Tuvalu

Public Sector Management

Improved Financial Management Program

Program Successful None 16-Dec-2008

Ap

pe

ndix

1

17

Table 6d: Portfolio Implementation Status (sovereign loans, as of 31 December 2014)

Sector Loan No. Fund Title

Net Loan Amount ($m)

Cumulative Disbursement

($m) Approval

Date Effectivity

Date Closing Date

OCR ADF OCR ADF Original Revised Actual

Public Sector Management

1693 ADF Island Development Program

- 3.972 - 3.972 13-Jul-99 19-Nov-99 30-Nov-00 30-Jun-01 19-Jul-01

Education 1921 ADF Maritime Training Project

- 1.901 - 1.901 16-Oct-02 19-Feb-03 30-Jun-05 31-Mar-10 25-May-11

Education 2088 ADF Maritime Training Project

- 2.046 - 2.046 3-Aug-04 13-Jan-05 30-Jun-06 31-Mar-10 25-May-11

TOTAL - 7.919 - 7.919

ADF = Asian Development Fund; OCR = Ordinary Capital Resources Source: ADB

18

Ap

pe

ndix

2

DEVELOPMENT COORDINATION

Table 7: Development Coordination Matrix Sectors and

Themes Current ADB Strategic

Focus Other Development Partners’ Strategies and/or Main Activities

Multilateral Institutions and the UN System Bilateral

Sector

Public Sector Management

Strengthening public sector financial management, procurement reform and state-owned enterprise reform

ADB, EU, WB, UNDP

Budget and technical support for policy reforms linked to the priorities set out in the Policy Reform Matrix. Good governance reform support.

Australia Japan New Zealand Taipei, China

Budget support and non-project grant aid linked to policy reform. Taipei,China provides annual budget support.

Energy Considered but sector needs are being met by other development partners

WB, EU A WB project to be approved in 2015 for renewable energy following onto NZ/EU’s

project. EU’s renewable energy project is ongoing for all outer islands.

UAE, Japan (PEC funding through PIFS)

UAE also finances the renewable energy project. Japan is providing solar panels to outer islands

ICT Not a core ADB sector WB Providing TA support for improved connectivity

Education Not a core ADB sector EU Primary school rehabilitation on Vaitupu

Australia Japan New Zealand

Increased access to education, training services; competency development under the education sector program and the remote and islands education program; workforce skills development

Health Not a core ADB sector WHO and UN Population Fund

Essential drug supply and maternal and child health

Australia Urban and rural infrastructure rehabilitation and development.

Transport Proposed project to development outer island maritime infrastructure (jetties)

WB

Rehabilitation/construction of airport and terminal Runway materials will be used to rehabilitate roads and pave the Funafuti

New Zealand, Japan

NZ Ship to Shore Project (2008-13) improved channels and navigation aids in outer islands and Funafuti; Japan built Vaitupu fishery port and Funafuti

A

pp

en

dix

2 1

9

Wharf yard Wharf, and provided a ship. Will provide another ship in 2015.

Water and sanitation

Not a core ADB sector EU Water supply and sanitation infrastructure rehabilitation, policy advice and capacity development.

Australia, Japan Water tanks to households and schools (Aust); De-salination plans and assists solid waste management (Japan)

Other New Zealand Filling borrow pits on Funafuti created during the construction of the Funafuti Airport in WW2.

Themes

Capacity Development

Capacity development for core and line ministries, EAs and IAs.

ADB, UNDP, WB, EU, SPC, PIF

Capacity building in economic management, public finance, infrastructure planning, climate change, environment and sustainable management, civil aviation, trade and investment policy, water supply and sanitation, aid management, parliamentary strengthening and governance at both national and local levels.

Australia Japan New Zealand

Capacity building in public sector financial management, health and education, and MDG-related planning. Development of renewable energy and fisheries capacity, and local governance

Environment Sustainability and Climate Change

Not a core ADB sector UNDP, SPREP Community resilience to climate change, adaptation planning and implementation, national biodiversity protection and awareness,

.. ..

