document of the world bank...alonso i terme (easpw), satyendra prasad (sasgp) and robert utz...
TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 76877-SB
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A PROPOSED
GRANT
IN THE AMOUNT OF SDR 1.4 MILLION
(US$2 MILLION EQUIVALENT)
FOR A
SECOND DEVELOPMENT POLICY OPERATION
TO
SOLOMON ISLANDS
July 25, 2013
Poverty Reduction and Economic Management Department
Timor-Leste, Papua New Guinea, and Pacific Islands Country Department
East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance of
their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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Government Fiscal Year
January 1 – December 31
Currency Equivalents
(Exchange Rate Effective as of July 9, 2013)
Currency Unit = Solomon Dollar (SBD)
US$1.00 = SBD 7.09 (average of buy and sell rates)
Weights and Measures
Metric System
ACRONYMS AND ABBREVIATION
ADB Asian Development Bank MMERE Ministry of Mines, Energy and Rural
Electrification
AusAID Australian Agency for International Development MoFT Ministry of Finance and Treasury
CBSI Central Bank of Solomon Islands MPS Ministry of Public Service
CED Customs and Excise Division MTDS Medium-term Development Strategy
CEWG Core Economic Working Group NDS National Development Strategy
CoA Chart of Accounts NGO Non-Governmental Organization
CPS Country Partnership Strategy NZAP New Zealand Aid Programme
CSO Community Service Obligation OAG Office of the Auditor General
DMS Debt Management Strategy PEFA Public Expenditure and Financial
Accountability
DPO Development Policy Operation PER Public Expenditure Review
DSA Debt Sustainability Analysis PFM Public Financial Management
EC European Commission PMO Prime Minister's Office
EFRP Economic and Financial Reform Program PPG Public and Publicly Guaranteed
EITI Extractive Industries Transparency Initiative PSDI Pacific Private Sector Development Initiative
FEDU Financial and Economic Development Unit RAMSI Regional Assistance Mission to Solomon
Islands
FEMSP Financial and Economic Management Strengthening
Program RDP Rural Development Program
GDP Gross Domestic Product ROSC Report on the Observance of Standards and
Codes for Accounting and Auditing
GEC Global Economic Crisis SBD Solomon Islands Dollar
HCA Honiara Club Agreement SCF Standby Credit Facility
HIES Household Income and Expenditure Survey SDR Special Drawing Rights
HSSP-TA Health Sector Support Program Technical Assistance SIEA Solomon Islands Electricity Authority
IDA International Development Association SIG Solomon Islands Government
IMF International Monetary Fund SISEP Solomon Islands Sustainable Energy Project
IRD Inland Revenue Division SISO Solomon Islands Statistical Office
ISN Interim Strategy Note SIWA Solomon Islands Water Authority
JRM Joint Review Mission SOE State Owned Enterprise
LDP Letter of Development Policy UN United Nations
MDPAC Ministry of Development, Planning, and Aid
Coordination UNDP United Nations Development Programme
MEHRD Ministry of Education and Human Resource
Development UNICEF United Nations Children’s Fund
MHMS Ministry of Health and Medical Services
Vice President:
Country Director:
Sector Director:
Lead Economist:
Task Team Leader:
Axel van Trotsenburg
Franz R. Drees-Gross
Sudhir Shetty
Vivek Suri
Timothy J. Bulman
SOLOMON ISLANDS
SECOND DEVELOPMENT POLICY OPERATION
TABLE OF CONTENTS
GRANT AND PROGRAM SUMMARY:
I. INTRODUCTION ................................................................................................................. 1 II. COUNTRY CONTEXT ........................................................................................................ 4
A. Recent Economic Developments .................................................................................... 4
B. Macroeconomic Outlook for 2013-2015 ........................................................................ 7
C. Debt Sustainability .......................................................................................................... 9
III. THE GOVERNMENT’S PROGRAM .............................................................................. 10 A. The Incidence and Nature of Poverty ........................................................................... 10
B. The National Development Strategy ............................................................................. 12
IV. WORLD BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ...................... 13 A. Links to the Country Partnership Strategy .................................................................... 13
B. Results Achieved under Previous Development Policy Operations ............................. 14 C. Complementarity with Other Bank Activities .............................................................. 14
D. Complementarity with Other Development Partner Programs ..................................... 16 E. Lessons Learned............................................................................................................ 18 F. Analytical Underpinnings ............................................................................................. 20
V. THE PROPOSED OPERATION ...................................................................................... 21 A. Rationale and Objectives .............................................................................................. 21 B. Policy Areas .................................................................................................................. 22
VI. OPERATION IMPLEMENTATION ............................................................................... 37 A. Participation Process ..................................................................................................... 37 B. Poverty, Gender and Social Impacts ............................................................................. 37
C. Environmental Aspects ................................................................................................. 38 D. Implementation, Monitoring and Evaluation ................................................................ 38 E. Fiduciary Aspects.......................................................................................................... 39 F. Disbursement and Auditing .......................................................................................... 40 G. Risks and Risk Mitigation ............................................................................................. 40
ANNEXES:
Annex 1: Letter of Development Policy .................................................................................43 Annex 2: Program Matrix .......................................................................................................46 Annex 3: Economic and Financial Reform Program ..............................................................48
Annex 4: IMF Macroeconomic Framework Assessment .......................................................59 Annex 5: Solomon Islands at a Glance ...................................................................................60
TABLES:
Table 1: Selected Macroeconomic Economic Indicators, 2009-15 ...............................................5 Table 2: Solomon Islands Fiscal Indicators, 2009-15 ....................................................................7 Table 3: Debt Sustainability Indicators, 2010-22 ........................................................................10 Table 4: Policy Actions Completed for the First Development Policy Operation ......................14
Table 5: Proposed Policy Actions for the Second Development Policy Operation ......................23 FIGURES:
Figure 1. GDP growth and contributions ........................................................................................6 Figure 2. Foreign reserves and exchange rate .................................................................................6 Figure 3. Honiara CPI inflation ......................................................................................................6 Figure 4. Budget balance ................................................................................................................6
Figure 5. Reforms to the Chart of Accounts .................................................................................28
BOXES:
Box 1: The Third Joint Assessment Mission of the EFRP Matrix ...............................................18 Box 2: Good Practice Principles on Conditionality ......................................................................19 Box 3: Budget Consultations as a Means to Highlight Gender Concerns ....................................26
The Second Development Policy Operation for Solomon Islands was prepared by an IDA team
supervised by Vivek Suri (Lead Economist, EASPR), led by Timothy Bulman (Economist, EASPN),
and included Jhelum Tini Chatterjee (EASPN), Isabella Micali-Drossos (LEGES), Stephen Hartung
(EASFM), Samantha Evans (EACNF), Thang-Long Ton (EASPW), Mildred Gonsalvez (EASPW)
and Jane Sansbury (EACNQ). The team benefitted from inputs and advice from Juan Carlos
Mendoza (EACNF), Anne Tully (EACSB) and Jinan Shi (EASR1). The peer reviewers were Rosa
Alonso I Terme (EASPW), Satyendra Prasad (SASGP) and Robert Utz (AFTP4).
The team worked under the overall guidance of Sudhir Shetty (Sector Director, EASPR) and Franz R.
Drees-Gross (Country Director, EACNF).
OPERATION AND PROGRAM SUMMARY
SOLOMON ISLANDS DEVELOPMENT POLICY OPERATION 2
Recipient: Solomon Islands
Implementing Agency: Ministry of Finance and Treasury
Financing Data: IDA Grant
Operation Type: Programmatic, second in a series of two development policy operations,
each one tranche, to be disbursed upon effectiveness.
Main Policy Areas: Public financial management, state owned enterprises, and extractive
revenue transparency.
Key Results Indicators: i) The number of civil society organizations consulted during budget
preparation; ii) Active use of a new chart of accounts in budget
preparation; iii) The number of ministries that do not deviate more than
10 percent from the budget allocations approved at the start of the fiscal
year; iv) Reduction in the share of procurements conducted through
unauthorized procedures; v) Improved financial position of the water and
electricity authorities; and vi) Publication of mining revenue reports.
Program Development
Objectives and Contribution
to Interim Strategy Note and
Country Partnership
Strategy:
The proposed operation is the second in a series of two development
policy operations in support of Solomon Islands’ transition from post-
conflict recovery to sustainable development in the context of its
National Development Strategy (NDS). The Program Development
Objectives are: i) improve public financial management; ii) improve the
financial position of key State Owned Enterprises; and iii) improve
extractive revenue transparency. The proposed operation is fully aligned
with the objectives set out in the recently approved Country Partnership
Strategy (CPS) FY13-16 to: Enhance macroeconomic and fiscal stability
(Outcome 1); Enhance regulatory framework, public sector capacity and
community benefits in the mining sector (Outcome 2); and Improve
policy and budgetary processes to support poverty reduction and service
delivery (Outcome 9). The overarching themes throughout are public
sector effectiveness and accountability.
Risks and Risk Mitigation: Program ownership is potentially subject to some political risk given
frequent changes in governments in Solomon Islands. The risk is
reduced in several ways. Many of the key political leaders and senior
officials remain in government even if their portfolios are altered.
Within this group, there is a high-level recognition of the need for
reform and the degree of commitment has deepened significantly across
a range of political actors. The establishment and maintenance of the
government-led multi-donor Core Economic Working Group (CEWG)
mechanism can also be a force for policy stability.
The macroeconomic and fiscal framework is subject to considerable
risks from volatile commodity prices and natural disasters. These risks
are reduced by successful government action to build up external and
internal buffers accompanied by an ongoing dialogue with the IMF and
donors on macroeconomic policy. The Bank will continue to monitor
the impact of global economic shocks and assess the need for further
support. Both the World Bank-supported Rapid Employment Project and
the Rural Development Program could be ramped up if need be as part
of a response to an economic shock.
There is some risk of a resurgence of social unrest. This is being
addressed by the Government on many fronts ranging from security to
state-building to public service provision, with assistance from the
Regional Assistance Mission to Solomon Islands (RAMSI) and other
key donors. The World Bank Justice for the Poor program is aimed at
better understanding this risk. In part, it focuses on analyzing local-level
justice service delivery from the perspective of the user and better
understanding how government can respond to community needs. The
proposed grant with its emphasis on public sector effectiveness and
accountability will augment these efforts by helping to improve service
delivery outcomes, in turn contributing to political stabilization.
Weak institutional capacity could hamper the implementation of the
reforms supported by the proposed operation and the broader NDS.
These risks are mitigated by the choice and design of the supported
measures which are calibrated to existing capacity, the provision of
extensive technical assistance by RAMSI, the Pacific Financial
Technical Assistance Centre, the World Bank, and other donors through
ongoing or planned projects supporting the key ministries responsible
for policing, justice, prisons, public finance, health, education, and
infrastructure.
The transition in RAMSI support may create short-term coordination
risks. It is expected that the RAMSI civilian program will transition to
bilateral development assistance from AusAID, NZAP and other donors
in 2013, and the overall advisory presence is expected to be maintained
into the medium-term. Overall aid levels are not expected to decline.
This change in modality may bring some short-term coordination risks
but it also creates an opportunity for the Government to collaborate with
the international community through the CEWG process on how a long-
term aid program could best serve the population – including elements
of assistance aimed at reducing fragility, encouraging growth and job
creation, and building government capacity.
Operation ID Number: P143242
1
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A PROPOSED
DEVELOPMENT POLICY OPERATION 2
SOLOMON ISLANDS
I. INTRODUCTION
1. Solomon Islands is a fragile, post-conflict small island state and the poorest in the Pacific
when measured in terms of GDP per capita.1 Most of the population is dispersed across rural
areas of the archipelago, where they largely depend on subsistence agriculture. This caps food
poverty rates, but exposes the population to environmental shocks. Poverty rates are higher in
urban areas, where traditional safety nets are weaker and unemployment rates are high. A
former British protectorate, the country became independent in 1978 and enjoyed twenty years of
moderate but sustained economic growth and improvement in social indicators.
2. A low-level conflict between 1998 and 2003, known as “the tension,” brought the formal
economy and many state functions to a halt. Real GDP per capita, which had been slowly
eroding between 1996 and 1999, fell sharply between 2000 and 2002. An Australian-led and
financed regional peacekeeping mission, the Regional Assistance Mission to Solomon Islands
(RAMSI), stopped the violence and rapidly restored order and basic state functions, particularly
in finance. The country has subsequently enjoyed a fairly good security situation, interrupted
only by short-lived but destructive riots in 2006, mainly in the capital Honiara. RAMSI presently
retains a police and military presence, as well as a large corps of civilians in advisory or in line
functions, notably in the Ministry of Finance and Treasury (MoFT). Given the overall stability in
the country, RAMSI will undergo a significant transition in mid-2013. Although an extensive
police presence will remain to build the capacity of the Royal Solomon Islands Police Force, the
bulk of the military component is scheduled to depart, and the advisory support will transition to
bilateral programs.
3. Two successive parliamentary elections have taken place since the tension, in April 2006
and again in August 2010. The country has a Westminster parliamentary democracy. It suffers
from structural political instability. Lack of established political parties leads to regular floor-
crossings, votes of no confidence, and chronic uncertainty among weak ruling coalitions. This
form of political instability was in evidence well before the tension and is likely to persist until
the underlying structural issues are addressed. In addition to these direct sources of political
instability are various structural issues, which also go to the causes of the tension and include
over-centralization of decision-making in Honiara, poor service delivery, a narrow economic
base, conflicts over land tenure in the context of inter-island migration, and poor links between
1 Comparator countries include the Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Papua New
Guinea, Samoa, Timor-Leste, Tonga, Tuvalu, and Vanuatu.
2
indigenous and imported political systems. The structural political instability adds another layer
of difficulty to the long-run challenges involved in addressing the causes of the tension.
4. Until very recently, fiscal discipline was weak and pro-cyclical spending prevailed while
public service delivery from government and its state owned enterprises (SOEs) was inadequate
and inequitably distributed. Government policy efforts, supported by the RAMSI intervention,
together with the Honiara Club Agreement of 2005, helped stabilize the fiscal situation, although
there was significant but temporary slippage during the Global Economic Crisis (GEC) of
2008/09. The legacy of poor fiscal management made it difficult for the Government to manage
the GEC, with the result that strong internal and external imbalances emerged in 2009. That year
saw the imposition of drastic spending reservations, the accumulation of significant arrears,
uncertainty as to whether government could meet payroll obligations, and a reduction in import
cover to less than one month.
5. In response, the Government and donors formed the Core Economic Working Group
(CEWG) in March 2009 to better meet the economic and fiscal challenges facing the country
during the GEC. The CEWG represents a very close collaboration between officials from the
Ministry of Finance and Treasury (MoFT), Central Bank of Solomon Islands (CBSI), the
Ministry of Development, Planning, and Aid Coordination (MDPAC), the Prime Minister’s
Office (PMO), the Ministry of Public Service (MPS), RAMSI, Australia, New Zealand, the
Asian Development Bank (ADB), the European Commission (EC), and the World Bank. The
formation of the CEWG led to a successful request for an IMF Standby Credit Facility (SCF) and
start of budget support from the CEWG members. The situation has significantly improved
since then, following three years of well-managed positive economic shocks, and a deepening
policy dialogue including the introduction of the Economic and Financial Reform Program
(EFRP) -- a common matrix for key reforms explicitly backed by budget support.
6. Since 2011 the Government has built cash reserves to over two months of expenditure
(excluding externally financed projects), foreign exchange reserves to over 7 months of import
cover, and a credible reform program to address structural weaknesses in budget preparation and
execution. For the first time in recent history, budgets have been fully funded and backed by
analytical work and consultations with civil society organizations and between the central
finance agencies and implementing ministries. The Government has developed mechanisms to
grant tax exemptions more transparently and systematically. The management of procurement
has been strengthened and made consistent across ministries through the creation of a dedicated
and centralized unit, as well as improved regulations. An application for candidate status to the
Extractive Industries Transparency Initiative (EITI) has been completed and candidacy obtained
and the first revenue reports are being prepared, important steps for the future of mining in
Solomon Islands. The Government has adopted a new Chart of Accounts to better track and
analyze spending. Severe solvency issues in the key public utilities have been resolved in a
manner that is likely to be sustained over the longer term and is already allowing them to focus
more on service delivery. These and other ongoing reforms are expected to contribute
substantially to the quality of governance and improved delivery of public services, which will
particularly benefit Solomon Islands’ poorest and more vulnerable citizens, especially girls and
women, and support more inclusive growth.
3
7. The CEWG and budget support have contributed to progress on reforms. The
government and its partners have followed good practice precepts from the start. Through a
flexible, non- legalistic dialogue, well suited to Solomon Islands, the Government and its
development partners have agreed on rolling matrices of economic and financial policy actions
under a program of budget support. Through this process of open dialogue, these policy actions
have been drawn from the Government’s larger reform agenda, including the National
Development Strategy (NDS) and sectoral strategies, the governing coalition’s policy program,
and relevant ministries’ corporate plans. The CEWG process and the budget support it has
brought have an established track record of not only a credible multi-year reform effort, but also
effectively mitigating risks associated with political fragility. The strong dialogue and incentives
created by the IMF and the budget support program meant that reform efforts remained strong
and continuous during periods of political instability in the last quarter of 2010 and the first and
fourth quarters of 2011. An ongoing challenge is to maintain this positive momentum through
years when SIG enjoys positive revenue surprises and is less reliant on budget support.
8. Structural political instability has not impeded progress towards policy reforms. There
have been no major setbacks or slowing of the reform program in the last three years despite
several changes in the Minister of Finance and Treasury, changes in government, and elections.
The establishment of the CEWG mechanism, as noted above, contributed to this outcome but
there are other factors at work as well. Many of the key political leaders and senior bureaucratic
officials remain in government even if some of their portfolios are altered with each successive
change in government. Within this group, there is a high level recognition of the need for
reform. Each Minister of Finance has supported the reform agenda and to the CEWG, and as the
reforms have begun to yield results, the degree of commitment has deepened significantly across
a range of political actors.
9. Against this background, national priorities include increased social and economic
opportunities, sustainable population growth, stability, and peace – as referenced in the NDS.
The strategy places emphasis on efficient public service delivery, transparency, and
accountability. In essence, Solomon Islands is transitioning from a post-conflict stance to the
business of long-term development.
10. In support of that effort, a Second Development Policy Operation (DPO-2) for
SDR 1.4 million (US$2 million equivalent) is proposed. This grant would be the second in a
series of two development policy operations in support of Solomon Islands’ transition from post-
conflict recovery to sustainable development in the context of its NDS. The proposed operation
will support the two themes of the Country Partnership Strategy (CPS) FY13-FY16 for Solomon
Islands,2 namely, strengthening economic resilience and improved service provision.
Specifically it will contribute to the following CPS outcomes: Outcome 1. Enhanced
macroeconomic and fiscal stability; Outcome 2. Enhanced regulatory framework, public sector
capacity and community benefits in the mining sector; and Outcome 9. Improved policy and
budgetary processes to support poverty reduction and service delivery. The operation
complements similar support provided by the ADB, the EC, the Australian Agency for
International Development (AusAID) and the New Zealand Aid Programme (NZAP).
2 The CPS for FY13-FY16 was discussed by the Board on June 13, 2013. Report No. 76349 SB.
4
II. COUNTRY CONTEXT
A. RECENT ECONOMIC DEVELOPMENTS
11. In mid-2013, the Solomon Islands continued to experience a markedly more secure
macroeconomic footing relative to 2008-09, although economic growth had slowed and some
fiscal pressures were re-emerging. In 2010 and 2011, a surge in logging, the restart of gold
mining operations, support from the government’s development partners, favorable external
conditions, and gains in macroeconomic management lifted growth rates. Foreign exchange
reserves and government cash reserves were built, and retail prices were kept in check (Table 1).
These gains in macroeconomic conditions slowed in 2012, as logging and mining activity
stabilized and agricultural production declined in response to weaker prices; stronger
government spending provided some offset. Still, these conditions contrast sharply with
conditions in 2009, when Solomon Islands was worst affected among the Pacific Island
Countries by the GEC, with output contracting sharply, the government running short of cash to
meet recurrent obligations, and depleting foreign exchange reserves. Even with the recovery in
the Solomon Islands economy in the post-tension period, incomes have barely kept pace with
population growth. The latter averages almost 2.3 percent a year, according to the 2009 census,
meaning that by the end of 2012 per capita GDP remained below its pre-tension peak.
