asian development bank · 2014. 9. 29. · asian development bank pcr: sam 32050 program completion...

ASIAN DEVELOPMENT BANK PCR: SAM 32050

PROGRAM COMPLETION REPORT

ON THE

FINANCIAL SECTOR PROGRAM (Loan 1608-SAM[SF])

IN

SAMOA

October 2004

CURRENCY EQUIVALENTS

Currency Unit – tala (ST)

At Appraisal At Program Completion (15 Jan 1998) (15 Sep 2004)

ST1.00 = $0.357 $0.355 $1.00 = ST2.801 ST2.817

ABBREVIATIONS

ADB – Asian Development Bank ANZ – Australian and New Zealand Banking Group ASC – Agriculture Stores Corporation BI – Brugger Industries CBS – Central Bank of Samoa CSL – Computer Services, Ltd. DBS – Development Bank of Samoa FIA – Financial Institutions Act FID – Financial Institutions Department GDP – gross domestic product HSL – Hellaby Samoa, Ltd. IMF – International Monetary Fund LAR – liquid asset ratio MOA – Memorandum of Agreement MOF – Ministry of Finance NOP – net open position NPF – National Provident Fund PBB – public beneficiaries bodies PFTAC – Pacific Financial Technical Advisory Centre PTB – public trading bodies PTD – Posts and Telecommunications Department SCPL – Samoa Coconut Products, Ltd. SCL – Samoa Communications, Ltd. SES – statement of economic strategy SFC – Samoa Forest Corporation SIS – Samoa Iron and Steel SOE – state-owned enterprise

SOEMD – State-Owned Enterprise Monitoring Division SPDC – Special Projects Development Corporation SDR – statutory reserve deposit TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government ends on 30 June. (ii) In this report, "$" refers to US dollars.

CONTENTS

Page

BASIC DATA I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Program Outputs 2 C. Program Costs 10 D. Disbursements 10 E. Program Schedule 10 F. Implementation Arrangements 11 G. Conditions and Covenants 11 H. Related Technical Assistance 11 I. Consultant Recruitment and Procurement 12 J. Performance of Consultants, Contractors, and Suppliers 12 K. Performance of the Borrower and the Executing Agency 12 L. Performance of the Asian Development Bank 13

III. EVALUATION OF PERFORMANCE 13

A. Relevance 13 B. Efficacy in Achievement of Purpose 14 C. Efficiency in Achievement of Outputs and Purpose 14 D. Preliminary Assessment of Sustainability 15 E. Environmental, Sociocultural, and Other Impacts 14

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 15

A. Overall Assessment 15 B. Lessons Learned 15 C. Recommendations 16

APPENDIXES 1. Chronology of Major Events 17 2. Development Policy Matrix 18

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number

Independent State of Samoa 1608-SAM (SF) Financial Sector Program Samoa Treasury Department and Central Bank of Samoa SDR5,605,000 PCR: SAM 32050

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Tranche Releases

11 Oct 1997 29 Oct 1997 15 Jan 1998 16 Jan 1998 19 Feb 1998 24 Mar 1998 24 Jun 1998 01 Jun 1998 None 30 Jun 2001 16 Nov 2001 Two 1% per annum 40 10

a. Dates Item Appraisal Actual Date of First Tranche Feb 1998 19 Jun 1998 — 7 Jul 1998 Date of Second Tranche Jun 2001 16 Nov 2001

b. Amounts ($ million)

Item Appraisal Actual First Tranche 4.00 1.00 — 2.97 Second Tranche 3.50 3.31

Total 7.50 7.28

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9. Disbursements Initial Disbursement

19 Jun 1998

Final Disbursement

16 Nov 2001

Time Interval

41 months

Effective Date

1 Jun 1998

Original Closing Date

30 Jun 2001

Time Interval

37 months

C. Program Data

Tranching Schedule Actual Schedule

($ million)

Item First Tranche Second Total Release 1 Release 2 Tranche Development Bank of Samoa 0.67 1.00 - 1.67 Central Bank Securities - 1.40 - 1.40 Budgetary Support 0.33 0.57 3.31 4.21

Total 1.00 2.97 3.31 7.28

Actual Schedule (ST$ million)

Item First Tranche Second Total Release 1 Release 2 Tranche Development Bank of Samoa 2.00 3.00 - 5.00 Central Bank Securities 0.00 4.19 - 4.19 Budgetary Support 1.00 1.71 11.70 14.41

Total 3.00 8.90 11.70 23.6 D. Supporting Technical Assistance (TA)

Name of TA Estimated Cost ($’000)

Actual Cost ($‘000)

TA 788-SAM: Rationalization and Privatization of Selected Government Corporations and Activities

310.0 296.1

TA 1062-SAM: Implementing Privatization of Selected Government Corporations and Activities

270.0 227.1

TA 1234-SAM: Privatization of State-owned Enterprises 365.0 314.8 TA 1499-SAM: Banking Supervisory Assistance to the Central Bank of Samoa

222.5 148.1

TA 1631-SAM: Implementation of Privatization Exercise 320.0 297.5 TA 2788-SAM: Implementation of the Privatization Strategy 600.0 550.5 TA 2989-SAM:Institutional Strengthening of Government Financial Institutions

950.0 893.0

Total 3,037.5 2,727.1

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E. Program Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From Mar 1998 to Dec 1998 Satisfactory Satisfactory From Jan 1999 to Dec 1999 Satisfactory Satisfactory From Jan 2000 to Dec 2000 Satisfactory Partly Satisfactory From Jan 2001 to Nov 2001 Satisfactory Partly Satisfactory F. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-

Days

Specialization of Membersa

Fact-Finding 21 Jul–1

Aug 1997 3 25 a, c, f

Appraisal 13–24 Oct 1997

4 40 a, c, f, g

Inception 30 Mar–3 Apr 1998

2 10 a b

TA and Loan Review 1 13–23 Oct 1998

4 26 a, b, c, d

TA and Loan Review 2 1–4 Nov 1999

7 28 c, d, e

Brief Review–with Country Programming 15–19 May 2000

2 10 c, d

Brief Review–with Country Programming 26 Mar–5 Apr 2001

1 5 b

TA and Loan Review 3 25–29 Jun 2001

3 18 b, e

TA Review 4 28 Jan–1 Feb 2002

1 5 b

TA Review 5 9–13 Sep 2002

1 5 b

TA Review 6 17–21 Mar 2003

1 5 b

TA Review 7 22–23 Sep 2003

1 2 b

Program Completion Reviewb 17–27 Aug 2004

1 9 b

a a = senior project implementation specialist, b = senior project implementation officer, c = financial analyst, d =

economist, e = TA consultants, f = counsel, g = staff consultant b The program completion report was prepared by Ms. A. T. Vatucawaqa, Senior Project Implementation Officer,

South Pacific Regional Mission.

I. PROGRAM DESCRIPTION

1. In February 1998, the Asian Development Bank (ADB) approved the Financial Sector Program Loan (Program) for SDR5.605 million ($7.5 million equivalent) from its Special Fund resources to the Independent State of Samoa. The Program aimed to develop a market-based system in the financial sector that would broaden participation—thereby increasing domestic resource mobilization—and promote efficiency in resource allocation by fostering competition and encouraging greater reliance on market mechanisms. The reforms were to address two main constraints to economic growth: (i) weaknesses in Samoa’s financial system, and (ii) dominance of the state-owned enterprises (SOE), most of which were inefficient and were fiscal burdens on Samoa’s budget. Monetary policy instruments in use before the reform created distortions in the financial system, resulting in a substantial shift of resources from banks to non-banks, which remained outside the purview of prudential guidelines. That increased the inherent risk in the financial system. Two technical assistance (TA) grants supported implementation of the Program’s policy framework.1 2. The specific program components were (i) promoting and developing financial markets through liberalization of the financial system, use of indirect instruments of monetary management, and adoption of measures to increase trading in the money and foreign exchange markets; (ii) strengthening the Central Bank of Samoa (CBS), enhancing its operational autonomy, and strengthening its credibility; (iii) strengthening the prudential and regulatory framework to underpin the transition to a market-oriented financial system; (iv) strengthening the institutional and operational performance of the National Provident Fund (NPF) and the Development Bank of Samoa (DBS); and (v) privatizing and corporatizing SOEs, to lessen the fiscal burden and enhance efficiency in resource allocation. 3. Since the mid 1980s ADB, the International Monetary Fund (IMF), and the World Bank, in respective consultations with the Government, have emphasized the importance of liberalizing the financial sector to stimulate sustainable economic growth and employment. During a reconnaissance mission for a proposed sixth credit line to the DBS, (see Chronology of Major Events - Appendix 1) ADB advised the Government that future loan assistance to the financial sector would be on the condition that the Government liberalize the sector. The IMF, during its 1995 and 1996 Article 4 Consultation Missions, emphasized the importance of accelerating privatization of SOEs, strengthening the prudential framework for banks, and adoption of indirect and market-based monetary policy instruments. At the 1996 ADB annual meeting, the Government requested ADB assistance in design and implementation of a program loan for reform of the financial sector. This program completion report gives an overview, and a preliminary evaluation of initial impacts and benefits of the Program loan.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The Program was designed and formulated through a consultative and participatory process that the Samoans initiated. The current Prime Minister and former minister of finance, a pro-reformist, spearheaded the reform, with close support from the Cabinet, senior managerial officials of the Treasury (now the Ministry of Finance [MOF]) and CBS. The clear political will and commitment of Samoa’s leaders to empower and implement the financial sector reform

1 ADB. 1997. Technical Assistance to Samoa for Implementation of the Privatization Strategy. Manila; and ADB.

1998. Technical Assistance to Samoa for Institutional Strengthening of Government Financial Institutions. Manila.

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according to an agreed timetable is commended. The transition to a liberalized financial market was initiated in 1997, in concert with the Government’s comprehensive economic reform program. The Government released its first biannual Statement of Economic Strategy (SES) in 1996–97, which emphasized the need to maintain macroeconomic stability and encourage private sector-led economic growth based on a new partnership of consultation between the Government and the private sector. The strategy involved improving the efficiency and accountability of the public sector through privatization and corporatization, human resource development, tax and tariff reforms, and financial market reforms. Timing of the loan processing was opportune because lessons from the Asian financial crisis were still vivid, and gave the Government impetus to reform its financial sector. This also provided a window of opportunity for other development partners2 to support the Program. 5. The SES rationale and the program content were consistent with ADB’s 1997 Pacific Strategy (para. 46). The Government’s development policy letter, addressed to ADB on 9 January 1998, clearly described its policy for realization of the Program and the agreed reform measures, which were also summarized in the policy matrix (Appendix 2). The program objectives and five supporting components were translated into 62 specific policy and institutional reform activities involving various government agencies. Forty-three of the 62 activities relate to the financial sector component and 19, to the SOE component. The financial component was well designed and some bold reform measures were implemented. But the privatizing of eight named SOEs was overly ambitious and not practical, particularly since this formed an important second tranche release condition. The legal processes to finalize sale of three of the earlier agreed eight SOEs by the revised compliance date of July 2001 was protracted, so the Government requested that ADB substitute three earlier agreed SOEs for three other SOEs that were not included under the Program but had been successfully privatized in 1999–00. ADB reviewed and agreed to the proposed substitution provided that the Government would remain committed to privatizing the three agreed SOEs (para. 30). B. Program Outputs

6. The Government satisfactorily fulfilled the terms of 52 of 62 of the policy actions, partially complied with 6, and substantially fulfilled 4 (Appendix 2). The program outputs are described by component in paras. 7–31, based on assessments made in line with the program loan reform matrix, which was formulated at appraisal.3

1. Liberalizing the Financial Sector

7. Deregulation of the interest rates in January 1998, with removal of interest rate ceilings on deposits and lending, was a positive outcome of the liberalization. Before this, the maximum rate on loans and overdrafts was set at 12%, and the minimum savings rates at 3%. The minimum rate on 1-month to 2-year term deposits ranged from 4.5 to 7.5%. After deregulation, banks initially introduced base lending rates of 11.75 to12.00%, with additional risk margins as high as 2% points. But rates declined over subsequent years and stood at 9.75–10.00% by March 2004. Since 2001, real deposit rates have averaged 4.5%. In 1998, the weighted average lending rate was 12.89% and the weighted average deposit rate was 5.14%, resulting in a spread of 7.75%. After the reform, the weighted average lending rate gradually declined to 11.3% by 2003; the weighted average deposit rate declined to 4.47%, with a weighted average 2 ADB consulted closely with officials from the Australian Agency for International Development, European

Investment Bank, IMF, Pacific Financial Technical Advisory Centre (PFTAC) based in Fiji, and World Bank. 3 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Independent Sate of Samoa for the Financial Sector Program. Manila.

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interest spread of 6.83%. The ratio of reserve money to quasi money, a measure of the efficiency of the banking sector, has declined steadily from 63.7% in March 1997, then to 32.8% in March 1998, to 30.3% in March 2002, and 28.9% by July 2004. The change in the distribution of lending, to favor commercial banks, was another positive outcome of the liberalization, considering that non-banks were not subjected to the same supervisory controls as commercial banks. Before the reforms, non-bank lending to the private sector was 14% higher than commercial bank lending. By late1999, commercial bank and non-bank shares were almost identical, but by the end of 2000, commercial bank lending to the private sector exceeded that of non-banks by 15%. By late 2003, the commercial bank share of total lending had increased to 32%, reflecting a robust banking and private sector partnership. 8. After deregulation of interest rates, the liquid asset ratio was phased out by May 1999. CBS issued its own bills in 1998 for the purpose of managing liquidity to achieve its monetary policy objectives. Regular auctions were conducted after 1998 and continue, with the three commercial banks lodging competitive bids and more than 90% of auctions fully subscribed. Non-bank public financial institutions have made few bids. 9. As envisaged under the Program, Samoa moved to full current account convertibility of the tala and most of the foreign exchange controls now relate to the capital account. Several remaining current account controls were removed over the program period. First, the ceiling on foreign exchange holdings for commercial banks was removed and replaced by the net open position (NOP) in September 1999. Second, commercial banks now provide forward foreign exchange cover/contracts, although they must report their activities to CBS, which monitors the situation through NOP. Third, the Export Financing Facility was discontinued in December 1997. Fourth, the revised exchange control regulations, which became effective in August 1999, allow parties to operate as foreign exchange dealers after CBS approval. Guidelines are in place and a number of private sector entrepreneurs have applied to CBS. Under the revised exchange control regulations, retailers are not allowed to accept foreign currency for domestic purchases. Fifth was relaxation of limits on the sale of foreign exchange (up to ST7,000) and the remittance of foreign exchange (up to ST80,000) specifically for the payment of imports by the authorized foreign exchange dealers. 10. Overall, some indicators of the success of the liberalization included (i) greater public acceptance and satisfaction with the outcomes since the liberalization; (ii) introduction of new products; and (iii) strong interest from potential new entrants, across the sector, notably the entrance of a new locally owned bank and of insurance companies and agents.4 Other spinoffs were the improved working relationship between the private sector and the Government and their contributions to achieving a consensus view on the formulation of Samoa’s development strategy.