ADB = Asian Development Bank, AusAID = Australian Agency for International Development, EU = European Union, MDG = Millennium Development Goals, PIF + Pacific Islands Forum, SPC = South Pacific Commission, SPREP = South Pacific Regional Environmental Programme, UNDP = United Nations Development Programme, WHO = World Health Organization, TBC = to be confirmed. Source: Development partner websites and communications.

20 Appendix 3

SECTOR ASSESSMENT (I) Public Sector Management

1. Sector Performance, Problems, and Opportunities 1. Background. Geographic remoteness and dispersion, a narrow economic base, reliance on external earnings, and a small market naturally limit economic growth in Tuvalu and contribute to macroeconomic volatility. In the absence of a vibrant private sector, high public spending drives growth. Without independent monetary and exchange rate policies, given the adoption of the Australian dollar, and limited leverage of banking regulation and interest rate policy, the government is reliant on fiscal policy to manage the impact of shocks and stimulate inclusive growth. 2. Tuvalu’s future growth strategy is set out in the National Strategy for Sustainable Development (Te Kakeega II), 2005–2015, which was developed through an extensive consultative and participatory process with the various island councils, civil society organizations, the private sector, and development partners. The national plan sets eight strategic priorities, including promotion of good governance, macroeconomic growth and stability, employment, and private sector development. The expected outcomes are more employment opportunities, higher economic growth, better health care, better education, better basic infrastructure, and continued social stability. 3. Revenue policy and performance. A key government public sector management challenge is the high volatility of the country’s external revenues. For the past 5 years, central government’s current revenues have increased as a share of gross domestic product (GDP) from an average of 62% in 2010-2012, to an average of around 103% in 2013–2015. This is being driven by strong fishing license revenue performance, good returns from the Tuvalu Trust Fund (TTF), backed by budget support contributions from Tuvalu’s development partners, including the Asian Development Bank (ADB), the Governments of Australia and New Zealand, and the World Bank. This has enabled the government to rebuild the Consolidated Investment Fund (CIF) from $3.2 million in 2012 to $20.4 million at the end of 2014. The CIF serves as a repository for the automatic distributions from the TTF and acts as a revenue stability mechanism. Withdrawals from the CIF are used to fund the recurrent budget as well as capital reinvestments.17

Figure 1: Revenue performance and composition (% of GDP)

e = estimate, GDP = gross domestic product, b = budget Source: Government of Tuvalu National Budget

17 The TTF, originally capitalized by donors in 1987, was established to provide additional funding for budget support. The TTF can

be withdrawn only if its market value exceeds a ‘maintained value” indexed to Australian CPI. The TTF board, representing both donors and the government, can determine transfer the excess to the budget. The CIF serves as a fiscal buffer and deposit account for grants, and can be withdrawn at the government’s discretion. The CIF targets a minimum balance equivalent to 16% of the TFF’s maintained value to finance post grant deficits for four years. This is based on the assumption that a “dry spell” up to four years could occur when no distribution would be made from the TTF.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2010 2011 2012 2013 2014e 2015b