12. GDP growth slowed in 2012 to below 5 percent, following growth near 10.5 percent in
2011. The slowdown in aggregate growth was due to unchanged or lower production across a
range of major commodities, especially agricultural exports. Over the full year, cash crop
production volumes fell by as much as 30 percent. Other key drivers of production and revenue
growth stabilized in 2012 (Figure 1). Mining is estimated to have contributed around
1 percentage point to 2012 growth, but production is now likely to have stabilized, at levels
below earlier expectations. Reported log production remained at record levels in 2012 (at
2.0 million m3), although prices weakened slightly with slower construction activity in the main
Asian markets. With the weakening in external conditions, the number and scale of applications
for foreign direct investment retreated in 2012 from recent record highs.
13. Notwithstanding the weakness in the external sectors, domestic demand remained robust
through 2012, continuing its relatively strong growth of 2010 and 2011. A notable boost to
private consumption and government spending came from the Festival of Pacific Arts (FoPA),
which was held in Honiara in July, while implementation of donor-funded projects also added to
domestic demand. Manufacturing (largely for domestic consumption) and urban construction
continued recent upward trends. This demand appears to have translated into more job
opportunities, with the CBSI’s preferred employment indicator rising by 9 percent over the year
(to 46,332 in December). Between 2009 and 2012, SIG’s planned expenditure grew by
65 percent rising to 36 percent of GDP. Most of this increase was due to greater development
spending by SIG, which grew by 280 percent over this period, part of which reflects previously
off-budget spending being brought on-budget. Realized spending on payroll rose by 48 percent
over this period, while spending on other recurrent items rose by 93 percent. (Table 2).
14. Despite the deterioration in export performance, a trade surplus was recorded in 2012,
while the current account was marginally in deficit. The exchange rate appreciated to 7.1 SBD
per USD at the start of 2012 and remained near that level through to March 2013, when it
5
depreciated to about 7.2. Foreign exchange reserves increased to US$482 million in April 2013
(latest available; over 8 months’ forward non-mining import cover), compared with $418 million
twelve months earlier (Figure 2). In September 2012, the central bank announced that it would
henceforth peg the exchange rate to a basket of currencies, rather than the U.S. dollar alone. The
additional flexibility is expected to be beneficial for macroeconomic management.
Table 1: Selected Macroeconomic Economic Indicators, 2009-15 1/
2009 2010 2011 2012 2013 2014 2015
Actual Est. Est. Est. Proj. Proj. Proj.
Output and Prices
Nominal GDP (millions SBD) 4,815 5,498 6,637 7,331 8,099 8,883 9,681
Nominal GDP (millions US$) 598 682 915 997 1,067 1,136 1,205
Real GDP (% change) -4.7 7.8 10.7 4.8 4.0 3.5 3.7
Real GDP, excl. logging & mineral (% change) -2.6 5.4 7.3 3.5 5.5 3.8 4.0
Consumer price index (% change, period average) 7.1 0.9 7.4 5.9 6.0 5.0 4.7
Balance of Payments (US$ millions)
Current account balance -128 -210 -59 -1 -22 -77 -66
(% GDP) -21.4 -30.8 -6.7 -0.1 -2.0 -6.5 -5.3
Goods trade balance -74 -137 -5 47 0 -7 -18
Exports 165 224 418 493 489 526 536
O/w- Logging 88 125 191 219 226 216 145
Imports 239 360 423 446 488 533 554
Services balance (Net) -35 -81 -49 -58 -66 -95 -83
Income balance (Net) -166 -173 -178 -111 -123 -150 -154
Current transfers (Net) 147 181 173 120 167 175 188
Foreign direct investment 117 236 141 67 27 34 36
(% GDP) 19.5 34.6 16.2 6.7 2.4 2.9 2.9
Exports G&NFS (US$, % change) -12.9 40.6 68.6 14.9 0.4 7.3 2.6
Imports G&NFS (US$, % change) -15.8 59.2 11.4 6.6 8.9 11.6 2.2
Foreign exchange reserves 146 266 412 450 550 576 590
(months of forward imports) 4.1 6.4 7.6 8.5 8.4 8.6 8.6
Financial indicators
Domestic credit to private sector (% change) -4.1 -4.7 4.7 4.0 6.0 7.0 7.0
Lending rate (%) 15.4 13.5 11.5 11.4 11.0 10.0 10.0
Exchange rate (SBD$/US$, eop) 8.06 8.06 7.25 7.1 7.3 7.82 8.03
Real effective exchange rate Index (2005=100) 120.6 112.0 124.5 125.4 125.4 125.4 125.4
Percent change (%) 6.9 -7.1 11.2 0.7 0.0 0.0 0.0
1. Data and projections are from Solomon Islands Statistics Office, CBSI, IMF Country Reports Nos. 12/156 and 11/359, IMF
staff analysis, and World Bank staff projections. GDP data through 2009 are published by the Solomon Islands Statistics Office.
GDP data 2010-2012 are IMF staff estimates. Since GDP is an estimate, all ratios to GDP are also estimates.
15. Resurgent international prices for wheat, corn, and some other foods from late 2011 did
not affect Solomon Islands. Indeed, inflation slowed on improved local growing conditions and
stable import prices for rice (the main imported food, which is especially important for poorer
urban households lacking access to gardens) and fuel (which affects all prices through large
transport and electricity generation costs). A very wet rainy season brought inflation for the food
component of the CPI to a peak in March 2012, with overall inflation peaking at 8.3 percent.
Prices then retreated through the rest of 2012, helped by the slight strengthening in the exchange
rate, with urban prices rising 5.1 percent over 2012 overall. Adjustments to administered prices
(electricity and water tariffs) caused a brief spike to inflation in January 2013. (Figure 3).
6
16. Excess liquidity remained high in the banking system, with the Government’s repayment
of domestic debt contributing to this. Banks continued to experience difficulties in finding new
opportunities for private sector lending that met their prudential standards. Since late 2012,
following the revised Honiara Club Agreement (HCA; discussed below), banks were able to lend
to SOEs. Solomon Airlines obtained a local currency loan at relatively modest interest rates
secured by an aircraft, while the electricity authority is discussing borrowing options with banks.
These were the key drivers of a 20 percent increase in non-government lending in the year to
December 2012, in contrast with stagnant private sector credit between 2009 and late 2011.
Figure 1. GDP growth and contributions Percentage change and percent of GDP
Figure 2. Foreign reserves and exchange
rate
Figure 3. Honiara CPI inflation Year-on-year
Figure 4. Budget balance Millions of SBD and percent of GDP
Sources: SISO, MoFT, IMF, and World Bank staff calculations. Notes: Budget balance is overall balance. Donor-
funded grants for development projects are excluded. * 2013 data are projections
17. Slower-than-expected revenue growth and stronger spending shifted fiscal policy to a
much more expansionary stance in 2012 relative to the previous two years, although the budget
remained in surplus, at around 4 percent of GDP. (Figure 4 and Table 2) Government revenues
0%
8%
16%
24%
32%
40%
-12
-6
0
6
12
18
2001 2003 2005 2007 2009 2011e 2013f 2015f
Logging & MiningAgricultureOtherGrants (% GDP; RHS)
% 6.5
7.0
7.5
8.0
8.5
9.00
100
200
300
400
500
2003 2005 2007 2009 2011 2013
Total foreign exchangereserves (LHS)
SBD per USD (RHS)
USD m
SBD/ USD
-10
0
10
20
30
40
50
2006 2007 2008 2009 2010 2011 2012 2013
Total, 3-mth/3mthannualized
Food
Total
%
-16
-12
-8
-4
0
4
8
12
0
700
1,400
2,100
2,800
3,500
4,200
4,900
2001 2003 2005 2007 2009 2011 2013*
Balance (% GDP; RHS)Non-resource primary balance (% GDP; RHS)Expenditure (LHS)Revenues (LHS)
SBD m
%
SBD m
% GDP
7
grew by 15 percent in 2012 compared with 25 percent in 2011. Improved compliance and growth
in domestic consumption made the main contributions to revenue growth. This outturn was
weaker than the Government had expected, with the cost of tax exemptions about double the
budgeted amount, while PAYE (pay-as-you-earn) income tax receipts were a quarter below
budget forecasts, partly due to an underestimation of the impact of an increase in the tax-free
threshold. Government spending in 2012 continued to grow strongly, and disbursement rates
were higher than in recent years. From its own resources, the government spent 22 percent more
in 2012 compared with 2011. While one-off factors have contributed to the growth in spending,
such as spending on goods and services ahead of the FoPA, the development budget was the core
source of the increase.
Table 2: Solomon Islands Fiscal Indicators, 2009-15 (as percentage of GDP)1/
2009 2010 2011 2012 2013 2014 2015
Actual Est. Est. Est. Proj. Proj. Proj.
Revenues and grants 55.2 62.6 60.3 54.2 53.3 50.8 50.0
Revenues 30.5 32.0 33.1 34.6 33.4 32.9 32.0
Grants 24.7 30.6 27.1 19.6 19.9 17.9 18.0
Expenditures 53.5 56.4 51.2 50.3 52.5 50.2 49.6
Recurrent 28.6 28.2 25.6 28.5 28.2 26.8 26.6
Development 25.6 27.9 25.5 21.8 24.3 23.4 23.0
Other -0.7 0.3 0.0 0.0 0.0 0.0 0.0
Budget balance 1.8 6.2 9.0 3.9 0.8 0.6 0.4
Non-commodity primary balance -0.7 -1.3 -1.4 -4.3 -4.0 -3.7 -2.8
Public debt 33.9 28.5 22.2 17.9 16.0 13.9 13.8
O/w- denominated in foreign currency 23.2 19.8 15.2 13.0 11.4 11.1 11.3
SIG presentation (excludes most donor project grants and corresponding development expenditure and locates some
financing transactions among revenues and expenses):
Total Revenue 34.3 39.6 40.9 43.2 44.5 38.5 37.3
Domestically-sourced 30.4 32.2 34.4 33.8 33.1 31.8 31.1
Externally-provided 4.0 7.5 6.5 9.4 11.4 6.8 6.2
Total Expenditure 34.8 34.5 36.0 45.1 44.5 38.5 37.3
Recurrent 29.2 28.6 28.2 32.8 31.5 28.9 28.4
Payroll 10.6 10.3 9.7 9.3 8.7 8.9 9.0
Debt servicing 2.0 1.7 1.9 1.8 1.7 1.5 1.4
Other 14.6 14.5 14.0 16.6 15.3 14.0 13.9
Expenditure of Tied Budget Support 2.1 2.1 2.6 4.4 5.9 4.5 4.1
Development 5.6 5.9 7.9 12.4 12.9 9.3 8.7
SIG-funded 3.8 4.4 5.4 10.4 8.6 8.0 7.5
Development partner-funded 1.9 1.5 2.5 2.0 2.7 1.6 1.4
Balance -0.5 5.2 4.9 -2.0 0.0 0.0 0.0
1. Data and projections are from Solomon Islands Statistics Office, CBSI, IMF Country Reports Nos. 12/156 and 11/359, IMF
staff analysis, and World Bank staff projections. GDP data through 2009 are published by the Solomon Islands Statistics Office.
GDP data 2010-2012 are IMF staff estimates. Since GDP is an estimate, all ratios to GDP are also estimates.
B. MACROECONOMIC OUTLOOK FOR 2013-2015
18. The macroeconomic framework has been adequate to provide an acceptable level of price
stability, maintain acceptable internal and external balances, reduce the stock of debt, and build
8
reserves to cushion shocks. This broad framework is expected to be maintained in the coming
years and is therefore adequate to support the proposed program.
19. In the next few years, growth trends in the overall economy and the extractive sector are
likely to again diverge, although, in contrast with the 2010-2012 period, extractive sectors are
expected to drag rather than drive aggregate growth. Growth is likely to return to a medium-term
trend approaching 4 percent in the non-extractive economy. Growth in the overall economy is
expected to be slower, as the rate of logging is projected to decline slowly through this decade,
while Gold Ridge production is expected to remain near 2012 levels, which are around one-
quarter below expectations at the time the mine was re-opened.
20. In the medium-term, the key sources of improvements in living standards and shared
prosperity in the non-extractive economy are likely to be higher agricultural productivity, greater
opportunities in urban areas, and improved public service delivery. Agricultural production is
expected to contribute to growth in the next few years, as various cash crop sectors continue to
revive, extension services improve, and improved intermediation by trading companies facilitates
farmers’ access to markets. Since its launch in 2009, the Bank-supported Rural Development
Program (RDP) alone has provided extension services to 20,000 farmers across the country,
giving as many as 140,000 rural residents access to improved agricultural yields. This is
especially important for raising incomes in rural areas, where 85 percent of the population
resides. Gradually expanding access to regional labor markets for Solomon Islanders combined
with various low-cost innovations in financial services are likely to complement improved
agricultural productivity to support rural incomes. In urban areas, less expensive and more
reliable public utilities, and stronger human capital through investments in education and health,
are likely to support urban business. As well as supporting overall GDP, these drivers are likely
to be key for improving living standards for the bottom 40 percent of the population.
21. The gains in the health of public finances achieved in 2010 and 2011 are likely to be
broadly retained through the coming years under baseline projections. The 2013 budget, passed
in December 2012, projected a modest surplus, and included provisions for unexpected
expenditures. There are some pressures on these projections, given that in 2013 teachers won a
long-delayed pay increase, and a tsunami caused significant costs for relief operations. On the
other hand, the 2013 budget projections for revenue growth are more modest than recent years’
with revenues projected to decline as a share of GDP despite efforts to broaden the tax base and
raise compliance. In its 2-year forward estimates the Government projects maintaining a
balanced budget. Revenues will, however, remain susceptible to macroeconomic volatility,
especially in the logging and mining sectors, for the foreseeable future.
22. The external position is set to deteriorate temporarily during the transition from logging
exports to more cash crops and marine products in addition to mining. Export growth may slow
to almost zero in 2013 as mining production stabilizes and logging exports start a gradual
decline, although a reversal of the 2012 drop in agricultural production generates some potential
for a stronger outcome. Exports are projected to pick up slightly in 2014 and increasing
thereafter, linked to improvements in agricultural output, and, in later years, potential investment
in new fish canning and mining. Import growth is also expected to slow in 2013, but by less than
the slowing in exports. The net result is that the trade position is projected to weaken and the
current account deficit, after deteriorating in 2013, is projected to stabilize near 10 percent of
9
GDP. In consequence, the pace of reserve accumulation will also slow but is expected to remain
above 8 months of non-mining-related goods and service imports. This outlook puts a premium
on continued access to IMF standby facilities, while also avoiding any unnecessary reserve
drawings.
23. The medium-term outlook is subject to considerable risks inherent in a small, isolated and
geographically dispersed economy such as Solomon Islands. Frequent changes in the holders of
ministerial positions are likely to persist, which can slow the path to improved efficiency in
resource use. Elections are next scheduled in 2014, although political pressures on the executive
are ongoing. External developments provide the main source of macroeconomic risk. The
Solomon Islands are particularly susceptible to natural disasters, which can disrupt fragile
transport and production infrastructure and place additional demands on public finances to
support recovery. Declines in global commodity prices could have a dampening influence on real
activity, and slow the development of participation in the market economy. The transition from
the RAMSI program to more traditional bilateral support is expected to have limited overall
impact on domestic demand, although it does present some downside risks. Conversely, there
are also notable positive risks, especially from 2015, with significant investments proposed in
nickel mining pending clarity on the mining tax and land access regimes, while various proposals
for new fish canning operations are also under development.
C. DEBT SUSTAINABILITY
24. Government debt continued to decline, and the country’s risk rating improved to ‘yellow
light’ status from ‘red light’ status under the Honiara Club Agreement (HCA) in 2012, reflecting
the improvement from ‘high’ to ‘moderate’ risk of debt distress in the 2011 World Bank-IMF
Low Income Country Debt Sustainability Assessment (DSA). This led to the HCA to be revised,
and Cabinet endorsed a debt management strategy (DMS) in May 2012. Under the DMS, the
Government sets an annual limit on new borrowing as part of the annual budget, based on a debt
sustainability assessment prepared by the Debt Management and Economic Unit at the MoFT.
The debt limit covers domestic and external borrowing and guarantees by the Government as
well as SOE borrowing. The Government entered its first loan under the revised HCA in 2012,
with the ADB financing a submarine fiber optic cable. Meanwhile in 2012, the Government
made significant advance payments on outstanding restructured domestic bonds. Government
debt fell to SBD 1.02 billion (around 18 percent of GDP) at the end of 2012.
25. The November 2012 DSA concluded that Solomon Islands remained at a moderate risk
of debt distress. Containing the risk of debt distress will require continued efforts to rebuild fiscal
buffers, and strengthening the budgetary process to improve fiscal discipline and the quality of
spending. Debt management will need to be strengthened in light of the resumption of
borrowing.
26. Under the baseline scenario of the DSA, key indicators of sustainability—the present
value of public and publicly guaranteed (PPG) external debt, the ratio of PPG debt service to
exports and the ratio of PPG debt service to revenue—all remain below the indicative thresholds
based on the quality of Solomon Islands’ institutions (Table 3). The baseline scenario allows for
renewed access to external concessional financing following the revised Honiara Club
Agreement. As a result, the ratio of PPG debt-to-GDP rises in the long-term. In the sensitivity
10
analysis, shocks relating to non-debt creating flows (largely official grants, plus net foreign
direct investment) resulted in a substantial increase in the debt burden and caused some
indicators to rise significantly above their thresholds over an extended time period. Based on past
debt problems and the country’s uncertain growth prospects, a cautious approach to new
borrowing was advised, especially for SOEs.
27. The 2012 DSA suggests that Solomon Islands’ overall public sector debt dynamics are
sustainable in light of the current size and the evolution of the domestic debt stock. At the end of
2012, central government public and publicly-guaranteed debt had fallen to near 18 percent of
GDP. Around two-thirds of public debt was external. The ratio of debt servicing to non-grant
revenues is estimated to have fallen from around 6.9 percent in 2009 to 6.1 percent in 2012 and
further declines were anticipated. With SIG now able to access concessional loans within the
constraints of the revised debt management strategy, net present value of public debt to GDP
ratio is likely to remain near 20 percent of GDP into the medium-term.
Table 3: Debt Sustainability Indicators, 2010-22 1/
2010 2011 2012 2013 2022
NPV of debt-to-GDP ratio (%, max. 30) 28.5 22.2 18.2 15.4 19.4
NPV of external debt-to-GDP ratio (%, max. 30) 19.8 15.2 12.9 11.7 17.7
NPV of external debt-to-exports ratio (%, max. 100) 30.1 19.8 18.2 17.4 36.7
External debt service to exports ratio (%, max. 15) 3.0 1.2 1.3 1.5 1.2
Debt service to revenues ratio (%) 6.3 4.3 6.1 5.1 1.9
1. Public and publicly guaranteed debt. Source: International Monetary Fund Report No. 11/359.
III. THE GOVERNMENT’S PROGRAM
A. THE INCIDENCE AND NATURE OF POVERTY
28. Reducing poverty is a key concern of the Government and its development partners.
While evidence suggests improvement in recent years, a comprehensive household survey is
currently being carried out and will be available in 2014. Poverty in Solomon Islands is largely
related to basic needs, a higher threshold than a lack of access to adequate food. ‘Basic needs’
poverty headcount rate was estimated at 22.7 percent at the time of the last Household Income
and Expenditure Survey (HIES) in 2005-06, while the food (or extreme) poverty rate was
estimated at 10.6 percent. The poverty headcount rate was markedly higher in Honiara
(32.2 percent) than in rural areas (18.8 percent). Female-headed households tended to represent a
greater share of households in the poorest expenditure deciles, especially in the rural areas. The
Poverty Gap Index, measuring the depth of poverty in Solomon Islands was estimated at 7.5,
which is similar to Tonga and Samoa and less than that estimated for Fiji. The Squared Poverty
Gap Index, which is a measure of the severity of poverty being experienced, was 3.5 nationally,
similar to Fiji, and Tonga.