2. Promoting Money Markets

11. Since removal of direct controls, CBS now makes greater use of CBS bills for monetary policy implementation, supported by the 5% reserve requirement. Participation in the auctions is open to the public, commercial banks, and non-bank financial institutions. The securities are issued at auction. CBS securities are freely transferable at negotiated prices, and the securities can be discounted at CBS. All four commercial banks regularly support the auctions and actively use the bills in their fund management. This instrument has enabled CBS to influence the

4 The Samoa Commercial Bank, Ltd. started operation on 14 April 2003; the Western Money Union started in 2002;

and Colonial Insurance Company, Ltd. and two other insurance agents, in 2001.

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amount of liquidity in the banking system by targeting demand deposits of commercial banks with CBS. The auctions started on 6 January 1998 with 25 auctions, increasing to 42 by the end of 2003 (Table 1). For the same period, the total value of securities rose by 72%, from ST116.2 million to ST200.0 million by 2003. Of the ST207.99 million worth of tenders received in 2003, only ST140.37 million were successful. For the same period, ST46.14 million of CBS securities have yet to mature. Except for 2002, various amounts of securities had been rediscounted. The auctions have been held an average of every 3 weeks out of 4, depending on the liquidity situation.

Table 1: Central Bank Securities (ST Million)

Item 1998 1999 2000 2001 2002 2003 Float/Auctions (no.) 25 33 34 29 43 42 Amount Auctioned/Floated (ST) 116.2 121.2 123.0 113.0 184.0 200.0 Amount Tendered (ST) 149.59 150.6 121.4 128.0 210.1 207.99Amount Allotted (ST) 100.6 106.4 102.2 102.0 145.5 140.37Amount Redeemed/Matured (ST) 70.7 95.6 109.8 94.7 128.8 94.6 Amount Outstanding (ST) 26.9 28.0 18.0 8.9 18.7 46.14Amount Rediscountable (ST) 3.0 14.86 6.5 8.89 3.64Source: Central Bank of Samoa Statistics. 12. Interbank placements between the two main commercial banks5 have increased over the years, but market activity remains minimal. This reflects the small size of the economy and financial sector, the extent of monetization, and the conservative liquidity position run by the banks. But demand has slowly emerged with the economy’s growth and as monetization increases, particularly with the entrance of Samoa Commercial Bank, Ltd. and other non-bank institutions. Banks have only occasional business needs to use money market products. Money market development is often a function of the development of the clearing system. The greater the value of transactions being cleared across accounts held at CBS, the greater the need to find short-term funds to meet clearing obligations. In Samoa, the use of checks or direct transfers between accounts at CBS is facilitated through the exchange settlement accounts, and there is a reasonable amount of daily activity. Interest rates have been liberalized and CBS is issuing securities that are transferable, negotiable, and rediscountable. The rediscount facility is penal,6 to create the price incentives for financial institutions to access interbank markets before approaching CBS, and statutory reserve deposits are maintained on an average daily basis, providing banks the flexibility to manage reserves at CBS. Furthermore, CBS has institutionalized a liquidity management framework under which it forecasts daily changes, as far as 2 weeks ahead, in banks’ settlement accounts at CBS. This provides CBS the ability to accurately influence system liquidity in line with its monetary policy stance. In April 2003, CBS introduced a repurchase facility in response to a shortage of liquidity in the banking system. The facility is operational and provides commercial banks the necessary short-term funds whenever short of liquidity. 13. One justification for the Program related to the cost of issuing CBS securities. This has been satisfactorily agreed to in a memorandum of agreement signed in August 2001 by Treasury and CBS. By September 2004, Treasury had reimbursed ST4,187,613 to CBS from loan proceeds. It is understood that Treasury will continue to finance these costs until 2005–06,

5 The Australian and New Zealand Banking Group (ANZ) and Westpac Banking Corporation. 6 A price incentive tool to encourage interbank borrowing, the facility has a penal rate attached to it, e.g. 1% above

CBS bills, which makes it more costly to rediscount at CBS vs borrowing from another bank.

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when a plan to transfer Treasury’s foreign exchange reserves to CBS will be implemented. It is also understood that additional measures may be required to strengthen the balance sheet, including allowing CBS to invest the funds raised from issue of CBS bills in a counterpart asset such as a treasury bill, and allowing CBS to maintain a portfolio of longer-term government securities or counterpart assets of similar maturity and yield to CBS securities. That will assure CBS’s long-term viability. But both CBS and Treasury must amend their legislations before these transfers can be executed. There is a long queue in processing priority bills and amendments for Parliament approval, but the mechanics are in place and agreement has been reached. Both institutions are aware of the importance and timing of advancing this initiative (para. 17).

3. Promoting Foreign Exchange Markets

14. A second tranche condition to remove a 1% levy on foreign exchange transactions was removed in January 1999, along with cessation of the export finance facility, removal of restrictions limiting the amount of foreign exchange a commercial bank may hold, and introduction of forward exchange contracts. These changes were important, but the major impact on the foreign exchange market has been from the increased presence of licensed money changers. The impact on commercial banks’ revenues from foreign exchange services is noticeable, with customers being much more price sensitive. Commercial banks, when setting their rates, must be conscious of rates that money changers offer. The increased competition has been positive, but there are concerns that some money changers provide “trade services” in addition to money changing. 15. The ANZ in particular has reported increased demand for forward foreign exchange. The facility is to enable parties to cover their foreign exchange positions earlier to prevent potential losses from future exchange rate fluctuations. Since ANZ introduced forward foreign exchange, customers are increasingly requesting it. Increased use of forward foreign exchange will be important to integrate the domestic money and foreign exchange markets, as well as to integrate Samoan interest rates with international interest rates.

4. Strengthening Central Bank of Samoa, Enhancing Its Operational Autonomy, and Underpinning Its Credibility

16. CBS has made major progress in positioning itself to meet demands of a liberalized financial system. It has undergone a fundamental restructuring to focus more sharply on implementation of market-based policies and output-based budgeting, and on building and maintaining a strong, effective, and independent central bank and supervisory authority. There were two aspects to strengthening the operational autonomy of CBS: formalization of an inflation target, and securing an adequate income stream for CBS, so that it can meet its responsibilities and have adequate funding for market interventions. Since 1998–99 the Government has stated that its monetary policy objective was to keep inflation at or lower than 6%, and CBS has been responsible for attaining this target. The target was formalized in the SES to support the 1998–99 budget. CBS publishes a quarterly Bulletin and Treasury began publishing its Economic Review. These documents review economic and financial conditions to inform the public of inflation outcomes compared with targets. In 2002 CBS started publishing biannual and annual monetary policy statements that include assessments of the current policy settings vis-à-vis attainment of future inflation targets. Since then the inflation target has been lowered to 3%, a liquidity management framework has been put in place, and the monetary policy process is more forward looking.

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17. To develop a longer-term funding mechanism for CBS, a memorandum of agreement was signed in August 2001 with Treasury setting out the mechanics of funding costs of CBS securities and transfer of foreign reserves to CBS to strengthen the CBS balance sheet. As noted in para. 13, an amendment to CBS legislation will be required before all foreign reserves are transferred, which will allow CBS to retain more of its earnings. 18. The Program helped strengthen CBS procedures by introducing (i) a new computerized accounting system; (ii) output- and performance-based budgeting systems; (iii) a liquidity management system, resource mobilization plans, and risk management techniques; (iv) an expanded chart of accounts consistent with the generic charts that the IMF advocates for central banks; and (v) CBS’s own corporate plans. CBS published its first corporate plan in 2001, covering 2001–02, and recently released its second plan for 2003–05. An internal audit unit has been established to monitor CBS procedures and management systems. Information systems and technology have been introduced in line with international dissemination of information. CBS launched its website in December 2000, and redesigned it in 2003 to enhance information quality and offer wider services. 19. CBS has benefited enormously from staff development and training under the Program, including support provided by IMF, PFTAC, the Commonwealth Secretariat, and reserve banks of Australia, Fiji, and New Zealand. ADB, through its TA, provided various targeted technical training programs in line with the reform initiatives being implemented, and an in-house management training course to support strengthen the ongoing organizational reform process through targeted skills development for managers, assistant managers, and senior staff. 20. The Financial Institutions Department (FID) was restructured in 2001 to provide a focal point for CBS to carry out its supervisory function, by providing both onsite and offsite inspections. FID has tried to meet its responsibilities, despite limited human resources and training. A qualified and experienced senior manager heads FID, supported by five staff with appropriate qualifications, although some lack relevant working experience and/or assertiveness for on-site inspections. But experience will come, over time. Within FID is the Financial Intelligence Unit, which monitors, receives, and disseminates information to other relevant agencies on anti-money laundering activities and financing of anti-terrorism activities. As part of its initiative to comply with regional and international agreements to combat illegal financial activities, Samoa was formally accepted, in June 2000, as a member of the Asia Pacific Group on Money Laundering, a multilateral body whose broad activities include the combating of money laundering. ADB and IMF helped CBS establish its intelligence unit, including provision of a computer. 21. To strengthen CBS credibility, the Program called for separation of the Offshore Financial Center from CBS. The Samoa Financial Services Authority Bill has been prepared, but not yet enacted. Progressing the bill to legislation is still a priority, but has been overtaken by the urgent need for important amendments to the International Banking Act for the smooth operation of the Offshore Financial Center so it can comply with international standards. The Government considers any delay in meeting these standards more detrimental than delaying separation of the Center from CBS.

5. Strengthening the Prudential and Regulatory Framework

22. The prudential and regulatory framework was improved substantially through the Program. The Financial Institutions Act (FIA) was passed in 1996 to strengthen CBS’s role in exercising prudential supervision over Samoa’s financial institutions. In January 2001, further

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FIA amendments empowered CBS to extend supervisory guidelines to non-bank financial institutions such as NPF, DBS, and the insurance sector. The banking supervision framework has been formalized into a set of eight prudential statements. Both NPF and DBS have generally complied with the full disclosure requirements for prudential supervision, and cooperate closely with CBS in meeting them. Regulations on on-site supervision and analysis are operating. Furthermore, measures were taken to (i) introduce a policy on disclosure requirements and (ii) prepare prudential statements to cover general provisioning of 2%, in addition to specific provisions. For that, CBS has introduced components of a full disclosure regime. Prudential statements are being implemented that specify a minimum general provision of 1%. This is not a concern, because the banks already have provisions that are comfortably higher than 2%. Nevertheless, CBS plans to amend the policy specification to 2%. 23. The greatest change has been the improved surveillance of money laundering, and improved anti-terrorism financing. CBS has drafted detailed guidance notes for the financial sector to support the Money Laundering Prevention Act 2000. CBS issued the notes in July 2001, when regulations to support the Act were issued. This surveillance interfaces with the increased surveillance over the Offshore Financial Center and obligates domestic financial institutions to know their customers, record all transactions of ST30,000 or more, and report any suspicious transactions to CBS. The Money Laundering Prevention Act 2000 overrides secrecy provisions in any other legislation, including those that affect the Offshore Center. The Offshore Center is also improving its surveillance over institutions directly under its jurisdiction through amendments to the Offshore Banking Act, which have been drafted, and planned amendments to the Offshore Trustees Act, with assistance from the Commonwealth Fund for Technical Cooperation. To stay abreast with internationally accepted standards in prudential supervision and anti-money laundering, CBS has further reviewed relevant legislation and drafted new legislation. Accordingly, several amendments have been proposed to strengthen and improve the current Money Laundering Prevention Act 2000 and the Financial Institutions Act 1996. Also, new legislation has been drafted to govern (i) the supervision of insurance activities, (ii) proceeds of crime and (iii) mutual assistance in criminal activities. Depending on national priorities, some of these legislations will be submitted for Parliament approval in the September 2004 session, or 2005 sessions.

6. Strengthening the Development Bank of Samoa and National Provident Fund

24. DBS and NPF must be strengthened to ensure a stable financial system. Before the reform, NPF was the largest lender and had the potential to influence the interest rate and lending growth of the financial sector. In November 1997 DBS adopted a market-based interest rate policy. The NPF board approved a similar policy in 1998. These actions were preconditions, and were consistent with the thrust of the financial sector liberalization, which envisaged the creation of an inter-bank market that would allow banks and non-banks to meet liquidity requirements, and joint project financing between banks and nonbanks. The Program developed a framework based on six core principles (Appendix 2). NPF has completed all program requirements, including amendments to the NPF Act that incorporates prudential guidelines. In terms of the review of board composition, the Public Trading Bodies Act included a proviso to this effect. An amendment to the NPF Act allowed NPF to invest 10% of its investment portfolio offshore. For this, an ADB TA assisted NPF with its first investment in offshore assets with placement of an initial ST$2.0 million into a global bond wholesale trust managed by the BT Financial Group, a wholly owned Westpac Banking Group in Australia. Further investments will be according to cash availability and Samoa’s economy. Preliminary indications are a 10% return in only 9 months. The NPF board is seriously considering further

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offshore placements. Investment and finance staff were trained. The effectiveness of this training can only be assessed in the long term, but a framework for ongoing development opportunities and reinforcement of initial training has been introduced, using the services of the chosen investment manager and the management of the local branch of the Westpac Bank. Generally, NPF is well placed to meet ongoing interests of contributors by responding to market changes and offering a flexible investment strategy. 25. A new health care scheme for members awaits Parliament approval, which will affect NPF’s financial products, services, and sustainability. The scheme will provide 3% employer: 3% employee contributions, raising the total contributions to the fund, including pension contributions, to 8% employer: 8% employee. Consistent with the spirit of reform, NPF has been wholesaling its housing portfolio to commercial banks and a second bidding lot is in progress, which reduces the risk of infecting its investment portfolio. In late June 2003, the fund paid out a 3% return on members’ funds, which reflects sound economic environment. Mercer Consultants completed a second actuarial review in April 2002; its key recommendations were implemented. Overall, institutional changes such as the organizational restructuring and development of financial models, strategic plans, and credit policies and procedures have improved budgeting and forecasting, and reinforced NPF’s strategic changes. 26. DBS’s organizational structure was reviewed and new operational procedures and guidelines were introduced to support the changes through the Program. The adoption of market interest rate policy was supported by introduction of an improved loan classification system. Problem loans were addressed vigorously. The TA helped with preparation of its first and second corporate plans. The second plan takes into account the alignment of SOEs like DBS with requirements of the Public Bodies Performance and Accountability Act, through which DBS must operate commercially to earn a profit. Since the reform, DBS has worked to improve its financial performance, operational efficiencies, and services, especially in transforming its focus from a project-driven to a client-focused institution. Under the Program, the Government on-lent ST$5.0 million to DBS at 6% onlending rate for 14 years with 2 years grace period. The funds were directed at supporting lending to tourism, industry, manufacturing, and agriculture.