Grants

.tv

Fish license

Investment revenue

Import duties

Income tax

Appendix 3 21

4. Tuvalu is a member of the Parties of the Nauru Agreement, which has initiated a more strategic management of tuna resources with higher economic returns for member countries through the Vessel Day Scheme (VDS).18 Fishing license fees reached a record high of $13 million (A$18 million) in 2013, where it’s expected to remain, because of improved negotiating power under the VDS. In June 2013, Tuvalu and 14 other countries in the Pacific, renewed a Multilateral Treaty on Fisheries (commonly known as the US Treaty) for US purse seiners to fish in the waters of the Pacific Island countries on an interim basis, which saw the value of the regional US treaty triple from $21 million to $63 million per annum. 5. Owing to the introduction of the VDS and the establishment of fishing joint ventures with Asian companies, both fishing exports and fishing license fees have more than doubled in just a few years, with each accounting for about half of GDP now. Foreign aid, including both budget support and off-budget project financing, has also hovered at around half of GDP. However, remittances, which used to be one of the most important sources of foreign exchange inflows, have shrunk dramatically since the global financial crisis, to 10% of GDP compared to the pre-crisis levels of nearly 20%. Imports, which closely correlate with fiscal spending, have been generally stable. 6. Tax revenue outperformed the budget target largely as a result of improved compliance following a tax audit of public enterprises and the favorable performance of a fishing joint venture as well as a VAT rate increase. These developments were further reinforced by higher-than-expected foreign grants. Current spending was generally restrained, and on-budget capital spending was small, reflecting the government’s weak implementation capacity. As a whole, the fiscal surplus reached 26.3% of GDP. 7. Expenditure performance. For the last four years, 2010-2014, government expenditures grew steadily as offshore revenue rose. Much of the extra spending went to Special Development Expenditures, civil servants pay increase, Tuvalu Medical Treatment Scheme and government scholarships. Some of the additional expenditure items were recurrent in nature or incurred some level of recurrent costs which will be difficult to reduce in future. For 2010-2013, government expenditures averaged 85% of GDP, grants and revenue averaged 85%. In 2014 expenditures increased to 95% of GDP, with revenue at 124% of GDP.

8. High staff costs remain a key source of fiscal pressure in the medium term. These now account for 45% of on-budget spending, well up from 24% in 1996. In 1994, a public sector reform program, which included proposed downsizing of the civil service, became a core component of the government’s national plan. However, by 2012, the number of established posts for civil servants had grown by 40% above the 1994 level, although the population had risen by less than 10%. Average rates of pay also increased substantially during the period. Staff costs rose from 27.6% of GDP in 2008 to 32% of GDP in 2014 and are an ongoing source of fiscal pressure. 9. The Te Kakeega II identifies basic education, health care, and vocational education as key expenditure priorities.19 These items receive a very low share of the budget and are largely supported through external contributions. Shifting funds to these priorities requires that resources be diverted from other sectors.

18

The scheme allocates member countries with a set number of days to allocate to the highest bidding commercial fishing vessels. It is designed to increase the rate of return from fishing activities by limiting catches of target tuna species and stimulates competition between Distant Water Fishing Nations to purchase units of fishing effort in days. At the ninth Parties of the Nauru Agreement meeting in Majuro on June 12-13, 2014, Ministers agreed to raise the fishing day fee from the current benchmark of $6,000 to $8,000 starting 1 January 2015.

19 Government of Tuvalu. 2005. Te Kakeega II, 2005–2015. Funafuti.

22 Appendix 3

Figure 2: Expenditure performance and composition (% of GDP)

Source: Tuvalu Government National Budgets

10. Public Enterprise Reform. Progress has been made in enhancing the governance of public enterprises through improved financial reporting, enforcement of the 2009 Public Enterprise Act, and progress made in merging and privatization efforts. Nonetheless, given their responsibilities to implement social policies, the poorly managed public enterprises are far from operating on a commercial basis and are mostly making losses despite receiving large government subsidies. A reform plan is needed to put public enterprises on a sustainable footing. The reform package should aim to enhance the enterprises’ commercial orientation and financial soundness. In particular, there is a need to clearly define and cost their social responsibilities, which, together with strengthened accounting and auditing practices, would enhance their transparency and accountability. 2. Government’s Sector Strategy 11. Public sector reform strategies. To address all these challenges and insulate its fiscal position from revenue volatility and global shocks, the government developed a medium-term fiscal framework in June 2012 in consultation with the International Monetary Fund. The framework is aimed at maintaining fiscal sustainability. It is based on the government’s multiyear Policy Reform Matrix (PRM), which was prepared in March 2012 in collaboration with ADB, the governments of Australia and New Zealand, and the World Bank. The PRM covers four main areas: governance, social development, education and human resources, and macroeconomic growth and stability. 12. Implementation of sector strategies. The PRM explicitly targets a sustainable budget framework, which will be accomplished by strengthening fiscal controls, making budgeting and budget execution more effective, improving service delivery, protecting essential social services, reforming the government’s public enterprises, and increasing revenue mobilization. Implementation of the PRM will help ease fiscal constraints by boosting economic growth, improving tax collections, reducing nonpriority expenditure, and unlocking additional budget support. 13. Country Performance Assessment scores. The equal-weighted average score of the four institutional components of the Country Performance Assessment (CPA) for Tuvalu showed

Appendix 3 23

gradually decreased from 3.1 to 3.0 (on a scale from 0 to 6) from 2008–2014.20 Scores notably increased since 2012 (except for PSM and Institutions), coinciding with mounting government commitment and efforts to reforms.