29. Rural households produce substantially more of their own food (59 percent) than those in
urban areas (17 percent in provincial urban areas and 9 percent in Honiara). The difference in
reliance on own production is greatest between urban and rural households in the lowest
expenditure quintile. These figures reflect both the greater subsistence production and the levels
of food security of rural households, as well as the general lack of organized markets in these
11
areas; it also signifies the greater need for cash for food purchases in Honiara and the provincial-
urban centers. In Honiara, 79 percent of all household heads were in some form of full- or part-
time employment. In contrast, in the rural areas only 17 percent of household heads were
formally employed. Instead, the rural population relies on a combination of subsistence farming,
logging, fishing, and the sale of cash crops. Roughly 84 percent of the population lived in rural
locations.
30. Various other development indicators are generally poor, although Solomon Islands
outperforms many of its immediate regional peers on some indicators. Solomon Islands ranked
143 out of 187 countries on the United Nations’ 2012 Human Development Index. Life
expectancy at birth is estimated to be 67 years. According to UNICEF sources, infant mortality
in 2009 was estimated at 30 per 1,000 live births, and under-5 mortality at 36 per 1,000.3
According to the same sources, 12 percent of children younger than 5 years were moderately
underweight in 2009, and 33 percent suffered from moderate to severe stunting. According to
the UNDP analysis of the 2006 HIES, the poor in Honiara were only one-third as likely to have
post primary education as the better-off, while in the rural areas, the poorest households are only
half as likely to have gone beyond primary level compared with the average for all households.
The average schooling attained by citizens 25 years or older was 4.5 years.4 While access to
healthcare appears to be relatively equitably distributed, the extent of healthcare available
anywhere in Solomon Islands is basic, with few secondary health functions available.
31. A household survey updating the 2005/06 indicators is expected to be completed by
November 2013, with a new living standards assessment to be completed in the first half of
2014. Solomon Islands, like several other Pacific Island countries, has not been part of the
surveys conducted by the International Comparison Project (which computes Purchasing Power
Parities) until the most recent round (ICP 2011) for which results are expected to become
available in late 2013. Initial calculations suggest that a $1.25 poverty line (averaged over the
country) will result in a poverty head count lower than the one obtained from the national food
poverty line.
32. Indicators more recent than the 2005/06 household survey suggest improvements in
living conditions in recent years that are likely to have benefited both the extreme poor and the
bottom 40 percent of the population. The Human Development Index rose marginally between
2006 and 2012, to 0.530, although this suffers from similar data constraints as the poverty
measurement. But indicators of real income growth and the coverage and effectiveness of service
delivery improved. Non-extractive real production per capita (one-quarter of which is non-
logging agriculture) is estimated to have grown by 17 percent between 2006 and 2013. Urban
living costs grew less rapidly than in the early 2000s, protecting households’ real spending
power, especially for those without access to formal sector incomes. Other factors suggest
households across the country enjoyed better access to services in early 2013 than has been the
case for some time. For example, health and education services and related outcomes generally
improved over this period, and remained notably more equitably distributed than in many
countries in the region (for example, the difference in the share of maternal deliveries in health
facilities between the top and bottom expenditure quartile was 20 percent in Solomon Islands,
3 The 2009 Demographic and Health Survey provided an infant mortality estimate of 24 deaths per 1,000 live births.
4 From Barro and Lee (2010) as reported in the 2010 UN Human Development Report.
12
among the smallest difference of lower-income countries with available data). The Rural
Development Program (RDP), operating since 2009, has provided 300,000 beneficiaries across
all the rural wards (apart from Rennell and Bellona Province) with improved access to water
supply, health posts, education, and energy services. Its extension services have helped as many
as 120,000 people across 80 percent of Solomon Islands’ rural wards directly benefit from
improved agricultural productivity.
B. THE NATIONAL DEVELOPMENT STRATEGY
33. Since the tension, Solomon Islands has incrementally developed a roster of development
plans. A Medium-Term Development Strategy (MTDS) for the period 2008-2010 was adopted
by the Government in 2008. A new MTDS, entitled the National Development Strategy (NDS)
2011-2020, was adopted in 2011. It builds on the experiences of past development strategies, and
upon available analytical work done in recent years by government, donors and other agencies. It
was extensively consulted with officials across the government, donors, the Solomon Islands
private sector and civil society.
34. The new NDS provides three high-level, over-arching goals. The first is to increase social
and economic opportunities for all Solomon Islanders. This goal is supported by efforts aimed at
providing help for the vulnerable, and by providing an equitable distribution of public resources
and economic benefits. The second goal is to secure sustainable growth. Supporting activities
include facilitating private sector development, diversifying the economy, and improving the
management of environmental issues and climate change in particular. The third goal is to
maintain stability and peace. This goal is supported by maintaining security, law and order; and
by securing regional and international partnerships. These three goals are complemented
throughout by a general emphasis on improving the quality of governance. Special emphasis is
placed on increasing the efficiency, effectiveness and accountability of public service delivery
(notably for policing, health, education and infrastructure) and on ensuring compliance with laws
and regulations. Towards implementing programs to realize these high-level objectives, over
2012 and 2013 the Government has been developing a series of sectoral strategies, which are
then linked to individual ministries’ corporate plans. These prioritize specific, costed activities,
which are linked to a monitoring and evaluation framework. From the various policy goals of the
NDS, as implemented through the sectoral strategies and ministries’ corporate plans (especially
MoFT and MDPAC), key policy actions are assembled into the EFRP through the consultative
CEWG process. Through this process, policy actions expected to have a strong impact on
improving key development outcomes, especially through more effective use of public resources,
and where reform champions value links to budget support, are prioritized.5 From the EFRP, the
World Bank identified a multi-year program of policy actions that align with its Country
Partnership Strategy, and that complement the reforms supported by other CEWG development
partners.
5 The 2012-2015 EFRP matrix is reproduced in Annex 3 of this document, and the previous iteration was reproduced
in the First Development Policy Operation Program Document.
13
IV. WORLD BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
A. LINKS TO THE COUNTRY PARTNERSHIP STRATEGY
35. Solomon Islands has been a member of the World Bank Group since independence in
1978. The Solomon Islands Government has received a number of loans and grants from the
World Bank, totaling US$63.4 million, prior to the Interim Strategy Note (ISN) FY2010-2013.
These projects assisted governments’ work in numerous fields including education, rural
development, health, and energy. In November 2008, the World Bank Group established a
permanent office in Honiara together with the Asian Development Bank. During the period of
the ISN FY10-13, US$ 15.1 million in IDA Grants and US$ 19.9 million in Trust Fund Grants
were disbursed by the World Bank to Solomon Islands.
36. This series of two development policy operations was designed during the ISN for FY10-
FY13, and is based on the country’s NDS, the earlier MTDS, and associated sectoral strategies.
This second operation in the series is also consistent with the current Country Partnership
Strategy FY13-FY16,6 which is aligned with the Government’s NDS. Both programs are
explicitly rooted in a results-based framework which is consistent with the goals of the NDS and
MTDS. Results are monitored, where appropriate and possible, by quantitative intermediate
progress indicators that are directly affected by Bank interventions.
37. The ISN specifically envisioned the initiation of development policy operations, stating
that “the WBG will move toward a modest Development Policy Operation in FY2011 in order to
support select PFM reforms, encourage coordination, selectivity, and sequencing among the
overall donor budget support program, and help to move the country away from narrow project
aid modalities. A gradual shift to budget support could also over the medium-term become a
more cost effective use of aid funds, given the high transaction costs of project implementation
in Solomon Islands.” The CPS envisages that the current series is followed by a future
development policy operation or series, which may expand further from the current PFM focus
to other areas of high priority to the Government, as the Government’s familiarity with the DPO
instrument grows and as the CEWG moves into a new phase of policy dialogue.
38. The proposed operation is the second in a series bridging the FY10-13 ISN and FY13-16
Country Partnership Strategy. It will support a number of key outcomes that are consistent with
the objectives of both. These include policy actions that will help address fiscal pressures and
build macroeconomic and fiscal stability, through the specific policy actions supported by the
program, the provision of financing and through the attendant participation of the Bank and other
donor partners in the policy dialogue; update the mining sector regulatory and institutional
framework and seek participation in the EITI to support community benefits from mining; and
improve the effectiveness, efficiency, and planning of public service provision.
6 The ISN and CPS are published respectively as World Bank Report No. 53496-SB and No.76349-SB.
14
B. RESULTS ACHIEVED UNDER PREVIOUS DEVELOPMENT POLICY OPERATIONS
39. The proposed operation is the second of two programmatic Development Policy
Operations from the World Bank. The momentum of the first DPO has been maintained, with
the Government building on and deepening its policy reform efforts as the program matures. The
Government’s ownership of the supported reform program has remained strong.
40. Across the individual policy actions achieved under DPO-1, in the year since the
approval of the program, all have seen deepening government engagement. While it is generally
too soon to robustly assess whether these actions have improved outcomes, the identified results
indicators have generally been met. (Table 4) Their contribution to more inclusive service
provision and development extends beyond the results indicators identified at the time of
preparing DPO-1.
C. COMPLEMENTARITY WITH OTHER BANK ACTIVITIES
41. Several operations are direct complements to the DPO series and provide financial and
technical assistance in these areas. The line ministry expenditure analyses provide hands-on
technical assistance to support selected line ministries and the central finance agencies analyze
and report on spending patterns across various heads and government priorities. The intended
improvements in public expenditure management will benefit from and build upon similar work
initiated under the Health Sector Support Program Technical Assistance (HSSP-TA) Project
Active since March 2008, the HSSP-TA complements the larger AusAID HSSP sector-wide
approach with targeted technical assistance to the Ministry of Health and Medical Services. The
technical assistance focuses on public expenditure and financial management and planning for
the medium-term and at the provincial level. The support to the implementation and analysis of
the 2012-2013 Solomon Islands Household Income and Expenditure Survey will ensure timely
data are available to provide updated assessments of poverty and human development needs and
to inform spending allocation decisions.
Table 4: Policy Actions Completed for the First Development Policy Operation
Policy Actions Intermediate results
indicators, 2013/2014 Subsequent progress
Development Objective One: Improve Public Financial Management
(1) Introduced the use of
ministerial expenditure
analysis briefs into the
annual budget process from
2012, providing information
on the level and composition
of budgeted and actual
expenditures.
The number of ministries
and government institutions
in 2013 that do not deviate
more than 10 percent from
the original and
supplemental allocations
approved by Parliament will
increase to at least 14
compared to the 2009
baseline of 10.
The line ministry expenditure analyses introduced in 2011
are becoming routinized into the Budget preparation work
program, and have also become more thorough. A more
strategic approach to these analyses is being supported by
the Bank at the request of the MoFT in collaboration with
select line ministries, highlighting the extent to which
resource allocation supports the Government’s inclusive
growth and service delivery objectives. While these
analyses are yet to lead to measurable improvements in
budget execution rates, which were little changed in 2012
from previous years, and it is too early to robustly assess
their impact on allocation decisions, officials involved
indicate that this is leading to more informed prioritization
of spending proposals.
15
Policy Actions Intermediate results
indicators, 2013/2014 Subsequent progress
(2) Issued separate
accounting warrants on April
19, 2011 for each ministry in
order to strengthen payroll
expenditure control.
Total actual payroll
expenditure in 2012 shall not
deviate by more than 10
percent from the
appropriated amount.
Separate warrants for payroll were again issued for the 2013
budget. In 2012, total payroll expenditure (including
allowances and pension contributions) was 7 percent greater
than budgeted. The number of ministries overspending on
wages & salaries declined from 22 in 2010 and 24 in 2011
to 18 in 2012. The extent of overspending also declined: 12
ministries overspent their budget for payroll by more than
10 percent in 2010, 13 ministries in 2011 and 9 ministries in
2012. Improved payroll control reduces the risk of
unplanned resource reallocations, that can undermine the
Government’s inclusive and pro-poor service delivery goals.
(3) Published successful
tenders awarded by the
Central Tender Board,
including the name of bidder
and amount of bid.
Details of successful tenders
awarded by the Central
Tender Board in 2011-12,
including items procured,
contract amount,
procurement method, and
name of vendor are
published on the MoFT
website.
Tenders awarded by the Central Tender Board continue to
be reported on the MoFT website, including items procured,
contract amount, procurement method, and name of vendor,
although there have been periods when the website has not
been updated (due to the lack of staff with the technical
skills and issues with the website’s hosting arrangement).
The website also now presents more information on tenders
advertised. Further, SIG has undertaken additional measures
to improve the efficiency of its procurement (discussed
below with respect to Policy Action 5 for DPO-2).
Development Objective Two: Improve the Financial Management of Key State Owned Enterprises
(4) Adopted a Community
Service Obligation policy for
State Owned Enterprises on
June 9, 2011, with a
budgetary allocation in 2011.
Solomon Islands Water
Authority (SIWA) debts to
the Solomon Islands
Electricity Authority (SIEA)
are reduced by at least one-
third from a September 30,
2011 baseline of SBD 33
million.
The Government has continued and deepened the program
of community service obligation contracts. In the 2013
budget, SBD 24 million was allocated for three community
service obligation contracts with SIWA, SIEA and Solomon
Airlines, to defray the cost of providing services in high-
cost areas. These funds were also partly allocated to address
the debts of SIWA to SIEA, which have been fully resolved
through an agreement (discussed below with respect to
Policy Action 6 for DPO-2). These funds are supporting
equitable provision of public services (electricity, water and
air transport), by ensuring that services continue to be
supplied at equivalent prices in higher-cost, remoter areas.
Development Objective Three: Improve Extractive Revenue Transparency
(5) Endorsed an EITI policy
paper on July 6, 2011
proposing the
implementation of EITI
principles and commitment
to work with civil society
organizations and extractive
industry companies in the
Solomon Islands, with an
accompanying public
statement on August 26,
2011.
A work program for
improving extractive
revenue transparency has
been agreed between
government, civil society,
and firms. In addition SIG
publishes national EITI
Report by December 2013,
required to achieve EITI
member status.
Solomon Islands continued the EITI candidature process in
2012 and into 2013 (discussed below with respect to Policy
Action 7 for DPO-2). Government, civil society, and firms
have agreed on a work program towards this objective.
42. The DPOs’ focus on SOEs complements the Solomon Islands Sustainable Energy Project
(IDA Grant H415-SB and AusAID Grant TF0971366). With a World Bank grant of
US$4 million for four years to 2013, this project aims to support and improve the efficiency and
16
reliability of electricity supplied by the Solomon Islands Electricity Authority (SIEA). This is
being done through the recruitment of management expertise, the improvement of SIEA’s
financial position, and the strengthening of SIEA’s technical operations. Efforts have led to
improved collections, installation of more cash power meters, and significant reductions in
outages. The World Bank has been the leading donor on energy issues since 2004, including
ongoing support for the proposed Tina River hydroelectric project.
43. The focus on updating the regulatory and institutional fiscal framework for mining,
particularly with regard to efficiency and transparency, is fully consistent with the Bank’s
Mining Sector Technical Assistance (Grant TF097135). The World Bank, through the State and
Peace-building Fund, is providing technical assistance to the Solomon Islands Government to
review policy, legislation and institutional arrangements relating to the mining industry. This
will set the stage for a planned second phase of the project which will include a major capacity
building effort. The project is gender-informed, by also including activities aimed at
mainstreaming women’s voice on mining related issues. The project is complemented by
separate efforts to support the Government’s stated intention to implement the Extractive
Industries Transparency Initiative (EITI). The process is supported by the placement of an EITI
specialist in the World Bank office in Honiara.
D. COMPLEMENTARITY WITH OTHER DEVELOPMENT PARTNER PROGRAMS
44. The proposed DPO series will complement and leverage the support of other
development partners, especially as coordinated through the CEWG. The specific areas for IDA
support have been identified in close coordination with other development partners, aiming for
synergy with their respective interventions, and building on IDA’s comparative advantage in
these areas. The Bank will continue to collaborate closely with these donors during
implementation of the government program supported by the proposed operation, especially
through the mechanism of the CEWG.
45. The creation of a multi-donor CEWG together with SIG was a transformational event, as
discussed above. The first Economic and Financial Reform Program (EFRP)7 was constructed
through the CEWG process in 2009 and was followed by a Joint Review Mission (JRM) led by
MoFT under the auspices of the CEWG in August 2010. The reform program has been updated
annually, and from 2011 included a rolling three-year program of actions and indicators of the
impacts of various policy reforms (the latest EFRP is reproduced in Annex 3). JRMs have been
held annually, and a summary of the third Mission’s findings is provided in Box 1. At the time of
the fourth mission, which will coincide with the transition from the RAMSI civilian program to
bilateral support, a more thorough retrospective review of the EFRP program and its impacts is
planned. The missions guide the disbursement decisions of donors. In order to avoid
overwhelming a small Ministry of Finance, there is an agreement that donor representation in the
review is limited to a rotating subset of the full membership from year to year. The 2011 and
2012 missions were led by the World Bank and MoFT on behalf of development partners and
government respectively, with participation from AusAID, the EC and, in 2012, ADB, as well as
MDPAC and CBSI. 7 It should be noted that the EFRP does not, and is not intended to, address unresolved issues underlying “the
tension”. That work is ongoing and is led primarily by RAMSI. Additional work on related issues is led by the
UNDP as well as the World Bank under the Justice for the Poor program.
17
46. The creation of the CEWG and a common EFRP matrix facilitated the introduction of
general budget support to Solomon Islands by the ADB and the EC in 2010 and 2011, followed
by the World Bank in 2012, and proposed operations by all of these donors again in 2013. ADB
support under the Economic Support and Recovery Program8 focuses on fiscal management,
public financial management, SOE accountability, telecommunications deregulation, and
transportation policy, and, later, gender. The ADB disbursed US$5 million into the 2010 budget,
under its Economic Support and Recovery Program sub-program 1. It disbursed an additional
US$5 million into the 2011 and 2013 budgets. EC budget support under its Vulnerability
Flexibility (V-Flex) Funds was focused primarily on mitigating the impact of the Global
Economic Crisis. In 2010, the EC disbursed €15.2 million into the 2010 budget, followed by
€2.8 million into the 2011 budget under its Climate Assistance Programme. The EC plans to
disburse €1.5 million into the 2013 budget, with a pipeline of €2 million to €2.5 million each
year from 2014 to 2018, linked to progress in achieving the EFRP goals and an ongoing stable
macroeconomic framework.
47. In addition, the Governments of Australia and of New Zealand are providing sector
budget support to health and education, with each aligned to the common EFRP matrix as well as
related policy achievements in the sectors. Australia also provided AU$3 million each year from
2010 through 2012 in support of progress against the rolling EFRP policy actions. In 2013
AU$ 2 million was disbursed in the first quarter of the year, with an additional AU$ 1 million to
be paid once further actions had been completed. Under a multi-year funding arrangement,
AU$ 3 million is linked to the EFRP. This is one component of the Solomon Islands Economic
and Public Sector Governance Program (SIGOV), which succeeds the RAMSI Economic
Governance and the Accountability and Public Sector programs. New Zealand has disbursed
SBD 55 million each year from 2010 through 2012 as budget support for the education sector
with links to progress against the EFRP reform matrix. Under a tripartite funding arrangement
signed in March 2013 between SIG, Australia and New Zealand, NZ has agreed to provide up to
SBD 55 million per annum for 2013 through 2015 for sector budget support, which includes
references to progress on the EFRP matrix. The Bank has collaborated closely with each of
these donors to ensure close alignment and complementarities in the areas supported by the DPO
series, under the auspices of the CEWG.
48. The Bank is also taking care to align its efforts with ongoing donor programs of technical
support for public financial management, notably the comprehensive program of support from
the RAMSI Financial and Economic Management Strengthening Program (FEMSP), from
ADB’s Pacific Private Sector Development Initiative (PSDI) on SOE reforms and NDS
implementation, and from the Pacific Financial Technical Assistance Centre. The work on SOE
reforms is conducted in collaboration with the ADB, which takes the lead in this sector.