7. Privatizing/Corporatizing State-Owned Enterprises

27. The Government initiated an action plan to encourage corporatization and privatization of identified SOEs7 through the Program. The State-Owned Enterprise Monitoring Division (SOEMD) was mandated to implement and coordinate SOE privatization. A new framework of legislation to support this work was introduced in 2001, after enactment of the Public Bodies Performance and Accountability Act (now called Public Bodies). Privatization was slow, but the Government’s commitment remained strong, as evident from the new governance and accountability measures that the ADB-funded TA8 initiated and encouraged for the State-Owned Enterprise Monitoring Division (SOEMD), and the schedules annexed to the public bodies. Previous ADB TAs9 have catalyzed similar transformations for reforms supported by the 7 These included (i) the Special Projects Development Corporation (SPDC); (ii) the Agriculture Stores Corporation

(ASC); (iii) the Samoa Forest Corporation (SFC); (iv) Computer Services, Ltd. (CSL); (v) Samoa Iron and Steel (SIS); (vi) Hellaby Samoa, Ltd. (HSL); (vii) Brugger Industries (BI); and (viii) Samoa Coconut Products, Ltd. (SCPL).

8 ADB. 2001.Technical Assistance to the Independent State of Samoa for Implementation of State-Owned Enterprise Reforms. Manila.

9 ADB. 1986. Technical Assistance to the Independent State of Samoa for Rationalization and Privatization of Selected Government Corporations. Manila; ADB. 1988. Technical Assistance to the Independent State of Samoa for Implementing Privatization of Selected Government Corporations and Activities. Manila; ADB. 1989. Technical Assistance to the Independent State of Samoa for Privatization of State-owned Enterprises. Manila; ADB. 1991.

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Government’s priority for privatization and divestment. Because of those findings, and a review of lessons learned, the Government launched, in August 2003, its Policy Paper on SOE Ownership, Performance Improvement, and Divestment. The Government is commended for this large-scale improvement under its public sector agenda for reform. 28. The Government has increased emphasis on improving performance and accountability across all of its commercial activities—not simply changing the SOEs’ form or ownership—through its SOE policies on ownership, performance, and divestment. The Government’s Policy Paper describes which enterprises the Government will continue to own, and reasons for it; how the Government can improve on these enterprises; and what businesses the Government should divest from. These flow from the classification of former SOEs into either public trading bodies (PTBs) if their principal objectives are to “be a profitable and successful business,” or public beneficiary bodies (PBBs) if their principal objectives are to “provide excellent service to their users.” SOEMD, in particular, has provided excellent guidance and support through public consultations and one-on-one peer discussion to familiarize stakeholders with workings of the new act, and the monitoring, supervision, and implementing of privatization policies and procedures. Consequently, progress has been considerable in improving performance in these governmental commercial activities in separate initiatives for institutional strengthening at most major SOEs. 29. The trend of overall SOE performance has been erratic. Over the 5-year period 1997–2001, return on equity has varied from almost 4% before tax to the breakeven point. This consolidation masks the contrast between those SOEs that have performed vs nonperforming SOEs. The aggregate result for 2001 return on equity of all SOEs amounted to a loss of ST$9 million. Dividend payments have mirrored the return on equity. But asset values (a measure of government investment in SOEs) have continued to grow, reaching almost ST$1.2 million in 2001. During this 5-year period, government inputs to SOEs, either as capital injections or grants, totaled ST$173 million. Simultaneously, the indebtedness level of these enterprises has increased. Five SOEs accounted for 80% of total liabilities. 30. At the time of the second tranche release, only five of the eight identified SOEs were privatized and/or substantial work had been completed for their divestment. Three companies10 encountered legal difficulties and the Government requested their substitution by three other SOEs11 that were successfully privatized in 1999–2000 in order to satisfy conditions for the second tranche release. ADB agreed to waive full compliance and substitute three proposed companies for the three originally identified companies. Since then, the Government has approved the sale of CSL shares, worked on privatization of ASC, and the attorney general’s Office is taking legal actions on SFC. Unfortunately, the death of a prospective buyer delayed the sale of HSL, and the sale process must start again (para. 37). 31. The Posts and Telecommunications Department (PTD) was successfully corporatized into Samoa Communications, Ltd. (SCL) on 1 July 1999 through the Program. SCL now operates on a commercial basis with a team of expatriate and local managers (Appendix 2). SCL is understood not to have paid any dividends to the Government, but has invested in capital works such as a new office building, and maintenance works such as laying new infrastructural cables and equipment in line with international telecommunication developments.

Technical Assistance to the Independent State of Samoa for Implementation of Privatization Exercise. Manila; and ADB. 1997. Technical Assistance to the Independent State of Samoa for Implementation of the Privatization Strategy. Manila.

10 Agriculture Stores, Ltd., Samoa Forest Corporation, and Computer Services, Ltd. 11 Samoa Breweries, Ltd., Rothmans Tobacco (Samoa), Ltd., and BOC Gases, Ltd.

10

C. Program Costs

32. ADB supported the Program with a loan of SDR5,605,000 ($7.5 million equivalent). The loan proceeds were withdrawn to finance foreign currency expenditures for eligible procurement items specified in Schedule 3 of the Loan Agreement, including those incurred within 180 days of loan effectiveness. Counterpart funds generated from the loan proceeds were used to (i) finance the incremental budgetary cost of issuing CBS securities, (ii) a loan to DBS, and (iii) budgetary support (see Basic Data). The budgetary support was in lieu of reduced government revenue from foreign exchange levies, and reduced government income as a result of PTD corporatization. D. Disbursements

33. Loan proceeds were withdrawn in accordance with ADB’s standard disbursement procedures, and used exclusively to finance the full foreign exchange cost of items produced in and procured from ADB members, other than those on the negative list. The loan was disbursed in two tranches. The first tranche of $3.97 million equivalent was released in two parts: $1.00 million equivalent was disbursed on 19 June 1998, and a second release of $2.97 million equivalent was disbursed on 7 July 1998. The second tranche of $3.31 million equivalent was disbursed on 16 November 2001 (see Basic Data). E. Program Schedule

34. The planned program period was 3 years, but actual implementation took slightly longer, from June 1998 to November 2001. Release of the second tranche was delayed by about 5 months because compliance was delayed for one of the six tranche-release conditions related to divesture of eight SOEs. Consequently, the loan had to be extended twice. The loan account was closed on 16 November 2001. F. Implementation Arrangements

35. CBS and MOF were joint Executing Agencies for the Program, and provided crucial support throughout implementation. They coordinated the Program, administered loan proceeds, and provided the necessary supporting documents to ADB. Other government ministries and agencies involved in implementation included SOEMD, DBS, NPF, the attorney general’s office, the Department of Trade and Industry, and commercial banks. A financial sector program coordination committee, chaired by the minister of finance, was established to ensure close coordination and monitoring of program activities. Its members were the financial secretary, the governor of CBS, and the general managers of DBS and NPF. The committee never met formally because of heavy work commitments of senior officials involved, but maintained an open line of communication at all times. The TA consultants interacted effectively with government agency staff and provided the necessary technical and advisory support to facilitate program implementation. G. Conditions and Covenants

36. The Program consisted of a total of 62 policy actions. No specific policy actions were specified for the first tranche, but the release was made upon loan effectiveness on the basis of demonstrated improvements. Progress was substantial through (i) the Government’s reduced involvement in commercially oriented enterprises through privatization of SOEs, and (ii)

11

adoption of a medium-term strategy, which was described in the 1996–97 SES. The first SES called for (i) private sector-led economic growth based on the establishment of a new partnership between the Government and the private sector, (ii) continued reform of the public sector by reducing the size of the public service and improving its efficiency and accountability, (iii) continued divestment of SOEs, (iv) strengthening human resources through increased budgetary expenditures for health and education, (v) reforming the tax and tariff regime to enhance private sector competitiveness and provide a level playing field for business and investment, and (vi) enhancing the efficiency of financial resources allocation. Six actions were specified as conditions for second-tranche release, and 56 actions were to be implemented during the program period. Appendix 2 gives the status of compliance with policy actions. 37. Of the 62 policy actions, 43 related to the financial sector component and 19 to the SOE component. The financial sector component was well designed, but the practicality of privatizing eight named SOEs was ambitious, particularly because this was an important condition for release of the second tranche. The Government did not foresee the protracted legal processes involved in finalizing the sale of three of the earlier agreed eight SOEs by the revised compliance date of July 2001. Consequently the Government requested that ADB substitute three earlier agreed SOEs for three other SOEs that had been successfully privatized in 1999–2000. ADB reviewed this, and noted that the Government remained committed to privatizing the three agreed SOEs. ADB remains engaged in the sector. Accordingly, ADB approved the waiver of full compliance with the condition pertaining to divesture of eight SOEs, and agreed with the substitution of three earlier agreed SOEs by three successfully privatized SOEs. H. Related Technical Assistance

38. TA 2989 was intended to help the Government in management of the financial sector reform program by strengthening the institutional capacities of CBS, NPF, and DBS. Key components included establishment of a liquidity management framework for CBS; strengthening of CBS’s prudential framework; operational streamlining of CBS, NPF, and DBS; assistance to DBS in development of a strategy for domestic resource mobilization; and study tours and training workshops. 39. The TA provided 28 person-months of consulting services of various experts over a 2-year period. The TA was extended several times, and additional consulting time was allocated to cater to new requirements, including anti-money laundering and anti-terrorism financing, onsite inspections, prudential regulations for the non-banks, offshore investments by NPF, strategic and corporate planning exercises, design of software and hardware for new accounting systems, and management training and training needs assessment. The flexible and responsive nature of the TA enabled implementation of additional initiatives in financial sector reform over a 5-year period, resulting in some tangible outputs. Complementing the ADB-funded TA program were the Treasury Institutional Strengthening Project, funded by the Australian Agency for International Development, and IMF assistance. 40. The TA played a crucial role in fulfilling program policy actions. Four consulting firms and seven international consultants provided expert advice in specific program areas. Improvements were substantial in each component, and the TA was rated successful. The Technical Assistance Completion Report gives details.

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I. Consultant Recruitment and Procurement

41. No consultants were recruited through the Program, although ADB recruited seven individual consultants and four consulting firms under separate TAs in accordance with its Guidelines on the Use of Consultants. The loan proceeds were used to cover the foreign exchange costs of eligible items under the Program in accordance with provisions of Schedule 3 of the Loan Agreement. Based on Treasury certification, ADB’s loan review and program completion review missions confirmed that procurement was in accordance with procurement procedures stipulated in Schedule 4 of the Loan Agreement. J. Performance of Consultants, Contractors, and Suppliers

42. The consultants selected under the TA were of a high caliber with sound technical knowledge and strong working experience of the Pacific or similar environments. The training workshops and mentoring exercises were highly relevant and complemented the reform initiatives being implemented. The consultants performed in accordance with their terms of reference, except for one consultant who did not address one component. Nevertheless, CBS, NPF, and DBS appreciated the quality of the experts’ work and advice. The consultants’ reports were of satisfactory quality. The TA consultants’ overall performance was satisfactory, and contributed effectively to successful program implementation. K. Performance of the Borrower and the Executing Agency

43. The Government’s commitment and support throughout program implementation was commendable. Ownership was strong, with the Prime Minister leading the reform, supported by a strong team of officials from Treasury and key line agencies/ministries. Treasury, under the leadership of the present Prime Minister, was responsible for the consultative formulation of the SES and its dissemination, including the program component. The public information campaign also involved local financial institutions, which expressed satisfaction with the consultative process and approval of the financial sector reforms. 44. The TA played a critical role in implementing some of the demanding measures for financial sector reform like CBS supervision of anti-money laundering and anti-terrorism measures with the commercial banks, on-site inspection, prudential guidelines on disclosure requirements, supervision of non-banks under the Financial Institutions Act, and drafting of a new insurance bill. The line agencies involved in the TA benefited immensely from the reform experience, resulting in improved capacity building. But the privatization and corporatization component encountered protracted legal wranglings and making of decisions, which delayed the release of the second tranche. Initially, some SOEs resisted changes with reporting requirements that SOEMD imposed. But the SOEs have complied with the new regulations and procedures since enactment of the Public Bodies Performance and Accountability Act of 2001. Overall, the participating government institutions performed satisfactorily. L. Performance of the Asian Development Bank

45. The ADB Vanuatu Resident Mission was involved in the processing and initial administration of the Program before the Program was moved to the Pacific Operations Department in Manila on 1 March 1999. The Program was returned to the Vanuatu Mission for continued administration on 1 February 2001. The change in staffing assignment in no way affected program implementation. In fact, ADB played a leading role in development of Samoa’s financial sector through TA grants and the program loan. ADB consulted closely with the World

13

Bank, IMF, and regional institutions regarding Samoa’s financial sector reforms. ADB’s close supervision and timely advice contributed significantly to the successful achievement and realization of the program objectives. The Government commended the ADB Vanuatu Mission for its effective advice, supervision, and engagement of qualified and experienced consultants to help with the reform agenda. ADB’s overall performance was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

46. The Program was highly relevant, both at appraisal and completion. The rationale of the program loan and its content was consistent with ADB’s 1997 Pacific Strategy and Samoa’s strategy enunciated in its 1996–97 SES (para.5). The Pacific Strategy stated that ADB would (i) support the maintenance of stable macroeconomic environments and private sector development to replace the public sector as the main growth engine; (ii) provide efficient financial intermediation for private sector development and optimal resource allocation; and (iii) support expansion, supervision, and competition in the financial sector. The design and focus of the Program was relevant for building a sound, efficient, and market-responsive banking system in a transition economy, and retained relevance throughout program implementation. Political commitment to reform was strong; Parliament approved key legislation in a timely manner, after consulting widely with stakeholders. Although the privatization of eight SOEs was considered overly ambitious and optimistic, the political will to continue reforming this sector was commendable. Generally the Program’s reform actions were appropriate and generated the expected sustainable changes that benefited the economy and improved institutional development and capacity building. B. Efficacy in Achievement of Purpose

47. The Program is rated efficacious. The targeted average annual growth rate of 4% for the 5 years after 1998 was achieved. The highest growth rate, 7.5%, was in 2000. But recent global economic events like rising oil prices may slow overall growth. The Program included support for five components (para. 2). Under the first component, market-determined interest rates now prevail and liberalization of the financial sector has improved efficiency in resource allocation as evident from key financial indicators noted in paras. 7-18. A closer alignment of bank lending rates to the Central Bank bills rate enables CBS to exert good control over monetary management and reduce inflation. Under the second component, CBS was restructured to meet demands of a liberalized financial system, including a sharper focus on implementation of market-based policies. Under the third component, the Program developed and tested prudential guidelines and regulatory frameworks to underpin the transition to a market-oriented financial system, and compliance with best international banking practices, and anti-money laundering and anti-terrorism acts, despite delayed enactment of the insurance bill. Institutional development and capacity building of both the DBS and NPF to better manage their assets have been strengthened under component four; although only one institution has actively participated in the money and foreign exchange markets. NPF has invested at least 10% of its funds offshore with a secure fund broking company, and DBS’s funds are secured for lending only. Privatization and coproratization of SOEs under component five has been progressive but at a slower rate than anticipated because of the protracted legal processes involved and the limited market. This is despite the static returns at best and negative returns at worst, high and increasing levels of government investment and debt, decreasing dividends, and a lack of rigorous reporting and compliance with accounting standards.