Figure 3: Country Performance Assessment scores

PSM = Public Sector Management. Source: Asian Development Bank (Country Performance Assessment reports, various years).

3. ADB Sector Experience and Assistance Program 14. ADB support. Exhibiting most of the constraints of a fragile situation, ADB’s operations in Tuvalu are demand-driven, within areas of ADB’s comparative strengths, and capitalize on regional approaches and partnerships. The country operations business plan (COBP), 2016–2018 for Tuvalu is aligned with ADB’s Interim Pacific Approach 2015, which extends the validity of ADB's Pacific Approach 2010-2014. The goal is for sustained, resilient, and improved standards of living.21 This aligns with the aim of Tuvalu’s National Strategy for Sustainable Development (Te Kakeega II), 2005–2015 to achieve a healthier, more educated, peaceful, and prosperous nation. ADB’s COBP shares this focus and aims to (i) continue ADB’s emphasis on inclusive growth, (ii) further strengthen knowledge solutions, (iii) address emerging needs within the broad contours of ADB’s Strategy 2020, and (iv) actively leverage resources through cofinancing. The Pacific Approach serves as the country partnership strategy for Tuvalu. 15. The Pacific Approach recognizes strengthened public sector management and an improved private sector environment as key drivers of change. ADB interventions in 2016-2018 will strengthen PFM to help government manage their financial resource better as well as improve public expenditure management, which is critical to restoring fiscal sustainability and stimulating economic growth. Furthermore, to ensure ADB’s investments are demand-driven and sustainable, the policy focus of ADB’s pipeline program will be anchored to the PRM.

20 The CPA’s four institutional components cover economic management, structural policies, policies for social inclusion, and P and

institutions. The equal-weighted average referred to here does not include country portfolio performance and does not follow the composite country performance rating calculation formula.

21 ADB. 2015. Interim Pacific Approach, 2015. Manila; ADB. 2009. Pacific Approach, 2010–2014. Manila; Government of Tuvalu.

2

2.5

3

3.5

4

2008 2009 2010 2011 2012 2013 2014

Economic Management

Structural Policies

Social Inclusion

PSM and Insitutions

equal weighted score

24 Appendix 3

(II) Transport (Maritime)

Tuvalu is a chain of nine islands, stretching over a total distance of 680 kilometers approximately in the South Pacific Ocean with a total land area of 26 square kilometers. The total population of Tuvalu was estimated to be around 10,800 as of 2013, with only small populations (ie less than 1,000 people) on each of the outer islands.

The main source of transportation of cargo and passengers from Funafuti, the capital, to

the outer islands are by two government owned vessels, at the frequency of one trip per month. These vessels are also used for emergency evacuations. With the exception of Funafuti, Vaitupu and Nukufetau, manmade channels and natural passages seem to be the only doorway for communities on Nanumea, Nanumaga, Niutao, Nui, and Nukulaelae to transfer passengers and goods of all sorts between ship and shore. The transfer of passengers and cargo between the ship and shore by workboats is dangerous, particularly when the sea conditions are unfavorable. Serious accidents occurred in the past, leading to loss of life as well as economic losses.

The transfer of people and goods in a more safe and efficient way between ship and shore is a major concern of the Government and outer island improved shipping and port services is a priority in the Tuvalu National Strategy for Sustainable Development – Te Kakeega II (TKII), to improve the livelihoods and economic development of the outer islands. It is also prioritized in the Tuvalu Infrastructure Strategic Investment Plan 2011-2015 (TISIP) 1 and the Tuvalu Government’s Roadmap for 2013-2015. Through improving outer islands’ port facilities, the Government aims at economic development including fishery and thereby improving people’s livelihood in the outer islands. The Government also expects to reduce people’s migration from the outer islands to Funafuti, which is currently facing problems with overcrowding, pollution, and rapid spread of diseases.