49. IMF and IDA staffs have coordinated closely on the identification of the respective
institutions’ areas of focus. The IMF Board concluded the second review of Solomon Islands’
arrangement under the second Standby Credit Facility in November 2012, following the earlier
programs. The authorities and the IMF agreed that support for the Government’s reform
program will shift to a three-year Extended Credit Facility following the expiry of the second
arrangement in December 2012. IMF and IDA staffs have coordinated their advice closely on
8 ADB Project Number: 43186-01.
18
economic issues and solutions for the Government. IDA relies on the IMF for advice and
assistance on issues related to macroeconomic management while the IMF relies on IDA for
advice and assistance on issues such as sector strategies, human development challenges, and
private sector development. Both staffs collaborate on issues related to fiscal management and
are also coordinating closely to provide advice to the Government in its efforts to strengthen
public financial management, including the drafting of a revised Public Finance Act.
Box 1: The Third Joint Assessment Mission of the EFRP Matrix
E. LESSONS LEARNED
50. The proposed operation will be the second World Bank DPO for Solomon Islands in the
current two-operation series. The design of this operation has benefited from lessons learned
through the first operation, from development partners providing budget support in Solomon
Islands, and from similar World Bank operations in other small, fragile countries. These are
summarized below, and in Box 2:
Budget support to fragile states should not be viewed as simply a transfer of financial
resources; rather, it should be considered as a key element of an aid package that also
includes evidence-based policy dialogue, analytical work, technical assistance, and capacity-
building activities. This advice is well heeded: the proposed operation is embedded in the
CEWG policy dialogue, it builds on prior analytical work, and it complements ongoing TA
programs provided by RAMSI, the World Bank, and other donors.
The 2012 Joint Assessment Mission, reviewing SIG’s achievements in implementing the Economic and Financial
Reform Program (EFRP) 2012-2014, found progress in many important areas described elsewhere in this
document. It recommended the following priorities for the CEWG-supported reform program, which includes
areas already being addressed and areas that would benefit from greater emphasis.
1. Ensure that vacant positions are filled in priority areas, subject to budgetary resources. Into the medium-term,
establish performance management systems that create appropriate incentives for the development of public
servants, especially senior management.
2. Develop an assessment of, and a roadmap for, addressing institutional weaknesses and capacity needs across
central fiscal agencies and key implementing agencies.
3. Strengthen budgetary planning and execution processes to improve the quality of spending, by:
i) costing recommended Development projects before submission to Cabinet for approval
ii) assessing spending proposals for consistency with the National Development Strategy, especially with
respect to the poverty reduction objectives;
iii) further integrating the Recurrent and Development budget formation processes;
iv) improving linkages between line ministries and central agencies with respect to budget planning;
v) improving the linkages between the planning and budget preparation functions within line ministries to
better support policy-focused budget requests; and,
vi) completing preparation of multi-year investment pipelines and recurrent forward estimates, with SIG
seeking support for this through multi-year commitments from development partners
4. Develop a comprehensive PFM strategy and roadmap that identifies, prioritizes and sequences reforms.
5. Operationalize the recently-created procurement unit in MoFT.
6. Support financial inclusion, by ensuring the regulatory framework facilitates the development of low-cost
financial innovations in Solomon Islands.
7. Ensure Solomon Islands receives a fair return from its natural resources, by developing and legislating a
standard template for taxation arrangements of future mining projects, and addressing risks around aggressive
tax planning.
19
Close working relations supporting an ongoing dialogue between the Bank and government
counterparts improve the quality of Bank assistance. The establishment of a World Bank
country office in 2008 has helped ensure such a relationship. The CEWG, where the Bank
takes a lead role among development partners, has become the central mechanism for
ongoing policy dialogue. As an increasingly well-recognized institution, especially for the
Prime Minister and Minister of Finance and Treasury, the CEWG ensures the policy dialogue
has continued even beyond the earlier period of high fiscal pressures.
Programmatic operations focusing on a modest reform agenda may be suitable for gradual
reformers such as the Solomon Islands Government – strong ownership for uncomplicated
and politically feasible reforms can build momentum for future change. This lesson is
reflected in the design of the EFRP matrix to which this operation is aligned (discussed
elsewhere and reproduced in Annex 3).
Effective coordination among donors is important in small states with limited capacity.
Capacity to implement structural reforms is extremely thin in small states and can easily be
overwhelmed by the relatively large number of donors, some of which bring processes
designed for higher-capacity contexts. It is therefore critical that donors coordinate their
activities closely and minimize duplication of efforts that overstretches government capacity.
In recognition of this lesson, this DPO was prepared through the CEWG mechanism in a
manner fully aligned with the EFRP matrix including its annual review process.
Complementing the policy actions with technical assistance is important both for design of
the policy actions and their implementation. Especially given the extremely thin capacity in
Solomon Islands, ongoing technical assistance will be needed over the medium- to long-term
to ensure that SIG’s policy reform achievements are sustained and their potential to support
inclusive access to services and more effective use of resources is achieved.
51. Results indicators are included in the Program Matrix in Annex 2 for measurement at the
conclusion of this proposed operation, the final in this series.
Box 2: Good Practice Principles on Conditionality
Ownership: Reinforce country ownership. All prior actions for DPO-2 are consistent with the Government’s NDS.
Harmonization: Agree up front with government and other financial partners on a coordinated accountability
framework. This is achieved through the CEWG EFRP matrix, jointly negotiated and agreed on an annual cycle (See
Section IV.D above).
Customization: Customize the accountability framework and modalities of Bank support to country circumstances.
This is achieved in the broad sense through consistency with the NDS. The framework is also reviewed and revised
annually, in response to evolving circumstances.
Criticality: Choose only actions critical for achieving results as conditions for disbursement. The number of donor
benchmarks was 17 in 2009 and 19 for 2010/11, of which 5 were selected for the DPO-1, and 7 out of 14 budget
support-linked actions were selected for DPO–2. Further efforts to consolidate the EFRP matrix on the basis of
criticality have been pursued in preparing the 2012-15 matrix.
Transparency and predictability: Conduct transparent progress reviews conducive to predictable and
performance-based financial support. The EFRP matrix provides a pre-established and harmonized framework for
the evaluation of performance by linking indicative outcome indicators with policy actions.
20
F. ANALYTICAL UNDERPINNINGS
52. The design of the proposed operation is based on the conclusions and recommendations
presented in a number of analytical documents. They include core diagnostic assessments by the
World Bank in collaboration with the Government and other donors. The design aspects related
to public financial management are informed primarily by the 2010/11 Public Expenditure
Review (PER), which focused on issues related to budget formation and budget execution, at the
request of MoFT, as a means of improving public service delivery. The PER provides guidance
on a number of reform options aimed at budget formation and budget execution, some of which
have been taken up in the evolving EFRPs.9 At the request of MoFT, the PER process has been
followed by public expenditure analyses of selected line ministries. These analyses have
supported the development of capacity of budget and planning officers in the line ministries to
analyze their resource use against priorities, track patterns in their expenditures, and also to
develop better communication with the central finance agencies. Additional guidance in public
expenditure management is provided by the Solomon Islands Public Financial Management
Performance Report (EC, 2008) and the Solomon Islands Public Expenditure and Financial
Accountability (PEFA) assessment (2012), the Solomon Islands Operational Procurement
Review (IDA, 2008 and 2012), the Financial and Economic Management Strengthening Program
(RAMSI, multi-year), Solomon Islands Education Sector Public Expenditure Review (IDA,
2009) and the Health Financing Options report (IDA, 2010). An assessment of civil society and
the demand for good governance can be found in an unpublished 2008 report commissioned for
the World Bank entitled Pacific Region Civil Society Scoping Mission Country Notes, and
through other background pieces prepared by the World Bank’s Justice for the Poor program.
53. Much of the policy program addressing SOE weaknesses was informed by ‘Designing a
Program of Support for Strengthening the Solomon Islands’ State Owned Enterprises’ (RAMSI,
2010), and ‘Finding Balance: Benchmarking the Performance of State-Owned Enterprises in
Fiji, Marshall Islands, Samoa, Solomon Islands, and Tonga,’ along with preparatory work for the
World Bank Solomon Islands Sustainable Energy Project (Additional Financing). Among other
things, these reports included suggestions for improving the governance, financial accountability
and sustainability of key SOEs.
54. The content related to mining is informed by the publicly-available analysis prepared for
the Solomon Islands Mining Sector Technical Assistance Project (Grant TF097135), a
background paper completed for the Solomon Islands Growth Prospects Discussion Note, and a
background note on the history of the Gold Ridge Mine prepared by the Justice for the Poor
team. These documents established the need for more attention to the quality of the regulatory
framework particularly with regard to exploration, taxation and revenue sharing, and to the
complexities of community involvement and communication in the Solomon Islands context.
9 The PER team also provided informal technical assistance to their counterparts in the MoFT Public Expenditure
Analysis Section.
21
V. THE PROPOSED OPERATION
A. RATIONALE AND OBJECTIVES
55. The proposed grant of SDR 1.4 million (US$2 million equivalent) is the second in a
programmatic series of two development policy operations in support of Solomon Islands’
transition from post-conflict recovery to sustainable development in the context of its NDS.
Budget support as a form of assistance in Solomon Islands serves several over-arching strategic
purposes. It has proven more effective than investment lending or TA alone in supporting and
consolidating structural reform. It mitigates vulnerability to unanticipated shocks. And it
promotes dialogue and coordination across development partners, thus reducing transaction costs
for government and aid fragmentation.
56. The proposed operation supports three development objectives: i) improve public
financial management; ii) improve the financial position of key State Owned Enterprises; and iii)
improve extractive revenue transparency. The proposed operation is fully aligned with the
objectives of the Country Partnership Strategy (FY13-FY16) contributing to: macroeconomic
and fiscal stability (Outcome 1); enhanced regulatory framework, public sector capacity and
community benefits in the mining sector (Outcome 2); and improved policy and budgetary
processes to support poverty reduction and service delivery (Outcome 9). The overarching
themes throughout are public sector effectiveness and accountability.
57. Improved public financial management is the first development objective. Successive
governments have been re-building basic systems in partnership with the donor community but
there is now an appetite to undertake measures in new areas. One of these is the quality of
budget formation and execution. The Government intends to more transparently link its future
budgets to the NDS and associated sectoral strategies. It has introduced a more consultative
budget formation process, while at the same time, lifting the quality of budget execution. If
these reforms are sustained, the quality of public service delivery should gradually improve,
especially to more vulnerable groups, and this will boost overall confidence in the public sector,
and future prospects for the economy.
58. Improved financial management is also needed to strengthen SOEs’ financial position,
which is the second development objective. The SOEs responsible for electricity and water not
only provide key public services, but also have an important role to play in job creation and
investment promotion. A new SOE Act, passed in 2007, and its accompanying regulations
issued in 2010, are facilitating their ability and motivation to play this role. The aspects related
to governance and monitoring of the SOEs are particularly important to success. The
Government intends that these provisions shall be implemented. The earlier policy reforms
undertaken under the CEWG Policy Matrix 2010-2011 required: i) publicly releasing an annual
SOE monitoring report, ii) endorsing debt restructuring for the Solomon Islands Electricity
Authority (SIEA) and new appointments to senior positions, iii) completing the tender process
for sale of Sasape Marina and initiating a restructuring of Solomon Airlines, iv) implementing
SOE regulations on community service obligations, and v) appointing directors with a view to
further enhancing performance. It also required actions to resolve the debt that the Solomon
Islands Water Authority (SIWA) owed to the SIEA (more than SBD 33 million). The
sustainable resolution of this debt is the focus of this operation.
22
59. The selection of the third policy objective, improved extractive revenue transparency, is
motivated by three post-conflict needs: i) mitigate the proven potential for conflict through
transparent and consultative administration of benefits; ii) address the well-founded public
concern that mining will go the way of logging, providing only short term benefits to only a few
people, and iii) strengthen the ability of the Government to administer a technically challenging
sector with large international investors.
B. POLICY AREAS
60. Policy actions supported by the proposed operation are aligned with the Government’s
NDS and sectoral strategies, and, within those, its EFRP (the 2012-2015 EFRP matrix is
reproduced in Annex 3 of this document, and the previous iteration was reproduced in the First
Development Policy Operation Program Document). Table 4 provides details of the operation’s
prior actions. The rationale for their selection is discussed below and in Section III.B above,
particularly in terms of their importance to the government program, expressed government
commitment, and feasibility in the context of ongoing capacity constraints. Specifically, each of
the three policy areas in this sub-section includes a description of the challenges facing the
Government, a review of recent government actions, and reforms planned to be undertaken under
the broader program, including the policy actions supported by the proposed operation. The
operation foresees outcomes in line with the results targeted in the CPS which, in turn, is
consistent with the results sought by the NDS.
61. One policy action identified at the time of DPO–1 has been refocused, while another has
been dropped in favor of an important policy reform that is further advanced (Table 5). Policy
action (2) has been refocused on the application of ‘natural account codes’ (the simplest level of
economic classification of expenditure items) in the revised chart of accounts for both the
recurrent and development budgets, which is already improving budget preparation and
monitoring, especially of the development budget.10
Given that the development budget was
previously presented only at the aggregate project level, this is assessed to have a more
immediate positive impact on budget preparation and execution. Tracking spending by programs
and activities is to be phased-in over the coming years as capacity is built in the use of the new
CoA and the definition of programs is clarified.
62. Meanwhile, work on the redrafted Public Finance Act (PFA, previously action 4) has
been slower than anticipated, due to the iterative process of preparing drafts and reviewing these,
and to the need to ensure consistency between the new Act and other legislation being submitted
to parliament relating to the management of public funds. The redrafted Act remains a
component of the IMF three-year Extended Credit Facility program, with SIG undertaking to
submit to Parliament the draft of a new Public Finance Act that covers fiscal responsibility
provisions and management of public debt by 31 October 2013. Complementing the IMF’s
engagement, the World Bank has remained engaged in the development of the Act, through
preparing extensive comments on draft Bills and by providing further background analysis to
support the preparation of the Act. The PFA action has been replaced by one with reflects the
Government’s notable legislative and operational progress to establish a stronger and more
transparent process of assessing exemptions to customs, excise and other tax obligations.
10
‘Natural account codes’ and their role in budget preparation and tracking are described below, from paragraph 71.
23
Table 5: Proposed Policy Actions for the Second Development Policy Operation
Indicative Triggers for DPO-2
Identified at DPO-1 Proposed Policy Actions for DPO-2 Status
Development Objective One: Improve Public Financial Management
(1) Publish a summary of the
consultations with civil society
organizations that occurred in preparing
the 2012 budget and solicit similar
consultations in the formation of the
2013 budget.
(1) Published a summary of the
consultations with civil society
organizations that occurred in preparing
the 2012 budget and carried out similar
consultations in the formation of the
2013 budget.
Completed. No change from
trigger.
(2) Adopt a new chart of accounts
(CoA) to plan and track expenditures by
programs and activities.
(2) Adopted a new chart of accounts to
plan and track expenditures by natural
account codes across recurrent and
development expenditures.
New CoA adopted. Action
refocused on more immediate
priorities of tracking expenditures
by natural account codes,
especially for the development
budget.
(3) To assess the full content of
individual ministry spending proposals
for the recurrent and development
budgets, adopt formal consultation
mechanisms between central agencies
and line ministries as part of the budget
formation process.
(3) Adopted formal consultation
mechanisms between ministries as part
of the budget formation process to assess
the full content of ministries’ spending
proposals for the recurrent and
development budgets.
Completed. No change from
trigger.
(4) Cabinet endorses policy positions
consistent with sound Public Financial
Management principles, to be
incorporated in a new Act, including the
requirement that all budgets and
budgetary variations are fully funded.
(4) Parliament has approved a Bill
establishing a transparent and consistent
process for approving tax exemptions.
New action. Completed.
(5) Create and begin staffing a
dedicated procurement branch within
the Treasury including dedicated units
for policy and training, tender support,
and operational procurement.
(5) Established a dedicated procurement
branch within the Treasury including
dedicated units for policy and training,
tender support, and operational
procurement.
Completed. Procurement unit
established and new staff hired.
Development Objective Two: Improve the Financial Position of Key State Owned Enterprises
(6) SIEA and SIWA, in collaboration
with MoFT, agree on a mechanism for
the reduction of SIWA’s debts to SIEA.
(6) SIEA and SIWA, in collaboration
with MoFT, have agreed on a mechanism
for the reduction of SIWA’s debts to
SIEA.
Completed. No change from
trigger.
Development Objective Three: Improve Extractive Revenue Transparency
(7) An application for candidate status
to EITI international secretariat is
completed.
(7) Has applied successfully for
candidate status to the EITI.
Completed. No change from
trigger.
24
(1) The Recipient has published a summary of the consultations with civil society
organizations that occurred in preparing the 2012 budget and carried out similar
consultations in the formation of the 2013 budget.
63. Current situation and challenges: The use of public resources in Solomon Islands has
suffered from weak feedback and accountability mechanisms. Very few Solomon Islanders pay
taxes directly, reflecting limited participation in the formal economy. Most revenues are
collected from international trade, especially foreign-owned resource exporting companies, and
as aid flows. Meanwhile, conceptions of government as a provider of public goods and services
are yet to become well entrenched, and the notion of an accountable state remains weak. An
electoral system that awards single-member seats to the candidate with a plurality of votes, the
absence of political parties, and strong intra-clan relationships at the expense of inter-clan ties,
further entrenches a tendency to view public resource use solely through a narrow, clientelist
lens. These issues weaken the effectiveness and efficiency with which public resources translate
into delivery of public services.
64. The budget preparation process, has until recently been internally focused and lacked
participation from subnational governments, civil society organizations (CSOs) or the wider
community in Solomon Islands. It has instead been largely focused on Caucus11
and Cabinet.
During consultations held with government agencies and civil society as part of the PER process,
participants attributed weaknesses in budget allocation decisions partly to this lack of broader
engagement with stakeholders. In addition, given the scale of development partner support in
Solomon Islands, stronger domestic consultation mechanisms can reduce the risk of government-
donor dialogue crowding-out domestic stakeholders from the budget dialogue.
65. Recent government actions: SIG recognizes the benefits of involving external
stakeholders in the budget formation process. Within the governing coalition’s policy platform
on budget reform (policy 4.3.4.3) “to strengthen resource allocation processes to improve SIG’s
ability to deliver services effectively to the people of Solomon Islands,” and the EFRP policy
reform goal of “build[ing] community and broader awareness of the budget process and
engagement in the appropriate use of public resources”, SIG has taken important steps to expand
the involvement of CSOs and subnational governments in the budget processes. While efforts to
engage civil society have been limited partly due to the still nascent nature of the CSOs in
Solomon Islands, these consultations developed wider participation in the budget process.
66. In 2011, the Government piloted consultation meetings with civil society and churches in
Honiara, facilitated by the MoFT Budget Unit. Participation of these stakeholders was
incorporated into the Cabinet-endorsed 2012 Budget preparation calendar. The communications
flow was in both directions: the discussions informed budget allocation decisions, while also
being used by MoFT and MDPAC to describe the budget process and to provide information on
the service delivery activities of the Government. A summary of these consultations was
included in the new ‘Volume 1’ of the 2012 Budget Papers. Whilst only a limited number of
CSOs participated, the 2011 consultations were viewed as an important, first positive step
towards greater external consultation.
11
Most members of Cabinet and many of the coalition of Members of Parliament supporting the current Prime
Minister, plus some non-members, constitute the ‘Caucus’.
25
67. Building on the 2011 pilot, SIG expanded the scope of its external consultations within
the 2013 budget process. Over May and June 2012 the government consulted with civil society
organizations in nine provinces plus a larger range of bodies in Honiara, and included
representatives of all provincial governments (except Makira Ulawa province, due to logistical
issues). Ahead of the meetings, formal letters from the Minister of Finance were sent to
provincial governments and civil society representatives, requesting their participation and
support in the process. A variety of organizations received invitations, with women’s groups
especially included in an effort to ensure gender balance (discussed further in Box 3). Invitations
were accompanied by questionnaires, towards prompting reflection and to receive preliminary
written feedback ahead of the meetings. The meetings were generally held as open forums. Of
more-than thirty organizations invited to the consultation meetings, written feedback was
received from nineteen. This is an improvement on both the number and breadth of
organizations consulted in the 2012 Budget process. Provincial government representatives
generally engaged with MoFT and MDPAC substantively on budget allocation and execution
issues, while capacity was weaker among the civil society organizations.