14

C. Efficiency in Achievement of Outputs and Purpose

48. The Program is rated as efficient. The Program was catalyzed by the policy dialogue that ADB initiated, particularly during formulation of the sixth development bank loan, and coordination with the IMF, other development partners, and the Government. Communication was strong within the Government of the purposes and nature of economic reforms. This was supported by the first publication of the Government SES in 1996–97. The loan consideration process within ADB proceeded well. Loan appraisal took place 11–29 October 1997. Loan negotiations took 2 days, ending 16 February 1998. The Board approved the loan on 19 February 1998, and the Program was declared effective on1 June 1998. The first tranche was released upon effectivity and the second tranche, 5 months after the original due date. D. Preliminary Assessment of Sustainability

49. The sustainability of the Program is rated likely. A preliminary assessment of the sustainability of the legal, regulatory, and institutional framework for a market-based financial system created under the Program has been sound, despite delays in enactment of the Samoa International Financial Authority Bill, the Insurance Bill, and other related legislative amendments. Progress in building CBS capacities is evident. The new bill encompassing insurance industry operations will provide an effective regulatory instrument once it becomes law. But capacity and institutional building with DBS and NPF can potentially be distracted by some key investment decisions in support of government projects, which may impinge on the long-term financial sustainability of the institutions concerned. Operationalization of the Public Bodies Performance and Accountability Act is still ongoing, but is already impacting the management dynamics of SOE’s board operations in terms of changing mindsets and attitudes; heightening corporate skills, code of conduct, and ethics; and good governance practices. Overall, although the Government has achieved the objectives of the reform program, major impediments remain in growth of the financial sector and the consequent multiplying effect on increased private sector activities. Options for broadening Samoa’s reform agenda include accelerating the momentum of SOE reforms; reforming productive sectors such as agriculture, tourism, and trade; and early resolution to improvement of secured transactions, land reform, and regulatory frameworks for small businesses. E. Environmental, Sociocultural, and Other Impacts

50. The assessment of institutional and other impacts is considered moderate. The Program’s overall impact on the private sector, civil society, and nongovernment organizations has been positive. The increased accessibility of information and business choices available to the public is substantial. The multiplier effect of institutional reforms on some SOEs like the Public Works Department has resulted in the creation of new private sector companies, and heightened acceptance of the “user-pay” concept.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

51. The Program contributed significantly to expanding Samoa’s small economy, developing a sound and stable financial system, and creating an enabling and conducive environment for private sector activities. Some positive features of the Program were the introduction of indirect monetary instruments, liquidity management systems, forecasting techniques for monetary policy management, performance-based budgeting principles, and institutional and SOE

15

governance reform. These reforms must be sustained. Program achievements have helped lay a solid foundation for further reforms in the business, trade, and other productive sectors of the economy. The relevant TAs contributed effectively to the Program’s sustained momentum and practical working. Overall, the Program was successful,12 not only in helping achieve the Government’s commitment, but as a process in itself. B. Lessons Learned

52. The Program encouraged and instilled the value of stakeholder consultation, particularly with the private sector, and of the participation process to strengthen support for, and broad ownership of, reform initiatives. The consultation process gave stakeholders an opportunity to understand, monitor, and reassess their goals; and to adjust to conform with the Government’s reform program. The flow-on effect is seen in the effective contributions of the private sector and civil society to formulation of Samoa’s development strategy. Also, the Samoan Government was right in targeting first reforms at the financial sector, before embarking on wider initiatives for public sector reform. 53. Waivers of tranche conditions are not encouraged, unless for strong and valid reasons. But in this case, the policy condition to expressly identify eight SOEs for privatization during the design phase was too ambitious and optimistic, considering the process by past experiences. The Government had still not completely resolved the privatization and divestment of three of the eight SOEs by September 2004, when this report was written. 54. A strong governance framework was a program highlight. This is reflected in numerous laws drafted and pushed to enactment. But some significant legislation like the Companies Act 2000 and its amendments have not yet been announced and implemented. Schedules to the Public Bodies Performance and Accountability Act 2001 are in place, and two more are being drafted. In other cases, further amendments for effective implementation have been, or are being made. These shortcomings imply that some legislation was passed with little scrutiny or reflection. Once bills are completed, the next crucial phase is a learning exercise in educating users about workings of relevant acts. C. Recommendations

1. Program Related

55. Future Monitoring. The Government should ensure that the condition for privatization of the remaining SOEs, originally identified under the Program, is met. Similarly, efforts should be increased to ensure fulfillment of the six policy conditions that attracted a partially completed compliance rating. 56. Finalization of the draft schedules to the important Public Bodies Performance and Accountability Act 2001 should be accelerated, to formalize its implementation. Similarly, the Government should prioritize amendments to the Companies Act 2000. 57. Further Action or Follow-Up. Samoa is at a crossroad. Despite the improving macroeconomic stability, a pervasive and relentless reform mindset must be entrenched for higher sustained growth. Samoa must transform such sectors as agriculture, tourism, and trade

12 This program completion report is part of a sample of such reports independently reviewed by the Operations

Evaluation Department. This review validates the methodology used and the rating given.

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to competitive and efficient drivers of growth, much like it has begun in the financial sector. Such an approach is essential for consolidation, if financial gains are to be maximized and sustained 58. Timing of the Program Performance Audit Report. To further assess the impact of the reforms on the financial sector and on the economy, a program performance audit review is proposed in September 2005, assuming the two important pieces of legislation noted in para. 56 are completed and implemented. The program performance report should judge the impact of the Program in the context of the overall process of financial and economic reforms.

2. General

59. In the longer term, Samoa will require future TA in promotion of awareness and in understanding the workings of important legislation like the Companies Act and the Public Bodies Performance and Accountability Act. Capacity building through continuous upskilling and mentoring will be crucial.

CHRONOLOGY OF MAJOR EVENTS Appendix 1 17

Date Event

May 1996 Reconnaissance Mission fielded to Samoa

19 Jul 1997 Fact-Finding Mission begins 1 Aug 1997 Fact-Finding Mission ends 1 Oct 1997 Management Review Meeting

11 Oct 1997 Appraisal Mission begins 29 Oct 1997 Appraisal Mission ends 17 Dec 1997 Staff Review Committee Meeting 15 Jan 1998 Loan negotiations begin 16 Jan 1998 Loan negotiations end 27 Jan 1998 Board document circulated 19 Feb 1998 Loan program approved 24 Mar 1998 Loan Agreement signed 30 Mar 1998 Inception Mission 1 Jun 1998 Loan declared effective

19 Jun 1998 First release of first tranche 7 Jul 1998 Second release of first tranche

13–23 Oct 1998 First loan and technical assistance (TA) review 1 Mar 1999 Program transferred to Pacific Operations Manila for administration

1–4 Nov 1999 Second review for the program and TA 14 Jan 2000 Government sent letter to Director, Pacific Operations, requesting to

substitute three privatized state-owned enterprises (SOEs) for the three original SOEs

5 Apr 2000 Government sent letter to Asian Development Bank (ADB) seeking amendments to loan conditions for release of second tranche

7 Apr 2000 ADB responded to Government’s letter of 5 April 2000 31 Oct 2000 Government requested first extension to loan closing date 10 Nov 2000 ADB approved request for extension 1 Feb 2001 Program transferred to Vanuatu Office for continued administration

26 Mar 2001 Country programing mission fielded 25–29 Jun 2001 Third review for the Program and TA

18 Jul 2001 Minister of Finance sent letter to ADB advising compliance status of second tranche release conditions

20 Jul 2001 Interdepartmental circulation of draft progress report 28 Sep 2001 Receipt of signed memorandum of agreement between Central Bank of

Samoa and Treasury 25 Oct 2001 ADB President approved release of second tranche 15 Nov 2001 ADB Board approved, on a no objection basis, release of second

tranche 16 Nov 2001 Final disbursement made and program account closed 17 Aug 2004 Program Completion Review Mission

ADB Asian Development Bank SOE state-owned enterprise TA technical assistance Source: Program and TA files

DEVELOPMENT POLICY MATRIX 18 Appendix 2

Samoa: Financial Sector Program Loan

Policy Objectives and Reform Measures under the Program

Status in August 2001: Asian Development Bank

Progress Report


Program Completion Report

1. Promotion and development of financial markets 1.1 Develop systems and procedures for the

auctioning of government securities, and conduct public information campaign to prepare financial institutions and the public for introduction of the auctions. 1

Completed. In the last quarter of 1997, the Central Bank of Samoa (CBS) prepared a prospectus and operating guidelines for the auctioning of securities. CBS also conducted a training program comprising (i) training for CBS staff; and (ii) seminars for banks, non-bank financial institutions, and the Treasury on auction procedures. In January 1998, CBS conducted a public information campaign that consisted of (i) a press release from the minister of finance, (ii) a television interview with the governor of CBS. (iii) newspaper advertisements on liberalization and commencement of auctions, and (iv) pamphlets for the public on financial sector liberalization.

Completed.

1.2 Secure agreement between CBS and Treasury

on whether CBS will fund the debt servicing costs associated with the issue of CBS bills, or if costs will be explicitly borne by the budget.

Completed. By August 2001 Treasury had reimbursed CBS for the interest cost on the bills, in part through Program funds. Treasury will continue to finance interest costs on CBS bills for 2 years, after which the requirement that CBS make direct transfers from balance sheet reserves to Treasury will cease. At the end of 5 years, Treasury will transfer its foreign reserves to CBS. Details of the final agreement were formalized in a Memorandum of Agreement (MOA), which the Cabinet approved on 31 August 2001. The cost of servicing CBS bills was ST1.9 million in 2000 and ST1.0 million for the first half of 2001.

Completed. Treasury has reimbursed CBS for the interest cost on the bills, partly through Program funds. In August 2001, a memorandum of understanding was signed between CBS and Treasury that focuses on the need to further strengthen the balance sheet of the Central Bank. Treasury will continue to pay the cost of Central Bank Securities until FY 2005–06 and for Central Bank budget transfers, to be phased out starting in FY2005–06. From 1998 to the end of June 2004, total interest cost reimbursed to CBS by Treasury was ST4.19 million.

1 Actions taken include preparation of prospectus for CBS bills and operational guidelines for conducting auctions, establishing register of eligible bidders, preparation of bidding forms and

tender boxes, determining allotment and settlement procedures, deciding on audit procedures, orienting financial institutions, publicly announcing the commencement date, and preparing media strategy.

DEVELOPMENT POLICY MATRIX



Progress Report



1.3 Begin public auctioning of transferable,

negotiable, and discountable CBS securities on at least a bimonthly basis.

1.4 Discontinue the practice of defining statutory

reserve deposit (SRD) as a percentage of liquid asset ratio (LAR), and redefine SRD as a direct proportion of bank liabilities. The SRD ratio will initially be set at an effective level prevailing at the time the definition is changed. CBS bills will not qualify as an eligible asset for SRD, but will be an eligible asset for LAR.

1.5 Announce a phase-out formula for LAR, to take

place over 24 months.

Completed. The first auction was held on 1 Jun 98. Auctions are usually held every 2 weeks, but are sometimes held weekly. Only 91-day bills were offered until August 1998; since September 1998 both 91-and 182-day maturities have been offered. The rationale for introducing 182-day bills was to encourage greater participation from non-banks and tie up excess liquidity of banks for a longer period; 56-day bills have been offered since the beginning of 2001; 28-day bills were offered in March 2001, but the yield was too high to warrant continuing the maturity. Bills are being allocated according to a discriminatory price format, but 10% of any offering is reserved for noncompetitive bids. Securities can be freely traded at negotiated prices, and can be discounted at CBS at any time after issue, but are subject to a rediscount penalty of 100 basis points above yield at issue or yield at last auction, whichever is greater. A high effective rediscount penalty was set intentionally to encourage interbank transactions and discourage recourse to the CBS rediscount facility. Banks dominate the bidding; non-banks have little interest; and other business and the public have almost no interest. Completed. SRD was established as an instrument in its own right and separated from LAR in January 1998. SRD was redefined as a direct proportion of bank deposits and was set at 5%, which was slightly below the effective 6% prevailing before separation of LAR and SRD. CBS bills are not an eligible asset for SRD. SRD has remained at 5% of bank deposits from February 1998 until the present. Completed. LAR was reduced from 2% to 20% of bank deposits in January 1998 when it was separated from SRD, and has subsequently

Completed. Completed. Completed.

Appendix 2 19




Progress Report



1.6 Remove interest rate controls imposed by CBS on the commercial banking sector.

1.7 Implement gradual relaxation of credit growth

ceilings consistent with the needs of monetary policy, and complete removal of credit growth ceilings by the end of the program period.

1.8 Adopt a liquidity management framework that

will form the basis for determining the size of auctions that CBS bills. Liquidity projections will initially have a 2-week horizon and will incorporate forecasts of government receipts and payments that Treasury will supply.

1.9 Develop a monitoring and information system

for monetary aggregates such as liquidity,

been reduced by 1%/month after January 1998.LAR was completely phased out by September 1999. Completed. CBS interest controls on commercial banks were removed in January 1998. Before this the maximum rate on loans and overdrafts was 12%, the minimum savings rate was 3%, and the minimum rates on term deposits ranged from 4.5 to 7.5% for terms of 1 month to 2 years. Positive real deposit rates resulted and lending rates increased. Lending rates also increased on account of banks adopting risk-based procedures for credit assessment. Nominal interest rates have fallen with lower inflation in 1999 and 2000. Completed. Credit ceilings on the growth of commercial banks were removed in January 1998. Because it will take time before CBS securities are actively traded in sufficient amounts to influence financial sector liquidity, CBS has retained the legislative ability under the CBS Act to re-impose credit ceilings should this be necessary for monetary control. This has not been used and CBS has effectively used the instruments that are being developed to decrease liquidity. Completed. Work related to establishment of a liquidity management system at CBS began in January 1998, but could not be maintained. Completed. CBS reviewed and amended its monetary information system in late 1997,

Completed. Completed. Completed. Work related to the establishment of a CBS liquidity management system began in January 1998, but could not be maintained. CBS has now developed its own liquidity management forecasting system, which is also used to determine the size of auctions. Forecasts are prepared on a daily basis, up to 2 weeks ahead. The system forecasts transactions that impact on bank’s exchange settlement accounts at CBS. Completed.

20 Appendix 2




Progress Report



foreign exchange reserve levels, credit growth, inflation, and interest rates consistent with the needs of formulating monetary policy.

1.10 Increase the frequency of reporting

requirements by financial institutions for monetary aggregates such as credit growth, liquidity, and foreign reserves. Also, increase the reporting of interest rates from quarterly to monthly for non-banks and from monthly to weekly for banks.

1.11 Remove foreign exchange levy 1.12 Terminate CBS’s Export Finance Facility. 1.13 Allow commercial banks to establish a forward

foreign exchange market. 1.14 Review the ceiling on commercial banks’

foreign exchange holdings and implications for CBS profitability. Subject to the review, develop a plan for phased reduction of the ceilings.

consistent with the needs of a liberalized financial sector. Completed. All commercial banks now provide weekly balance sheet information to CBS, which has rigidly enforced this reporting requirement since January 1998. Before this, banks were to supply weekly information, but CBS did not enforce the requirement. The National Provide Fund (NPF) and the Development Bank of Samoa (DBS) have provided monthly balance sheet information since January 1998, but CBS has not requested other non-bank financial institutions to provide monthly, rather than quarterly, reports because those institutions are relatively small. Completed. The foreign exchange levy of 1% was removed in January 1999. Completed. The Export Finance Facility, which provided funds for exporters at subsidized rates, was discontinued in December 1997. Completed. Since June 1998, banks have been permitted to offer forward foreign exchange contracts. They must report their activities to CBS; this is monitored under the net open position (NOP) by CBS. Banks report increased customer awareness of the products and expect demand for the products to slowly increase through 2001. Completed. Ceilings on foreign exchange holdings of commercial banks was abolished in September 1999, and replaced by NOP. NOP is a prudential regulation covering a bank’s management of its foreign exchange exposure. Also, the Revised Exchange Control Regulations, which became effective in August

Completed. All commercial banks now provide weekly balance sheet information to CBS. This reporting requirement has been rigidly enforced by CBS since January 1998. Before this, banks were supposed to supply weekly information, but CBS did not enforce the requirement. NPF and DBS have provided monthly balance sheet information since January 1998. This was formalized after the amendment to the Financial Institutions Act of 2001, enabling CBS to supervise the non-banks. Completed. Completed. Completed. Completed.

Appendix 2 21




Progress Report



1.15 Assess the adequacy of the clearing system to

handle future transaction volumes and the need for a book-entry system to give impetus to secondary market trading in CBS bills.

2. Strengthening of CBS, enhancing its operational autonomy, and underpinning its credibility

2.1 Formalize an inflation target range as a primary

monetary policy target, and implement procedures to communicate such targets to the public; report progress in meeting these targets; and publicize the monetary, credit, and exchange conditions that are consistent with these targets.

1999, allow parties to operate as money changers, contingent on CBS approval. Completed. The clearing system will be able to cope with the volume of daily transactions being settled across exchange settlement accounts as CBS. The use of checks is low in Samoa, and demand for direct single transaction settlement is also low. The situation is similar for CBS bills, which are issued as certificates. There has been no secondary market trading by September 2004. The absence of a book entry system is not likely to be a significant impediment to development of secondary markets in the next few years because the trading volume is expected to remain low. Continuing compliance. CBS has not adopted an inflation target because such targets are specified in inflation-targeting monetary policy regimes, and as originally conceived by the Program. CBS considers such a regime unsuitable for Samoa because, for example, of supply-side influences. Nevertheless, the government policy is geared to low inflation, and the Government has stated, for example in the 2001–02 budget address, that its goal is for less than 3% inflation. This document is supported by the Government’s public Statement of Economic Strategy. CBS publishes a quarterly bulletin and Treasury published a quarterly economic review. These documents review economic and financial conditions. CBS make assessments on the likelihood of achieving inflation and foreign reserve objectives through its monetary programming framework, which integrates forecasts of real gross domestic product (GDP), balance of payments, fiscal position, and credit growth.

Completed. Completed. CBS has not strictly adopted inflation targets as these targets were formulated in inflation-targeting monetary policy regimes. This is because CBS considers such a regime unsuitable for Samoa because of the dominant supply-side factors. But the Macroeconomic Policy Coordinating Committee sets targets for economic growth, inflation, and monetary growth for the next 2 years, which are published in the minister’s budget address and supported by the Government’s statement of economic strategy. CBS and the Treasury publish quarterly economic reviews that review economic and financial conditions, but include no assessment of whether current policy settings are consistent with attaining inflation or foreign reserves targets. But CBS makes these assessments through its monetary programing framework, which integrates forecasts of real GDP, monetary aggregates, and balance of payments.

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2.2 Introduce a computerized accounting system in CBS.

2.3 Extend public sector management reform (such

as performance- and output-based budgeting and preparation of a corporate plan) to CBS with the objective of providing CBS’s services in a cost-effective manner.

2.4 Secure an agreement, satisfactory to ADB,

between CBS and Treasury to provide a more secure income stream to CBS. Options to be considered will include structuring the CBS balance sheet or linking CBS funding more explicitly to the budget. Merits of centralizing official reserves with CBS to be assessed in the context of this agreement.

Completed. The Reserve Bank of New Zealand helped CBS develop specifications for a computerized accounting system. Tenders were held for purchase of a system, which was installed in 2000 and is now fully operational. Completed. The first CBS corporate plan covering 2001–02 has been published. Consultants fielded under TA 2989-SAM assisted in this work. The document discusses Asian Development Bank’s (ADB) functions, and performance indicators, including key initiatives for 2001–02. The document includes a 2-yearly review of the corporate planning process, and a section on the ethics and values that management wants to characterize CBS, including greater transparency, efficient resource use, and higher standards of financial reporting. No external expenditure constraints have been imposed on CBS. However, all areas of CBS will be subject to budgets and will bid for budget allocations to the bank’s newly established Budget Review Team, which, in turn, will make recommendations to the governor. The corporate plan states that CBS will develop benchmarking techniques to improve operational efficiency. Completed. An MOA was signed on 31 August 2001 between the financial secretary and the CBS governor on mechanics of a long-term arrangement for CBS. Beginning in August 2001, Treasury will continue to finance the interest costs on CBS bills for 2 years, during which the CBS obligation for direct transfers from balance sheet reserves to the Treasury will cease. After 3 years, Treasury will transfer its foreign reserves to CBS. MOA will provide the basis for continuing cooperation between Treasury and CBS. The broad principles underlying MOA will be the

Completed. The Bank TA and technical assistance from the Reserve Bank of New Zealand helped CBS develop specifications for a computerized accounting system. An accounting software system, licensed from an Australian software company, was installed in 2000. Completed. After the first CBS corporate plan for 2001–02, the plan for 2003–05 was released in June 2003. Consultants fielded under TA 2989-SAM assisted in this work. The current plan discusses ADB’s functions, including key initiatives for 2003–05, as well as performance indicators. The document also enshrines a regular 3-year review into the corporate planning process and includes a section on the ethics and values that management wants to characterize CBS. Greater transparency, efficiency in the use of resources, and high standards of financial reporting are highlighted. No external expenditure constraint has been imposed on CBS, but all areas of the Central Bank will be subject to budget consideration and scrutiny by its budget review committee, which makes recommendations to the governor. Ongoing: The required MOA between the financial secretary and the governor was signed in August 2001. This MOU provides a time frame to implement agreed policy actions to strengthen the balance sheet of the Central Bank. These policy actions will require the Central Bank to, among other things, bear the interest costs of CBS securities (starting in FY2004–05), service payments of the Governments external debt, centralize foreign reserves from Treasury, and retain budgetary transfers of reserves that normally go to Treasury. The latter necessitates legislative

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2.5 Separate the administration of the Offshore

Financial Center from CBS. 2.6 Assess the adequacy of staffing levels in the

CBS Supervision Department to undertake existing functions and to implement on-site inspections. Also, assess the need to recruit additional staff.

3. Underpin the transition to a market-oriented financial system by strengthening the prudential and regulatory framework. 3.1 Enact the Financial Institutions Act (FIA).

ability of CBS to demonstrate financial strength, independent of Treasury, through its own balance sheet, and for CBS to achieve its policy objectives in a least-cost manner. Consultants fielded under TA 2989-SAM have helped CBS and Treasury in this work. Partially completed. The separation will be affected by passing of the Samoa Financial Services Bill. The bill has been prepared and, although still a priority, has been delayed because of the urgency to ensure that the Offshore Financial Center complies with more stringent international standards. The Government considers any delay in meeting these standards more detrimental than delaying separation of the Offshore Center from CBS. Completed. The current structure of the Financial Institutions Department is considered satisfactory for off-site supervision and strategic on-site examination. Some staff recruitment is consistent with vacancy levels and tasks being undertaken. On-site examination of banks has begun, in conjunction with external audits of banks. Completed. Parliament passed the FIA, prepared with ADB assistance under TA 1499-SAM, in March 1996. This legislation strengthened licensing, prudential, and other regulatory matters relating to commercial banks.

amendments to Central Bank legislation that will be done in due course. The merit of centralizing reserves with the Central Bank is the fact that the bank is in a better position and has better knowledge of the foreign exchange investment markets internationally, which can earn higher and safer returns by placing funds offshore. This is an income stream that will help strengthen the bank’s balance sheet. Second, centralizing reserves will provide the Central Bank with up-to-date information in planning and forecasting of monetary aggregates. Partially completed. The Samoa International Finance Authority Bill will separate the Offshore Finance Centre from the Central Bank and establish it as a separate statutory body. The Bill awaits parliamentary approval, hopefully at the next parliament meeting before the end of 2004. Completed. The current structure of the Financial Institutions Department is considered satisfactory for off-site supervision and strategic on-site examination. Some staff recruitment is consistent with vacancy levels and the tasks undertaken. On-site examination of banks started in May 2003 and was implemented in conjunction with the work of the external bank auditors. Completed. The Financial Institution Act, which was prepared with ADB assistance under TA No. 1499-SAM, was passed by Parliament in March 1996. This legislation strengthened licensing, and prudential and other regulatory matters relating to commercial banks. A 2001 amendment allows the

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3.2 Implement a CBS on-site inspection system for

banking institutions, and strengthen CBS’s on-site inspection capabilities.

3.3 Implement prudential statements that specify a

minimum capital adequacy ratio that is patterned after the Bank of international Settlement capital measurement framework.

3.4 Implement prudential statements that specify

bank limits to single borrowers or related groups of borrowers.

3.5 Implement prudential statements on the

management of day-to- day liquidity needs and unexpected liquidity fluctuations.

Completed. CBS is implementing an on-site inspection system for banking institutions. A manual for on-site examination has been provided to supplement other information on supervisory procedures and practices. Tripartite discussions among CBS, banks, and external auditors on performance and prudential matters will be held annually. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM and were issued in March 1996. Further assistance was provided under TA 2989-SAM. Banks are required to meet a 15% capital adequacy standard. The banks are complying with the statement, and are being supervised closely. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. A 25% limit is in place. Banks are complying with the statement and are supervised closely. CBS has drafted an amendment to the policy to allow banks to exceed the limit, provided they have a guarantee from a parent bank. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring bank compliance with these

Central Bank to extend its supervisory regime to the non-bank financial institutions such as the NPF, DBS, and insurance companies. Completed. The on-site inspection system for banking institutions, implemented by CBS in April 2003, was completed. A manual for on-site examinations was provided to supplement other information on supervisory procedures and practices. Annual tripartite discussions among CBS, banks, and external auditors on performance and prudential matters will be held. Completed and ongoing. These prudential statements were prepared with ADB technical assistance under TA 1499-SAM, and were issued in March 1996. Further assistance was provided under TA 2989-SAM. Banks are required to meet a 15% capital adequacy standard. Banks are complying with the prudential requirements, and are being closely supervised. Completed and ongoing. These prudential statements with ADB technical assistance under TA 1499-SAM were issued in March 1996. Further assistance was provided under TA 2989-SAM. A single borrower’s limit of 25% is in place. Banks are complying with the statement, and are closely supervised. An amendment to the Financial Institutions Act 1996 allows the banks to exceed the single borrower’s limit, provided they have a guarantee from a parent bank. Completed and ongoing. These prudential statements were prepared with ADB technical assistance under TA 1499-SAM, and were issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring

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3.6 Implement prudential statements that prescribe

limits on “connected exposures” (i.e. bank directors, board members, shareholders, bank employees and their related interests).

3.7 Implement prudential statements that underscore

the importance of a portfolio review system as a basis for determining asset quality and adequate level of reserves, and underscore the accounting treatment of accrued but uncollected interest on nonperforming loans.

3.8 Implement prudential statements that ensure that

banks maintain adequate accounting and internal control systems.

3.9 Implement procedures and guidelines on the

issuing of banking licenses for CBS. 3.10 Implement a revised reporting system for the

quarterly review of the financial conditions of banks that includes information on capital adequacy, liquidity, profitability, lending, and

prudential guidelines. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring bank compliance with these prudential guidelines. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring bank compliance with these prudential guidelines, and plans to increase the general provision requirement from 1% to 2% under a prudential statement concerned with loss provisions. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring bank compliance with these prudential guidelines. Continuing compliance. These prudential statements were prepared during ADB TA No. 1499-SAM, and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring bank compliance with these prudential guidelines, and the arrangements are being reviewed continuously. Continuing compliance. These prudential statements were prepared during ADB TA 1499-SAM and issued in March 1996. Further assistance was provided under TA 2989-SAM.

compliance with these prudential guidelines by the banks. The current policy replaced the original arrangements under the liquid asset requirement. Completed and ongoing. CBS is monitoring compliance with these prudential guidelines by the banks. Completed and ongoing. CBS is monitoring compliance with these prudential guidelines by the banks. All banks have now maintained at least 3% in their general loss provision, above the 2% requirement. Completed and ongoing. These prudential statements were prepared with ADB technical assistance under TA No. 1499-SAM and issued in March 1996. Further assistance was provided under TA 2989-SAM. CBS is monitoring compliance with these prudential guidelines by the banks. Completed and ongoing. CBS is monitoring compliance with these prudential guidelines by the banks. Completed and ongoing. Assessments are reviewed by the governor, and by the board.

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deposit operations. 3.11 Introduce a policy on disclosure requirements

for banks and non-banks. 3.12 Introduce prudential statement on management

of foreign exchange exposures. 3.13 Implement the revised prudential statement on

provisioning that calls for the increase in provisioning of loan loss classification from 1% to 2%

Data from the prudential guidelines are important inputs for the quarterly review of banks’ performance. Assessments are reviewed by the governor and by the board. Continuing compliance. CBS intends to develop a full disclosure regime similar to that used by the Reserve Bank of New Zealand. Some elements are in place. TA work in this area is ongoing. Banks are required to publish audited annual accounts within 3 months of the end of the financial year. This requirement is expected to be extended to quarterly or half-yearly accounts. CBS also regularly publishes, in newspapers, a comprehensive statement of interest rates, fees, and charges for each account and service type of each bank. Continuing compliance. The prudential statement has been finalized with assistance from consultants fielded under TA 2989-SAM. Banks are reporting details on a weekly basis. Substantially completed. CBS has prepared a prudential statement on provisioning that calls for banks to maintain a general provision of at least 1% in addition to the specific provisions required against classified loans. CBS will raise the general provision requirement to 2%, and has informed the banks. The delay in revising the standard for the general provision is not a concern, because each bank now comfortably exceeds this requirement.

Complied with. CBS continues to consult and discuss with relevant financial institutions how best to implement information disclosure. CBS continues to publish relevant information for bank customers and the public. The banks, on the other hand, have published changes in their interest rates, fees, and charge structures from time to time. CBS shall continue to monitor and review current trends, considering the introduction of more appropriate and effective ways for banks to disclose information in the future. Complied with. Procedures and guidelines are in place for the active management and investment of foreign exchange. An investment committee of senior managers, chaired by the governor, overseas the strategies for managing and investing foreign exchange. Completed. The general provision requirement for loan loss has been raised to 2%, and all banks maintain a ratio of at least 3%.

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3.14 Introduce anti-money laundering legislation. 3.15 Amend the FIA of 1996 to provide prudential

supervision of non-bank financial institutions, including NPF and DBS. These prudential guidelines will cover portfolio quality, provisions for arrears, single lender exposure, connected lending, ineligibility of directors to borrow from these institutions (except where the Government guarantees such borrowings), etc.

4. Strengthening of NPF and DBS 4.1 Undertake an actuarial review for NPF consistent

with the requirements of the NPF Act.

Completed. The Money Laundering Prevention Act was passed in 2000. CBS has drafted a detailed set of guidance notes for the financial sector to support the application of the legislation. CBS plans to issue the notes in July 2001, as regulations to support the act are issued. The legislation surveillance bridges the domestic and offshore jurisdictions. Domestic financial institutions are obligated to know their customers, keep records on any transaction higher than ST30,000, and report any suspicious transactions to CBS. The legislation overrides secrecy provisions in any other legislation, including provisions related to the International Companies Office. The International Companies Office is also taking steps to improve surveillance over institutions directly under its jurisdiction through amendments to the Offshore Banking Act, which have been drafted, and planned amendments to the Offshore Trustees Act, with the assistance of the Commonwealth Fund for Technical Cooperation. This assistance began in July 2001. Completed. The FIA was amended in 2001 to provide for CBS supervision of non-banks, which are defined as any person or body (whether incorporated or unincorporated) that provides financial services to the public. The definition of financial services is wide-ranging: “any service that consists of providing a financial product and includes, but is not limited to, securities, credit, credit contracts, insurance, superannuation, investments, investment advice, control of investments, and management of investments.” Completed. The actuarial review is complete. The NPF Act stipulates that an actuarial review be conducted at least every 5 years. This was the first review since 1990, although the Pension

Completed. The Money Laundering Prevention Act was passed in 2000, and the relevant regulations and detailed “Guidance Notes for the Financial Sector” to support implementation of the legislation are in effect. Because of assessments of the Asia Pacific Group on Anti Money Laundering and the IMF, and also in view of recent international developments, legislative amendments have been drafted and await Parliamentary approval. Completed. The Financial Institutions Act 1996 has been amended by the Financial Institutions Amendment Act 2001, which sets the prudential supervisory powers of the Central Bank over the operations of the non-bank financial institutions. Selected non-banks have now been brought under the Bank’s supervisory umbrella: the NPF, DBS, and the four large insurance companies. Also, statements have been finalized for these institutions for prudential governance of their operations. Completed.

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4.2 Amend the NPF Act to unequivocally state that

the NPF management must at all times be in the interest of its members.

4.3 Amend the NPF Act to allow NPF to diversify its

asset allocation, including provision for offshore investments, subject to prudent risk management practices and oversight by the NPF board, and consistency with the members’ interests.

Reserve Account was not set up until 1993. The conclusions were that, to meet pension liabilities, ST3,944,000 should be transferred from the General Reserve Account to the Pension Reserve Account on 1 January 1999 to meet pension liabilities. This transfer would not have been necessary if interest from investment earnings had been credited to the Pension Reserve Account since its inception, and should not be needed in the future, provided interest is credited annually to the account. The review also suggested that directors consider adopting pension conversion factors that vary with the age of the retiree, as well as making some specific advance provisions so benefits can increase over time. Originally, the initial review was intended to be followed by an assessment of the existing asset allocation of the investments of NPF and the implications of changes in the NPF Act, allowing members to totally commute pensions at age 55, and the Parliamentary Pension Fund decision to withdraw accounts from NPF and to manage its funds independently. Results of the first review showed no need for further assessments. Completed. An amendment stating that the members’ interests should be paramount in NPF administration was approved by the NPF board in July 1998. The amendment was introduced into Parliament and passed into law in December 1998. Completed. In October 1998, the NPF board adopted a policy paper establishing the basis for a strategic investment framework for NPF’s future asset allocation. The NPF Act was amended to allow as much as 10% of NPF assets to be invested offshore. The amendment passed into law in December 1998. The issue of

Completed. Completed. A policy paper setting out the basis for a strategic investment framework for the future asset allocation of the fund was agreed by the NPF board in October 1998. The NPF Act has also been amended to allow for as much as 10% of the assets of the fund to be invested offshore. It made its first offshore placement in August 2003 for

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4.4 Implement an NPF interest rate policy that is

market-based and reflects the interests of NPF’s members.

4.5 Undertake an institutional assessment of NPF,

including the preparation of an NPF corporate plan that will streamline NPF operations.

the balance between ministerial direction of the board on this issue, and board accountability for its policy implementation, was also resolved by amending the act. Provisions requiring ministerial approval to invest funds outside of Samoa, except at call or for a term not exceeding 1 year, and on the maximum amount that could be invested by the board outside Samoa, were repealed. Completed. In October 1998, the NPF board approved a policy paper on interest rate structure. The paper was reviewed by the credit specialist and funds management specialist, who considered refinements in risk weighting that should be applied to different customer categories. An amended paper was presented and agreed to by the NPF board at its November meeting. Since then, further adjustments have been made to NPF’s interest rate policy to reflect market conditions. The last review was in April 2001. Completed. The corporate plan prepared in 1998 focused on restructuring the organization and establishing four divisions. The plan included few, if any, measurable indicators, and lacked financial forecasts or budgets. Since then management plans have been developed for each division and functional area. Similarly, a set of policies has also been prepared for each area, which the board approved at a special meeting in December 1999. A financial model of the fund has also been developed that can be used to develop financial forecasts and budgets. As part of the improvement in financial reporting, the fund now reports on an accrual accounting basis, with monthly financial reports. Management is also aware of the need to

ST2.0 million. Completed. Completed.

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4.6 Develop a DBS interest rate policy that is market-

based and reflects costs of funds, risks, and interest rates charged by commercial banks. Discontinue an interest rate policy based on sectoral considerations.

4.7 Prepare a detailed feasibility study for domestic

resource mobilization by DBS, including preparation of an assessment for DBS to issue

operate on a commercial basis, emphasizing profitability. Completed. The DBS board approved an initial policy paper in November 1997. The policy has been progressively implemented, starting with new borrowers, since January 1998. Borrowers’ terms have been amended progressively since January 1999, and all borrowers are now subject to market interest rate policy. Under the policy, DBS applies differential interest rates to borrowers based on credit, project, and security risk. The previous sectoral-based policy has been discontinued (but sectoral considerations will impact the determination of project risk). The exception is small loans, which have been subjected to a flat interest rate regime because of their high administration costs and risks (especially for agricultural loans), and likely customer resistance and political sensitivity to further rate increases. The policy was reviewed in August 2000. Consequent changes included weighting credit, project, and security risk when determining the lending rate, and redefining the base rate as a minimum rate, in line with other banks. The flat rate for small loans was continued. DBS has re-specified its base rate as a minimum rate. Lending rates currently range from10.5 to 13.5%, similar to those offered by commercial banks. The market interest rate policy has been supported by the introduction of an improved loan classification system and greater efforts to bring problem loans to a conclusion. Completed. A study was completed and a draft discussed with the financial secretary and chair of the DBS board, as well as the governor of

Completed. • Completed.

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its own government-guaranteed securities that are transferable and negotiable.

5. Privatization and Corporatization of Public Enterprises and Utilities 5.1 Announce publicly the Government’s

privatization/corporatization plans.

CBS. The main issues identified in the paper were • willingness of the Government to provide a

guarantee (and the impracticality of attempting to issue securities without it);

• asset/liability matching, bearing in mind the long-term nature of DBS lending;

• public acceptance of securities issued by a high-risk lender, despite the government guarantee. (Acceptance of the securities could be enhanced by CBS acceptance of securities at its discount window.);

• the cost of administration for relatively small issue sizes;

• the need to develop a secondary market; and

• the level of savings available to invest in any issue.

Completed. The Government announced its privatization/corporatization plans in the June 1996 Statement of Economic Strategy and 1996–97 Budget Statement. They were later confirmed in the Statement of Economic Strategy 1998–99, which stipulates the corporatization and restructuring of Posts and Telecommunications, Ltd. (PTD) during the 1998–99 financial year, privatization of eight state-owned enterprises (SOEs), and reviewing the legal framework that governs the monitoring of SOEs. (These supporting comments occur in the 1998–99 budget statement: “Government will continue with the program to corporatize, and where appropriate, privatize government business enterprises, to ensure that maximum efficiencies are achieved in the delivery of services throughout the country.” The 1999–00 and 2000–01 statements of economic strategy and budget continued these

Completed. The Government announced its privatization/corporatization plans in the June 1996 Statement of Economic Strategy and 1996–97 Budget Statement. They were later confirmed in the Statement of Economic Strategy 1998–99, which stipulates the corporatization and restructuring of PTD within the framework that governs the monitoring of SOEs. (These supporting comments are in the 1998–99 Budget Statement: “Government will continue with the program to corporatize, and where appropriate privatize government business enterprises, to ensure that maximum efficiencies are achieved in the delivery of services throughout the country.”) The 199–00 and 2000–01 Statements of Economic Strategy and Budget Statements continued these themes. The Government has continued to do this through: • the 2002–04 SES. • press announcements in September 2003 regarding the policy for SOE ownership, performance, and divestment and an announcement to explain a detailed plan on

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5.2 Dispose of all Government equity in the Bank of

Western Samoa. 5.3 Review the Government’s privatization

/corporatization strategy, which was prepared in 1995.

5.4 Establish a ministerial privatization committee that will meet at least quarterly.

economic strategy and budget continued these themes. Completed. In 1994, the Government sold all of its equity in the Bank of Western Samoa. Completed. Officials and the full TA team reviewed the overall strategy in late 1997, and discussions continued in 1998. These were reflected in an updated privatization paper prepared for the Privatization/Corporatization Committee (see 5.4) in mid August 1998. This paper proposed specific actions (see 5.14), a valuation methodology, and an outlined comprehensive approach to future privatization. The Cabinet agreed to some specific privatization proposals (Samoa Breweries, Ltd. and BOC Gases, Ltd., see 5.14–5.16), but reached no position on the wider issues raised by this paper. On 15 October 1999, a new paper, “Strengthening of SOE Performance,” was sent to the Prime Minister and minister of finance to provide an integrated update of subsequent developments in policy advice, and recommend sponsorship of the revised SOE Bill as the main vehicle for the strategy. That SOE Bill has been replaced by the Public Bodies (Performance and Accountability) Bill, which incorporates much of its policy content. Substantially completed and requiring reactivation. The Privatization/Corporatization Committee was established to meet when required to deliberate on

announcement to explain a detailed plan on divestment of short-term targets for privatization.

Completed. In 1994, the Government sold all of its equity in the Bank of Western Samoa. Completed. Officials and the full TA team reviewed the overall strategy in late 1997, and discussions continued in 1998. These were reflected in an updated privatization paper prepared for the Privatization/Corporatization Committee (see 5.4) in mid August 1998. This paper proposed specific actions (see 5.14), a valuation methodology, and an outlined comprehensive approach to future privatization. The Cabinet agreed to some specific privatization proposals (Samoa Breweries, Ltd. and BOC Gases, Ltd., see 5.14–5.16), but reached no position on the wider issues raised by this paper. On 15 October 1999, a new paper “Strengthening of SOE Performance” was sent to the Prime Minister and minister of finance to provide an integrated update of subsequent developments in policy advice, and recommend sponsorship of the revised SOE Bill as the main vehicle for the strategy. That SOE Bill has been replaced by the Public Bodies (Performance and Accountability) Bill, which incorporates much of its policy content. An overall policy on SOE ownership, performance, and divestment was developed and approved by Cabinet in September 2003. Partially completed. The Privatization/Corporatization Committee was established to meet when required to deliberate on privatization/corporatization matters. The minister

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5.5 Prepare a capability assessment of the State

Owned Enterprise Monitoring Division (SOEMD), and allocate sufficient staff to SOEMD to effectively supervise SOEs.

privatization/corporatization matters. The minister of finance was the chair. Members included the ministers of civil aviation, works, posts and telecommunications, and agriculture. Committee officials included the financial secretary, attorney general, secretary of the Public Service Commission, director of posts and telecom, and director of agriculture. Officers of other departments attended when needed. The Committee has not met since April 1998. Instead, the full Cabinet has deliberated and decided on privatization and corporatization matters as needed. This is a positive move because it reflects the widespread desire within Cabinet to be involved in these discussions and decisions. When necessary, additional sittings of Cabinet have been held, with briefings by officials, to enable privatization and corporatization papers to be fully considered. A ministerial committee similar to that which led to the development of the Public Bodies (Performance and Accountability) Bill is now urgently required to lead development of schedules to that bill, and the program of implementation of the new framework for public bodies: (i) the recently enacted Public Bodies (Performance and Accountability) Act; (ii) the Companies Act; and (iii) the Public Finance Management Act. This could be more appropriately called the “ministerial public bodies committee.” Substantially completed but requiring urgent action. A capability assessment conducted in 1998 was updated in May 1999 for the 1999–00 budget process. The assessment showed that, at 1.5 fulltime equivalents, the State Owned Enterprise Monitoring Division (SOEMD) was still understaffed, considering its workload.

of finance was the chair. Members included the ministers of civil aviation, works, posts and telecommunications, and agriculture. Committee officials included the financial secretary, attorney general, secretary of the Public Service Commission, director of posts and telecom, and director of agriculture. Officers of other departments attended when needed. The Committee has not met since April 1998. Instead, the full Cabinet has deliberated and decided on privatization and corporatization matters as required. This has been a positive move because it reflects the widespread desire within Cabinet to be involved in these discussions and decisions. When necessary, additional sittings of Cabinet have been held, with briefings by officials, to enable full consideration of privatization and corporatization papers. All ministers and key officials were consulted in the development of the overall policy. Partially Completed. A capability assessment was conducted in May 1999 for the 1999–00 budget process. The assessment showed that, at 1.5 fulltime equivalents, SOEMD was still understaffed, considering its workload. In October 1999, SOEMD was upgraded to a full

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5.6 Finalize a cabinet submission on the issues and

options for corporatizing PTD.

In October 1999, SOEMD was upgraded to be a full division within the Treasury Department, headed by an assistant secretary. Treasury then supported, and PSC approved, TA recommendations for at least four fulltime staff members just to cope with the existing work program of privatization, policy advice, and support for the SCL corporatization, plus routine monitoring, analysis, and reporting. But coping with the substantial work increase that will be generated by passing of the Public Bodies (Performance and Accountability) Act will require at least one additional staff member (a research officer) making a total of five staff. It will also be important that all SOEMD staff participate in any training and development programs provided for SOE directors, office holders (e.g., company secretaries), and/or senior managers. The immediate problem is that, after having briefly had four staff, SOEMD faces the substantial workload mentioned above with only two staff. Completed. The paper on corporatization of PTD, tabled in the Cabinet on 7 April 1998, outlined the issues and options for corporatization, and recommended a selected model for a corporatized PTD. This model proposed separating ministerial policy-setting from commercial governance (i.e., no ministers or public servants on the board); and the use of a license and annual statements of corporate intent to set standards for customer service and commercial performance. Having no ministers on the board proved contentious in the Cabinet, and was the main

division within the Treasury Department, headed by an assistant secretary. Treasury then supported, and PSC approved, TA recommendations for at least four fulltime staff members just to cope with the existing work program of privatization, policy advice, support for SCL corporatization, plus routine monitoring, analysis, and reporting. But coping with the substantial increase in work that will be generated by the passing of the Public Bodies (Performance and Accountability) Act, will require at least one additional staff member (a research officer), making a total of five staff. It will also be important that all SOEMD staff participate in any training and development programs provided for SOE directors, office holders (e.g., company secretaries), and/or senior managers. The immediate problem is that, after having briefly had four staff, SOEMD faces the substantial workload mentioned above with only two staff. The staff now totals six, with a provision for two more staff in the current budget. Completed. The corporatization of PTD is now fully operational.

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5.7 Review existing legislative requirements relating

to performance, reporting, accountability, and external audit of SOEs; and analyze the existing performance.

reason that the proposal was stalled. Further submissions were prepared for the minister of finance in late 1998 and early 1999. In May 1999, the Cabinet approved urgent action to implement the commitment on statement of economic strategy 1998–99, which stipulated the corporatization and restructuring of PTD within the 1998–99 financial year. Completed. Reviews and actions on strengthening the legal and institutional framework for governance of SOEs have taken place in association with SOEMD’s annual report on SOEs and the Government’s commercial investments. These include review of the legal and regulatory frameworks applied to SOEs; the authority of SOEMD; and SOE supervision, monitoring, auditing, and reporting issues. As observed in the policy matrices of earlier missions, this review shows the need for strong political action to achieve change because past performance (especially failures to apply and enforce existing laws) show that new legislative requirements alone are definitely not the answer. In the past, cabinet ministers, as SOE board chairs, have acted illegally; their colleagues have appeared supportive, indifferent, or powerless to prevent this. Another issue is that a number of recent aid-funded initiatives with various SOEs have produced a variety of proposed legislative reforms for each SOE. There is a lack of policy coordination, inadequate use of umbrella legislation, and consequently, a large risk of conflicting solutions, plus a great waste of scarce policy advisory resources, law-drafting resources, and legislative time in Parliament. Conversely, at least one major PTB (the Water Authority) has considered development of the

Completed. Reviews and actions on strengthening the legal and institutional framework for governance of SOEs have taken place in association with SOEMD’s annual report on SOEs and the Government’s commercial investments. These include review of the legal and regulatory frameworks applied to SOEs; the authority of SOEMD; and SOE supervision, monitoring, auditing, and reporting issues. The Public Bodies (Performance and Accountability) Act was passed in 2001. The Act states the principle objectives for all public bodies and outlines all reporting requirements, from planning to performance.

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5.8 Amend legislation required to strengthen

reporting/accountability and sanctions for SOEs.

SOE legislative framework in its own institutional strengthening, so is now well-prepared to leverage the Companies Act and Public Bodies (Performance and Accountability) Bill in its own legislative reforms. Complied with, and being implemented. The Public Bodies (Performance and Accountability) Bill was introduced to provide the umbrella legislative framework for SOEs, now renamed public trading bodies. But drafting instructions have been issued to the attorney general’s office on the contents of the schedules covering reporting and accountability. The SOE Bill was tabled at Cabinet in June 2000, then referred to a cabinet subcommittee for review. Ministers on that committee expressed concern with the draft bill and apparent over-empowerment that might allow SOEMD to interfere in normal operational issues. This led to redrafting of the bill and its renaming as the Public Bodies (Performance and Accountability) Bill. The new bill was drafted to act as umbrella legislation, and to include most of the policy content of the previous bill. It particularly includes incorporating the public trading bodies under the Companies Act, particularly to leverage corporate governance arrangements and the history of supporting case law. The Bill also requires directors to declare their pecuniary interests. It imposes a fine of as much as ST10,000 on directors who do not withdraw from involvement when there is a conflict between their interests and those of the public. The same sanction applies to any person involved in acting noncommercially, except when subject to a valid community service obligation directive issued by the responsible minister.

Partially complied with. The Public Bodies (Performance and Accountability) Act was introduced to provide the umbrella legislative framework for SOEs, now renamed public trading bodies. But the schedule covering reporting and accountability is not yet available. The Act includes incorporating the public trading bodies under the Companies Act, particularly to leverage the corporate governance arrangements and the history of supporting case law. The Act also requires directors to declare their pecuniary interests. It imposes a fine of as much as ST10,000 on directors who do not withdraw from involvement when there is a conflict between their interests and those of the public body. The same sanction applies to any person involved in acting noncommercially except when subject to a valid community service obligation directive issued by the responsible minister. But much of the detail was, and is still, to be covered in the schedules. On sanctions/penalties, Treasury had earlier proposed that ministers cease to serve on SOE boards (this move would free the Cabinet from conflict of interest in censuring a body headed by one of its own members), and that board members’ fees be withheld if reporting and other legislative requirements have not been complied with – and that ultimately Ministers must be prepared to dismiss Directors of Boards that are persistently failing to meet these responsibilities – also refer to 5.7, 5.9, and 5.10.

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5.9 Ensure strict SOE compliance with all legislative

requirements. 5.10 Ensure that external audits of all SOEs in which

the Government holds a majority share are carried out annually, beginning in the 1996–97 financial year. That includes timely submission of the audit report to SOEMD.

However, much of the detail was, and is still, to be covered in the schedules, for which drafting instructions have been issued. On sanctions/penalties, Treasury earlier proposed that ministers cease to serve on SOE boards (this move would free Cabinet from the conflict of interest in censuring a body headed by one of its own members); that board member fees be withheld if reporting and other legislative requirements are not complied with; and that, ultimately, ministers must be prepared to dismiss directors of boards that consistently fail to meet these responsibilities (also see 5.7, 5.9, and 5.10). These solutions could be included in the schedules to the new umbrella legislation. Completed. The Public Bodies (Performance and Accountability) Bill imposes reporting requirements, although there is no penalty system, and the detailed schedule will not be available until December 2001. Complied with, and being implemented. Details are set out in the accompanying schedule. All except one of the operative fully owned SOEs (the Samoa Land Corporation) are externally audited annually. This is a substantial improvement. The Samoa Land Corporation published annual accounts until 1999–00 but has not had them audited because the board is still waiting for earlier audits to be completed, so that it can make any necessary adjustments to the opening and closing positions in subsequent

Ongoing. The Public Bodies Bodies (Performance and Accountability) Act is in place, but the schedules and regulations are not yet completed. It imposes reporting requirements, although there is no penalty system as such. It is unclear whether the regime under the Act will require (i) output performance reporting by SOEs to gain and retain access to any budgetary support (see 5.13); and (ii) business cases and progress reports to support capital expenditure by SOEs. Complied with, and being implemented. Details are in the accompanying schedule. All but one of the operative fully owned SOEs (the Samoa Land Corporation) are externally audited annually. This is a substantial improvement. The Samoa Land Corporation published annual accounts until 1999–00 but has not had them audited because the board is still waiting for earlier audits to be completed, so that it can make any necessary adjustments to the opening and closing positions in subsequent years’ accounts, and sign them off.

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5.11 Enhance the managerial autonomy of SOEs by

increasing the number of directors with private sector experience on their boards.

years’ accounts, and sign them off. 1992–94 audits have just been completed. Timeliness has improved greatly over the past year. Much of the improvement is due to institutional strengthening programs within most of the larger SOEs, and to increased numbers of trained accountants in SOEs. The Public Bodies (Performance and Accountability) Bill is intended to ensure future maintenance of compliance standards. Partially complied with, and being implemented. In the past, little progress had been made because of • the practical problem of a lack of people in

the private sector that are qualified and available to be nominated to SOE boards, and

• apparent political influence and resistance to reducing the role of ministers on SOE boards.

In terms of solutions, • the Government will have the opportunity to

include in the third schedule to the Public Bodies (Performance and Accountability) Bill a provision relating the initial selection and continuing responsibilities of public trading body directors, to the PTB principal objective of being a successful (profitable and efficient) business; and to remove ministers and public servants from the board in alignment with global best practices for corporate governance.

• The Bill’s third schedule is expected to also ensure that one criterion for selection of directors of public beneficial bodies will be the ability to help meet PBB objectives.

• The application to PTBs of the new Companies Act regime should help directly by rules that enhance PTB managerial

Audits for the three years, 1992–94 have just been completed. Timeliness has improved greatly over the past. Much of the improvement is due to institutional strengthening programs within most of the larger SOEs, and to increased numbers of trained accountants in SOEs. The Public Bodies (Performance and Accountability) Act is intended to ensure future maintenance of compliance standards. Partially complied with, and being implemented. In the past, little progress had been made because of • the practical problem of a lack of people in

the private sector that are qualified and available to be nominated to SOE boards, and

• apparent political influence and resistance to reducing the role of ministers on SOE boards.

In terms of solutions, • the Government will have the opportunity to

include in the third schedule to the Public Bodies (Performance and Accountability) Act a provision relating the initial selection and continuing responsibilities of public trading body directors to the PTB principal objective of being a successful (profitable and efficient) business; and to remove ministers and public servants from the board in alignment with global best practice for corporate governance.

• The Act’s third schedule is expected to also ensure that one criterion for selection of directors of public beneficial bodies will be the ability to help meet PBB objectives.

• The application to PTBs of the new Companies Act regime should help directly by rules that enhance PTB managerial autonomy, and indirectly by raising private sector director performance and thus

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5.12 Prepare and submit to SOEMD detailed

business plans and corporate plans for all wholly and majority owned SOEs.

5.13 Allocate budgetary support to SOEs according

to requirements of the output performance budget system and base budgetary appropriation by SOEs on specific output definitions and performance measures, and to availability of audited accounts for the most recent reporting period.

by rules that enhance PTB managerial autonomy, and indirectly by raising private sector director performance and thus, increase the pool of suitable board members.

• The recently introduced legislation increasing the number of directors on many public bodies has the potential to make boards too large (many are already unwieldy) and to be applied in ways that undermine both the Companies Act and the Public Bodies (Performance and Accountability) Bill—or it may help achieve the policy matrix objective 5.11.

Partially complied with, and being implemented. Institutional strengthening has helped some SOEs produce business plans and corporate plans, but others still do not produce business plans or do not forward them to SOEMD. The Public Bodies (Performance and Accountability) Bill schedule 5 will obligate public bodies to prepare and provide these, as well as statements of corporate objectives. Substantially completed, but should be integrated into the new framework. Advances are now made by allocating budgetary support to SOEs according to requirements of performance budgeting. Advances of these funds are quarterly, and conditional on the provision of quarterly reports on operations and appropriations of earlier funds. This process now should be formally incorporated into the new Public Finance Management Act/Public Bodies (PFMA/PB) performance and accountability framework. But at the implementation level, SOEs have not formalized their performance measures. SOE

sector director performance and thus, increasing the pool of suitable board members.

• The recently introduced legislation increasing the number of directors on many public bodies has the potential to make boards too large (many are already unwieldy) and to be applied in ways that undermine both the Companies Act and the Public Bodies (Performance and Accountability) Act—or it may help to achieve the policy matrix objective 5.11.

Partially completed. Institutional strengthening has helped some SOEs produce business plans and corporate plans, but others still do not produce business plans or do not forward them to SOEMD. The Public Bodies (Performance and Accountability) Act. Schedule 5 will obligate public bodies to prepare and provide these, as well as statements of corporate objective. Substantially completed but should be integrated into new Framework. Advances are now made by allocating budgetary support to SOEs according to requirements of performance budgeting. Advances of these funds are quarterly, and conditional on the provision of quarterly reports on operations and appropriations of earlier funds. This process now needs to be formally incorporated into the new PFMA/PB performance and accountability framework. The provision in the Public Bodies (Performance and Accountability) Act for funding to cease for community service obligations of PTBs is being addressed in the Government’s policy paper on

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5.14 Finalize a cabinet submission on the issues and

options for privatizing eight SOEs.

performance measures require further work, particularly once the Public Bodies Bill is passed, and existing SOEs like the Electric Power Corporation and the Water Authority are fully covered by the new schedules 5 and 6 (with statements of corporate objectives, customer service standards, performance measures, etc.). The lack of funding for provision in the Public Bodies (Performance and Accountability) Bill for community service obligations of PTBs is of great concern to ADB, particularly as there is no mention in the bill of any role for the minister of finance in such decisions. This is as much a fiscal decision as Parliament’s allocation of monies. Cross-subsidization by public utilities is well known to be highly regressive in its impact, i.e., the poorest consumers bear a much greater share of the burden than wealthier consumers. The setting up of a new class of public bodies (“public beneficial bodies”) in the Public Bodies (Performance and Accountability) Bill, will need to be integrated with the Public Finance Management Act, introduced at the same time, to clarify how the output performance budget system will apply, and how this specific policy condition will be complied with. Completed. General submissions on all these SOEs were finalized and submitted to ministers. In addition, specific submissions covered the Special Project Development Corporation (SPDC), the Samoa Forest Corporation, Samoa Iron and Steel, and Hellaby Samoa. The minister of finance was briefed on the position with the remaining targets: Computer Services, Ltd. (CSL), Agriculture Stores Corporation (ASC), and Brugger Industries, Ltd. When considerable impediments to some proposed actions were found, the minister of finance promoted other

SOE ownership, performance, and divestment. Similarly, issues regarding the establishment of a new class of PTB and PBB in the Public Bodies (Performance and Accountability) Act will need to be integrated with the Public Finance Management Act. Completed. General submissions on all these SOEs were finalized and submitted to ministers. In addition, specific submissions covered SPDC, SCPL, the Samoa Forest Corporation, Samoa Iron and Steel, and Hellaby Samoa. The minister of finance was briefed on the position with the targets – CSL, ASC and Brugger Industries, Ltd. When considerable impediments to some proposed actions were found, the minister of finance promoted other papers that had been prepared on privatizing Rothmans Tobacco (Samoa), Ltd. and selling an extra 36% of the shares in Samoa

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5.15 Divest all government equity in eight SOEs.

papers that had been prepared on privatizing Rothmans Tobacco (Samoa), Ltd. and selling an extra 36% of the shares in Samoa Breweries (see below). BOC Gases was also reviewed, and successful sale proposals were prepared and submitted. Note: One general impediment was that the forms of the documents of incorporation for most of these companies were originally designed to protect the interests of all the nongovernment shareholders, and to give considerable power to these other shareholders over attempts by the Government to divest its shares. Instead of being relatively simple and speedy transactions, these share sales became protracted and complex multiparty negotiations, with restricted options available to the Government. Substantially complied with, and being implemented. During formulation of the FSPL, and reflecting the Government’s commitment to privatization as expressed in the SES 1996–97, eight specific SOEs were identified to be privatized over 2 years. The Government’s program was ambitious but nevertheless, was deemed achievable. Unfortunately, protracted legal procedures and other difficulties outside government control have slowed privatization of the original eight SOEs. By September 2001, two SOEs had been fully privatized, substantial progress had been made on an additional three SOEs, and the remaining three SOEs had encountered such legal difficulties that the Government requested that they be substituted with three other SOEs that had been successfully privatized in 1999–00, in order to satisfy conditions of the second tranche release. The three new companies to be substituted were Samoa Breweries, Ltd., Rothmans Tobacco (Samoa), Ltd., and BOC Gases, Ltd.

Breweries (see below). BOC Gases was also reviewed, and successful sale proposals were prepared and submitted. Complied with, and being implemented. (i) ADB agreed to waive the condition for substitution of three of the originally agreed SOEs with three other SOEs that had been successfully privatized. This was on the assurance and understanding that the Government would remain committed to divesting unprofitable commercial businesses, and releasing a policy paper in this regard. (ii) SPDC: The process of disposal of the assets of the former business has been completed, apart from one issue—resolution of a dispute over a debt of the corporation and assets retained by the creditor—which is being resolved through court action. That claim is for ST230,000. Sales proceeds and debts collected were ST291,068, but all of this and another ST1,077,466 (i.e., ST1,278,514 total) was paid to the firm’s creditors. Because this statutory corporation was disbanded once before, and then revived, repeal of the Act is more than just a technical detail. Provisions have been drafted to enable repeal, but their introduction

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Although this condition of tranche release has not been fully met, substantial progress has been made in privatizing five of the eight original SOEs identified for privatization, including two that have been fully privatized. The Government remains committed to the privatization of all eight originally agreed SOEs. The Government has offered to substitute three new SOEs to replace the three SOEs that are likely to require substantially more time than anticipated for privatization. A revised action plan for the privatization of the three delayed SOEs has been submitted by SOEMD. It should also be noted that ADB remains engaged in the sector, and a TA is being processed to build on the earlier privatization work and help implement the recently drafted Public Bodies (Performance and Accountability) Bill. Progress of corporatization of each of the eight SOEs and the three that have been proposed for substitution is described below. (i) Special Project Development Corp. The

process of disposal of SPDC’s assets has been completed, except for one issue (resolution of a dispute over a debt of the corporation and assets retained by the creditor), which is being resolved through court action. That claim is for ST230,000. Sales proceeds and debts collected were ST291,068, but all of this and another ST1,077,466 (i.e., ST1,278,514) were paid to the firm’s creditors. The Public Trading Bodies Act, under which SPDC has operated, is to be amended. The necessary amendments were tabled in Parliament in August 2001.

(ii) Agriculture Stores Corporation.

Longstanding issues between the ASC and

was one of many deferred until the next sitting of Parliament. (iii) Agriculture Stores Corporation (completion delayed): Long-standing issues between the Corporation and Treasury concerning accounting policies have been resolved sufficiently for financial accounts to be brought up-to-date (1999–00) and for nonqualified audit opinions, that note certain unfinished work, to be issued on each policy. That unfinished work involves the corporation obtaining Cabinet approval to a writeoff or reduction in selling prices of some of the stock received under Japanese aid. A repayment schedule will then be agreed upon with the Treasury Department. The minister of finance has undertaken to speed that work and ensure prompt privatization action, that may include some restraints on sellers to retain certain assets in the same line of business. (iv) Samoa Forests Corporation (completion delayed): Agreement has been reached with the other shareholder to buy government shares (40% of shareholding) and buildings, for a total of ST329,000, but that party has since failed to meet the payment. Payment for other assets also needs an agreed-upon payment schedule that will be honored. SOEMD has attempted, without success, to negotiate new payment arrangements, but ministerial involvement and/or court action appears to be the next step for resolution and payment. (v) Computer Services, Ltd. (completion delayed): The minister of finance will personally direct the process of achieving sale of the Government’s shares while satisfying the restrictions on this process in the company’s documents of incorporation. (vi) Samoa Iron and Steel, Ltd,: Sale of the Government’s 9% shareholding (61,200 shares) to an existing shareholder for ST85,680 has now passed through all stages except settlement. Payment is due at the end of June 2001. (vii) Brugger Industries, Ltd.: The Government’s

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the Treasury Department concerning accounting policies have been resolved sufficiently for financial accounts to be brought up-to-date (1999–00) and for nonqualified audit opinions that note certain unfinished work to be issued. That unfinished work involves ASC obtaining Cabinet approval to a write off or reduction in sale prices of stock received under Japanese assistance. A repayment schedule will then be agreed between ASC and the Treasury Department. The minister of finance has undertaken to speed that work and ensure that a privatization action that may include some restraints on sellers to retain certain assets in the same line of business will then be accomplished. For compliance purposes, Samoa Breweries, Ltd. has been substituted for ASC. The Government sold its 51% shareholding in Samoa Breweries to Carlton Breweries (Fiji) in mid 2000 for ST13.1 million.

(iii) A Samoa Forests Corporation agreement

has been reached, with the other shareholder to buy government shares (40% of shareholding) and buildings, for a total settlement of ST329,000. But that party has failed to meet the payment schedule. A further ST894,570 for outstanding lease payments and payment for other assets also needs an agreed payment schedule that will be honored. SOEMD has attempted, without success, to negotiate new payment arrangements. Ministerial involvement and/or court action appear to be the next step for achieving resolution and repayment. For compliance purposes, Rothmans Tobacco (Samoa), Ltd. has been substituted for SFC. In November 1999, the Government sold its

9,000 shares were sold for ST12,128 in May 2000. (viii) Samoa Coconut Products, Ltd. (SCPL): The previous lessee is in receivership. There are unresolved disputes with the receiver over ownership of some assets. Other remaining assets have been sold to Elan Trading, and a deposit of ST100,000 has been paid, with final settlement of a further ST1,025,000 due 1 July 2001. The disputed assets have been removed from the sale and the proceeds reduced by ST750,000 (i.e., from ST1.875 million to ST1.125 million). SCPL must be formally dis-established. (ix) In addition, action was taken to maintain momentum on privatization, and to fulfill the spirit of the loan obligation, by (x) BOC Gases, Ltd. fully divesting the Government’s 40,000 shares in August 1999 for ST320,030. (xi) Samoa Breweries, Ltd. extending its commitment to privatize at least 15% of all equity by the successful privatizing of an additional 36% of the shares (see below); (xii) Rothmans Tobacco (Samoa), Ltd.: full divestment of the Government’s 40% shareholding (80,000 shares) for ST2,880,000 in October 2000.

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40% shareholding to BAT Company. (iv) Computer Services, Ltd. The minister of

finance will personally direct the sale of the Government’s shares while satisfying restrictions on this process in the company’s documents of incorporation. For compliance purposes, BOC Gases, Ltd. has been substituted for CSL. In August 1999, the Government sold its 17% shareholding in BOC Gases to BOC Gases (UK) for ST0.319 million.

(v) Samoa Iron and Steel, Ltd. The

Government’s shareholding (4%, or 24,000 shares) was sold in November 1998 for ST84,000.

(vi) Hellaby Samoa, Ltd.. Documentation

recording sale to an existing shareholder has now passed through all stages. Registration of the transfer is expected to be finalized upon receipt of final payment.

(vii) Brugger Industries, Ltd. The Government’s

9,000 shares were sold for ST12,128 in May 2000.

(viii) Samoa Coconut Products, Ltd. (SCPL).

The Government’s fellow shareholder in SCPL, Samoa Coconut Oilmill Products, Ltd. (SCOPL) is in receivership. Disputes between the receiver and SCOPL over ownership of some of the SCPL assets has been reached with Elan Trading, and a deposit paid, with final settlement expected soon from the buyer. SCPL will be formally wound-up upon completion of final asset sales.

Action was also taken to maintain momentum on

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5.16 Commence phased privatization of, and dispose

of at least 15% equity in, Samoa Breweries, Ltd. 5.17 Develop a suitable regulatory framework for a

corporatized Posts and Telecommunications Department (PTD), including the preparation of appropriate legislation.

privatization, and to fulfill the spirit of the loan obligations, by • BOC Gases, Ltd. fully divesting the

Government’s 40,000 shares in August 1999 for ST320,030.

• Samoa Breweries, Ltd: extending the commitment to privatize at least 15% of all equity by the successful privatizing of an additional 36% of the shares (see below).

• Rothmans Tobacco (Samoa), Ltd:. Full divestment of the Government’s 40% shareholding (80,000 shares) for ST2,880,000) in October 2000.

Completed. Fifty-one percent of the Government’s share in Samoa Breweries (5,712,000 shares) was sold in July 1999 for ST13,137,600, leaving only 15.5% to be divested later (see below). Completed. Officials and advisers have changed the approach initially adopted. First, they are proposing having a utilities regulator, expanding and incorporating the spectrum management function, plus licensing, standards setting, handling complaints, reviewing tariffs, monitoring and enforcing the performance standards in licenses, etc. Second, a ministry was created by the same act that created SCL, and policy issues are vested in the ministry. Another part of the proposed regulatory framework will be special licenses issued by the ministry. Although SCL has had an interim license, a full license has now been granted that covers the overall policies and specifies the minimum services and standards to be offered by the corporation. Where

Completed. This has been done, as indicated above. Fifty-one percent of the Government’s shareholding in Samoa Breweries (5,712,000 shares) was sold in July 1999 for ST13,137,600, leaving only 15.5% to be divested later (see below). Completed. Officials and advisers have changed the initial approach. First, it is now proposed to have a utilities regulator expanding and incorporating the spectrum management function, plus licensing, standard settling, handling complaints, reviewing the monitoring, enforcing the performance standards in licenses, etc. Second, a ministry was created by the same act that created SCL, and policy issues are vested in that ministry. Another part of the proposed regulatory framework will be special licenses issued by the ministry. Although SCL has had an interim license, a full license has now been granted that covers the overall policies and specifies the minimum services and standards the corporation will offer. Where appropriate, as part of these licenses, maximum prices may also be set for specified services/products. This is one way to

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5.18 Corporatize PTD under a commercially oriented

board of directors.

be offered by the corporation. Where appropriate, as part of these licenses, maximum prices may also be set for specified services/products. This is one way to address competition issues. Third, additional regulatory objectives will be achieved at a more detailed level and in a more flexible manner by statements of corporate Intent. The articles of association require the annual preparation of a statement of corporate intent, stating clearly how it intends to meet its dual obligations of • service performance under the license, and • commercial performance to meet

shareholder objectives. SCL must also publish an annual report at the end of each year showing the actual performance against all parts of the statement of corporate intent. A draft SCI has been prepared under the TA and is due to be considered by the board. Fourth, the Spectrum Management Unit was set up by legislation to issue licenses to operators and apparatus for specific spectrum uses. The ADB TA helped arrange for this work to continue beyond the end of the TA. An Australian Agency for International Development (AusAid)-funded telecommunications sector expert made a substantial contribution, but substantial technical support is needed for the large volume of complex finishing work. The New Zealand Overseas Development Agency (NZODA) as been approached for assistance. Completed. Cabinet approved corporatization of PTD effective 1 July 1999. Parliament passed the Postal and Telecommunications Act on 25

address competition issues. Third, further regulatory objectives will be achieved at a more detailed level, and in a more flexible manner, by statements of corporate intent. The articles of association require the annual preparation of a statement of corporate intent, stating clearly how it intends to meet its dual obligations of:

• service performance under the license, and

• commercial performance to meet shareholder objectives.

SCL must also publish an annual report at the end of each year that shows the actual performance against all parts of the statement of corporate intent. Fourth, the Spectrum Management Unit was set up by legislation to issue licences to operators and apparatus for specific spectrum uses. The ADB TA helped arrange for this work to continue beyond the end of the TA. An AusAid-funded telecommunications sector expert made a substantial contribution, but substantial technical support for the large volume of complex finishing work. NZODA has been approached for assistance. Completed. Cabinet approved corporatization of PTD effective 1 July 1999. Parliament passed the Postal and Telecommunications Act on 25 June

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5.19 Prepare a detailed implementation schedule for

phase 2 of the privatization strategy, including identification of SOEs to be privatized during phase 2.

the Postal and Telecommunications Act on 25 June 1999. Effective 1 July 1999, Samoa Communications, Ltd. was incorporated under the Companies Act. Its rights to use the assets and carry on the business of PTD were licensed on an interim basis. The other final arrangements for the new entity are being designed and implemented in conjunction with regulatory arrangements for competition policy (see 5.19). Substantially completed, but requiring further review. The privatization paper that was prepared for consideration of the Privatization/Corporatization Committee outlines the SOEs to be privatized in the short term, as well as those that are longer-term candidates for privatization. But a significant change in approach is proposed. Instead of privatization proceeding independently of SOE strengthening, the two are to be integrated. In the future, privatization should be considered as an alternative to strengthening. Privatization should proceed in all cases where a consideration of the public policy objectives for the SOE (using the type of approach in output performance budgeting) leads to the conclusion that ownership is not essential to achieve these objectives. Indeed, ownership may even be seen as undesirable. At this stage, only the CBS is seen as inherently excluded from consideration for full privatization.

Postal and Telecommunications Act on 25 June 1999. Effective 1 July 1999, Samoa Communications, Ltd. was incorporated under the Companies Act. Completed. This component has been satisfactorily completed with the ongoing work under TA 3768-SAM: Implementation of State-Owned Enterprise Reforms. The Cabinet approved its Policy on State-Owned Enterprise Ownership, Performance, and Divestment in August 2003, fulfilling this policy condition.

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