New Zealand is also working on Maritime transport in Tuvalu. New Zealand’s recent

ship-to-shore project directly supported TKII’s Infrastructure and Support Services’ priority to “improve quality, frequency and cost effectiveness of transport services to the outer islands” improved to some degree the safety and efficient transportation of goods and passengers between the ships and shore by widening and deepening the channels in six outer islands and installing some navigational aids. Nonetheless, danger persists as some channels are still narrow andshallow, and navigational aids are lacking. In November 2014, MFAT’s Maritime and Safety Adviser undertook a scoping mission to Tuvalu and provided several recommendations related to outer island transport for the purpose of developing a safe and sustainable approach to outer island shipping.

Japan reconstructed a fishery harbour in Viatupu in late 1990’s and constructed Funafuti wharf in 2010. Japan has also provided a ship (582 gross tonne) in 2002 and will provide another ship in later 2015. The new ship will have the following specifications: length: 60.5m, width: 12.5m, draft [designed]: 3.1m, gross tonnage: 1,270t, cargo capacity: 500t, passenger capacity.

Given the small, dispersed, remote population of Tuvalu, the costs of improving port

facilities will be high, making it difficult to identify feasible options with favourable cost benefit ratios to encourage investment by any single donor. The case for co-ordination and partnering is therefore very strong, so that a number of donors can play a role in providing essential improvements to the people of Tuvalu at least cost.

During ADB’s country programming in 2014, government requested that ADB consider

preparing a port development project for Funafuti and outer islands. The Country Business and Operation Plan 2015-2017 includes a project preparatory TA worth $600,000 scheduled for

Appendix 3 25

2015 and an investment project worth $7.82 million scheduled for 2016.22 The government has prioritized the improvement of port facilities on the following outer islands of Nanumaga, Niutao, Nui, Nukulaelae, Nukufetau, and Nanumea. Government wishes to improve the transfer operation of cargo and passengers between a ship floating off-shore and the shore by constructing jetties with lifting equipment and basin for workboats and by further improving the channels as necessary. While port development is of paramount importance to the government, the affordability of building adequate facilities at five locations is unclear, and in the context of the fairly small populations in each of the outer islands cost-effectiveness will also be an issue. Indeed, it is highly likely that within the funding currently identified, only one or two of the five outer islands’ port could be improved.

To appropriately inform the potential investment project, government has submitted a

request to the Pacific Regional Infrastructure Facility (PRIF) to assist with examining how an outer island transport system could be designed that would meet the needs of the communities in the most cost effective manner. PRIF will develop the characteristics and required facilities for the outer island ports, including preliminary cost estimates to support project preparatory stage investigations of a possible port development project

The government has formed a task force for the project with the participation of the

Ministries of Home Affairs and Rural Development; Finance and Economic Development; Communication and Transport; Public Utilities; and Foreign Affairs, Trade, Labor, Tourism, and Environment. The PPTA team will also work closely with other relevant government offices as well as other development partners, if applicable. The PPTA team will stay in close touch with ADB staff in charge throughout the design process.

22

Funding for the renamed 2016 Outer Island Port Development Project has increased from $7.82 million to $9.41 million. Approximately $2.2 million of this will be allocated for a Project Design Advance in 2015.

26 Appendix 4

RISK ASSESSMENT AND RISK MANAGEMENT PLAN

Risks

Assessment without

Mitigation Management Plan or Measures

Assessment with

Mitigation Global economic recovery falters.

Medium ADB will support government efforts to achieve fiscal sustainability and rebuild a buffer in the Consolidated Investment Fund to improve fiscal resilience to economic shocks.

Low

Political instability weakens fiscal discipline and policy commitment.

Medium The MFED to develop broad-based support for the reform program and for medium-term fiscal targets.

Low

Prolonged drought or other adverse weather events damage the economy.

Medium Development partners including ADB, Australia, New Zealand, and the World Bank, will support government efforts to achieve fiscal sustainability and rebuild a buffer in the Consolidated Investment Fund to improve fiscal resilience to economic shocks.