68. To structure the 2013 Budget consultations, and ensure that they informed the
Government’s priority of improving the inclusiveness of service delivery, the Government
focused on the areas of health and education, with respect to three topics: i) access; ii) service
level or quality; and iii) gaps in services. With respect to accessibility, discussions focused on the
adequacy of infrastructure, remoteness and associated high transport costs to the service delivery
sites. Participants expressed concern over the availability of key drugs and dressing in remote
clinics, alongside the lack of basic water and sanitation infrastructure. Participants focused the
discussions of quality of services on the need for in-service training of teachers and nurses, for
maintenance of structures, and funding for village health tours and basic health equipment in
rural clinics. Participants prioritized shortfalls in services for early childhood education (ECE),
which are run mostly by communities and untrained teachers, as well as in library services and in
ICT infrastructure.
69. The Budget Unit synthesized the comments received into common themes. As the
consultations focused on the social sectors, the Ministry of Education and Human Resource
Development (MEHRD) and the Ministry of Health and Medical Services (MHMS) received
feedback to inform their development of bids for new funding the 2013 budget. The reports were
also submitted to Cabinet, alongside ministries’ budget bids. A summary of the budget
consultations was presented in Volume I of the 2013 Budget Papers, expanding on the brief
summary presented in the 2012 Budget Papers.
70. Outcomes and responses: The consultations have given the wider community a stronger
voice in the process of preparing the government’s annual budget plan. However, given that the
consultations are still relatively recent, it is too early to determine the extent to which these are
affecting the resource allocation decisions of MoFT and Cabinet at an aggregate level, or are
raising community expectations around service delivery. They are, however, influencing the
allocation of resources for individual projects. For example, through the consultations in one
province for the 2013 Budget, a disability support group was directed to approach the
appropriate ministry (Ministry of Home Affairs) to seek assistance for a program for disabled
Solomon Islanders. When the Ministry submitted a bid for additional resources to fund the
project, the MoFT officials reviewing the bids understood its importance and were able to
26
recommend it to Cabinet, and the project was funded. Further, MoFT officials believe that there
is rapid learning among CSO and provincial government participants through the consultations,
and that their capacity to engage will deepen with experience. In 2013, MoFT provided
participants with summaries of the previous year’s consultations and how they influenced budget
decisions. Efforts in 2013 and 2014 to broadcast information on the budget and the consultation
process, including these summaries, are expected to further deepen the capacity and willingness
of community organizations to engage in the budget process, and to monitor the allocation and
use of public resources, especially outside of Honiara. Feedback from a range of bodies on
participation in the budget process has been positive.
Box 3: Budget Consultations as a Means to Highlight Gender Concerns The consultations between SIG’s central agencies and CSOs and subnational governments represent a significant
development in the resource allocation process. Already, the consultations have helped improve the quality of the
bids for additional budget resources by service delivery ministries. They have also strengthened the ability of central
finance agencies to select bids that best support improved service delivery, especially for more vulnerable groups.
In designing the consultation program, MoFT especially sought the involvement of women’s groups among CSOs.
Their inputs are evident in both the education and health sectors. The focus on improving access to services
including through making access safer and improving the working conditions for education and health service
providers, particularly benefits women and girls.
Key issues highlighted with respect to education include the difficulties of access to education facilities, the lack of
adequate school infrastructure, staff absenteeism due to inadequate housing for staff, costly and limited transport,
and absence of provision of pre- and post-schooling education, especially around basic numeracy and literacy. The
incidence of teenage pregnancy and other family pressures mean women and girls would especially benefit from the
latter, particularly from ‘second chance’ education opportunities. With respect to health, consultations also focused
on the impact of poor infrastructure for access, limited provision of health services in most regions and poor
retention of staff. Participants highlighted issues around absence of water and sanitation infrastructure for ‘almost all
communities,’ which especially affects women.
These findings are used by the MoFT to brief Cabinet on priorities among service delivery ministries’ bids for
additional budget resources. They complement other efforts by SIG to improve Solomon Islands gender inequalities
and strengthen service delivery for women and girls, including:
• Adopt a medium-term national education action plan that includes results-based targets for improving gender
equality in access to education services
• Establish and operationalize a taskforce for gender mainstreaming in health policies
• Conduct a consultation workshop with line ministries on the formulation of the manual for implementing gender-
mainstreamed policy
All these specific actions complement other efforts to strengthen public financial management supported through
this program, which enable improved targeting of social spending. Better targeted social spending helps narrow the
priority gender gaps in health and education in Solomon Islands.
(2) The Recipient has adopted a new chart of accounts to plan and track expenditures
by natural account codes across recurrent and development expenditures.
71. Current situation and challenges: The Chart of Accounts (CoA) is the framework for
classifying and recording budget transactions. This makes it critical for effective budget
management including budget preparation, execution and the tracking. By being the key tool for
monitoring budget execution, the structure of the CoA determines what information management
receives, and how it structures its budgetary decisions.
27
72. The coding methodology of the pre-2013 CoA was primarily focused around codes for
inputs for ministries and divisions within ministries, and was only applied in detail to recurrent
expenditures. The recurrent budget often showed expenditures not classified by the final and
most simple expenditure code. Further, codes had proliferated, with multiple codes relating to
similar spending types. The development budget was classified only by aggregate project codes.
This presented spending on development projects as lump sums, without any information on the
composition of these expenditures.
73. Recent government actions: Through 2012, significant work was undertaken to revise
and restructure the CoA, to unify the classifications used in the development and recurrent
budgets, and to achieve a standardized format for all four budget ledgers. As well as being better
organized and providing for detail on development project spending, the revised format has the
capability for reporting according to programs, outputs or activities and for the collection of
information on where (i.e., in which Province) spending occurs. Both the 2013 recurrent and
development budgets were classified according to the revised CoA. The following changes have
been made to the CoA (Figure 5):
The new CoA has been broadened from three into four fields. These four fields are used to
classify both development and recurrent budgets. All expenditures are mapped on a
consistent coding system. Field 1 records the Ministry, Field 2 records the sub-divisions,
Field 3 records results- or policy-based information and Field 4 records the expenditures.
Field 2 can be used to capture provincial-level information.
Field 2 will consist of four digits and represent cost centres within each Ministry known as
‘sub-heads’. These will be further rationalized over time, as line ministries re-assess their
divisional structure (for example, MEHRD in 2012 had 36 divisions or sub heads and
MHMS had 34 divisions, and both are working to simplify these structures). Under the
legacy scheme, sub-heads can include not only Ministry divisions (for example, in MEHRD,
these include National Library, Schools Inspectorate, Tertiary Support, Planning Unit) but
also projects, activities and programs.
Field 3 continued to be under development in early 2013. The four-digit code in Field 3 will
be linked to an NDS objective, followed by an activity, program or project code. It is planned
to be activated for select, higher-capacity ministries for the 2014 recurrent budget. These
ministries will have mapped their functional structure into the NDS policy framework,
allowing for budgetary resources to be mapped to programs and activities with reference to
the NDS. Ministries are developing this structuring in coordination with MoFT, MDPAC and
MPS. The pilot program will allow for further refinements to the structure of Field 3 codes,
before these are adopted across the whole of government for the 2015 budget (prepared from
mid-2014).
Field 4 has been simplified to the most basic expenditure codes, or ‘Natural Account Codes’
(such as ‘drugs and dressings’, ‘audit fees’, ‘IT supplies’, or ‘uniforms’). It includes revenue
items, salaries, consumables, grants, assets and liabilities. This field has been cleaned
significantly from the previous CoA, with 22 percent of codes (mainly specific project codes)
28
requiring further simplification as the transition process completes. This action is expected to
bring the greatest immediate benefits.
74. Treasury officers undertook extensive consultations with line ministries to discuss their
needs for the revised CoA. A new manual of the CoA was drafted and approved by Treasury and
the MoFT executive. Capacity building on the new CoA has focused on officers in Treasury, and
a plan has been tailored for the implementation of the new CoA across Treasury and the Line
Ministries.
Figure 5. Reforms to the Chart of Accounts Up to 2012:
Field 1 Field 2 Field 3
Ministry Sub-divisions Account codes
-Only recurrent budget is
classified according to CoA.
No linkages to development
budget for comparison
between budgets
-Numerous cost centers
create complex budget
structures at line ministry
level
-Lacks consistency as field
includes projects, activities
and programs
-Spending is not assigned to
final point of expenditure,
lack of clarity on
expenditures
From 2013: Field 1 Field 2 Field 3 Field 4
Ministry Sub-divisions Results based coding Basic Expenditure
codes
-Both recurrent and
development budget
are now classified and
are consistent
-Can also be used to
record in which
Province spending
occurs
-Line ministries’
divisional structure to
be further rationalized
-Linkages with line
ministry strategy and
national development
objectives
-May be used to track
results and
performance of
projects and activities
(Under development in
2013)
-Expenditures coded to
most basic natural
account codes
-78% of codes (mainly
project codes) were
been rationalized by
May 2013, with the
remainder to be
cleaned prior to 2014
budget process
75. Outcomes and responses: Fields 1, 2 and 4 of the new CoA became operational for the
2013 budget preparation process. Field 3 (based on performance indicators or links to the
Government’s objectives in the NDS and sectoral strategies) has been used for the 2013
development budget and will be operational for the full budget from fiscal 2015. The new CoA
classification and coding functions will allow for greater linkages with Ministry-level strategies,
national development objectives and closer tracking of resources according to projects and
activities. In particular, it will enable better tracking of the resources the Government allocates
and disburses against its inclusive service-delivery goals. By requiring that development projects
are presented according to various internal cost headings, rather than simply in terms of the full
29
project, the new CoA is likely to support better-designed and -executed development projects
that more fully achieve their goals while being less likely to make unplanned calls for additional
funds. The new CoA’s full set of capabilities will be phased-in and will need to keep pace with
the associated training program for line-ministry staff which is being developed by Treasury.
(3) The Recipient has adopted formal consultation mechanisms between ministries as
part of the budget formation process to assess the full content of individual ministry
spending proposals for the recurrent and development budgets.
76. Current situation and challenges: Inadequate communications within and between SIG
government agencies is an ongoing legacy of the tension, as well as being a consequence of
structural political weaknesses, including the lack of a strong central agency in the Westminster-
style system and a cabinet composed of a fluid coalition of MPs. The Public Expenditure Review
and subsequent consultations between the MoFT and line ministries identified significant
weaknesses in the communications between these bodies.
77. Line ministries repeatedly requested improved communications with MoFT to support
their budget preparation. Weak communications undermine the budget, by leading to inadequate
preparation of bids for new recurrent and development allocations, less information available to
MoFT to advise ministers on the selection of bids, and inefficient allocations for existing
programs in the recurrent budget. In addition, as the central agencies seek to strengthen many
aspects of the budget process in the context of the NDS and EFRP, it is essential that these
agencies engage with the line agencies responsible for final expenditures and service delivery.
78. Recent government actions: As it developed its larger program to strengthen budget
processes, the Budget Unit in MoFT has prioritized formalizing consultations with line ministries
into the budget preparation process. These are now included in the annual Cabinet-endorsed
Budget Calendar, and are recognized by both the central finance agencies and line ministries as
an integral component of the regular budget preparation process. Including the consultations in
the Calendar is likely to ensure that they are sustained, rather than just occurring during a period
of peak focus on the budget process.
79. While preparing the 2013 budget, MoFT, jointly with MDPAC, made two rounds of
visits to all line ministries to discuss their priorities, communicate key messages relating to the
budget baselines and expenditure trends, and the guidelines for preparing budget bids. Visiting
the ministries jointly ensured both recurrent and development budget elements were discussed
together, addressing another area of weakness. Line ministries generally viewed these
consultations as an opportunity to present the challenges in the preparation of their bids for new
resources, as well as to discuss the baseline allocations ahead of the formal budget committee
meetings.
80. Outcomes and responses: Improved budget coordination between central agencies and
line ministries in the 2013 budget process led to more budget bids being submitted on time and
consistent with central agencies’ requirements. Any delays in line ministry submissions were
within acceptable margins. Participants reported that these consultations were important in
30
providing a forum for wider discussions on budget preparation as well as dealing with practical
problems in the design and planning of the budget. MoFT reported being better informed about
sector and ministries’ priorities. Line ministries reported an improved understanding of the
budget process and the need for prioritizing budget bids in light of the Government’s NDS and
sectoral strategies including its inclusive service delivery goals. MoFT and line ministries have
noted lessons from the recent consultations that suggest scope for further improvements in the
process. The budget calendar could allow for more time for consultations on the ministries’ bid
preparations with MoFT and MDPAC. The bids could be more strongly linked with the
Government’s strategic directions and goals, costing needs to be improved, and line ministries
need to make a stronger effort at keeping their bids close to the ceilings provided by MoFT.
(4) The Recipient’s Parliament has approved a Bill establishing a transparent and
consistent process for approving tax exemptions.
81. Current situation and challenges: Under the previous legislation, the Minister of
Finance and Treasury had the authority to grant exemptions for customs and excise duties, and
other taxes, while the Commissioner of Inland Revenue had the authority to grant income tax
exemptions. In practice, the Minister could receive advice from committees in the Inland Review
Division (IRD) and Customs and Excise Division (CED). These committees would consider
exemption applications independently, meaning that an exemption could be granted for customs
and excise duties but not for payments to IRD or vice versa. The processes and criteria for
granting exemptions were also opaque, raising questions about the integrity of some decisions.
The value of the exemptions granted was uncertain, with recent full-year estimates as high as
SBD 70 million for payments due to IRD and SBD 20 million for payments due to CED. The
lack of transparency around the process and criteria for granting exemptions also led to a large
number of applications.
82. Recent government actions: The Government has prepared a new framework for
granting exemptions. In 2012 the Government tabled in Parliament a Bill to revise the provisions
relating to the granting of exemptions in the Customs and Excise Act, the Goods Tax Act, the
Income Tax Act, the Sales Tax Act, and the Stamp Duties Act. Parliament approved the Bill, and
it is expected to be implemented in the third quarter of 2013, after enabling regulations have
been gazetted. It makes the Finance Minister’s decision to grant exemptions subject to the
recommendations of a committee, with a prescribed process for handling disagreements between
the Minister and the Committee. The Committee is made up of officers from IRD, CED,
MDPAC and the Ministry of Commerce, and members’ terms are limited to two years. The
default position is that the Committee’s recommendation on an application for an exemption will
prevail, although the Minister can request that the Committee review its recommendation.
Exemptions are granted against published criteria, set out in the relevant Acts and regulations
and with reference to the exemption’s impact on the national economy. The framework also
requires that exemption decisions are made promptly, and prescribes short timeframes for
requesting further information and notifying the applicant of the outcome of the exemption
recommendation. All grants of exemption are to be published each quarter in the Government
Gazette.
31
83. Outcomes and responses: The Committee is expected to ensure exemption applications
are considered consistently across IRD- and CED-administered revenues heads. By generating
clarity around the process and criteria for exemptions, the time to process exemptions should be
shortened, and there may be a fall in the number of exemption applications, or at least in the
number that do not meet the criteria. While the process for granting exemptions will be
strengthened, their total value could increase or decrease. This is because potential new
investment projects of strategic national interest, such as high-employment fish canneries or the
nickel mines, may receive significant exemptions from duties on equipment imports, for
example. The key indicator of the success of the exemptions framework will be that the
committee meets regularly and its recommendations are transparent and authoritative.
(5) The Recipient has established a dedicated procurement branch within the Treasury
responsible for policy and training, tender support, and operational procurement.
84. Current situation and challenges: Until recently there was no single entity in SIG
dedicated to policy and oversight of public procurement, addressing issues of legal and
regulatory policy; providing documentation to support national standards; monitoring
procurement operations; developing well-targeted capacity building programs; or supporting the
development of technology to aid procurement.
85. There have been some improvements made in the overall performance of procurement
processes, and efforts to enhance transparency with the publication of contracts awarded by the
Central Tender Board (CTB). Compliance monitoring has also improved through the
introduction of compliance checklists, in part driven by the goal of helping the Auditor General
locate documents.
86. Given the overall size of the government structure, the existence of several small
ministries and limited procurement capacity across government, fully decentralized procurement
functions may be inappropriate. These issues amplify the limitations of the very small private
sector in Solomon Islands to supply goods and services, especially outside of the capital.
87. Recent government actions: Following consultations held in October 2012 with
government and stakeholders a SIG Procurement Reform Plan was developed for 2012-2014.
The Plan covers the following actions:
Preparing a procurement and contract administration manual, as well as standard bidding
documents. These were prepared in Q1 2013, with a training program in their use expected to
be rolled out later in 2013 following consultations held in March 2013. The manual covers
procurement planning, open tendering processes, contract administration and handling
complaints, and aims to standardize procurement procedures across SIG.
Legislative strengthening, with Financial Circular 12/2012 issued as an interim measure (in
effect from 1 January 2013). It increases transparency by requiring that tenders be advertised
and contract awards be posted on the MoFT website, tightens controls for contracts
exceeding SBD 100,000, and clarifies the role of Financial Controllers on ministerial tender
boards.
32
Developing the procurement capacity of officers across SIG, through rolling training
programs.
88. A dedicated procurement unit has been established within the Accountant General’s
office. Centralizing procurement may generate economies of scale, raising value for money and
quality of goods and services procured across government. The central procurement unit
provides both policy and back-office functions for procurement, including developing guidelines
and instructions for procurement, and standardized procurement documentation and systems. It
acts to develop the capacity of SIG officers responsible for procurement, including in the use of
this documentation and systems. The central unit consolidates and systematizes the procurement
activities spread across various line ministries and agencies. By being located within the
Accountant General’s office, it can support the Accountant General in any expansion of its role
as a final reviewer of procurement decisions. It also coordinates documentation of tender offers
and awards.
89. In May 2013, the unit had 11 staff with its establishment allowing for 4 additional staff.
The procurement unit covers the following functions: i) tender support ii) operational
procurement, iii) policy training and iv) CTB secretariat. The positions have mostly been
relatively junior, and all but one has been filled by new recruits into the public service. It is
envisaged that the Secretariat of the CTB will be brought organizationally within the
procurement unit and act as a positive role model at the apex of SIG procurement. At present the
secretariat is co-located with the unit.
90. Outcomes and responses: Establishment of a central procurement office as a division of
MoFT allows for greater co-ordination and oversight of operations of the CTB and ministerial
tender boards across SIG. In the Solomon Islands context, centralization is seen as a means of
better managing the constraints of thin capacity in government and the private sector. It allows
for the development of centralized “framework” contracts which all line ministries can use for
purchases thereby aggregating individual ministry purchases. Through framework contracts, by
unifying and simplifying processes, and by providing greater guidance on preparing
procurements in line with financial instructions, the unit can reduce the processing burden on the
very thin capacity in most line ministries, while building the capacity of the cadre of
professionals in the central procurement agency. Strengthened monitoring across SIG
procurement entities would lead to improved availability of empirical evidence on procurement
activities. This in turn would allow a better targeting of capacity building initiatives leading to
efficiency gains and increased donor confidence in SIG systems. A more robust, transparent and
commercially-oriented procurement process may also open opportunities for entrepreneurs who
lack informal connections with key policy influencers, including women entrepreneurs, thereby
supporting inclusiveness.
91. The dedicated tender unit has already brought some significant improvements in
managing procurement documents, helping annual audits and establishing “preferred supplier” or
“framework” contracts. These contracts could be expanded from IT to other low value and
frequently procured goods, such as stationery. Errors in compliance across procurement
operations remain significant, although they are now better documented through the use of
checklists which enable the assessment of individual ministries’ performance. As the unit
develops, it will also be important to focus on efforts to strengthen the capacity of government
33
officials engaged in procurement as well as to provide outreach to local businesses so that they
can improve the quality of their bids.
(6) SIEA and SIWA, in collaboration with MoFT, have agreed on a mechanism for the
reduction of SIWA’s debts to SIEA.
92. Current situation and challenges: By 2010, the Solomon Island Water Authority
(SIWA) had accumulated debts of SBD 36.7 million, owed mainly to its largest supplier, the
Solomon Islands Electricity Authority (SIEA). These debts were due to water tariffs set at a
fraction of the cost of supply, poor account collection, and poor management and internal
controls. They, in turn, damaged SIEA’s cash flow and ability to pay its suppliers, especially for
fuel. The key utilities’ poor financial health limited the expansion of electricity and water supply,
especially outside of urban areas, and kept the quality of supply poor in areas that are connected.
Growing financial pressures, especially late payment for fuel, brought risks of deeper cuts in
supply, including to key facilities such as Solomon Islands’ main hospital.
93. Recent government actions: An agreement between MoFT, Ministry of Mines, Energy
and Rural Electrification (MMERE) and SIWA and SIEA was negotiated in May 2012. Its core
outcome, supported under the proposed operation, was the full settlement of SIWA’s debt to
SIEA. It achieved this through an initial capital injection from SIG of SBD 5 million to SIWA
for immediate onward payment to SIEA, followed by a further SBD 15 million transfer from SIG
after the approval of the 2013 budget. SIEA also agreed to convert SBD 7.5 million of the debt
from SIWA into an interest-free loan to be repaid over 8 years, and to write-off SBD 9.2 million
of SIWA’s debt.
94. SIG also agreed to improve both organizations’ financial positions by entering into
community service obligation contracts, where it agreed to make payments to SIWA and SIEA
to cover the additional cost of supplying customers in areas (provincial capitals) where operating
costs are significantly higher than the nationally uniform tariffs. SIG also agreed to waive duties
on imports of parts for maintenance for 24 months, towards improving the efficiency of both
entities’ operations.
95. Simply writing-off debts and refinancing the key SOEs would not address the underlying
issues. Recapitalization needs to be accompanied by adjustments in revenue and management
practices, such that bills are collected, costs are better controlled, and adequate revenues are
raised. In the case of SIWA, MoFT agreed to allow step-wise increases in tariffs until they
covered operating costs (assessed through an independent tariff study, completed in late 2012),
and then to move to regular, formula-determined, tariff adjustments. SIWA’s tariffs are likely to
follow movements in SIEA’s given that electricity costs are the main cost for SIWA, which in
turn are largely driven by movements in fuel prices. While not part of the proposed operation,
the progressive adjustment in SIWA’s tariff was on schedule at May 2013.
96. Outcomes and responses: Resolving the immediate debt issue between SIWA and SIEA
has allowed both organizations to shift their focus from liquidity management to improving their
organizational efficiency, and raising the quality and coverage of their services. The efforts at
34
SIEA are supported by the World Bank Sustainable Energy Project with its objectives of
improving operational efficiency, system reliability and financial sustainability of SIEA.
Improving SIEA’s operating performance will be important for attracting private sector
participation in the proposed Tina River Hydropower project. At SIWA, supported by the
ongoing AusAID SIWA Rapid Assistance Program, a new Board and management was installed
in late 2011, and the organization has started long-delayed vital maintenance and infrastructure
upgrading work, as well as registering all users towards reducing ‘non-revenue water’ losses
from uncollected bills. SIWA has developed a longer-term plan, which includes a strategic
review of alternative water supplies, to reduce losses, costs and reliance on electricity for
pumping.
97. Bringing water tariffs into line with costs, and adopting regular, formula-based
adjustments as practiced by SIEA, alongside the other management improvements in both
organizations, will dramatically reduce the risk of the utilities’ finances again becoming
unsustainable and of further pressures on the overall budget for refinancing and subsidies. Given
the relatively well-off characteristics of both organizations’ customers, especially larger
customers, making both organizations more self-funding and less reliant on budgetary financing
may actually improve the overall progressivity of SIG’s resource use. The relative wealth of
SIWA’s customers, mostly owning houses and in the main urban areas, and the modest and
stable share of household spending allocated to water, suggests that these tariff adjustments have
limited regressivity. Recent efforts to improve the organizations’ management, to invest in basic
maintenance and to reduce operating costs need to continue if more Solomon Islanders are to be
able to access their services and to build on the inclusive financial arrangements established
through the community service contracts developed in 2011 and 2012. This in turn will require
ongoing technical support from their respective development partners.
(7) The Recipient has applied successfully for EITI candidate status.
98. Current situation and challenges: SIG projects that, in the longer-term, revenue from
mining may partially replace revenues currently earned from logging, which is widely seen to be
at an unsustainable rate and is expected to decline in the medium-term. Yet, economic benefits
may be limited unless SIG can effectively develop and enforce tax and benefit-sharing
arrangements. Perceptions among the local communities directly affected by mining operations
have been, and will remain, especially important in this regard. Success will be more likely if
institutional and policy settings are strengthened in the MMERE and in IRD.
99. Just prior to the civil unrest, the Gold Ridge mine on the island of Guadalcanal started
operating. A medium scale, privately-owned mine, it produced approximately 100,000 ounces of
gold per year but was forced to cease operations during the conflict. It reopened under new
ownership in 2009 and had first production in 2011, and after 18 months of operation is expected
to export 80,000 ounces annually, worth around US$120 million at June 2013 market prices.
Significant tax revenues from the mine are unlikely in its first 5 years of production as
accelerated depreciation allowances are taken against exploration and development investments.
Nonetheless, mining is already playing an important role in the economy, particularly in terms of
balance of payments support through gold exports, as well as royalty payments.
35
100. In addition to Gold Ridge there are significant other possible future mineral development
opportunities, including nickel on Choisel and Santa Isabel islands and copper and gold on
Guadalcanal, Vella Lavella and New Georgia islands. In addition, the seabed surrounding the
Solomon Islands contains mineral deposits which are high in copper, gold and zinc, although
underwater mining technologies are yet to be tested commercially. The nickel mine on Santa
Isabel could export as much as 30,000 tons of nickel, valued at US$490 million per year at June
2013 market prices, and initial development applications were lodged in September 2011.
Development of nickel will be highly capital intensive and require significant infrastructure
development in terms of roads and port facilities. This project can only go forward after some
ambiguities regarding licensing, and community concerns are resolved.
101. The experience with logging offers significant lessons around the management of mining
sector benefit streams. There is a widely held perception within the Government and citizenry
that the logging industry has contributed little lasting benefit to either local communities or the
State. Management of community benefit streams from logging has in general been very poor,
opaque, often corrupt, and a source of tension. Perceptions around the Gold Ridge mine
immediately prior to its closure with the tension were similar, with strong feelings on the part of
the local community that most of the benefits were accruing to people other than themselves and
that revenue streams were not transparent.
102. The principal benefit of mining for Solomon Islands is its capacity to contribute
substantially to export and Government revenues. However a necessary condition for mining to
be sustainable is that mineral revenues are fair and transparent, and that revenues are used
effectively. The principal risk of the mining sector in such a small economy is that, if it is not
properly regulated and managed, then it can result in social, cultural and environmental harm to
affected communities and can become a vector for corruption that could become a flashpoint for
future conflict. Mitigating this risk and minimizing the capture of rents is a key challenge.
103. Recent government actions: Solomon Islands is the first EITI candidate country in
Oceania. The Government publically committed to joining the EITI in July 2011. Between that
time and May 2013, when it made its application to the EITI International Secretariat, the
Government effectively met the additional four requirements for candidacy: i) committed to
work with all stakeholders; ii) appointed a national EITI Champion (Finance Minister);
iv) established a national EITI Multi-Stakeholder Steering Committee (MSG) consisting of key
members of civil society, industry and government; and v) composed and published in the public
domain a national EITI Work Plan. Solomon Islands was admitted to EITI candidacy in June
2012.
104. SIG’s efforts towards EITI compliance have been strongly supported by its development
partners, led by the World Bank and including RAMSI and AusAID. The British High
Commission provided support for EITI outreach and knowledge work. The World Bank is also
supporting civil society capacity building to increase understanding of benefits sharing
mechanisms and their role in EITI, including through a specific program developing the capacity
of women in mining. Civil society has participated in EITI through the MSG, along with
representatives from government and mining companies. A work plan for implementing EITI has
been developed, and will be the basis for the Government to receive grant support from the EITI
multi-donor trust fund.
36
105. In addition to adopting the EITI, the framework for mining sector management needs to
be strengthened. A Mining Act was passed in 1990 and can be described as a piece of framework
legislation which anticipated the development of regulations to give effect to due process. These
regulations were never drafted, and as a result, much has been left to discretion in terms of
licensing and regulatory actions in the sector. This has contributed to confusion and conflict
between the Government and the private sector and has acted as a disincentive to mineral
exploration investment. The World Bank has provided, as a first phase of its assistance to the
Government in the sector, support in identifying and addressing the policy gaps related to the
legal and regulatory regime for the mining sector. The institutional capacity and structure of the
MMERE have been reviewed, and immediate support has been provided for the Ministry’s daily
functioning.
106. Outcomes and actions. Since entry into candidacy SIG’s leadership has continued to
advance Solomon Islands’ application. EITI implementation is a national undertaking, based on
meaningful participation by stakeholder representatives in planning and decision making. But it
is also a fully government-led initiative. Support at the level of the Prime Minister appears
strong. Going forward, there is a need for greater leadership on some key issues as additional
steps are required to advance towards candidacy. The first EITI Report needs to be produced
within 18 months of being accepted as a candidate, i.e., by December 2013. A request for
financial support from the EITI Multi-donor Trust Fund is needed, and a commitment of co-
financing by government is required. Senior officials in the Prime Minister’s Office and the
Ministry of Finance have provided assurance that the request will be forthcoming by mid-2013,
and other needed actions will be executed.
107. In support of broader strengthening of mining sector management, a second phase of
World Bank support is being prepared for the MMERE, implementing the policy and
institutional reform roadmaps developed during the first stage of support. Priority actions
include: a) legal and regulatory overhaul and drafting of a new bill for the establishment of the
Mineral Development Authority to take over the regulatory and monitoring functions of the
Geology Division and Mines Division; b) mineral title management and the establishment of a
cadaster office and online data access to facilitate enforcement of the new Mines and Minerals
Act; and, c) adoption of a new fiscal regime for mining with clear and predictable outcomes
rather than the current system based on case-by-case negotiations of fiscal terms.
37
VI. OPERATION IMPLEMENTATION
A. PARTICIPATION PROCESS
108. The design of this programmatic series of development policy operations draws from the
EFRP which, in turn, draws from elements of the NDS. The NDS benefited from stakeholder
consultations conducted by MDPAC on behalf of the Government as part of the preparation
process. The consultations included cabinet ministers, parliamentarians, non-governmental
organizations (NGOs), members of civil society, the private sector, cooperative associations,
local authorities, religious leaders, development partners and beneficiary groups. From the
various policy goals of the NDS, as implemented through the sectoral strategies and ministries’
corporate plans (especially MoFT and MDPAC), key policy actions are assembled into the EFRP
through the consultative CEWG process.
B. POVERTY, GENDER AND SOCIAL IMPACTS
109. The measures supported by this proposed development policy operation are expected to
have significant positive direct and indirect impacts both on reducing extreme poverty and
improving living standards of the bottom 40 percent of the population, and for improving
conditions for women. No adverse social or poverty impacts are expected from the actions
supported by the proposed operation.
110. Improving the coverage and quality of public services is often key to reducing poverty
and vulnerability to conflict. In other countries, more effective delivery of public goods and
services has been found to particularly benefit women and children. The present operation will
pursue this strategy through two channels: improvement in the quality of public services
provided directly by government ministries through better budget preparation and execution, and
through the provision of water and electricity by SOEs.12
111. Strengthening the budget formation process is expected to lead to a better alignment
between budgetary allocations and the poverty reduction and inclusive growth objectives of the
NDS. Better targeted social spending will help narrow the priority gender gaps in health and
education in Solomon Islands, with the public financial management reforms supported by the
program improving the targeting of public spending. Improving the quality of budget execution
should help ensure that the better aligned budget is well implemented and leakages to
unproductive uses are reduced. These changes should gradually improve the coverage and
quality of public service delivery throughout Solomon Islands. The new consultative role
created for citizens groups and provincial leaders, combined with the new provisions for greater
transparency, are expected to be helpful in motivating better results. In designing these
consultations, the MoFT has especially sought to include women’s groups, including those
12
UNIFEM and Sharples claim that the types of reforms supported by this program can be a positive force in
promoting a more equitable distribution of public resources and benefits of development for women and improving
overall budgetary processes and outcomes. (UNIFEM (2005) ‘Owning Development: Promoting Gender Equality in
New Aid Modalities and Partnerships’, Presentation to the UNIFEM/EC Brussels conference.
http://www.unifem.org/news_events/event_detail.php?EventID=31 ; Sharples, S. (2008) ‘Public Financial
Management Reform in Ghana (Sequencing & Prioritisation)’. London: DFID blog-
pfm.imf.org/pfmblog/files/Ghana.ppt).
38
outside Honiara, thus supporting gender-balanced provision of public services, and has focused
the consultations on the inclusive delivery of core education and health services. International
experience has shown this is essential for sustainable improvements in the gender inclusiveness
of budgeting.13
112. With regard to utility services, the adoption of community service obligation agreements
will support more equitable provision without compromising the financial position of SOEs.
Improved and lower-cost provision of water and electricity is likely to be especially beneficial
for women, by both improving conditions at home and creating new economic opportunities by
supporting growth of service industries, which disproportionately employ women.
113. In the longer run, EITI compliance in combination with other regulatory reforms planned
for the mining sector will facilitate poverty reduction and inclusive growth through the
promotion of a fiscal regime that clarifies revenue sharing obligations and creates more
transparency in the receipt and distribution of mining sector revenues. These outcomes, in turn,
are expected to increase the resources available to the Government, and to local mining-affected
communities, for poverty reducing programs and investments in public services. In addition,
improved transparency is expected to reduce the vulnerability to conflict associated with mining,
and support greater public accountability around the use of the revenues derived from mining.
C. ENVIRONMENTAL ASPECTS
114. The specific actions supported by the proposed programmatic series of development
policy operations are not likely to have significant positive or negative effects on the Solomon
Islands environment, forests or other natural resources. Specifically, the measures supported by
the proposed operation to improve the quality and transparency of budget formation and
execution, improve the transparency and accountability of SOEs, and improve mining sector
governance are not expected to have a negative effect on the country’s environment and natural
resources.
D. IMPLEMENTATION, MONITORING AND EVALUATION
115. The administration of this operation will be the responsibility of MoFT while monitoring
and evaluation is done jointly with the donors under the CEWG. The MoFT Financial and
Economic Development Unit (FEDU) is the main office responsible for monitoring the program
and all outcome indicators (detailed in Annex 3). FEDU will provide half-yearly reports to the
World Bank and other CEWG budget support partners on implementation progress against
established timetables and agreed performance indicators. This will be done as part of the
reporting process established earlier for the CEWG. The overall reform effort will be reviewed
by the Government in close coordination with the World Bank’s in-country office and regular
Bank missions to ensure continued implementation of the program within an adequate
macroeconomic policy framework.
116. The elements of the 2012-2015 EFRP matrix are shown in Annex 3. It captures all the
benchmarks from the budget support programs of each partner as set out in early 2013 as well as
13
Stotsky, J. (2006) Gender Budgeting. Washington: IMF. (http://www.imf.org/External/pubs/ft/wp/2006/wp06232.pdf).
39
a number of intermediate non-binding actions. EFRP matrices also contain a number of output
or outcome indicators. These indicators will help the authorities and the donor partners to
evaluate the impact of the Government’s program. It has been proposed that the 2013 Joint
Review Mission undertake a more thorough assessment of the achievements of the evolving
EFRPs since 2010.
E. FIDUCIARY ASPECTS
117. Fiduciary risks have decreased markedly as the result of a wide-ranging program of
reforms from 2003 onward, with support from RAMSI and other key donors. This reform effort
is expected to continue and deepen over the next several years. Even so, fiduciary risks remain
substantial. Key documents for issues related to the fiduciary aspects of public resource
management include the Solomon Islands Public Financial Management Performance Reports
(EC, 2008, and 2013), the Solomon Islands Operational Procurement Review (IDA, 2008 and
2012), the Financial and Economic Management Strengthening Program (RAMSI, 2010), and
the Public Expenditure Review (IDA, 2011). The budget is published at the time of initial
presentation to Parliament, and is available through the MoFT website and in hardcopy from the
ministry. Budget documentation now includes a comprehensive presentation of economic
developments and outlook, revenue and expenditure outcomes, policy changes, and spending
performance and activities of all ministries. Within-year fiscal performance is reported through
the central bank’s regular publications, which are available on its website.
118. The 2012 Public Expenditure and Financial Accountability (PEFA) Assessment found
broad improvements compared with the 2008 assessment. Seventeen of the 31 indicators
improved, 10 indicators were stable, and 2 indicators worsened. The two deteriorating indicators
were both with respect to the external scrutiny and audit, which largely reflects weaknesses in
the parliamentary Public Accounts Committee process and the use of Supplementary
Appropriations Acts to legalize within-year reallocations of funds. These issues are being partly
addressed with respect to the Office of the Auditor General in the 2012-2015 SIG EFRP (Annex
3) and are likely to be further addressed through the revised Public Finance Act. Other areas of
fiduciary risk showed improvement (e.g., indicator 9 on risks from other public sector entities;
indicator 17 on cash and debt management; and indicators 18 through 21 on internal controls).
119. Financial safeguards at the central bank have improved in several areas since 2010. The
CBSI website continues to publish financial statements prepared and audited in accordance with
international standards. Several recommendations of the 2010 Safeguards Assessment have been
implemented, including the establishment of an Audit Committee, and the filling of Board
vacancies. A new law for CBSI, enacted in 2012, provides adequate financial and legal
autonomy. In 2013, the authorities have also substantially completed an update to the
Safeguards Assessment which confirms that the CBSI continues with its well-established good
practices in financial transparency and accountability. Improvements are needed in oversight by
the Audit Committee and in the internal audit function. The updated assessment also
recommended that CBSI should publish the audit opinion of its international audit firm along
with the audited financial statements for financial year 2012. CBSI has committed to taking the
necessary steps to implement the recommendations of the safeguards assessment update.
40
120. Overall, the Bank has judged the Government’s commitment to and its performance in
implementing the PFM reform program as showing adequate improvement. In this light,
additional fiduciary arrangements beyond those already included in the EFRP and FEMSP are
not considered necessary for this operation.
F. DISBURSEMENT AND AUDITING
121. The operation would consist of a single tranche of SDR 1.4 million (US$2 million
equivalent) to be available upon effectiveness. The proposed operation will follow IDA's
disbursement procedures for development policy grants. Once the operation becomes effective,
and at the request of the Recipient, the proceeds will be deposited by IDA into an account at the
CBSI which forms part of the country’s foreign exchange reserves, and on the same day the
recipient will deposit an equivalent amount in its local currency budget accounting system. As a
due diligence measure, within 30 days of receipt the Recipient will provide a written
confirmation to IDA that the amount has been transferred to a local currency account available to
finance budgeted expenditures. Disbursement would not be linked to specific purchases. The
proceeds of the operation would not be used to finance expenditures excluded under the
Financing Agreement. If, after being deposited in a Government account, the proceeds of the
operation are used for ineligible purposes as defined in the Financing Agreement, IDA will
require the Recipient to either: (a) apply the corresponding amount to eligible purposes, or (b)
refund the amount directly to IDA. No designated account is required for this operation. The
deposit of funds into the Government’s foreign exchange account and movement of funds from
the Government’s foreign exchange account to its local currency account would be verified and
certified by the Auditor-General, within 6 months of the disbursement of the Grant.
G. RISKS AND RISK MITIGATION
Program Ownership
122. Program ownership is potentially subject to some political risk given frequent changes in
governments in Solomon Islands. There are no truly institutionalized political parties, which
leads to weak coalitions of individuals forming government. The average lifespan of such
governments, thus far, has been roughly 2.5 years (with a maximum of 4 years) and the average
time in office for a Minister of Finance has been 1.5 years although several have lasted as long as
3 to 4 years. The current Minister has been in that position since November 2011, when his
predecessor became Prime Minister.