Low

Higher crude oil prices damage the economy.

Medium Development partners including ADB, Australia, New Zealand, and the World Bank, will support government efforts to achieve fiscal sustainability and rebuild a buffer in the Consolidated Investment Fund to improve fiscal resilience to economic shocks.

Low

The commitment of government agencies to improved performance wanes.

Low Development partners will provide technical assistance to improve the performance of government agencies.

Low

Tuvalu fails to receive sufficient and timely budget support and technical assistance.

Low ADB will draw on existing regional technical assistance to support the government. The ongoing government-led policy dialogue with joint development partners on reform priorities will continue.

Low

Parliamentary and community support for the government’s economic management reforms weakens.

Medium MFED will conduct regular and systematic policy dialogue between the government and key stakeholders to sustain ownership and support for reforms.

Low

Government agencies fail to restrain low priority current expenditure.

Medium AusAID will support the strengthening of internal audit.

Low

Insufficient suitably qualified and

High ADB will provide the necessary technical assistance and will help build the capacity building of

Medium

Appendix 4 27

Risks

Assessment without

Mitigation Management Plan or Measures

Assessment with

Mitigation experienced personnel are available to manage the expansion in capital works (design, implementation)

government counterparts.

Legal barriers prevent structural reforms.

Medium Development partner support includes the legal drafting required for legislative reforms.

Low

Overall Medium Low ADB = Asian Development Bank, AusAID = Australian Agency for International Development, MFED = Ministry of Finance and Economic Development. Source: Asian Development Bank.

Appendix 5 28

COUNTRY COST-SHARING ARRANGEMENTS AND

ELIGIBLE EXPENDITURE FINANCING PARAMETERS, 2016–2018a

Item

Parameter

Remarks/Explanation

Country Cost-Sharing

Ceilingb for Loans

(2015−2017)

Up to 99%

Individual projects may be accorded ADB financing of up to 99% of total project costs to provide maximum flexibility for the government to finance its development agenda.

Actual cost-sharing for individual projects will be based on project-specific considerations: higher financing percentages may be provided for non-income earning projects that address binding constraints to inclusive growth; and lower financing percentages may be provided for income-earning projects to encourage local ownership.

ADB will continue to seek cofinancing opportunities with other development partners.

Country Cost-sharing

Ceilingb for TA

and Other Grants

(2015−2017)

Up to 99%

TA and other grant projects may be accorded ADB financing for up to 99% of project costs. A higher percentage of financing may be provided for projects with strong evidence of ownership and commitment that addressing binding constraints to inclusive growth. Under TA programs, the counterpart government agency would normally be expected to provide in-kind facilities to support the work of TA consultants.

Country Cost-sharing

Ceilingb for

Specific Sectors

None No sector-specific variations are proposed.

Limits on Recurrent Cost

Financingc

None

While no country limit has been set for recurrent cost financing, such financing is not expected to be significant. The government is encouraged to strengthen arrangements that ensure the fiscal and operational sustainability of projects once ADB funding ceases. ADB funding would, to the extent possible, to integrated into the budget to mitigate fiscal sustainability risks.

Taxes and Duties

None

Local taxes and duties are considered reasonable. No taxes and duties are targeted specifically at ADB projects. Tax and duty arrangements set out in ADB’s charter are complied with.

ADB may finance taxes and duties associated with project expenditures, provided they do not constitute an excessively high share of project costs.

Notes: a ADB’s policy on cost-sharing is governed by: ADB. (2005). Cost Sharing and Eligibility of Expenditures for

Asian Development Bank Financing: A New Approach. Manila. b

Country cost-sharing ceilings are financing parameters that indicate the maximum share of costs ADB will finance with respect to an aggregate portfolio of projects in a developing member country (DMC), over the country partnership strategy period for that DMC.

c Under ADB’s policy, recurrent costs of the borrower are eligible for ADB financing. These costs must be regularly or periodically incurred, and may include salaries and operating costs. However, only recurrent costs incurred during the implementation phase of projects will be eligible, and only up to an amount that would be in line with sound banking principles.