123. The experience since the late 2000s has, however, demonstrated that a well-articulated
program of policy and technical reforms can be sustained through periods of political uncertainty
and changes in ministerial leadership. There have been no major setbacks or slowing of the
reform program in this period despite several changes in the Minister of Finance, changes in
government, and elections. This is due to several factors. First, many of the key political leaders
and senior officials remain in government even if their portfolios are altered with successive
changes in government. Second, within this group, there is a high-level recognition of the need
for reform. Each Minister of Finance has been supportive of the reform agenda and, as the
reforms have begun to yield results, the degree of commitment has deepened significantly across
a range of political actors. Third, the establishment of the CEWG mechanism has led to a
41
coherent, coordinated, and consistent approach by donors. The CEWG as a coordination group,
and the EFRP matrix as a tool for articulating reform, are now in their fourth year.
Macroeconomic Shocks
124. The macroeconomic and fiscal framework is subject to considerable risks inherent in a
small, isolated and geographically dispersed and largely subsistence economy. Exogenous
shocks include volatile commodity prices (for logging, gold, smallholder cash crop exports and
energy imports), as well as weather and seismic events. The very high rates of logging since
2010 add to the risk of exhaustion of a key export crop and revenue source for government,
while there has been limited progress in developing either sustainable logging or mining at a
similar scale. High among endogenous shocks is the risk that under-analyzed policy decisions
made amidst political fragility or weak budgetary institutions will have significant fiscal costs.
125. The risks created by such shocks to macroeconomic stability and NDS implementation
are mitigated by successful government action to build up external and internal buffers,
accompanied by a policy dialogue with the IMF, the World Bank and the multi-donor budget
support donors. The Bank will continue to monitor the impact of global economic shocks and
assess the need for further support. Both the Bank supported Rapid Employment Project and
Rural Development Program are community based programs, in urban and rural areas
respectively, which could be ramped up if needed as part of a response to economic shocks.
Social Instability
126. There is some risk of a resurgence of popular unrest in some form. Continuing inter-
island migration, high unemployment in a young population in growing urban areas, and the
breakdown of the traditional 'kastom' systems, including the traditional social safety nets, and
poor service delivery, all pose a risk to stability. The risk may be especially important in
Honiara where food poverty is high and urban services are inadequate.
This risk is being addressed on many fronts ranging from security to state building to public
service provision, with assistance from RAMSI, the UNDP, and a number of key donors
including the ADB, AusAID, the EC, and NZAP. The World Bank Justice for the Poor program
is aimed at better understanding this risk. In part, it focuses on analyzing local-level justice
service delivery from the perspective of the user and better understanding how government can
respond to community needs. The proposed DPO with its emphasis on public sector
effectiveness and accountability will augment these efforts by helping to improve service
delivery outcomes, in turn contributing to political stabilization and reduced risks of social
instability.
42
Institutional Capacity
127. Weak institutional capacity could hamper the implementation of the reforms supported
by the proposed operation and the broader NDS. Capacity constraints abound as a consequence
of a small, widely dispersed population with generally low educational levels, and the short
history of Solomon Islands’ modern institutions. Staff capacity in key government agencies is
thin, and while turnover would have a significant impact on implementation of the program, it
has not been a notable impediment to date. Four specific weaknesses noted in recent analytical
work include inadequate participation in the budget process, weak articulation of measurable
goals and capacity to monitor progress, poor budget execution, weaknesses in the quality and
timeliness of financial reports, and a low capacity for producing and following up on external
audits. These risks are mitigated by the choice and design of the supported measures which are
calibrated to existing capacity, and the provision of extensive technical assistance by the RAMSI
and the bilateral programs that will succeed it from mid-2013, and by the World Bank and other
donors. In particular, the considerable range of Australian Government-funded support will
continue at least at the scale maintained since 2009, and may even provide more advisors for the
MoFT.
Strategic Partnerships
128. The transition in RAMSI assistance creates some short-term coordination risks, but these
are mitigated through a scale-up in other programs. Within the MoFT and other central
government agencies, the RAMSI advisory presence has been stable since 2009, while its
modalities have evolved with respect to security. Its civilian component will transition to
bilateral support programs on 1 July 2013, and the army component will be reduced to a core
while the police presence continues. Plans have been developed for more traditional
development assistance from AusAID, NZAP and other donors to substitute for the RAMSI
presence. Funding has been allocated to these plans to maintain the current scale of advisory
support into the medium-term, with some changes in recruitment strategy and operational focus.
For example, AusAID in its partnership agreement with SIG 2013-2017 has pre-allocated over
AU$20 million per year for its economic governance program. Overall aid levels are also
expected to be maintained. The change in modality creates some short-term coordination risks
but it also creates an opportunity for the Government to collaborate with the international
community through the CEWG process on ensuring that long-term aid programs best serve the
population – including elements of assistance aimed at reducing fragility, encouraging growth
and job creation, and building sustainable government capacity. Indeed, this transition is an
important indicator of the normalization of SIG operations post-tension.
43
ANNEX 1: LETTER OF DEVELOPMENT POLICY
44
45
46
ANNEX 2: PROGRAM MATRIX
Policy Areas DPO-1 Actions
2011/12
Proposed DPO-2 Actions
2012/13
Intermediate Results
2014
Development Objective One: Improve Public Financial Management
Broaden community
engagement in the
budget process
The Recipient has published a
summary of the consultations with
civil society organizations that
occurred in preparing the 2012
budget and carried out similar
consultations in the formation of
the 2013 budget.
In preparing the 2014 budget, the number of civil
society organizations, local community representatives, and
provincial leaders consulted during each annual budget
preparation cycle increases by at least 5 above the 2011
baseline of 5.
Dissemination of the summary of budget consultations
expands from a summary included within Budget Papers
Volume 1 to independent summaries provided to
communities including, consulted civil society
organizations, local community representatives, and
provincial leaders.
Develop the capacity to
better track
expenditures
The Recipient has adopted a new
chart of accounts to plan and track
expenditures by natural account
codes across recurrent and
development expenditures.
The 2014 budget is recorded and reported according to the
natural accounting heads for all development projects.
Improve the quality of
budget formation and
execution.
Introduced the use of ministerial
expenditure analysis briefs into
the annual budget process from
2012, providing information on
the level and composition of
budgeted and actual
expenditures.
The Recipient has adopted formal
consultation mechanisms between
ministries as part of the budget
formation process to assess the full
content of individual ministry
spending proposals for the
recurrent and development
budgets.
The number of ministries and government institutions in
2013 that do not deviate more than 10 percent from the
original and supplemental allocations approved by
Parliament will increase to at least 14 compared to the 2009
baseline of 10.
The Recipient’s Parliament has
approved a Bill establishing a
transparent and consistent process
for approving tax exemptions.
All exemptions approved after the Exemptions Committee
starts to operate are recommended by the Exemptions
Committee.
Issued separate accounting
warrants on April 19, 2011 for
each ministry in order to
strengthen payroll expenditure
control.
Total actual payroll expenditure (including wages and
salaries, allowances and NPF contributions) in 2012 and
2013 shall not deviate by more than 10 percent from the
appropriated amount, from a baseline deviation in 2010 of
15 percent.
47
Policy Areas DPO-1 Actions
2011/12
Proposed DPO-2 Actions
2012/13
Intermediate Results
2014
Take steps towards
strengthening
procurement.
Published successful tenders
awarded by the Central Tender
Board, including the name of
bidder and amount of bid.
Details of successful tenders awarded by the Central
Tender Board in 2011-13, including items procured,
contract amount, procurement method, and name of vendor
are published on the MoFT website.
The Recipient has established a
dedicated procurement branch
within the Treasury responsible for
policy and training, tender support,
and operational procurement.
Number of procurements filled through unauthorized
procurement falls below 3 percent in Q1-2015 from a
baseline above 7 percent in Q1-2013.
Development Objective Two: Improve the Financial Position of Key State Owned Enterprises
Improve SOE financial
position
Adopted a Community Service
Obligation policy for State Owned
Enterprises on June 9, 2011, with
a budgetary allocation in 2011.
SIEA and SIWA, in collaboration
with MoFT, have agreed on a
mechanism for the reduction of
SIWA’s debts to SIEA.
SIWA debts to SIEA are reduced by at least one-third from
a September 30, 2011 baseline of SBD 33 million.
Development Objective Three: Improve Extractive Revenue Transparency
Build the foundation for
future extractive
revenue transparency
Endorsed an EITI policy paper on
July 6, 2011 proposing the
implementation of EITI principles
and commitment to work with
civil society organizations and
extractive industry companies in
the Solomon Islands, with an
accompanying public statement
dated August 26, 2011.
The Recipient has applied
successfully for EITI candidate
status.
The Solomon Islands extractive industries revenue report,
consistent with the agreed Solomon Islands EITI multi-
stakeholder group work plan is published before 31
December 2014 (against a baseline of no reports published
up to 30 June 2013).
* Allocations will be pro-rated for unanticipated gains or losses in revenues and grants and net borrowing. Debt service, donor controlled expenditures for sector budget support,
and the development budget are excluded from the calculations. Estimated actual spending will be used if data from the Annual Accounts are not available.
48
ANNEX 3: ECONOMIC AND FINANCIAL REFORM PROGRAM1
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
Theme I: Strengthening SIG’s budget preparation and planning systems to ensure resources are applied to sustainably and effectively support better quality public services for Solomon Islands.
Strengthen resource allocation processes to improve SIG’s ability to deliver services. NCRA: 4.3.4.3 NDS Objective: 8 NDS Part II Implementing the Strategy
I-1. Building community and broader awareness of the budget process and engagement in the appropriate use of public funds.
a. Ministry of Finance and Treasury seeks input from Civil Society Organisations, including women’s groups, and provincial leaders for the 2014 Budget in April/May, 2013. A Cabinet submission is prepared summarising the feedback on how SIG could improve service delivery as part of the annual budget process for 2014. [Cabinets conclusion]
(Budget Unit)
The public takes greater interest in the budget process, which is evidenced by an increasing number of CSOs and provincial authorities providing input.
b. Cabinet endorsement is sought to inform provincial populations, beginning in 2014, by radio and media releases of the central government’s allocations for key public services, and realised expenditure in the 2013 budget. [Cabinet conclusion]
(Budget Unit)
c. Improve the quality of budget consultations by refining and including the infrastructure sector in the consultations. [Consultation documents]
(Budget Unit)
1 The Economic and Financial Reform Program matrix is the result of a government-led process designed in consultation with key stakeholders including development partners.
This matrix was approved by Cabinet in May 2013.
49
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
I-2. Improve the capacity of line ministries to develop robust and implementable budgets.
a. Budget Circular recommends Budget Committees, comprising of Heads of Division, Financial Controllers and Corporate Services, are established in ministries to prioritise budget bids against budget ceilings. [Budget circular]
(Budget Unit)
a. Budget Committees are embedded in the preparation of line ministry budgets to prioritise budget bids against budget ceilings. [Budget bids – Form 1, Composition of budget committees]
(Budget Unit, Line ministries)
The quality of budget submissions from line ministries improves in timeliness, policy linkages, detailed/robust costings, and adherence to budget ceilings, from a 2012 baseline.
I-3. Improve linkages between policy priorities, budgets and service delivery outcomes.
a. SIG determines its medium-term NDS priorities and develops 3 year medium term development plans to inform the pipeline of development projects and the development budget. [Medium term development plans]
(MDPAC)
2015 MTEF and budget show clear links to priorities set out in the NDS.
b. MDPAC issues first performance report, as part of the annual monitoring and evaluation of the NDS. [Performance report]
(MDPAC; EU, ADB)
c. Baselines of ministerial allocations are assessed using the NDS, sector strategies, corporate plans and annual reports, and used to further develop a rolling 3-year Medium Term Expenditure Framework (MTEF). [MTEF]
(MDPAC, Budget Unit)
50
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
I-4. Establish forward estimates to better manage budgets and provide greater certainty around budgets and service/project delivery.
a. Present forward revenue and expenditure estimates for both the 2013 recurrent and development budgets at a sub-head level in Volume 1 of the budget papers. [Volume 1 of the budget papers]
(Budget Unit)
a. Line ministries lodge 2-year forward revenue and expenditure estimates for both the recurrent and development budgets in their budget submissions for the 2014 budget. [Budget submissions]
(Budget Unit)
The annual budget is prepared using forward estimates.
I-5. Maintain sustainable and affordable levels of public debt.
a. SOE borrowing policy finalised and annexed to the Debt Management Strategy. [Debt Management Strategy]
(DMU)
a. Guarantee policy finalised and annexed to the Debt Management Strategy. [Debt Management Strategy]
(DMU)
Risk of debt distress does not increase, as assessed by the IMF World Bank joint Debt Sustainability Analysis
I-6. Improve the accountability framework for budget outcomes and outputs.
a. Ministries which have completed the Line Ministry Expenditure Analysis (MAL & MEHRD) refine output specifications (what services are actually being delivered to Solomon Islanders) in Volume 1 of the 2014 budget papers. [Quality Assessment of Volume 1 of the budget papers]
(Budget Unit)
a. At least two additional ministries complete the Line Ministry Expenditure Analysis and refine their output specifications in Volume 1 of the 2015 budget papers. [Quality Assessment of Volume 1 of the budget papers]
(Budget Unit)
Specifications of outputs improve for line ministries which have completed the LMEA.
I-7. Protect resource allocation to key service delivery, and infrastructure areas of
a. SIG allocation to the primary education sector in the 2013 budget is equivalent to at least 2011 actual expenditure, plus 5%. [Budget documents]
(Budget Unit, MEHRD)
a. Realised 2013 expenditure in the primary education sector was equivalent to 2011 actual expenditure, plus 5%. [2013 budget actuals]
(Budget Unit, MEHRD)
(The policy actions serve as outcome indicators, as these ensure ongoing minimum
51
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
expenditure and improve quality of government spending generally.
b. The recurrent MHMS budget allocates no less than 30% to Provinces. [2013 budget actuals]
(Budget Unit, MHMS)
b. Realised 2013 expenditure in the Provinces is no less than 30% of the recurrent MHMS budget, and the 2014 recurrent MHMS budget allocates no less than 35% to Provinces. [2013 budget actuals, 2014 budget]
(Budget Unit, MHMS)
b. Realised expenditure in the Provinces in 2014 is no less than 35% of the recurrent MHMS budget, and the 2015 recurrent MHMS budget allocates no less than 40% to Provinces. [2014 budget actual, 2015 budget]
(Budget Unit, MHMS)
expenditure by SIG on core services).
Theme II: Improve the quality of financial management systems towards ensuring resources intended for the better delivery of public services achieve their intended purposes.
Improve resource management processes and practices. NCRA: 4.3.4.1 SIG-RAMSI: 2.2.1
II.1. Continue to improve cash management, forecasting and controls in order to minimise disruptions to public service delivery from spending reservations, and to cover cyclicality and expenditure flows, potential contingent liabilities, and large shocks.
a. Adopt a new cash management framework, with training, including requirements and processes for the submission of significant spending requests from key ministries, to improve cash forecasting and commitment management. [Cash management framework]
(Treasury)
a. Key ministries comply fully with new cash-flow management requirements. [Execution of spending warrants]
(Treasury)
Cash reserves are maintained at no less than 2 months’ forward recurrent spending as per IMF definition. Cash-flow management indicators are consistent with budget execution aggregates.
52
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
Strengthen public financial management structures and standards. NCRA: 4.3.4.3.a SIG-RAMSI: 2.7.4 NDS Objective: 8
II-2. Review and update Chart of Accounts to enable SIG to begin tracking expenditures by programs and activities.
a. Phased introduction of additional field code and project reporting in the new Chart of Accounts. [Fiscal 2013 Budget execution quarterly reports]
(Treasury)
a. Update Chart of Accounts Manual to reflect introduction of third field code and provide to ministries together with training and briefings. [COA manual, training syllabus]
(Treasury)
a. 2015 Budget prepared according to the new Chart of Accounts, including natural account codes and the third field codes for both the recurrent and development budgets. [Budget papers]
(Budget Unit)
All line ministries have reported actual spending for 2015 against the new Chart of Accounts, including the third field code.
Strengthen the Government’s procurement process. NCRA: 4.3.4.1.h NDS Objective: 8
II-3. Strengthen and control procurement processes to reduce opportunity for corrupt practices and leakages that affect service delivery, allocative efficiency and aggregate fiscal discipline controls in procurement.
a. Development and adoption of procurement manual including standard bidding documents and procurement contracts. [Procurement manual]
(Treasury)
Enhanced capacity for coordination of compliant procurement processes, as well as enhanced capacity for the conduct of tenders. Increased range of training for ministries on procurement and tender functions.
b. Complete staffing the new Procurement Unit and provide an active training program for line ministries and ongoing support to ministerial tender boards. [Establishment list, training syllabus]
(Treasury)
53
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
c. Permanent Secretary of Finance issues circular to ministries, covering the new procurement guidelines, to strengthen procurement systems and processes. [Circular]
(Treasury)
Strengthen financial management legislation. NCRA: 4.3.4.3.a NDS Objective: 8
II-4. Strengthen the legal and regulatory framework for fiscal responsibility and discipline.
a. MoFT completes the review of the Public Finance Act and submits the new Public Finance Management Act (PFMA), consistent with sound financial management principles, to Parliament. [PFMA Bill]
(Treasury)
Fit for purpose Public Finance Management Act in place, including all subsidiary legislation, and with a separate Act to govern the operations of the Auditor General.
b. Development and submission to Parliament of the subsidiary legislation to the new Public Finance Management Act, to support the implementation of sound public financial management principles and practices. [Regulations and manuals]
(Treasury)
Strengthen Governance Institutions NCRA 4.3.4.1.d NDS Objective: 8
II-5. Provide internal audit services, training and advisory support to MoFT and other Ministries, SOEs and Provincial Governments.
a. Establish Audit Committee that, with the support of the Internal Audit team, is to promote and support proper governance and better controls and management practices across government and within Ministries [Minutes of meetings]
(Internal Audit, Line Ministries)
a. Extend role of Internal Audit Committee in a staged manner beyond compliance oversight to focus on improving governance and practice arrangements across Government. [Work plan, issuing of guidance and reports by Internal Audit]
(Internal Audit, Line Ministries)
Professional internal audit function established to promote proper governance, better controls and management practices for Ministries and SOEs.
54
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
b. Internal Audit team works with the senior management in the Ministries of Commerce and Lands to establish improved internal controls. [Work plans, Report]
(Internal Audit, Ministries of Commerce and Lands)
b. Internal Audit team works with the senior management in the Ministry of Forestry to establish improved internal controls [Work plans, Report]
(Internal Audit, Ministry of Forestry)
c. Fully functioning Internal Audit Division established in the Ministry of Provincial Government and Institutional Strengthening. [Establishment list]
(Internal Audit, MPGIS)
c. Internal audit functions established within the Ministry of Police, National Security and Correctional Services.
[Establishment list]
(Internal Audit, MPNSCS)
II-6. Provide resources, advisory, training and advocacy support to the Office of the Auditor General.
a. OAG submits, through MoFT, the revised National Audit Office Act to Cabinet to align the independence and mandate of the Auditor General to international standards for Supreme Audit Institutions
2.
[Cabinet conclusion] (OAG, MoFT)
a. OAG submits the revised National Audit Office Act to Parliament. [Bill]
(OAG)
An international standards compliant National Audit Office which competently undertakes the responsibilities of a Supreme Audit Institution to a level comparable to peers in the region, and provides reports on its external scrutiny of all public monies
b. OAG submits to the relevant authority (National Parliament, Provincial Government Assembly, Honiara City Council, and Boards of all other public bodies) all audit reports on audits conducted by the OAG within 2 months of completing those audits. [Audit reports]
(OAG)
2 The mandate includes audit scrutiny of all public monies regardless of source, including RCDF funds sourced by development partners.
55
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
c. All audit reports submitted to the National Parliament are circulated to all stakeholders including CSOs at the same time by way of suitable communications, including OAG’s website and media releases to the print and electronic media. [Media releases]
(OAG)
collected and expended.
d. MoFT and MPS provide sufficient payroll resources to fund (i.) the position of Deputy Auditor General, (ii) an additional audit function to oversight the audit of development partner grant and loan projects, and (iii) the upgrade of OAG corporate services function to better manage its strategic, administrative and financial operations. [2014 budget]
(MoFT, MPS)
Theme III: Improve the environment for private sector investment.
Better access to credit NCRA: 4.3.3.a, 4.3.3.c NDS Objective: 5
III-1. Remove barriers surrounding access to finance in the creation of locally owned businesses.
a. A policy paper, including recommendations for amendments to the Credit Union Legislation is submitted to Cabinet. [Cabinet conclusion]
(ERU, CBSI)
a. Amendment Bill to the Credit Union Legislation is submitted to Parliament for debate. [Bill]
(ERU, CBSI)
Increasing availability of sustainable and appropriate financial services to underpin business creation and expansion
b. A policy paper, including recommendations for amendments to the Insurance Act is submitted to Cabinet. [Cabinet conclusion]
(ERU, CBSI)
b. Amendment Bill to the Insurance Act is submitted to Parliament for debate. [Bill]
(ERU, CBSI)
56
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
Fair and Transparent taxes. NCRA: 4.3.4.1.e, 4.3.4.a, 4.3.4.1.b, NDS Objectives: 5, 8
III-2. Review duty remission and tax exemption guidelines to ensure that exemptions are granted in accordance with the law and not on a discretionary basis.
a. Regulations outlining guidelines for a unified Committee, to improve oversight of exemption decisions, are drafted. [Draft regulations]
(CED, IRD, ERU)
a. Unified exemptions committee is fully operational under the new legislation. [Committee meeting minutes]
(CED, IRD)
Exemption committee meets regularly with the required quorum, vigorously applies exemption guidelines, and meets service standards and publication commitments.
III-3. Improve duty collection and Customs enforcement.
a. Cabinet approves the release of the draft Customs Bill for consultations. [Cabinet conclusion]
(ERU, IRD, CED)
a. New and revised Customs Act to improve duty collection and customs enforcement tabled in Parliament. [Bill]
(ERU, IRD, CED)
Increasing customs revenues relative to relevant trade flows accounting for adjustments in applicable tariff and tax rates.
b. Financial arrangements are finalised, as well as recruitment of project manager to oversee the implementation for ASYCUDA project. [Payments to UNCTAD, Project manager recruited]
(CED)
b. Development of the system prototype in the pilot site accompanied with a comprehensive training regime for Customs officers and education and support for the trading business sector. [System prototype in place, Training manuals]
(CED)
III-4. Improve revenue from other ministries.
a. Formally establish group comprising (senior) officials from all ministries of ‘other government revenue’. [Minutes of meeting]
(FEDU)
a. Submit to Cabinet the findings and policy recommendations of the group to strengthen the collection of existing sources of revenue and identify and develop new sources of government revenue. [Cabinet conclusion]
(FEDU)
a. Develop Cross-Government Revenue Management Strategy (CGRMS) to increase revenue flows from other government ministries. [CGRMS]
(FEDU)
Cross-gov’t revenue management strategy implemented to increase sources of other Government revenue.
57
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
III-5. Receive a fair share from resources by developing and implementing a new resource tax framework.
a. Draft bill of the new legislation for a mining tax regime submitted to Cabinet. [Cabinet conclusion]
(ERU)
a. Draft bill of the new legislation for a mining tax regime is submitted to Parliament. [Bill]
(ERU)
New mining tax agreements are established under legislative framework.
Establish revenue transparency in the extractive sector. NCRA: 5.1.7.d
III-6. Attain EITI Member Status in order to facilitate revenue transparency.
a. Submission of multi-donor trust fund application package to secure funding for the implementation of the EITI work plan. [Completed application/]
(ERU)
a. Issue first EITI report by December 2013, as required under the EITI work-plan, with the view of gaining validation status in 2014. [EITI report]
(ERU)
EITI membership approved by EITI Secretariat.
Well-managed SIG businesses. NCRA: 4.3.4.2 NDS Objective: 5
III-7. Improve SOE monitoring and performance.
a. MoFT monitors and reports on SOEs’ financial health using performance ratios, to better inform SOE borrowing capabilities and to provide a more inclusive measurement of total public sector debt. [Report]
(DMU, ERU)
Absolute improvement in (i) revenue indicators, (ii) capital structure indicators, (iii) SOE liquidity and (iv) self-financing ratios for all SOEs, from a 2012 baseline.
Financial Stability NCRA: 4.2.7 NDS Objective: 5
III-8. Revise the National Provident Fund Act to improve the long-term financial viability of the
a. Obtain Cabinet approval of the revised NPF Bill and associated regulations, to improve the long-term financial viability of the NPF and reduce financial risks.
a. Submit to Parliament a revised NPF Bill and associated regulations, to improve the long-term financial viability of the NPF and reduce financial risks.
Ongoing implementation of the new NPF act and regulations.
58
Policy Reference
Policy Reform Area
Proposed Policy Reforms 2012/13 Completed in the year to 2013-Q2
Proposed Policy Reforms 2013/14 Completed in the year to 2014-Q2
Proposed Policy Reforms 2014/15 Completed in the year to 2015-Q2
Indicators of Outcomes of
Policy Reforms Assessed 2015-
Q2
NPF and reduce financial risks.
[Cabinet conclusion]
(ERU)
[Bill]
(ERU)
III-9. Maintain macroeconomic stability and fiscal sustainability to help the planning and implementation of effective public service delivery.
a. SIG maintains ongoing enhanced engagement with the IMF through a staff-monitored program. [IMF documentation]
(MOFT)
a. SIG maintains ongoing enhanced engagement with the IMF through a staff-monitored program. [IMF documentation]
(MOFT)
a. SIG maintains ongoing enhanced engagement with the IMF through a staff-monitored program. [IMF documentation]
(MOFT)
IMF program on track.
Private Sector-led Growth NCRA: 4.3.2
III-10. Reform the aviation sector to provide cheaper and more efficient services to all Solomon Islanders.
a. MoFT consults with relevant line ministries about the most appropriate arrangement for holding Government airport and airstrip assets and submits a recommendation to Cabinet, including a timeframe, for its implementation and the resolution of outstanding policy issues. [Cabinet conclusion]
(ERU)
a. Submit to Cabinet recommendations on the commercial arrangements under which airport and airfield assets are leased. [Cabinet conclusion]
(ERU)
Agreement reached on appropriate arrangement for holding SIG airport and airstrip assets, as well as on commercial arrangements under which these will be leased.
Total Accomplished Progressing Off track
I. Budget preparation and planning 11
II. Budget execution and reporting 9
III. Environment for private sector investment 10
EFRP 30
59
ANNEX 4: IMF MACROECONOMIC FRAMEWORK ASSESSMENT
Solomon Islands—Assessment Letter for the World Bank1
May 14, 2013
1. The macroeconomic environment remains favorable. While moderating from the extraordinary
expansion in the previous year, in 2012, economic growth remained robust at an estimated 4.8 percent, led
by mining and activities related to the Festival of Pacific Arts. At the same time, inflation fell to 5 percent,
gross international reserves reached US$500 million, and public debt declined to 18 percent of GDP. The
November 2012 IMF-World Bank Debt Sustainability Analysis concluded that Solomon Islands had a
moderate risk of debt distress.
2. Growth is expected to slow down in the medium term. Growth is projected at
4 percent for 2013 and slightly lower in subsequent years. Forestry, the traditional driver of growth, is being
adversely impacted by the gradual depletion of logging stocks, while mining and services are expected to
become the engines of growth in the medium term. Overall risks to the economy have become more
balanced. While regional prospects have improved lately, the near-term uncertainty originating from the
global economy remains significant.
3. Several challenges lie ahead. The economy remains vulnerable to shocks because of lack of
diversification, a strong dependence on aid, and frequent natural disasters. Bolstering resilience to
shocks, strengthening institutional capacity, and pursuing broad-based and more inclusive growth remain
top priorities.
4. A three-year arrangement under the Extended Credit Facility (ECF) was approved on
December 7, 2012 after a successful completion of a precautionary SCF on December 5, 2012. Program
implementation under the Fund-supported ECF has been satisfactory so far. The good track record of
program implementation has contributed to entrenching macroeconomic stability, strengthening institutions,
and improving the business environment. Looking forward, the authorities intend to enhance the efficiency
of tax collections, including by a new mining taxation regime, implement public financial management
reforms, and upgrade the legal framework of the financial sector.
5. Sustaining fiscal discipline and improving the quality of spending are critical to meeting
developmental goals. With logging revenues expected to decline and mining revenue still uncertain, sound
public finances require careful management. In addition, decisive implementation of the authorities’ plans to
improve the quality of public spending is needed, including by enhancing the transparency and
accountability in the use of constituency funds and upgrading the public financial management law.
6. Monetary and exchange rate policies should continue to be geared to maintaining price and external stability. Inflation is projected to remain stable. The new exchange rate peg to a basket of currencies is working well and could help buffer external shocks in the future.
7. The financial system is sound, but efforts to strengthen supervisory and regulatory
frameworks should continue. Ongoing reforms on the legal framework for the National Provident Fund,
financial institutions, and credit unions should help strengthen the financial sector’s regulatory framework.
__________________________________ 1.
The World Bank can also refer to our latest staff report that was published in December 2012.
http://www.imf.org/external/pubs/ft/scr/2012/cr12333.pdf.
60
ANNEX 5: SOLOMON ISLANDS AT A GLANCE
Solomon Islands at a glance East Lower
Key D evelo pment Indicato rs Solomon Asia & middle
Islands Pacific income
(2011)
Population, mid-year (millions) 0.55 1,974 2,533
Surface area (thousand sq. km) 29 16,302 20,842
Population growth (%) 2.6 0.7 1.6
Urban population (% of to tal population) 20 49 39
GNI (Atlas method, US$ billions) 0.6 8,387 4,488
GNI per capita (Atlas method, US$) 1,110 4,248 1,772
GNI per capita (PPP, international $) 2,350 7,266 3,837
GDP growth (%) 9.0 8.3 5.5
GDP per capita growth (%) 6.2 7.6 3.9
(mo st recent est imate, 2005–2011)
Poverty headcount ratio at $1.25 a day (PPP, %) 11 14 30.2
Poverty headcount ratio at $2.00 a day (PPP, %) 23 33 59.5
Life expectancy at birth (years) 68 72 66
Infant mortality (per 1,000 live births) 18 17 46
Child malnutrition (% of children under 5) 12 5 24
Adult literacy, male (% of ages 15 and o lder) .. 96 80
Adult literacy, female (% of ages 15 and o lder) .. 91 62
Gross primary enro llment, male (% of age group) 146 110 106
Gross primary enro llment, female (% of age group) 144 112 102
Access to an improved water source (% of population) 70 90 87
Access to improved sanitation facilities (% of population) 32 66 47
N et A id F lo ws 1980 1990 2000 2011
(US$ millions)
Net ODA and official aid 45 46 68 340
Top 3 donors (in 2010):
Australia 6 11 13 254
New Zealand 1 2 5 25
European Union Institutions 9 6 44 25
Aid (% of GNI) 41.3 22.0 15.7 61.4
Aid per capita (US$) 194 148 167 633
Lo ng-T erm Eco no mic T rends
Consumer prices (annual % change) 13.1 8.7 7.1 6.2
GDP implicit deflator (annual % change) .. 7.2 10.7 7.3
Exchange rate (annual average, local per US$) 0.8 2.5 5.1 7.5
1980–90 1990–2000 2000–11
Population, mid-year (millions) 0.2 0.3 0.4 0.6 3.0 2.8 2.7
GDP (US$ millions) 169 303 435 838 .. 3.4 4.9
Agriculture .. 28.9 34.7 38.9 .. 3.1 8.3
Industry .. 5.0 12.7 6.1 .. 5.3 0.2
M anufacturing .. 2.4 8.0 3.8 .. 2.8 -1.8
Services .. 66.1 52.6 55.0 .. 3.9 3.8
Household final consumption expenditure .. .. 89.3 81.9 .. .. ..
General gov't final consumption expenditure .. .. 25.2 39.2 .. .. ..
Gross capital formation 25.1 20.3 6.6 14.6 .. .. ..
Exports o f goods and services 36.9 30.1 24.1 25.8 .. .. ..
Imports o f goods and services 79.3 64.7 38.6 49.6 .. .. ..
Note: Figures in italics are for years other than those specified. .. indicates data are not available.
Development Economics, Development Data Group (DECDG).
(average annual growth %)
(% of GDP)
10 5 0 5 10
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2011
Male Female
0
10
20
30
40
50
60
1990 1995 2000 2011
Solomon Island s East Asia & Pacific
Under-5 mortality rate (per 1,000)
-20
-15
-10
-5
0
5
10
15
95 05
GDP GDP per capita
Growth of GDP and GDP per capita (%)
61
Solomon Islands
B alance o f P ayments and T rade 2000 2011
(US$ millions)
Total merchandise exports (fob) 65 418
Total merchandise imports (cif) 98 418
Net trade in goods and services -18 1
Current account balance -30 -52
as a % of GDP -7.0 -6.0
Personal transfers and
compensation of employees (receipts) 4 2
Reserves, including gold 16 393
C entral Go vernment F inance
(% of GDP)
Current revenue (including grants) 13.1 34.7
Tax revenue 11.6 24.8
Current expenditure 17.1 27.2
T echno lo gy and Infrastructure 2000 2011
Overall surplus/deficit -5.1 2.5
Paved roads (% of to tal) 2.4 ..
Highest marginal tax rate (%) Fixed line and mobile phone
Individual .. 40 subscribers (per 100 people) 2 51
Corporate .. 30 High technology exports
(% of manufactured exports) .. ..
External D ebt and R eso urce F lo ws
Enviro nment
(US$ millions)
Total debt outstanding and disbursed 156 256 Agricultural land (% of land area) 3 3
Total debt service 9 15 Forest area (% of land area) 81.0 78.9
Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) 0.1 0.1
Total debt (% of GDP) 35.9 25.1 Freshwater resources per capita (cu. meters) 103,447 80,939
Total debt service (% of exports) 7.6 2.5 Freshwater withdrawal (% of internal resources) .. ..
Foreign direct investment (net inflows) 13 258 CO2 emissions per capita (mt) 0.40 0.38
Portfo lio equity (net inflows) 0 0
GDP per unit o f energy use
(2005 PPP $ per kg of o il equivalent) .. 18.0
Energy use per capita (kg of o il equivalent) .. 129
Wo rld B ank Gro up po rtfo lio 2000 2011
(US$ millions)
IBRD
Total debt outstanding and disbursed 0 0
Disbursements 0 0
Principal repayments 0 0
Interest payments 0 0
IDA
Total debt outstanding and disbursed 38 40
Disbursements 1 0
P rivate Secto r D evelo pment 2000 2011 Total debt service 0 2
Time required to start a business (days) – 42 IFC (fiscal year)
Cost to start a business (% of GNI per capita) – 54.5 Total disbursed and outstanding portfo lio – 35
Time required to register property (days) – 87 o f which IFC own account – 35
Disbursements for IFC own account – 35
Ranked as a major constraint to business 2000 2011 Portfo lio sales, prepayments and
(% of managers surveyed who agreed) repayments for IFC own account – 0
n.a. .. ..
n.a. .. .. M IGA
Gross exposure – –
Stock market capitalization (% of GDP) .. .. New guarantees – –
Bank capital to asset ratio (%) .. ..
Note: Figures in italics are for years other than those specified.
.. indicates data are not available. – indicates observation is not applicable.
Development Economics, Development Data Group (DECDG).
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Polit ical stability
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2011
2000
Governance indicators, 2000 and 2011
Source: Worldw ide Governance Indicators (www.govindicators.org)
IBRD, 0
IDA, 40
IMF, 34
Other multi-lateral, 61
Bilateral, 18
Private, 92
Short-term, 11
Composition of total external debt, 2011
US$ millions
62
Millennium Development Goals Solomon Islands
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2011
Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. .. ..
Poverty headcount ratio at national poverty line (% of population) .. .. .. ..
Share of income or consumption to the poorest qunitile (%) .. .. .. ..
Prevalence of malnutrition (% of children under 5) 16.3 .. .. 11.5
Go al 2: ensure that children are able to co mplete primary scho o ling
Primary school enro llment (net, %) .. .. .. 87
Primary completion rate (% of relevant age group) 60 73 .. ..
Secondary school enro llment (gross, %) 14 18 21 48
Youth literacy rate (% of people ages 15-24) .. .. 85 ..
Go al 3: e liminate gender disparity in educat io n and empo wer wo men
Ratio of girls to boys in primary and secondary education (%) 84 85 90 96
Women employed in the nonagricultural sector (% of nonagricultural employment) .. .. 31 ..
Proportion of seats held by women in national parliament (%) 0 .. 2 0
Go al 4: reduce under-5 mo rtality by two -thirds
Under-5 mortality rate (per 1,000) 42 36 31 22
Infant mortality rate (per 1,000 live births) 34 29 25 18
M easles immunization (proportion of one-year o lds immunized, %) 70 68 85 73
Go al 5: reduce maternal mo rtality by three-fo urths
M aternal mortality ratio (modeled estimate, per 100,000 live births) 150 120 120 93
B irths attended by skilled health staff (% of to tal) .. 85 85 86
Contraceptive prevalence (% of women ages 15-49) .. 11 7 35
Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases
Prevalence of HIV (% of population ages 15-49) .. .. .. ..
Incidence of tuberculosis (per 100,000 people) 312 240 185 103
Tuberculosis case detection rate (%, all forms) 40 41 40 70
Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs
Access to an improved water source (% of population) .. 69 70 70
Access to improved sanitation facilities (% of population) .. 30 31 32
Forest area (% of to tal land area) 83.0 .. 81.0 78.9
Terrestrial protected areas (% of land area) 0.1 0.1 0.1 0.1
CO2 emissions (metric tons per capita) 0.5 0.5 0.4 0.4
GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 13.6 .. .. 18.0
Go al 8: develo p a glo bal partnership fo r develo pment
Telephone mainlines (per 100 people) 1.5 1.8 1.9 1.5
M obile phone subscribers (per 100 people) 0.0 0.1 0.3 49.8
Internet users (per 100 people) 0.0 0.0 0.5 6.0
Households with a computer (%) .. .. .. ..
Note: Figures in italics are for years other than those specified. .. indicates data are not available.
Development Economics, Development Data Group (DECDG).
So lo mo n Islands
0
25
50
75
100
125
2000 2005 2010
Primary net enrollm ent ratio
Ratio of girls to boys in pr ima ry & secondaryeducation
Education indicators (%)
0
10
20
30
40
50
60
2000 2005 2010
Fixed + mob ile subscribers
Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2011
Solomon Island s East Asia & Pacific
Measles immunization (% of 1-year olds)
63
W E S T E R N
M A K I R A
T E M O T U
M A L A I TA
CHOISEUL
ISABEL
GUADALCANAL
CENTRAL
RENNELL ANDBELLONA
Kundu
Sasamungga
Seghe
Kia
TatambaHapaiDaringali
Tarapaina
Heuru
Apaora
Mwaniwowo
Paruru
Tinggoa
Tutumu
Noka
Vana
Su'uMaravova
Dadale
Avu Avu
Luti
Sosolo
Tulagi
Buala
Kirakira
Lata
Auki
Tigoa
Taro Island
Gizo
HONIARA
PAPUANEW GUINEA
VANUATU
SOUTH PACIFICOCEAN
Coral Sea
Solomon
Sea
N e w G e o r g i a S o u n d
Choiseul
Santa Isabel
Malaita
Ontong Java Atoll
IndispensableReefs
Roncador Reef
San Cristobal
Rennell
Nendo
Santa Cruz IslandsUtupua
Reef Is.
Duff Is.
Tinakula
Fatutaka
Tikopia
AnutaVanikolo
Bellona
Guadalcanal
Shortland Is.
Vella Lavella
Kolombangara
New Georgia
New GeorgiaGroup
Ranongga
Rendova
Tetepare
San Jorge
Russell Is.Florida Is.
Vangunu
Nggatokae
Vaghena
Ulawa
Dai
Maramasike
Mono
Mt. Makarakomburu(2,447 m)
156°E 158°E
156°E 158°E
160°E 162°E 164°E 166°E 168°E 170°E
164°E 166°E 168°E 170°E
6°S
8°S
10°S
12°S
14°S14°S
10°S
8°S
6°S
SOLOMONISLANDS
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 50 100
0 50 100 150 Miles
150 Kilometers
IBRD 33482R
AU
GU
ST 2010
SOLOMONISLANDS
SELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
MAIN ROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES