TONGA

Country Operations Business Plan 2016–2018

STRATEGIC ANALYSIS

August 2015

CONTENTS

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background 1

B. Highlights of Previous Programming Approach 3

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities 3

B. Implementation Issues 5 APPENDICES TO LINKED DOCUMENT

1. Data Tables 7

Table 1: Progress towards the Millennium Development Goals 7

Table 2: Country Economic Indicators 10

Table 3: Country Poverty and Social Indicators 12

Table 4: Country Environment Indicators 13

Table 5: 2015 Country Performance Assessment Ratings 14

Table 6: Country Portfolio Indicators 15

Table 6a: Portfolio Amounts and Ratings 15

Table 6b: Disbursements and Net Transfers of Resources 16

Table 6c: Project Success Rates 17

Table 6d: Portfolio Implementation Status 18

2. Development Coordination 19

Development Coordination Matrix 19

3. Sector Assessments 21

I Infrastructure 21

II Climate Resilience 31

III Public Sector Management 41

IV Private Sector Development Assessments 49

4. Risk Assessment and Management Plan 58

5. Country Cost-Sharing Arrangements and Eligible Expenditure Financing 60

Parameters, 2016–2018

ABBREVIATIONS

ADF Asian Development Fund

CPS country partnership strategy

DPs development partners

GDP gross domestic product

IMF International Monetary Fund

MDGs millennium development goals

PFM public financial management

JPRM joint policy reform matrix

RETA regional technical assistance

SOE state-owned enterprise

TA technical assistance

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background 1. Tonga is located in the western South Pacific Ocean approximately 750 kilometers east of Fiji and 2,000 kilometers north of New Zealand. There are 170 islands in the archipelago, of which 36 are populated. The total land area of Tonga is 747 square kilometers ((km2), surrounded by an exclusive economic zone of 640,050 km2. The population of Tonga was estimated at 103,036 in 2011. Nearly 70% reside on the largest island of Tongatapu, where the capital, Nuku’alofa, is located. Emigration has been high over the past 30 years, at a rate of about 2.0% annually; this has lowered the rate of population growth to an average of 0.4% annually. Tonga has achieved a high level of human development. Gross domestic product (GDP) per capita in fiscal year (FY) 2012 was estimated at $4,572. This places the country in the ranks of middle-income countries. 2. Over the past decade, Tonga’s economy has been adversely affected by climatic shocks, in particular, tropical cyclones, soaring prices of imported fuels and food, civil disturbances in 2005 and 2006, and the global financial crisis. The resulting growth trajectory has been low, volatile, and largely public sector driven—with average growth of only 0.6% of GDP ranging between –4.6% to 4.2% of GDP from 2005–2014—highlighting the need to grow the private sector, including through enhanced economic participation of women, to create more jobs and improve future growth prospects. In recent years, the government has taken important steps to put in place the policy levers that will shape growth. Prudent management of debt and the excessive public wage bill, and further strengthening of domestic revenue mobilization, are required to put the fiscal position on a more sustainable path. More effective and efficient use of resources requires further PFM reforms. Better public service performance and continuous SOE reforms will benefit both the public and private sectors. Business environment reforms are needed to lower the cost and risk of doing business and encourage private sector activity to expand the formal economy and create employment. Measures have been taken to liberalize external trade and foreign direct investment, institute growth committees in priority sectors (e.g. tourism, agriculture and fisheries), simplify and improve the tax system, reform state-owned enterprises (SOEs), and strengthen public financial management through introducing a medium-term budget framework that links prioritized plans with annual budgets, and public procurement reforms. These measures are guided by the government-led Joint Policy Reform Matrix (JPRM), which development partners use as the basis for budget support that helps create fiscal space for critical reforms and set incentives to keep up reform momentum. 3. However, the government does not yet have control over all the policy levers. Government’s fiscal policy remains hampered by t h e large, relatively well– paid public s e c t o r that puts pressure on scarce funds, relatively high ad hoc tax exemptions, and weak implementation of budgeted policy priorities. Extensive borrowing from the Export-Import Bank of China for the reconstruction of Nuku’alofa’s central business district following civil disturbances in 2005 and 2006 led to a downgrading of Tonga’s debt distress level from moderate to high risk in 2010. Enforcement of a stricter debt policy that allows only concessional borrowing has led to an upgrade to moderate risk by the joint International Monetary Fund and World Bank debt sustainability analysis in 2013 and 2014. 4. Private sector development is essential to c r e a t e j o b opportunities for the labor-force. Its development has been constrained by multiple geographic, institutional, and policy constraints. The remnants of a state-led growth strategy, the large civil service, and SOE dominance in commercial activities, continues to hamper private sector development and new job creation. However, significant reforms have been undertaken to improve SOE governance, and selected SOEs have either been restructured or privatized between 2012 and 2014.

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Progress with the simplification of business license registration and new companies legislation has further improved the investment climate. A critical constraint for private sector development is the lack of access to land for both local and foreign investment. This is exacerbated by typ ica l ly short term leases, the lack of provisions for regular review of rental agreements, and protection for investors. Land tenure systems are intimately linked with cultural traditions and the structure of society, making it difficult to bring land management into line with the needs of a market- based economy. 5. A key challenge for Tonga is to improve the efficiency of the public sector and develop the private sector. Tackling developmental issues will be crucial to alleviate unemployment, poverty and hardship. Reforms in many aspects of the economy are needed if Tonga is to deliver the quality of education, health and other services consistent with its status as a middle-income country. Nurturing private-sector led growth is essential to increasing levels of private sector investment, and improving productivity, competitiveness and resource efficiency. This will require effective government, appropriately functioning factor markets, and an enabling climate to be created where companies with available capital feel confident in taking forward investment.

6. The standard of living in Tonga has improved dramatically over the past 50 years and absolute poverty is not widespread. However, the incidence of hardship among the economically disadvantaged groups has been increasing. Hardship is officially defined as “having difficulties in meeting basic needs such as education and transport.” From this perspective, the rural and outer-island communities, especially those in the rural areas of Nuku’alofa and the Niuas and Ha’apai outer-island groups, are experiencing higher rates of hardship. This means that they face limited job opportunities and access to key public services, the latter which affects the quality of health and education services received They depend heavily on subsistence production including handicrafts, and on remittances from overseas members of their households to fund their social and cultural obligations for ceremonies and church donations. The results of the 2009 Household Income and Expenditure Survey, the latest data available, suggest that the incidence of hardship in Tonga has increased over the past decade. It has been estimated that in 2009, 16.4% of households (22.5% of the population) were living below the basic needs poverty line, compared with 12.2% of households (16.2% of the population) in 2001 (Table 6). Overseas employment opportunities, both related to overseas labor mobility schemes and longer term migration, not only provide major sources of income and remittances but continues to be a viable long-term option for sustaining economic growth and helping to lift people out of poverty. 7. Tonga is generally on-track in relation to the achievement of the eight Millennium

Development Goals (MDGs) agreed by the international community to strengthen performance

in social and economic development by 2015. A status report on progress towards meeting

MDG goals and targets is included in Appendix 1, Table 1. Progress is considered to be lagging

in three areas: (i) managing the incidence of non-communicable diseases where the high

incidence of diabetes, cardio-vascular disease, hypertension and diabetes is a cause for

concern; (ii) promoting gender equality and empowering women, where for example none of the

thirty seats in Parliament is held by a woman; and (iii) reducing poverty, where 22.5% of the

population is considered to remain below the national basic needs poverty line.

8. As a category A country, Tonga is eligible for Asian Development Fund (ADF) and

concessional Ordinary Capital Resources, or OCR, resources The 2015 Debt Sustainability

Analysis indicates that Tonga remains at moderate risk of debt distress. External debt in 2015 is

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estimated at 45% of GDP and external debt and debt service indicators remain below the

thresholds. The 2014 Country Performance Assessment found that Tonga had maintained its

2012 ratings for all categories except public sector management and institutions where the

establishment of remuneration boards at the line ministry level and the 5.0% cost of living

adjustment increase in late 2013 has caused the rating to slip. In spite of this, Tonga continues

to perform well relative to the rest of the Pacific and in terms of structural policies and public

sector management and institutions, at par or better than ADB’s Group A countries.

B. Highlights of Previous Programming Approach 9. ADB’s Pacific Approach 2010-2014 has served as the country partnership strategy between ADB and Tonga since the expiry of the Country Partnership Strategy 2007-2011. The current Country Operations Business Plan (COBP) covers the period 2015-2017. ADB’s engagement during 2011–2014 has supported the government’s focus on strengthening the economy’s resilience to future shocks and improving Tonga’s long term growth prospects. The COBP supports this effort by focusing on prudent public sector management, renewable energy, and climate resilience. 10. ADB and other partners have increasingly provided budget support for Tonga to support the implementation of reform actions in the JPRM (ADB provided an initial $10m in budget support on 2009 and a further $4.5m in 2013). In total, budget support receipts from all partners have averaged about 15% of Tonga’s budget since FY2012 and have helped to restore public finances and debt at manageable levels, improve allocation of resources to priority sectors including maintenance of health and education spending at a time of fiscal consolidation, and accelerate the pace of business climate and state-owned enterprise reforms. 11. Investment in infrastructure is crucial to economic recovery in Tonga. It is vital to growth: spending on infrastructure not only provides a timely boost to economic activity and jobs but also creates a legacy of assets that could have long-lasting economic benefits. Domestic investment levels in Tonga have averaged 20% of GDP in the decade. However, the productivity of much of this investment is low, being channeled either into poorly performing state-owned enterprises or into residential construction. Government capital spending has historically been low while poor transport infrastructure and high costs of power and broadband internet services are significant constraints on doing business in Tonga; these compound the effects of remoteness on economic activity. Recognizing this challenge, the Government has signaled its intention to balance budget support with new investments in economic infrastructure once the period of the current COBP (2015–2017) ends. There are four large-scale ADB infrastructure projects ongoing in Tonga that amount to about $60 million. These are the Nuku’alofa Urban Development Project, the Climate Change Resilience Project, the Outer Island Renewable Energy Project and the Cyclone Ian Recovery Project. All are scheduled to end between 2016–2018 and occupy significant implementation capacities.

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities 12. The Tonga Strategic Development Framework 2015–2025 contains 5 pillars (Economic Institutions, Social institutions, Political Institutions, Infrastructure and Technology, and Natural Resources and Environment ), which are consistent with the focus of ADB’s Interim Pacific Approach 2015 and the proposed COBP 2016–2018.

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13. The indicative ADF and concessional OCR resource allocation for 2016–2018 is $23.51 million. The final allocation will depend on the available ADF and concessional OCR resources and the outcome of the country performance assessments. The 2014 debt distress classification of Tonga was assessed as at moderate risk of debt distress. In accordance with the ADF grants framework, the country is to receive 50% of its country allocation in grants in 2015, subject to a 20% volume discount on the grant portion of the country allocation.1 ADB’s interventions during this period include $15 million for the “Building Macroeconomic Resilience Program” and $20 million for project investments in information and communication technology and urban sector development. 14. Policy-based lending. Policy-based lending will continue to feature prominently in the COBP 2016–2018. Budget support has helped the government to significantly improve its management of the economy and its finances during a period of fiscal crisis and through major Constitutional changes that have absorbed significant political and administrative attention. The fiscal situation has stabilized, delivery of crucial social services maintained, returns from state-owned enterprises increased, and the business climate improved. As a result, Tonga has steadily climbed up in the Ease of Doing Business Indicators, and is now the highest ranked Pacific country. Tonga’s country performance assessment scores have rapidly improved, which has seen its biennial ADF allocation increase by 16% since 2010. The government wishes the focus of ADB’s policy-based lending to balance sound fiscal management with structural reforms and inclusive growth to promote jobs and social protection. ADB and other development partners will work with the government to transform the JRPM into a medium term critical reform path that helps strengthen economic resilience. Planned approval of ADB’s 2015 policy-based lending operation has been pushed back to the first quarter of 2016 in order to give the government room to implement vital policy and institutional reforms in the JPRM that will serve as building blocks for more substantial change in the future. 15. New investments. New investments will be based on the 2010 Tonga National Infrastructure Investment Plan (updated in 2013) and will be carefully phased in to ensure Government has adequate capacity for implementation.2 The government and ADB have agreed that the information and communications technology (ICT) and urban and water sectors should be prioritized in ADB’s lending pipeline. Consequently, the COBP contains two new project investments in these sectors: an ICT project ($10 million) that will build on an ongoing technical assistance (TA) project to promote the use of electronic applications in the social sectors and a urban and water project ($10 million) that will enable the expansion of the Nuku’alofa water supply to growth areas (footnote 6). 16. Capacity development. TA will support program implementation and project preparation. Tonga will also continue to benefit from regional technical assistance in line with ADB’s Regional Operations Business Plan, 2015–2017. Tonga will also continue to benefit from technical support from the Pacific Region Infrastructure Facility and the International Monetary Fund’s Pacific Financial Technical Assistance Centre. 17. Knowledge solutions will be promoted by capturing, generating and disseminating relevant development management knowledge, in line with ADB’s knowledge solutions agenda of the Midterm Review of Strategy 2020, the new Knowledge Management Action Plan, ADB’s Public Communication Policy 2011, and utilizing the User Guide to Preparing Communications Strategies for Projects. Concerted efforts will be made to (a) generate knowledge from ADB operations in Tonga, and (b) apply Pacific Developing Member Country-wide knowledge in

1 The proportion of grants for the resource allocations in 2016–2018 will be determined by future annual debt

distress classifications in accordance with the ADF grants framework. 2 Government of Tonga. 2010. National Infrastructure Investment Plan. Nuku’alofa.

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designing projects and reform programs in Tonga. This will be done in close coordination with the ADB’s Knowledge Sharing and Services Center, the Department of External Relations, and ADB’s various Communities of Practice. Lessons will be drawn from high-performance projects and programs and disseminated in policy notes, seminars, and other outreach events. B. Implementation Issues

1. Efforts to build ownership

18. Key initiatives in building Tongan ownership of ADB activities include close consultation with Tongan stakeholders at all stages of activity identification, formulation and implementation; ensuring close alignment between ADB activities and Tonga’s development strategies; working with government and other development partners in pursuing reform through the JPRM; use of local consultants wherever possible; and full-time presence through the ADB/WB Development Coordination Office.

2. Capacity

19. Tongan institutions are generally capable and staffed by educated, experienced and motivated personnel. However, these institutions are small and can lack breadth and depth in technical skills. This can put policy reform and project implementation at risk, and requires that reform and project design be supported by relatively high levels of technical support for extended periods. Capacity constraints also suggest that the reform agenda needs to be tightly focused on key policies and systems in order to be sustained.

3. Coordination

20. A joint declaration on aid effectiveness between the government and Development Partners was signed in October 2007, and high level consultations in relation to development assistance are held annually. Aid coordination is the responsibility of the Project and Aid Management Division in the Ministry of Finance and National Planning, with this institutional arrangement creating strong links between Development Partner activities, the strategic planning framework, and the annual budget process. The Division has experienced and effective staff, and acts as a key repository of information on development assistance activities. Some development partners have co-located representatives with the Division (including the ADB/WB Development Coordination Office and the UN Joint Presence Office).

4. Use of Development Coordination Office (DCO)

21. The ADB/WB Development Coordination Office in Tonga plays a pivotal role in supporting ADB’s activities in Tonga. The office is strategically located within the offices of the Ministry of Finance and National Planning, giving it ready access to key staff and smooth links with other arms of government. Experience to date has seen the office providing effective services to visiting missions and consultants, and opening very effective channels of communications with line ministries and other key stakeholders. An indicator of the success of the office is the high regard with which it is held by both ADB and the government.

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APPENDICES TO LINKED DOCUMENT

Appendix 1 7

DATA TABLES

Table 1: Progress toward the Millennium Development Goals and Targets

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

Off-track in relation to national poverty line Off-track: It is estimated that 22.5% of the population were living below the national basic needs poverty line in 2009. This grew from an estimated 16.2% in 2001. Off-track: Only slight improvement in the employment-to-population ratio from 53.1% in 1990 to 55.9% in 2006. There has been, however, faster growth in ratio of paid employment to population. On-track: There is negligible incidence of hunger in Tonga, with obesity being a much more significant problem than hunger. The prevalence of underweight children is low, with the most recent estimate being 2% in 1999. Incidence of food or absolute poverty remains low, but increased from 2.8% of the population in 2001 to 3.1% in 2009.

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

On-track On-track: Net enrolment ratio in primary education has increased from 91.6% (1990) to 93% (2008). The proportion of pupils starting grade 1 who reach last grade of primary school increased from 84% in 1996 to 90% in 2007.

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

Off-track in some areas Off-track: The ratio of girls to boys has remained around 0.88 at the primary level, indicating room for improvement. At the secondary level, representation is almost equal. The proportion of women in wage employment in the non-agricultural sector was 39.2% in 2006, and representation is lower in higher level positions. Only one of 30 seats in the national parliament was held by a woman in 2010.

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

On-track overall, stable rather than improving Stable: The under-five mortality rate per 1,000 remains low in Tonga, though the rate in 2008 was roughly the same as that in 1990 (26-27). The infant mortality rate is also low, but increased from 12.2 in 1991 to 16.4 in 2008. The proportion of 1 year old children immunized against measles is almost 100%.

Goal 5: Improve maternal health

On-track overall

8 Appendix 1

Goals and Targets Country Status Target 5.A: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio Target 5.B: Achieve, by 2015, universal access to reproductive health

On-track: The maternal mortality ratio has fluctuated, but was significantly lower in 2008 (76/100,000) than in 1995 (205/100,000). The skilled birth attendance rate has been high and stable, reaching 98% in 2007. On-track overall: Ante-natal coverage is high at 98% in 2008 (one visit) and 86% (4 visits), though the contraceptive prevalence rate is low at 27% in 2008, down from 33% in 1990.

Goal 6: Combat HIV/AIDS, malaria, and other diseases Target 6.A: Have halted by 2015 and begun to reverse the spread of HIV/AIDS Target 6.B: Achieve, by 2010, universal access to treatment for HIV/AIDS for all those who need it Target 6.C: Have halted by 2015 and begun to reverse the incidence of TB. Have reduced the prevalence of non-communicable diseases (NCDs).

Off-track in relation to NCDs Little data available. Official estimates on HIV/AIDS levels are low but likely to be understated. Estimates of condom use at last high-risk are very low (21% in 2008), and awareness of HIV/AIDS is low (36% of those in the 15-24 age group). No current cases of advanced HIV infection. Off-track: Significant progress has been made in relation to the incidence, prevalence and cure rate from TB. However, mortality and morbidity arising from NCDs including diabetes, cardiovascular disease, hypertension, and obesity are major areas of concern.

Goal 7: Ensure environmental sustainability Target 7.A: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation Target 7.D: By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers

Some data gaps; generally on-track. Data not available. Data not available On-track: The proportion of the population with access to an improved drinking water source increased from 92% in 1986 to 98% in 2006. The proportion of the population using an improved sanitation facility increased from 55% in 1986 to 82% in 2006. Data not available. Settlements are growing in swampy areas around Nuku’alofa, which has implications in terms of housing quality and access to basic services.

Goal 8: Develop a global partnership for development Target 8.A: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system

Data gaps; generally on-track Significant progress has been made in aid coordination and harmonization, with a significant reduction in the tying of aid Not applicable

Appendix 1 9

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

Data gaps Off-track: Debt service as a proportion of exports of goods and services remains manageable at 9.8% (2007). However, public debt has grown with external debt now exceeding the target ceiling of 40% of GDP (2012), and debt sustainability analysis concluding that Tonga is at high risk of debt distress. On-track: In 2002 it was estimated that 95% of the population had sustainable access to the 20 most essential drugs identified by WHO. The Tongan population has access to free health care and drugs. Tonga is considered to have achieved this target. On-track: There has been rapid growth in the number of telephone lines (5 per 100 population in 1990 to 21 in 2008), mobile phone users (from 0 per 100 population in 1990 to 46.4 in 2007), and internet users (0 per hundred population in 1990 to 8.4 in 2007).

Source: Adapted from 2nd National Millennium Development Goals Report, Tonga, Status and Progress 1990-2010, MFNP, September 2010.

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1 Table 2: Country Economic Indicators

Item

2011 2012 2013 2014e 2015p

A. Income and Growth

1. GDP Per Capita ($, current prices)

7,370.0

7,638.0

7,476.0

7,802.0

8,021.0

2. GDP growth (%, constant market prices) 2.0 0.5 (2.7) 2.1 2.4

Agriculture 2.0 0.5 --- --- ---

Industry 5.5 1.2 --- --- --- Services 1.8 0.5 --- --- ---

B. Savings and Investment (current market prices, % of GDP)

1. Gross domestic investment 36.8 33.9 --- --- ---

2. Gross domestic savings (11.8) (14.4) --- --- ---

C. Money and Inflation (annual % change)

1. Consumer Price Index 6.0 3.3 0.7 2.3 0.4

2. Total Liquidity (M2) 3.3 7.2 6.1 7.2 4.0

D. Government Finance (% of GDP)

1. Revenue and Grants 26.8 27.8 25.5 29.0 30.5

2. Expenditure and Onlending 34.4 30.6 26.8 28.0 32.3

3. Overall Fiscal Surplus (Deficit) (7.5) (2.8) (1.3) 1.1 (1.8)

E. Balance of Payments

1. Merchandise Trade Balance (% of GDP) (33.9) (34.2) (36.2) (36.0) (45.2)

2. Current Account Balance (% of GDP) (6.1) (8.8) (1.9) (1.4) (4.5)

3. Merchandise Exports ($) growth (annual % change) 36.7 65.7 (22.9) 8.7 0.0

4. Merchandise Imports ($) growth (annual % change) 17.0 17.5 (2.1) 0.1 11.6

F. External Payment Indicators

1. Gross Official Reserves, (including gold, $ million in month of current year's imports of goods)) 5.6 6.6 7.3 7.0 6.9

2. External Debt Service (% of X of goods & services) 7.0 7.3 8.4 10.1 8.1

3. Total External Debt (% of GDP) 36.6 42.6 46.0 42.9 44.9

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G. Memorandum Items

1. GDP (current prices, T$ million) 759.7 788.4 772.4 806.3 828.9

2. Exchange Rate ((T$/$, annual average) 1.9 1.7 1.7 1.8 2.1

3. Population (million) 0.1 0.1 0.1 0.1 0.1

--- = no available data; % = percent; $ = United States dollar; a = in fiscal year ended 30 June; e = estimate; GDP = gross domestic product;

M2 = money supply; p = projection; T$ = Tongan pa'anga.

Source: Asian Development Outlook 2015 database and ADB staff estimates.

12 Appendix 1

Table 3: Country Poverty and Social Indicators

Item 1990 2000 Latest Year A. Population Indicators 1. Population (‘000) 95.2 97.9 103.0 (2011) 2. Population growth (annual % change) 0.2 0.5 0.2 (2006-11) B. Social Indicators 1. Fertility rate (births/woman) 4.6 4.3 3.8 (2012)

2. Maternal mortality ratio (per 100,000 live births) 67 87 110 (2010) 3. Infant mortality rate (below 1 year, per 1,000 live births) 20.7 16.8 13.2 (2010)

4. Life expectancy at birth (years) 69.6 70.7 72.3 (2011) a. Female 71.1 72.8 75.2 (2011) b. Male 68.1 68.8 69.5 (2011) 5. Adult literacy (%) 98.9 (1996) … 99.0 (2006) a. Female 99.0 (1996) … 99.0 (2006) b. Male 98.8 (1996) … 99.0 (2006) 6. Primary school net enrollment (%) 92.3 91.3 (1999) 98.7 (2006) 7. Secondary school net enrollment (%) 81.9 76.1 73.0 (2004) 8. Child malnutrition (% underweight below 5 years old) … … 2.2 (1986)

9. Population below poverty line (%) … 16.2 (2001) 22.7 (2006) 10. Households with access to safe water (%) 91 (1986) 98 (1996) 98 (2006) 11. Households with access to sanitation (%) 55 (1986) 74 (1996) 82 (2006) 12. Public education expenditure (% of GDP) … 4.9 3.9 (2004) 13. Human development index rank … 55 (2004) 95/186 (2012) 14. Gender-related development index … … 0.462 (2012) C. Poverty Indicators 1. Human poverty index value (%) … … … Rank … … … 2. Provincial human poverty indices (%) not applicable 3. Poverty gap … … 6.3 (2009) 4. Poverty severity index … … … 5. Inequality (Gini Coefficient) … … 0.24 (2009) … = data not available, GDP = gross domestic product. Sources: 2nd National Millennium Development Goals Report, Tonga, Status and Progress 1990-2010, MFNP, September 2010; World Development Indicators, World Bank, 2012; UNDP Human Development Report 2013.

Appendix 1 13

Table 4: Country Environment Indicators

Indicator 1990 Latest Year A. Energy Efficiency of Emissions 1. GDP/unit of energy use (PPP$/kgoe) … … 2. Traditional fuel use (% of total energy use) … … 3. Carbon dioxide emissions (metric ton, ‘000) … … 4. Carbon dioxide emissions per capita (metric ton) … … B. Water Pollution: Water and Sanitation 1. % urban population with access to safe water … 98.3 (1996) 2. % rural population with access to safe water … 98.1 (1996) 3. % urban population with access to sanitation … 99 (1996) C. Land Use and Deforestation 1. Forest area (km

2) 90 90 (2010)

2. Average annual deforestation (km2) … …

3. Average annual deforestation (% change) … … 4. Rural population density (people/km

2 of arable land) 460 500 (2011)

5. Arable land (% of total land) 22.2 22.2 (2009) 6. Permanent cropland (% of total land) 16.7 15.3 (2009) D. Biodiversity and Protected Areas 1. Nationally protected area (km

2) 9.9 104.7 (2010)

2. Nationally protected area (% of total land) 1.4 14.5 3. Mammals (number of threatened species) 0 (1996) 2 (2012) 4. Birds (number of threatened species) 2 5 (2012) 5. Higher plants (number of threatened species) … 2 (2012) 6. Reptiles (number of threatened species) 3 (1996) … 7. Amphibians (number of threatened species) … … E. Urban Areas 1. Urban population (‘000) 21.6 24.5 (2011) 1. Urban population (% of total population) 22.7 23.5 (2011) 2. Per capita water use (liters/day) … … 3. Wastewater treated (%) ... … 4. Solid waste generated per capita (kg/day) … … … = data not available, GDP = gross domestic product, kg = kilogram, kgoe = kilograms of oil equivalent, km

2 =

square kilometer, PPP = purchasing power parity. Sources: 2nd National Millennium Development Goals Report, Tonga, Status and Progress 1990-2010, MFNP, September 2010; World Development Indicators, World Bank, 2012.

14 Appendix 1

Table 5: 2014 Country Performance Assessment Ratings

CRITERIA TUV Pacific

(Average) A. Economic Management 2.8 3.3

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

3.5 3.0 2.0

3.4 3.2 3.4

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

3.0 2.5 2.5

3.8 3.0 2.8

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

Sustainability

3.0 3.0 4.0 3.0 3.0

3.0 3.2 3.4 3.1 3.0

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

Public Sector

4.0 3.0 3.0 3.0 3.0

3.4 3.4 3.5 3.0 3.2

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

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Table 6: Country Portfolio Indicators

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

Net Amount Total On Track Potential Problem Actual Problem

Sector ($

million) (%) (no.) (%) (no.

) (%) (no.) (%) (no.) (%)

Energy 15.29 22.47 2 33.3 2 100.

0 0 0.0 0 0.0

Information and Communication Technology 9.70 14.26 1 16.7 1 100.

0 0 0.0 0 0.0

Multisector 19.25 28.29 1 16.7 1 100.

0 0 0.0 0 0.0 Water and Other Urban Infrastructure and Services 23.80 34.98 2 33.3 1 50.0 1 50.0 0 0.0

Total

68.04

100.0 6 100.0 5 83.3 1 16.7 0 0.0

Source: eOps extract.

Note: Covers effective projects active as of 31 December 2014.

Appendix 1 16

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

17

Ap

pe

ndix

1

Table 6c: Project Success Rates

Note: Based on validated PCRs and PPERs only and does not include ratings from PCRs. The period of coverage are projects approved from 1973–2009.

Ap

pe

ndix

1

18

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

No. Sector Grant No.

Title

Net Grant

Amount Cumulative Disbursements

($ million) Approval

Date Effectivity

Date

Closing Date ($

million) Original Revised

1 WUS 108

Integrated Urban Development Sector Project 11.300 11.256 27-May-08 18-Aug-08 30-Jun-13 31-Dec-13

2 ICT 256

Tonga-Fiji Submarine Cable Project 9.700 7.397 23-Aug-11 21-Dec-11 31-Dec-16 -

3 WUS 264

Nuku'alofa Urban Development Sector Project 6.060 1.478 17-Oct-11 10-Apr-12 31-Dec-17 31-Jan-19

4 WUS 265

Nuku'alofa Urban Development Sector Project 6.440 1.570 17-Oct-11 10-Apr-12 31-Dec-17 31-Jan-19

5 ENE 347

Outer Island Renewable Energy Project 2.000 - 27-Jun-13 9-Jun-14 30-Jun-20 -

6 ENE 348

Outer Island Renewable Energy Project 4.500 - 27-Jun-13 9-Jun-14 30-Jun-20 -

7 ANR 378

Climate Resilience Sector Project 19.250 0.046 9-Dec-13 12-Mar-14 30-Jun-19 -

8 ENE 389

Cyclone Ian Recovery Project 4.520 0.138 16-May-14 17-Sep-14 30-Jun-18 -

9 ENE 390

Cyclone Ian Recovery Project 4.266 - 16-May-14 17-Sep-14 30-Jun-18 -

Total 68.036 21.884

ANR = Agriculture, Natural Resources and Rural Development; ENE = Energy; ICT = Information and Communication Technology;

WUS = Water and Other Urban Infrastructure and Services

Source: GFIS

19

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DEVELOPMENT COORDINATION

Development Coordination Matrix

Sectors and Themes

Current ADB Strategy and/or Activities

Other Development Partners’ Strategies and/or Main Activities

Multilateral Institutions and the UN System Bilateral

Sector

Transport, ICT Submarine Fibre-Optic Cable Contribution to Pacific Infrastructure Advisory Centre (which among other activities supported the preparation and updating of the National Infrastructure Investment Plan), and co-financing from the Pacific Region Infrastructure Facility

World Bank IFC

Transport Sector Consolidation Project (TCSP), addressing all transport modes Pacific Islands Regional Connectivity (Tonga Broadband Connectivity) Pacific Islands Aviation Investment Program (including funding for Fua’amotu and Vava’u airports). Loan to Digicel Tonga

AusAID JICA China New Zealand

Co-financing for TCSP Replacement inter-island ferry Road improvement grant Concessional loan for road improvement and Vuna Wharf Vaipua Bridge, Vava’u Aircraft for domestic air service ‘Eua airport runway upgrade

Energy Renewable Energy Project Phases 1 and 2 Sustainable off-grid systems Energy efficiency

World Bank Tonga Energy Road Map (TERM)

AusAID New Zealand JICA United Arab Emirates

Co-financing for TERM Solar generation farm, Tongatapu Tonga village network upgrade Off-grid solar power systems and village power supplies, Tongatapu and Vava’u Solar micro-grid development, Tongatapu Solar power plant, Vava’u

Ap

pen

dix

2 2

0

Sectors and Themes

Current ADB Strategy and/or Activities

Other Development Partners’ Strategies and/or Main Activities

Multilateral Institutions and the UN System Bilateral

Urban development (roads, water, sanitation)

Nuku’alofa Urban Development Sector Project

AusAID China JICA

Co-financing for Nuku’alofa Urban Development Sector Project Concessional loan for Nuku’alofa Reconstruction Vava’u solid waste management

Theme

Climate resilience Strategic Program for Climate Resilience

UNDP World Bank

Pacific Risk Resilience Program covers four countries including Tonga Contributing to Pilot Program for Climate Resilience (PPCR)

AusAID JICA

Contributing to Pilot Program for Climate Resilience (PPCR) Numerous projects including training and capacity building, rural DRM activities, and earthquake observation assistance

Public sector management

Strengthening Public Finance Management (including budget support linked to joint policy matrix) Implementing the Public Finance Management Roadmap Regional TA to support economic management TA relating to social protection measures

World Bank PFTAC EU

Budget support, linked to joint policy matrix Technical assistance in PFM improvements Budget support, linked to renewable energy and energy efficiency indicators and recognizing joint policy matrix

AusAID UNDP

Budget support, linked to joint policy matrix Support for Parliament and Freedom of Information legislation

Private sector development

Regional TA to support private sector development, including funding for Private Sector Assessment

New Zealand Business Enterprise Centre Tourism Support Program

ADB = Asian Development Bank, AusAID = Australian Agency for International Development, EU = European Union, IFC = International Finance Corporation, JICA = Japan International Cooperation Agency, PFTAC = Pacific Financial Technical Assistance Centre, UNDP = United Nations Development Programme. Sources: Ministry of Finance and National Planning aid management database.

Appendix 3 21

SECTOR ASSESSMENTS

I. INFRASTRUCTURE SECTOR ASSESSMENT

A. Sector Situation and Key Issues3

1. The Tonga National Infrastructure Investment Plan (NIIP 2013 - in draft) notes that infrastructure plays a critical role in achieving the goals of the TSDF, because there is a clear and positive linkage between infrastructure, social development and economic growth. There is consensus that:

• There is a positive correlation between infrastructure and economic outcomes.

Investments in core economic infrastructure (such as electricity, telecoms, transport,

sewerage and water systems) produce the largest gains in productivity, while investments in roads and telecommunications typically deliver the greatest social

returns;

• Maintenance is not “visible” but is more likely to have a greater positive influence on

economic output than new projects.

• When access to core infrastructure has been addressed, the best economic results come from improving efficiency and then from reducing service prices.

• Infrastructure investment only adds value if it is allocated in the right way.

2. Inadequate infrastructure is a bottleneck to economic activity, and also reduces the day-to-day well-being of people; their quality of life; and the ability to withstand and respond to disasters. Sustainability is also compromised because resources are used wastefully. 3. Tonga is generally well-placed regarding access to basic infrastructure and associated services and the coverage and capacity of those services, with full national coverage of basic telecoms; a high level of access to reticulated power and water and off-grid arrangements in place elsewhere; one of the highest levels of road density in the region; and a strategically located network of ports and airports throughout the country. 4. The main priority now for development of Tonga’s infrastructure sector is to continue improving basic services, but at the same time, to use infrastructure investment as a catalyst for improved macroeconomic, social and environmental outcomes. Key drivers of need for further investment in infrastructure are:

• Continuing to provide basic infrastructure that is appropriate, well planned and

maintained.

• Achieving national goals as set out in the TSDF and developing the country as a whole.

The small dispersed population, multi-island geography, remoteness from markets, and

small market size of Tonga creates special challenges for development and operation of

infrastructure in support of these goals.

• Keeping pace with growth and shifts in demand for infrastructure services. In particular,

trends in population (especially drift to urban areas) and the opportunities arising from

new technology (such as online services) are changing the nature and pattern of

demand for infrastructure services.

• Addressing a range of specific issues and deficiencies with existing infrastructure so that the infrastructure system functions more effectively. Because of under-investment and

3 This section draws on the Tonga National Infrastructure Investment Plan 2013 (in draft).

22 Appendix 3

insufficient attention to maintenance in some areas, there is a backlog of infrastructure

deficiencies that need to be addressed.

• Improving the quality, safety, and reliability of economic infrastructure. As well as ensuring access to basic services, there are growing community expectations regarding

the quality of the services provided.

• Improving the resilience of infrastructure to the impacts of climate change and natural

disasters to protect the community and provide a safeguard so that infrastructure

services are still available when they are needed most.

• Lowering the cost of doing business (especially in areas such as energy and

telecommunications) to provide a catalyst for economic growth and enhance the

competitiveness of local business.

• Ensuring that Tonga maintains its compliance with international regulations, especially

safety and security in the international aviation and maritime sectors, so that connectivity to international markets is not constrained.

5. The role of government in relation to the infrastructure sector is changing. Government has largely moved away from taking responsibility for infrastructure investment and service delivery, to being a facilitator of infrastructure service outcomes. Under current arrangements, all economic infrastructure except roads and outer islands ports is now under the management and operation of Public Enterprises. This change is consistent with international good practice, but it requires a continuing focus by Government on the policy, legislation, institutional and regulatory environment that underpins infrastructure management. 6. The current situation and key issues in infrastructure sub-sectors, as identified in NIIP 2013, are:

i. Energy

7. Tonga has one of the highest levels of access to electricity in the region with around 85% of the population on-grid and high levels of supply reliability. But at the same time, Tonga has historically had one of the highest costs of electricity in the region. In part, this was a result of Tonga’s reliance on diesel-powered generation for on-grid services. System losses were also high at around 17% but are coming down and are expected to be reduced to around 13% by 2015. This is more consistent with international benchmarks. 8. The energy sector is in a phase of rebuilding and transformation. Tonga Power is investing heavily from its own resources to rehabilitate the electricity generation and supply system to increase efficiency and safety; and is working with development partners to upgrade village power supply systems and off-grid supply. At the same time, initiatives are underway to transform electricity production with a move towards greater stability and self-sufficiency. In 2009, Government responded to the twin challenges of reducing the Tongan contribution to global Greenhouse Gas (GHG) emissions and improving national energy security by endorsing a policy of 50% of energy from renewable resources. This is a challenging target that provides a clear indication that environmental sustainability and reducing the vulnerability of the country to future oil price shocks are key Government objectives. Government’s response to this target is set out in the Tonga Energy Road Map (TERM) 2010-2020.

Appendix 3 23

Challenges 9. Reducing the cost of doing business, improving the quality of life of people, and Government’s commitment to addressing climate change are driving the need for improved energy infrastructure. Under current conditions, growth in demand is not a major factor driving the need for investment. As noted above, Tonga has historically had some of the highest costs of electricity in the region. This has a negative impact of business costs and on household budgets. In addition, the high level of reliance on imported petroleum creates energy security and price stability issues.

ii. Telecommunications

10. In terms of access to basic telecommunications services, Tonga is well positioned. Mobile phone and internet services are already available throughout the country, including smaller and more remote communities. The completion of an undersea fibre-optic link to Fiji, scheduled for 2013, will deliver a step-change in speed, capacity and quality that will redefine telecommunications in Tonga; offset some of the geographical disadvantage experienced by Tonga; and create new economic and social opportunities. Competition and private sector involvement in the telecommunications sector has been a strong force driving these developments.

Challenges

11. Business and social connectivity and reducing the cost of doing business are key factors driving the need for improved telecommunications infrastructure. High standard telecoms can offset some of the geographical disadvantage experienced by Tonga and increase the international competitiveness of Tongan business, for instance in the tourism industry. Telecommunications also has a vital role during natural disasters and other emergency situations.

iii. Water and Sanitation

12. All Tongans have access to clean drinking water and around 85% of households have piped water supply. So in terms of meetings MDGs and providing basic access to clean water, the water sector is performing well. However problems exist in the efficiency of water supply, and a major challenge facing the reticulated water supply system is to reduce water losses. 13. Although Tonga does not currently have a central sewerage system in any urban area, important issues relating to disposal of grey water and septage (sludge pumped from septic tanks) are emerging and are likely to require a coordinated response in the short-medium term. As a partial response, a grey water collection system has been installed in central Nuku’alofa as part of the CBD redevelopment project.

Challenges

14. The need for infrastructure investment in the Water sector is driven by population trends; household consumption patterns; health and quality standards; and efficient management of valuable water supply resources. Another challenge is reducing loss and waste of valuable water. TWB is already working to reduce water losses and upgrade efficiency throughout its water supply and distribution system. There is also the opportunity for TWB and village water supply managers to be proactive in promoting responsible use of water through demand-side management (DSM) initiatives similar to the energy sector.

24 Appendix 3

iv. Solid Waste

15. In 2007, a new solid waste collection system was implemented on Tongatapu and the Waste Authority Limited (WAL) was established to take control of solid waste collection and disposal. On most other islands, formal arrangements for solid waste collection are not in place. WAL is gradually improving its performance but continues to require financial support from Government; there are also problems with the design of existing equipment and facilities, and an emerging problem with illegal dumping of waste.

Challenges

16. The need for infrastructure investment in the Solid Waste sector is driven by population trends; household consumption patterns; and health and quality standards. On Tongatapu, urban population growth at levels of up to 2.5% per year in some areas is increasing the demand for collection and disposal services. This is straining the capacity of WAL to meet the demand, especially while WAL is in a rebuilding phase. On outer islands, the challenge is to provide a long-term solution for sanitary and environmentally-acceptable disposal of solid waste.

v. Roads

17. Tonga has an extensive network of roads and one of the highest levels of road network density in the region. This network provides good access links to communities in terms of connectivity, but in some areas the condition has deteriorated significantly due to insufficient emphasis on maintenance. Government is addressing this problem through several road rehabilitation and upgrading programs in association with its development partners. Studies underway as part of the TSCP program provide a strategy for road maintenance over the next 5-10 years, including recommendations for road maintenance programming, institutional reform, sustainable funding mechanisms (such as a road fund); and the role of the private sector.

Challenges

18. Some parts of the road system are in poor condition and this is having a significant negative impact on the cost of road transport and links to market for agricultural producers. The main challenge driving the need for investment in roads is to progressively clear the backlog of maintenance and rehabilitate the road system to a standard where it can be sustainably maintained in a cost-effective way using local resources and expertise.

vi. Maritime

19. The maritime sector supports tourism; inter-island and international commerce; and inter-island travel for social, educational and medical needs. The existing ports have sufficient capacity for foreseeable needs and there are no plans to build any new ports for commercial shipping operations. In addition, the international ports comply with relevant international and IMO operating requirements. Although the port system meets basic needs for coverage, capacity and compliance, the standard of infrastructure has suffered from a lack of investment in core infrastructure and facilities; and insufficient emphasis on maintenance of outer-island ports and channels. For the medium-longer term, investment planning for the port sector is less well developed and it is important that an integrated approach is applied that enhances the overall safety, efficiency and resilience of the port system as a whole.

Challenges

20. Safety is government’s key priority for the maritime sector. Responding to this challenge will require investment in people, systems and infrastructure. There is also a need to put in

Appendix 3 25

place stronger institutional arrangements for operating and maintaining outer island ports, as the Ports Authority of Tonga currently handles only the Nuku’alofa port. The other major challenge driving the need for investment in the ports sector is building resilience to the impacts of climate change and natural disasters.

vii. Airports

21. Aviation also plays a vital role in connecting the Tongan economy and community in terms of tourism; inter-island and international commerce; and travel for social, educational and medical needs. The existing commercial airports provide sufficient coverage to all island groups and at this stage have sufficient capacity for foreseeable needs. However much of the infrastructure is nearing the end of its useful life or requires upgrade to continue to meet international and national safety and security standards. All commercial airports in Tonga are managed by Tonga Airports Ltd (TAL). 22. A significant investment program is already underway in the airport sector, with a focus on meeting safety and security compliance requirements in terms of fire and rescue capability, security screening, navigational aids, and runway condition. This includes resurfacing of runways at Fua’amotu and Vava’u.

Challenges

23. Safety, security and continuity of services are the key imperatives driving investment and reform in the aviation sector. The other major challenge in the aviation sector is to ensure that a supportive policy and institutional environment is in place for competitive and stable international and domestic air services.

viii. Multi-sector

24. Multi-sector projects generally fall into two broad categories. The first involves complex construction projects with the need for coordination across several sectors, such as electricity, telecoms, roads and water. The second category involves cross-cutting issues, especially climate change adaptation and disaster risk management (CCA/DRM).

Challenges

25. Tonga is especially vulnerable to CCA/DRM impacts. The overall challenge is firstly to ensure that potential CCA/DRM impacts are considered in all aspects of infrastructure planning, design, construction and management; and secondly that Tonga is well-prepared to respond quickly and effectively to disasters when they happen. Another key multi-sector challenge is construction coordination as projects increase in complexity. The third challenge is asset management, and especially maintenance.

26 Appendix 3

Overview of the economic infrastructure sector

Sector Notes

Energy 15.5 MW total installed capacity (Tongatapu, Vava’u, Ha’apai, ‘Eua) 1,300 km of distribution network (total of overhead, underground, submarine and low voltage cables) 16,500 domestic, 4,000 commercial customers 85% of population on-grid 15-16% line losses

Telecommunications Telephone access available throughout the country (fixed line or mobile) 15,000 landline subscribers (estimated 70% of households) 53,000 mobile customers (TCC, Digicel) 3,000 internet connections (1,200 TCC & 1597 TCC GSM Mobile Internet)

Water and sanitation 100% of population have access to safe drinking water (reticulated supply, rainwater tanks, wells, etc) 85% of households have piped water 4 x reticulated water supply schemes (Nuku’alofa, Nieafu, Pangai-Hihifo, ‘Eua) 15-39% Total losses (Nuku’alofa 39%) No central sewage collection and treatment system (septic tanks)

Solid Waste 1 x sanitary landfill (Tapuhia, Tongatapu) Household collection of solid waste on Tongatapu only No regular system for collection of recyclables

Transport Airports 1 x International/Domestic airport (Fua’amotu 2,671m asphalt

runway) 2 x Domestic airport – bitumen runway (Ha’apai, Vava’u) 1 x Domestic airport – chip seal runway (‘Eua) 2 x Domestic airport – grass runway (Niuafo’ou, Niuatoputapu) 80,000 international and 50,000 domestic departures per year 14 international flights per week (4 international destinations)

Roads 880 km (including community roads) 40% sealed 15,500 vehicles

Sea Ports 2 x International/Domestic ports (Nuku’alofa – 3 international, 2 inter-island berths; Vava’u – 1 international, 1 inter-island berth) 5 x domestic ports (‘Eua, Ha’afeva, Pangai, Niuafo’ou, Niuatoputapu) 8,500 international container movements per year (full TEU) (90% imports) 149 international ship calls at Nuku’alofa (General Cargo, Cruise, Tanker, Other)

Sources: From NIIP 2013 (in draft) – original sources: Infrastructure managers (TPL, TWB, TCC, PAT, TAL, Ministries); Tonga Census; various feasibility studies

Government’s Sector Policy and Planning Framework4 26. Outcome objective 3 of the TSDF 2011-2014 is for appropriate, well planned and maintained infrastructure that improves the everyday lives of the people and lowers the cost of

4 This section draws on the Tonga Strategic Development Framework 2011-2014.

Appendix 3 27

business, by the adequate funding and implementation of the National Infrastructure Investment Plan. Strategies directed at the achievement of this objective, as identified in TSDF, are:

• Ensuring safe and reliable transport infrastructure (roads, ports, airports), with the

necessary institutional arrangements in place to manage and fund effective development and maintenance of these facilities throughout the Kingdom.

• Increasing competition, with responsible supervision, to increase the quality of air and

sea transport services both domestically and between the Kingdom and overseas.

• Strengthening regulatory compliance and safety oversight of the transport sector to

ensure compliance with international safety standards.

• Improving the performance of the information and communications sector, with quality

service delivery, free and fair availability of information, geographical coverage, service affordability, and access to new service applications.

• Maintaining, and where possible expanding, the provision of reliable and cost efficient

power supplies, using traditional and renewable options, to all communities.

• Improving, and where possible expanding, the safe collection, disposal and recycling of

solid and liquid waste to protect people’s health and the environment.

• Maintaining and expanding access to safe water and sanitation for all communities.

• Taking a sector-wide approach to the provision and maintenance of infrastructure,

seeking alternative options for provision and cost-recovery, and implement the proposed

priority projects outlined in the NIIP (including: energy, telecoms, water, solid waste,

roads, ports and airports.

Government’s Institutional Arrangements and Capacity in the Sector5 27. NIIP 2013 notes that responsibility for infrastructure/service delivery is split between Government Ministries, Public Enterprises and the private sector (telecommunications only); and in some sectors Ministries and Public Enterprises are both involved. There is also outsourcing and sub-contracting to the private sector, which is happening in some sectors. 28. In some sectors, there are different agencies responsible for infrastructure/service delivery at different geographic/administrative levels. There are gaps in infrastructure/service delivery. It is unclear whether there is an agency responsible for infrastructure/services in the liquid waste/sanitation sector and for drainage. There are several agencies responsible for monitoring and standards (Environment & Climate Change; Health; Works), but liquid waste and run-off appear to be gaps in terms of responsibility for infrastructure. There are multiple agencies regulating different aspects of some sectors, for instance in the water sector, MLECCNR has a role in protecting water supply catchments and groundwater; Ministry of Health in testing water quality/contamination; and MAFF in some areas of resource management. This situation is not unusual, but does create potential for inefficient overlaps and delays. In the ports sector, responsibility for infrastructure/service delivery is split between a Ministry and Public Enterprise. In addition, the Ministry of Infrastructure is both operator and regulator which is contrary to general principles of good governance.

5 This section draws on the Tonga National Infrastructure Investment Plan 2013 (in draft).

28 Appendix 3

Institutional structure of the economic infrastructure sector

Sector Scope of services

Infrastructure/ Service Delivery

Regulation/ Monitoring Planning/ Policy

Power National Tonga Power Ltd

Electricity Commission TERM MLECCNR

Off-grid Outer Islands

MLECCNR/ Community

Telecoms National TCC/ Digicel PMO/MIC PMO/MIC Water National MLECCNR

MOH MAFF

MLECCNR MOH

Urban Areas Tonga Water Board (TWB)

TWB MPE

TWB MPE

Villages / Outer Islands

Village Committees Tonga Water

MOH MLECCNR

MOH MLECCNR

Sanitation National Private Sector/ Community

MLECCNR MOH

MOH

Urban Areas Villages Solid Waste National MLECCNR

MOH MLECCNR MOH

Nuku'alofa Waste Authority Ltd/ Private sector

Rural Tongatapu

Waste Authority Ltd

Other Islands Community MLECCNR MLECCNR Drainage National MOI MOI MOI Roads National MOI MOI MOI Ports Nuku'alofa Ports Authority

Tonga MOI MOI

Outer Islands MOI MOI MOI Airports National Tonga Airports Ltd MOI MOI Source: From NIIP 2013 (in draft) Legend: MLECCNR (Ministry of Lands, Environment, Climate Change and Natural Resources); MOH (Ministry of Health); MOI (Ministry of Infrastructure); TCC (Tonga Communications Corporation); MIC (Ministry of Information & Communication); MPE (Ministry of Public Enterprises); WAL (Waste Authority Ltd)

ADB Sector Experience 29. ADB has extensive experience across most infrastructure sub-sectors. In Tonga, ADB support is currently focused on:

• Urban development, with involvement in the Integrated Urban Development Sector

Project (focusing on urban roads and drainage, and capacity for urban planning) which is

coming to a close, and the Nuku’alofa Urban Development Sector Project (focusing on

improvements to water supply and sanitation, and institutional strengthening in this sector) which is underway.

• Renewable Energy, with projects underway to add solar generation capacity to power

grids in outer islands and to improve the efficiency of distribution of these grids, as well

as support through regional projects to introduce energy efficient technology and for off-grid solar installations.

Appendix 3 29

• Telecommunications, with the recent support for the Tonga-Fiji Submarine Cable Project

which will provide a major boost to the capacity of internet and other telecommunications

systems in Tonga.

Role of Other Development Partners in the Sector6 The table below provides information on the major activities supported by other Development Partners in infrastructure sub-sectors, both in recent years and planned.

Development partners involved in infrastructure

Development partner

Programming process

Recent and planned support for infrastructure

Approx. value (TOP

million) World Bank Country Assistance

Strategy (2011-14).

IFC Loan to Digicel Tonga.

Tonga Post Tsunami Reconstruction.

Pacific Islands Regional Connectivity

(Tonga Broadband Connectivity).

Transport Sector Consolidation Project

(TSCP), and transport follow-up.

Tonga Energy Road Map (TERM).

Pacific Islands Aviation Investment

Program (including funding for Fua’amotu

and Vava’u airports).

11

8

17

7

8

47

Australia Australia-Tonga

Partnership for

Development (2009-

2015).

Grant co-financing of WB led Transport

Sector Consolidation Project (TSCP),

ADB led Nuku’alofa Urban Development

Sector (NUDS) Project, WB led Tonga

Energy Road Map (TERM) Institutional

and Regulatory Framework

Strengthening Project, and assistance to

TERM Implementation Unit through

PIAC.

Upgrading of village water supplies.

27

Japan Project identification

within a development

assistance framework

(current focus on

climate change

adaptation, disaster

management, and the

environment).

Replacement inter-island ferry.

Vava’u waste management.

Small scale village water supplies.

Off-grid solar power systems and village

power supplies.

Solar micro-grid development, Tongatapu

25

3

2

12

24

6 This section draws on Annex F of the Tonga National Infrastructure Investment Plan 2013 (in draft)

30 Appendix 3

Development partner

Programming process

Recent and planned support for infrastructure

Approx. value (TOP

million) China Respond to requests

from the Government.

Roads improvement grant

Concessional loans for Nuku’alofa

Reconstruction (Vuna Wharf component)

and Roads Improvement.

Vaipua Bridge, Vava’u

Aircraft for domestic services

116

8

New Zealand Tonga-New Zealand

Joint Commitment for

Development (2011)

Solar generation farm – Tongatapu.

Tonga village network upgrade (with

World Bank and EU).

‘Eua airport runway rehabilitation.

Other involvement in infrastructure

related activities:

- Meridian operating costs (status: active)

- Major energy investment (status:

proposed)

- Ecocare Pacific Trust: solar PV and ICT

program for Tongan schools (status:

active)

- Pacific maritime safety: Manukau

Institute of Technology / NZ Maritime

School training for FISA crew in Tonga

(status: active)

- Pacific maritime safety: technical

assistance to Tonga MOT (status: active)

14

4

4

European

Union

National Indicative

Programme (2008-

13) linked to

allocations under the

European

Development Fund

(currently the 10th

EDF).

Sector budget support with renewable

energy as the focal sector.

2

United Arab Emirates

Solar power plant, Vava’u

Source: Adapted from Annex F, NIIP 2013 (in draft)

Appendix 3 31

II. CLIMATE RESILIENCE ASSESSMENT

A. Sector Situation and Key Issues7

1. The Tonga National Infrastructure Investment Plan (NIIP 2013—in draft) notes that Tonga is particularly vulnerable to natural disasters, and the effects of climate variability and long-term climate change8. Between 1991 and 2010, climate and non-climate related disasters in the form of cyclones, droughts, tsunamis and storm surge cost Tonga an average of 1.18% of GDP annually and affected thousands of households. Climate change is expected not only to exacerbate the frequency and/or intensity of extreme climate events in Tonga, but is projected to cause long-term, and in some cases irreversible, changes to climate. 2. At the national level, the Government of Tonga has prepared and endorsed the Joint National Action Plan on DRM and CCA for 2010 to 2015 (referred to as the JNAP) that highlights priority actions for Disaster Risk Management and Climate Change Adaptation over the next decade.

B. Climate and Natural Disaster Profile

3. Annex D of NIIP 2013 provides an overview of the current climate and recent observed trends in climate in terms of average terrestrial and marine parameters (rainfall, temperature, sea level, sea surface temperature and ocean acidifications), as well as extreme climate events (drought, cyclones, and storm surge). Located in the western South Pacific Ocean, Tonga experiences a typically tropical climate. There is a marked wet season between November and April, during which nearly two-thirds of annual rainfall is experienced. Remaining rainfall is experienced in the dry season between May and October. Average annual rainfall varies across the country; average annual rainfall is higher in Niua Fo’ou (2453 mm/year), Niua Toputapu (2374 mm/year) and Vava’u (2150 mm/year) than in Tongatapu (1721 mm/year) and Ha’apai (1619 mm/year). Inter-annual rainfall variability is high and during the wettest years total annual rainfall can be three times higher than during the driest years. The El Nino Southern Oscillation (ENSO) is a major influence on inter-annual rainfall variability. 4. Seasonal changes in air temperature result from the location of Tonga close to the sub-tropics, with sea surface temperature (SST) of surrounding waters an influence on seasonal variations. Average annual air temperature ranges from 27˚C at Niua Fo’ou and Niua Toputapu to 24˚C on Tongatapu. During the wet season, air temperature is generally higher than during the dry season and diurnal and seasonal variations can reach as high as 6°C throughout the country. Increases in air temperature (warming trends) have been observed for annual and seasonal mean air temperatures in Nuku’alofa for the period from 1950 to 2009, with the strongest trends of 0.16°C/decade recorded in the wet season. Data from 1970 to 2009 indicate warming trends of 0.4 to 0.9˚C in annual mean temperature over this period in Ha’apai, Vava’u and Niua Toputapu.

7 This section draws on Annex D of the Tonga National Infrastructure Investment Plan 2013(in draft), and the Joint

National Action Plan on Climate Change Adaptation and Disaster Risk Management 2010-2015 (JNAP). 8 The World Risk Report 2011, ranks Tonga as having the second highest risk globally to natural disaster risk based

on consideration of exposure, susceptibility, coping capacity and adaptive capacity (UNU IEHS, 2011); a Small States Secretariat analysis ranks Tonga third out of 111 countries in terms of vulnerability to climate change; whilst the Global Climate Risk Index ranks Tonga 19th out of 179 countries in terms of observed average annual losses as a percentage of GDP due to climate related disasters between 1991 and 2010, and 19th in terms of deaths per hundred thousand of population in this same period.

32 Appendix 3

5. Sea level trend data indicate a rising trend for sea level of approximately 6 mm/year since 1993; this equates to a cumulative sea level rise (SLR) of approximately 114mm in this 19-year period. The rate of sea level rise experienced is greater than the global average of 3.2 ± 0.4 mm / year. SLR is associated with coastal erosion and can increase the magnitude of storm surge as it provides a higher ‘starting point’ for wave action. Coastal erosion is being experienced along much of the northern coastline of Tongatapu, and along the coastline of Lifuka Island in Ha’apai. 6. SST data indicate that warming has been experienced at the rate of approximately 0.06°C per decade since 1970. However, at the regional scales at which the models operate, natural variability invariably plays a large role and it is difficult to identify long-term trends. SST is of concern because of its role in coral bleaching events; the last major coral bleaching event in the waters surrounding Tonga was in 2000. Anecdotal evidence indicates that smaller-scale coral bleaching events have become more frequent in recent years. 7. Ocean acidification, which is driven by the absorption of carbon dioxide (CO2) in seawater and measured in terms of the aragonite saturation state (Ωar), is an important influence on coral growth and the development of healthy reef ecosystems. In the Tongan region, the aragonite saturation state declined from around Ωar = 4.5 in the late 18th century to Ωar = 4.0 ± 0.1 by 2000 indicating increased acidity of seawater. 8. Tonga experiences on average 17 tropical cyclones per decade with most cyclones occurring in the wet season between November and April. Tropical cyclones exhibit high inter-annual variability ranging from zero some years to five cyclones/year in other years. Tropical cyclone incidence is highest in ENSO years. This high inter-annual variability makes it difficult to identify long term trends in cyclone frequency, however there is some evidence that decadal frequency is increasing with 7 cyclones experienced in the 1960s compared to 15 in the 1990s. Storm surge and extreme sea level events are most commonly associated with named tropical cyclones. 9. Droughts in Tonga are linked to low rainfall during ENSO periods. The last three major drought events were in 1983, 1998 and 2006. During these droughts, annual rainfall measured from 70 to 142 mm/year, more than ten times less than average annual rainfall in non-drought periods. C. Projected Future Climate Conditions

10. Information on climate projections for Tonga has been drawn from recent analyses undertaken by the Pacific Climate Change Science Program (PCCSP) and is based on the outputs of 18 global circulation models (GCM) for three emissions scenarios9. The projections discussed in this section are drawn from global level models and as such refer to average change over the broad geographic region of Tonga including the islands and surrounding ocean. 11. The “most likely climate future” for Tonga as described by the PCCSP is for warmer conditions with little change in rainfall. Intra-annual rainfall variability is expected to change with wet season rainfall expected to increase and dry season rainfall expected to decrease, but with

9 Scenarios used are drawn from IPCC (2007) and are B1 – a low emissions scenario, A1B – a medium emissions

scenario, and A2 – a high emissions scenario; the corresponding timeframes are three twenty-year periods centered on 2030, 2055 and 2090 relative to 1990.

Appendix 3 33

an overall net effect of little change in total annual rainfall. The intensity and frequency of extreme rainfall days is projected to increase. Changes in inter-annual rainfall are strongly influenced by ENSO conditions and because there is no consensus view of the likely evolution of ENSO under climate change scenarios, it is not possible to develop projections for changes in inter-annual rainfall variability. 12. Air temperature in Tonga is expected to continue to increase. An increase of < 1°C is projected by 2030, with increases of up to 2.5°C projected by 2090. The intensity and frequency of extreme hot days is projected to increase; for example, a maximum daily air temperature of at least 32.5°C current has a return period of 200 years, by 2050, it is projected that this return period will decrease to 35 years10. 13. Increases in mean sea level are expected to continue. The analyses carried out by PCCSP project SLR of 50 to 150 mm by 2030 and 200 to 600 mm by 2090. Climate change is also expected to have a significant effect on the return periods of extreme high sea levels that persist for at least an hour and which can cause coastal flooding, accelerated coastal erosion and saline intrusion into groundwater. An hourly sea level of 2.2m currently has a return period of 579 years; by 2050, it is projected that this return period will decrease to 1.5 years. 14. Estimates of the population and land area that could be affected by SLR scenarios of 0.3m and 1.0m, with and without storm surge, highlight the negative synergies projected to occur between SLR and storm surge, and indicate that with SLR of 0.3m (a scenario in the middle of the projected range), 14% of the population and nearly 4% of the land area of Tongatapu could be inundated. If the same SLR scenario occurred simultaneously with a storm surge equivalent to that recorded in 1983, over one third of the population and over 10% of the land area of Tongatapu could be affected by periodic inundation. Ha’apai, a group of 43 low elevation (≈ 1.0m ASL) coral islands, is likely to be significantly affected by SLR.

Estimates of Population and Land Area affected by Sea Level Rise in Tongatapu

No storm surge With storm surge (2.8m based on historic records)

SLR = 0.3m SLR = 1.0m No SLR SLR = 0.3m SLR = 1.0m Population affected

3,000 (4.3%) 10,000 (14.2%)

22,000 (31%)

27,000 (37%)

33,000 (46%)

Land area affected

3.1 km2

(1.1%) 10.3 km

2

(3.9%) n.a. 27.9 km

2

(11%) 37.3 km

2

(14%) Source: From Annex D, NIIP 2013 (in draft), Adapted from Mimura, 1999; population estimates updated to reflect 2006 census data

15. SST is expected to continue to increase at a rate that is comparable with (or slightly weaker) than air temperature increase. By 2050 the return period of a maximum water temperature event of 31°C is projected to have decreased to once every five years, compared to once every 33 years currently. Ocean acidification is also expected to continue to increase with aragonite saturation state values projected to reach Ωar = 3.5 by 2035 and to continue to decline thereafter. 16. Little change in the frequency of drought events is projected. Mild droughts are expected to occur between six and nine times in a twenty year period, while moderate and severe droughts are projected to occur once to twice, or once every twenty years respectively.

10

John E Hay & Associates, 2008

34 Appendix 3

Projections in relation to cyclone frequency and intensity are inconclusive. In the southeast Pacific Basin (0 - 40°S, 170°E - 130°W), within which Tonga is located, the frequency of tropical cyclones is expected to decrease. These projections are at a large scale and it is difficult to draw conclusions for Tonga, particularly in light of the prevailing high inter-annual frequency of cyclones. The intensity of cyclones may increase (i.e. an increase in the proportion of the most severe cyclones). Most models indicate a reduction in tropical cyclone wind hazard north of the 20°S latitude and an increase in hazard south of this latitude. Tonga is traversed by the 20°S latitude and thus national level projections are again difficult to develop. There is some evidence that the frequency of extreme wind gusts (often associated with cyclones) could increase. For example, a maximum daily wind gust of at least 65m/s is currently a one in 100 year event; by 2050, it is projected that a wind gust of this magnitude will become a one in 50 year event11. 17. Below is a summary of the future climate scenarios projected for Tonga in terms of likely outcomes, as well as in terms of the level of confidence of outcomes, which is effectively a measure of the degree to which the different GCMs agree on an outcome.

Summary of Future Climate Projections for Tonga

Climate Parameter

Projected Outcomes Confidence Level

…direction of trend

…degree of change …direction of trend

…degree of change

Annual average air temperature

Continued increase

0.6°C in 2030 to 2.6°C in 2090

Very high Moderate

Total annual rainfall

Little change 1% increase in 2030 to 9% increase in 2030

Low Low

Wet season rainfall

Increase 2% increase in 2030 to 16% increase in 2090

Moderate Moderate

Dry season rainfall Decrease 1% increase in 2030 to 3% decrease in 2090

Moderate Low

Sea level Continued increase

5 -15 cm increase in 2030 to 20 - 60 cm increase in 2090

Very high Moderate

Annual average SST

Continued increase

0.6°C in 2030 to 2.4°C in 2090

Very high Moderate

Annual maximum aragonite saturation state

Continued increase

3.4Ωar in 2030 to 2.4Ωar in 2090

Very high Moderate

Cyclone frequency Decline Not available Moderate Not available Cyclone intensity Increase Not available Not stated Not stated Mild drought frequency

Little change 7 - 9 times / 20 year period

Low Low

Moderate drought frequency

Little change 1 – 2 times / 20 year period

Low Low

Severe drought frequency

Little change 1 time / 20 year period

Low Low

Source: From Annex D NIIP 2013 (in draft), Adapted from PCCSP, 2011

11

John E Hay & Associates, 2008

Appendix 3 35

D. Natural Disasters: Tsunamis and Earthquakes

18. Tonga is located along one segment of the Pacific Ring of Fire in the Pacific Ocean where the Indo-Australian and Pacific tectonic plates meet. This area is an extremely active seismic zone that has the potential to generate major tsunamis. Earthquakes occur regularly in the Tonga region; in the last decade over 900 events with a magnitude greater than 5.0 on the Richter scale (defined as moderate earthquakes) have been recorded within a radius of 500km from Nuku’alofa12. 19. Since the beginning of the 19th century 21 small tsunami events (< 1.0m) have affected Tonga and in 1919 a tsunami with wave heights > 2.5m affected Ha’apai. In 2009, two consecutive earthquake events caused a major tsunami event that affected the north of Tonga. 20. Preliminary tsunami inundation modelling for Tongatapu indicates that the northern coast of the island is particularly susceptible to tsunami events generated by earthquakes. The modelling indicates that the channelling effects of the nearby coral reefs could cause the most significant inundation effects in the Nuku’alofa urban area with the projected impacts greatest at the eastern extreme of this area13. Modelling indicates that in the future, earthquake and tsunami loss (from one or multiple events in a calendar year) exceeding TOP 269 million, and causing up to 575 casualties is to be expected, on average, once every 100 years in Tonga14. E. Past Climate and Natural Disaster Impacts on Infrastructure

21. A review of published data and consultation with stakeholders have been used to document information of the impacts of past and current climate change and natural disasters on Tonga. 22. Tropical Cyclones: Since 1960 over 60 storms and cyclones have affected Tonga. Between 1900 and 2012, eleven major tropical cyclones struck Tonga, affecting more than 190,000 people and causing combined damage of more than TOP 140 million15. Tropical Cyclone Waka in 2002 was the most damaging of these major cyclones in economic terms and caused estimated damage of TOP 89 million and damaged 60% of the housing stock, 25 schools, and infrastructure in the water supply, energy, telecommunications and marine transport sectors. Tropical Cyclone Rene in 2010 caused damage in the infrastructure sector alone in the order of TOP 19 million including damage to housing, tourism infrastructure and roads and causeways. Damage included collapse or partial damage to houses, blockage of Nafanua Harbor in Eua, partial causeway failure, and blockage of roads by debris16. 23. Storm Surge: Storm surge is most often linked with tropical cyclone activity. The most severe recorded storm surge occurred during Cyclone Isaac in 1983 where a storm surge of

12

US Geological Service Earthquake Database; http://neic.usgs.gov accessed 21 November 2012 13

The modelling and the associated tsunami evacuation plan is being carried out by the MLECCNR in collaboration with NEMO, and with the support of SOPAC. At the time of writing the modelling results and mapping had not been finalized and could thus not be included in the report. Information presented above is based on discussions with officers from MLECCNR and NEMO. It is proposed to carry out a similar modelling exercise for Ha’apai in the near future.

14 PCRAFI, 2011

15 EM-DAT: The OFDA/CRED International Disaster Database – www.emdat.be, Université Catholique de Louvain, Brussels (Belgium). Major tropical cyclones recorded in the database include those that killed 10 or more people, or affected 100 or more people, or triggered declaration of a station of emergency or a call for international assistance.

16 NEMO, 2010

36 Appendix 3

about 1.6m acted on top of a high spring tide causing major flooding on Tongatapu and major damage to residential dwellings. During Tropical Cyclone Eseta in 2003, storm surge caused major damage to tourism infrastructure in Ha’atafu, Kolovai, and Fo’ui on Tongatapu and forced the closure of Nafanua Harbor in Eua for two weeks. Storm surge has damaged seawall infrastructure on the northeastern coast of Tongatapu and worsened coastal erosion along unprotected sections of coast on Tongatapu and Ha’apai. Storm surge causes saline infiltration of groundwater supplies in the northern coastal areas of Tongatapu and the western coast of Lifuka Island. The current road configuration along the north-eastern coast of Tongatapu lacks adequate drainage structures and in the event of overtopping of the road, seawater ponds on the land side of the road and must be pumped or evaporate. 24. Sea Level Rise and Coastal Erosion: With a concentration of infrastructure in the coastal zone, and low elevation, much of the infrastructure stock on the northern coast of Tongatapu is vulnerable to sea level rise and coastal erosion. Coastal villages in the Nuku’alofa area including Popua, Tukutonga and also the small islands of Nukunukumotu are currently affected by flooding and sea level rise particularly during spring tides. Much of the northeastern coastline of Tongatapu, from Niutoua to Nukuleka villages, and the north western coastline is eroding and undermining road infrastructure. Ha’apai is the most affected of the outer island groups due to the low elevation of many islands. There is already evidence of significant coastal erosion on the western coast of Lifuka Island, the largest and most populated island in Ha’apai. Prevailing erosion rates in this location are estimated at ≈1.3 m / year. The telecommunications tower on Lifuka Island has been decommissioned due to risks posed by coastal erosion, and the hospital is located within several metres of the eroded shoreline. 25. Flooding: Flooding in Tonga is not common but when it occurs it is mainly due to prolonged heavy rain, storm tides and heavy wave action17. Flooding is most common during the wet season (November-April) and is mostly associated with the passage of a tropical cyclone or storm. Periods of abnormally high rainfall persisting for more than three months are rare. The areas mainly affected are the coastal low-lying areas including the northern coastal zone of Tongatapu and the Ha’apai group of islands. These low-lying areas are subject to ponding of water, flooding of homes and commercial buildings, and blockage of road infrastructure. The water usually dissipates within 48-72 hours once the rain ceases. Rainfall induced flooding is not considered to pose high risks as the land mass is relatively small with low topography and the soils for the most part are relatively free draining. Cyclone Jasmine in February 2012 brought significant rainfall and flooding to Tongatapu. 26. Droughts: During the 1997/1998 drought event, water supplies on islands in the Ha’apai group were severely affected and it was necessary to ship drinking water to residents. 27. Tsunamis and Earthquakes: In total since 1900, tsunamis and earthquakes have historically caused less damage than cyclones when measured in economic terms. Such events caused a total of TOP 18.8 million damage over this period compared to TOP 142.3 million for cyclones.18 However, tsunamis and earthquakes have the potential to cause more significant damage to infrastructure per event than cyclones19. In 2009 two successive earthquakes of 8.1 and 8.0 on the Richter scale caused a tsunami that killed nine people, inundated 55% of the total land area, and destroyed roughly half the housing stock on the northern island of Niua

17

Tonga Meteorological Service, 2006 18

www.emdat.be 19

PCRAFI, 2011

Appendix 3 37

Toputapu as well as the island’s hospital20. In 1977 an earthquake of magnitude 7.2 on the Richter scale caused considerable damage to infrastructure in the south of the country, and in 2006 an event measuring 7.9 on the Richter scale caused damage to the hospital and wharf in Ha’apai. It is also thought that this event caused subsidence of ≈ 23 cm on the western side of Lifuka Island resulting in increased relative sea level21. F. Government’s Sector Policy and Planning Framework22

28. Outcome objective 7 of the Tonga Strategic Development Framework 2011-2014 is for cultural awareness, environmental sustainability, disaster risk management and climate change adaptation, to be integrated into all planning and implementation of programmes by establishing and adhering to appropriate procedures and consultation mechanisms. 29. Strategies set out in TSDF to work towards the achievement of this objective are:

Ensuring sustainable use of the environment, by enforcing Environmental Impact Assessments (EIAs), and strengthen the national capability for environmental management to create incentives for limiting the use of resources and production of waste.

30. TSDF notes that the government is committed to ensure sustainable development by enforcing Environmental Impact Assessments (EIAs), strengthening the national capability for environmental management and also integrating sustainable development into all of its policies and budgetary processes. Raising the environmental sustainability of economic development to safeguard the interests of future generations is recognized as vitally important. Government recognizes the interdependence of the economy and the environment and how this must be fully integrated in decision-making. A better understanding of the factors affecting land and sea-use will be sought to ensure sustainable use of these resources to contribute to appropriate fisheries, agriculture and tourism development which depend on a quality environment. 31. Government will explore options for enhancing the resilience of government, communities, businesses and natural resources; exploring the environmental, economic and societal consequences of changes in the demands on and availability of freshwater and other resources. A strong focus will be placed on improved management of resources to ensure sustainable use both for domestic use and promoting exports by creating incentives for limiting the use of resources and production of waste. 32. Greater effort will be made to analyze the options, risks and uncertainties in mitigating and adapting to climate change and variability. Government will strengthen legislation, policies and enforcement with regards to the environment and its natural resources. Due to the very significant need to sustain the environment the government will strive to fully enforce regulations such as the approved Environment Impact Assessment (EIA) Regulation. 33. Implementing the JNAP-CCADRM to reduce vulnerability & risks; and to enhance resilience to the impacts of climate change & natural hazards.

20

MLNR, 2009 21

http://www.spc.int/en/component/content/article/216-about-spc-news/869-lifuka-island-tonga-at-the-forefront-in-understanding-climate-change-impacts-on-small-islands.html

22 This section draws on the Tonga Strategic Development Framework 2011-2014.

38 Appendix 3

34. TSDF notes that recent events in Tonga and the Pacific Rim have drawn attention to the vital role of Disaster Management and Disaster Mitigation for the protection of the environment and of life and property. 35. The implementation of the JNAP-CCADRM aims to reduce vulnerability and risk and to enhance resilience to the impacts of climate change and natural hazards. 36. Government is also supporting the implementation of the Pacific Disaster Risk Reduction Management Framework for Action, 2005 – 2015. Government will implement Tonga’s JNAPCCADRM focusing on improving disaster mitigation through better design and placement of infrastructure and improved evacuation planning for communities. Improved response to disasters when they happen, will also be developed to help communities to recover more quickly. 37. Year-to-year climate variability, e.g. El Niño and extreme events such as droughts and storms, will continue to pose significant challenges to key economic sectors including agriculture, fisheries, tourism, public health and safety, climate-sensitive resources e.g. beaches & coral reefs, vulnerable coasts and critical water resources. People are also at risk from geological disasters such as earthquakes and tsunamis. Government will seek to develop a framework for multi-hazards risk management that will improve infrastructure investments and contribute to the development of sustainable communities in Tonga. 38. Government will continue to take an active role in encouraging the international community to take the global actions needed to address human driven climate change and where mitigation is not possible, find suitable options for adaptation. G. Government’s Institutional Arrangements and Capacity in the Sector23

39. The Ministry of Infrastructure, in collaboration with Ministry of Lands, Environment, Climate Change and Natural Resources, is responsible for compliance with the National Emergency Management Act, Implementation of National Disaster Plan and mainstreaming Disaster Risk Management through a Joint National Action Plan on Climate Change Adaptation and Disaster Risk Management (JNAP-CCADRM). 40. For the purpose of JNAP implementation, it is planned that a joint meeting of the National Environment and Climate Change Committee (NECCC) and the National Emergency Management Committee (NEMC) is to be called once every six months. The joint meeting of the NECCC and the NEMC will be the body to provide policy and high level coordination for JNAP implementation. A Task Force is established to Coordinate JNAP implementation, and to report to NECCC, NEMC and Cabinet. 41. The National Environment and Climate Change Committee (NECCC) has the mandate for the national coordination of all activities relating to the environment, climate change (adaptation and mitigation) and impact assessments. The National Emergency Management Committee (NEMC) has the responsibility for DRM capacity building in Tonga. The National Emergency Management Office (NEMO) provides secretariat support to the NEMC while the Ministry of Lands, Environment, Climate Change and Natural Resources does likewise for the NECCC. The Task Force is required to keep the NECCC and the NEMC informed of the

23

This section draws on the Joint National Action Plan on Climate Change Adaptation and Disaster Risk Management 2010-2015 (JNAP).

Appendix 3 39

progress of JNAP implementation through the mechanism of the Joint NECC and NEMC Meeting and to seek guidance on any specific CCA as the implementation rolls out. 42. The development partners and donors for climate change and disaster risk management will also have a key role to play in relation to JNAP implementation. The Task Force will liaise regularly with the relevant development partners and donors and will ensure that the relevant technical assistance and/or funding support is secured to address implementation. The Task Force will be mindful of and comply with all financial and administrative requirements of the various development partners and donors that have been engaged to support implementation. 43. SOPAC as the lead coordinator of the Pacific Disaster Risk Management Partnership Network (Partnership Network) will play a key role in ensuring that partner members are aware of JNAP priorities and of the local implementation arrangements. Similarly, the Secretariat for the Pacific Regional Environment Programme (SPREP) as the coordinator of the Climate Change Roundtable will communicate JNAP priorities to climate change partners. H. ADB Sector Experience

44. Climate change adaptation and mitigation is identified as one of the key drivers of change in ADB’s Pacific Approach 2010 to 2014. 45. Project preparatory technical assistance was approved in December 2012 and is underway in early 2013, to design a project to implement the Strategic Program for Climate Resilience for Tonga. The project will utilize funding from the Strategic Climate Fund of the Pilot Program for Climate Resilience, and could involve investment of $15 to $20 million. This project is likely to represent the major national level support for climate change adaptation in Tonga in the near future. I. Role of Other Development Partners in the Sector24

46. The table below summarizes opportunities for funding climate change adaptation and disaster risk management activities, involving other development partners.

CCA and DRM Funding Options for Tonga

Source Funding available

or potentially available

Activities and potential activities

ACP-EU Natural Disaster Risk Reduction (NDRR) Program

None to date. Potential source of funding for institutional strengthening and policy activities. Feasibility of accessing funds will depend on timing and priorities of future calls for proposals. Project financing generally of $0.4 to $1.75 million.

Adaptation Fund

None to date. Eligible activities include institutional, community and infrastructure vulnerability reduction measures. Potential source of future financing for both climate proofing of infrastructure and enabling environment improvements. Average project financing $11.6 million.

AusAID Participation in AusAID is contributing to the PPCR program through the

24

This section draws on the Tonga National Infrastructure Plan 2013 (in draft).

40 Appendix 3

Source Funding available

or potentially available

Activities and potential activities

regional knowledge generation activities. Contributing to PPCR grant.

ICCAI; discussions with staff in Tonga indicate that while this is likely to be the main source of CCA funding for Tonga in the future, one-off proposals for other activities included in the JNAP will be considered for financing.

Global Climate Change Alliance

SPC-GCCA Pacific Small Island States (regional) & GCCA Pacific Islands Forum support programme (regional)

Tonga does not have a GCCA national programme. Future support possible through regional initiatives or customized short-term technical assistance.

Green Climate Fund

None Established under auspices of UNFCCC as a major international adaptation fund but not yet operational.

International Climate Initiative (ICI) Germany

Tonga is a partner country in the Pacific Mangrove Initiative that is being financed until 2013 by the ICI Germany

CCA support is targeted towards ecosystem based adaptation measures but projects involving financing and insurance pilots, data management and water resources have also been financed. New projects are selected through a two-stage procedure that takes place once a year. Median financing envelope of $3.4 million.

JICA Numerous projects including training and capacity building activities with TMS, rural DRM activities, and earthquake observation assistance.

JICA is currently considering proposals submitted by JNAP Secretariat for funding of the eastern Tongatapu coastal protection and part of the tsunami evacuation plan road infrastructure. A decision on these projects is expected in early 2013. JICA has indicated that it will seek to ensure that climate resilience is taken into account in future infrastructure investments.

National Emergency Fund

Use for post-emergency relief.

The Fund was established by the Government and is available to fund post-disaster spending with the approval of Cabinet. The potential for this fund to be used as a vehicle for donor support to disaster relief activities could be investigated in the future subject to the development of procedures for fund use and establishment of a Board.

Pacific Disaster Risk Financing and Insurance Program (PCRAFI)

None. Fund is in initial stages of establishment.

Tonga is part of a two-year pilot regional risk insurance scheme. The Government of Japan is supporting the insurance scheme premium payment. Funds would be available to contribute to disaster relief in the event of a tsunami, earthquake or cyclone. Funding from the Pacific Disaster Risk Financing and Insurance Program could be channeled through the national emergency fund if appropriate governance structures are put in place.

Pilot Program for Climate Resilience – PPCR

None to date. The approved SPCR document (April, 2012) identifies climate proofing of infrastructure and improvements to the enabling environment for PPCR financing. Project preparation will commence in early 2013 and draw on findings of NIIP to set priorities. Provisional budget of ≈ $35 million (USD 20 million).

World Bank Contributing to PPCR grant.

Climate adaptation funding envisaged in current Country Assistance Strategy.

Source: Adapted from Annex F, NIIP 2013 (in draft).

Appendix 3 41

III. PUBLIC SECTOR MANAGEMENT ASSESSMENT

A. Sector Situation and Key Issues25

1. Tonga depends on a very limited number of sources for its foreign exchange earnings and has a relatively undiversified economic base. Remittances are Tonga’s largest source of foreign exchange, followed by tourism receipts. Recent economic performance has been weak despite structural reforms. Since 2007, Tonga has progressed major tax policy and customs administration reforms, while strengthening the business regulatory environment and corporatizing and privatizing several SOEs. The growth benefits of these reform efforts have been somewhat undermined, however, by geographical disadvantages and a range of shocks. 2. Tonga’s recovery from the Global Economic Crisis has been slow and difficult. Tonga was negatively impacted by the Global Economic Crisis through a substantial and prolonged decline in remittances and tourism receipts. Recovery has been further hampered by a prolonged and ongoing contraction in private sector credit, while Government revenues have also been negatively impacted by recent economic developments. 3. Tonga has relied on donor support for economic stimulus and fiscal support. The economy of Tonga continued to expand following the GEC, driven by grant and debt-financed stimulus as development partners and the Government responded to the immediate need for supporting aggregate demand. Multi-donor grant budget support has also supported continued public spending and service delivery in the context of tax revenue declines. 4. Natural disasters continue to impede Tonga’s recovery from the global economic crisis. Aside from the private costs of the natural disasters, these events cause a periodic diversion of public resources away from implementing the development program of the Government and towards immediate reconstruction needs. 5. Growth is expected to remain at modest levels through FY2013/14 and dependent on grant support. As fiscal stimulus is gradually removed, the pace of growth is expected to further slow. Consumption growth is expected to pick-up as remittances increase slightly, but remain well below pre-crisis levels. The recent lift in tourism is expected to continue, similarly driven by improved global economic conditions. The growth outlook remains heavily contingent on ongoing grant support from donors. Modest growth over the medium term is projected to occur in the context of ongoing population growth and slowing emigration. 6. Tonga faces challenges in achieving more robust economic growth over the medium-term. Due to inherently higher cost structures associated with geographical isolation and smallness, growth opportunities are concentrated in areas where economic rents can be generated– as from natural resources such as tourism and fisheries. While credit growth is forecast, continued risk aversion on behalf of commercial banks is likely to continue to place a brake on access to credit. Prospects for achieving significantly higher growth are limited. While much could be done to facilitate growth from the sources listed above, their potential to affect major changes in economy-wide output should not be overstated. It is not clear that any set of policy measures could be relied on to deliver sustained and substantial improvements in economic growth due to inherent disadvantages faced by Tonga arising from its small size and geographical isolation.

25

This section draws on work undertaken by the World Bank and ADB in planning budget support to Tonga, and IMF staff reports from the annual Article IV Consultation missions.

42 Appendix 3

7. Tonga’s remains at high risk of debt distress. The latest joint World Bank-IMF Debt Sustainability Analysis (DSA) for Tonga reports the present value of external debt at 40.3 percent of GDP in FY2012/13, as against a policy-dependent threshold of 30 percent. The large majority of debt relates to the two large China EXIM Bank loans contracted for reconstruction of Nuku’alofa in 2007 and road infrastructure in 2010. The DSA concludes that, taking into account the cushion provided by remittances, Tonga’s projected debt profile is consistent with manageable – if high risk – debt dynamics. 8. The government is committed to returning its debt to sustainable levels and managing the challenges associated with increased debt servicing obligations. The Government has maintained a policy of avoiding any new debt, even on concessional terms, over the past year, in order to regain the fiscal space needed to respond to future shocks. It has also introduced and implemented a policy of using domestic borrowing only for the purposes of in-year cash management. As grace periods on loans expire over coming years, the debt servicing profile will present a major challenge to fiscal sustainability, with substantial reprioritization of resources and successful management of wage bill pressures necessary to avoid either a failure to meet debt obligations or potentially significant declines in the provision of public services. 9. The current macroeconomic policy stance is satisfactory and sustainable over the medium-term, but outcomes remain subject to uncertainty and reliant on ongoing international assistance. A sharper than expected rise in global commodity prices would exacerbate inflation and threaten the incipient economic recovery in Tonga. The global fallout of possible developments in the European debt crisis and in the US economy could yield a further shock for Tonga’s remittance flows, which poses a threat both to growth and fiscal stability. The macroeconomic policy framework also depends on the continued availability of grants from development partners over the medium term, given Tonga’s high risk of debt distress and hence the inadvisability of borrowing to fund fiscal deficits. Finally, Tonga remains vulnerable to a variety of natural disasters, including tsunamis, cyclones, and flooding. B. Public Financial Management Reform

10. Performance indicators of public financial management in Tonga have shown an improvement in recent years. In the 2007 Public Expenditure and Financial Accountability (PEFA) assessment, Tonga received 16 ratings of “C” or better out of the 27 applicable indicators. In the 2010 PEFA assessment, the number indicators that Tonga scored “C” or better increased to 20, with further improvements observed against some indicators where performance was already strong. Reflecting tax policy and administration reforms, marked improvements were noted in the transparency of taxpayer obligations and liabilities, and the effectiveness of measures for taxpayer registration and tax assessment. Improvements were also noted for orderliness and participation in the annual budget process, the effectiveness of controls on payroll and non-salary expenditure, and the timeliness of accounts reconciliation. 11. The 2010 PEFA highlighted several weaknesses in PFM. The coverage of in-year budget reports was identified as an area for improvement, because the existing reports could not be used to compare actual and forecast revenues and expenditures, weakening control of budget execution. Public access to key fiscal information was found to be limited, in part because the budget proposal is made public only when it is approved, not when initially submitted to the legislature, and in-year budget reports are not made public. The process for legislative scrutiny of the budget was also found to be inadequate. Budget credibility was found to be weak at a disaggregated level, with significant variances in the composition of the outturn

Appendix 3 43

resulting from the shifting of resources between ministries during the year through the ‘Contingency Fund’. Significant weaknesses were found in the external audit process, in the scope, nature and follow-up of the external audit, and in legislative scrutiny of audit reports. Weaknesses were also identified in the chart of accounts, arrears collection, and timeliness of submissions of the annual financial statements. 12. A PFM assessment by PFTAC in 2010 provides further clarity on weaknesses and guidance on the appropriate sequencing of PFM reforms. In the assessment, PFTAC lays out the PFM building blocks that need strengthening in Tonga as a foundation for the planned introduction of a medium-term budget framework (MTBF). These include consolidating bank accounts, automating bank reconciliations and moving towards a Treasury Single Account (TSA), as well as improving the clarity and uniformity of application of the chart of accounts. Improved revenue, expenditure and cash flow forecasting is recommended, along with better monitoring of budget execution and more frequent consultations on budget execution with ministries. PFTAC also identifies the pressing need to strengthen planning processes in line ministries and the links between plans and the budget, and to control the use of the Contingency Fund. C. Fiscal Policy Reform

13. A review of revenue policy and administration was carried out by PFTAC in 2011, and broadly confirmed the appropriateness of current tax policy settings. The review identified drivers of the sharp declines in revenue during 2008/09 and FY2009/10 as: (i) falling trade tax revenues due to planned reductions in trade tax rates and increased exemptions and non-compliance; (ii) falling income tax revenues due to reduced tax rates in the context of falling incomes and the global economic crisis; (iii) a substantial decline in consumption tax revenues, due to a decline in consumption of items with a large domestic value added component due to lower remittances, and declines in the post-duty value of imported goods due to the reduction in trade taxes; (iv) various problems with exemptions and compliance. 14. The review concluded that Tonga’s current tax rates and structure are similar to many other countries and that overall tax performance is in the mid-range. The review recommended reforms to exemption and concession processes to improve transparency and reduce revenue loss, while also rationalizing, and making less severe, the existing penalty and interest regime for late payments and non-compliance. Over the medium-term, the review recommended the introduction of a presumptive tax for SMEs to reduce the administrative burden on the Revenue Service and new tax regimes for natural resources and land rentals. In the longer-term, the review recommended applying income tax to pensions to remove existing distortions and strengthen revenue. 15. The World Bank’s expenditure mapping work has highlighted the need for careful expenditure reprioritization. This work was undertaken collaboratively with the MFNP during FY2011/2012, and assessed the scope for meeting expenditure needs in priority sectors in the context of continued fiscal tightness and upcoming debt-servicing pressures. The analysis shows that it is possible for Tonga to increase spending in priority areas over the medium term, but that this will require not only higher levels of tax collections and/or budget support but also wage restraint, such that the wage bill declines somewhat in real terms over the medium term - particularly in non-priority sectors. The analysis also highlighted problems with budget execution and identified the need for improved expenditure control, including through: i) placing more limits on discretion of line ministries to transfer resources in-year, which has typically occurred

44 Appendix 3

at the cost of priority areas and critical inputs; and ii) improving the definition and scope of programs and sub-programs to better reflect ministry activities and allow greater linkages between policy, planning, and budgeting. 16. PFTAC provided assistance to Tonga in strengthening its debt-management framework in late 2011. With debt servicing obligations due to expand rapidly over coming years, a PFTAC team worked with the Tongan authorities to identify and address system weaknesses and capacity gaps in debt management. D. Structural Reform

17. The Tonga Energy Road Map (TERM) lays out a strategy to reduce Tonga’s vulnerability to oil price shocks and achieve an increase in quality access to modern energy services in a financially and environmentally sustainable manner. The related analytical work traces the implications of oil price volatility for electricity prices, and the implications of rising oil prices and energy demand for the viability of renewable energy sources for the grid. The analysis demonstrates the need for a comprehensive reform of the legislative, regulatory and institutional framework applying to the energy sector – including updating the regulatory framework for the electricity supplier to ensure its incentives are aligned to those of consumers in least cost energy sources. 18. Two studies by the World Bank on the petroleum sector identify existing weaknesses in the regulatory structure and supply chain for petroleum, and lay out a series of reforms to remedy these weaknesses. The overarching recommendation is to prioritize reforms to strengthen the petroleum regulatory regime, improve the competitive environment and increase energy security. 19. The IFC has recently undertaken a comprehensive review of constraints to tourism development in Tonga. During April 2010, IFC Advisory Services (Pacific) worked with the Tongan Ministry of Tourism to identify constraints to tourism development through the application of IFC’s Tourism Sector Diagnostic (TSD) Tool. The primary objective of the diagnostic study was to identify and measure sector constraints, in order to propose and mobilize appropriate solutions. Key constraints to sustainable tourism development identified through the analysis included: (i) a lack of coordination and leadership in the tourism sector; (ii) a lack of institutional capacity and resources within the tourism bureau; and (iii) an outdated and cumbersome regulatory environment, with processes for foreign investment approval, establishing clear land titles, and the granting of business licensing needing to be streamlined. 20. The diagnostic study also identified lack of a substantial accommodation product at a suitable price as a constraint on tourism sector development, with the absence of a large, high quality hotel impeding broader volume-based development of the industry, including the emergence of wholesale businesses in the tourism sector. Reforms to the business license regime are likely to contribute to improvements in the regulatory environment for tourism investment. 21. The ADB has played the lead role among development partners on analytical work and technical assistance on public enterprise reform in Tonga. Tonga’s portfolio of 14 public enterprises currently includes 8 infrastructure service providers and 6 enterprises engaged in commercial activities, with a combined asset value the equivalent of about 40 percent of GDP (in FY2008/09). The ADB’s latest benchmarking study of the performance of public enterprises in the Pacific, Finding Balance, shows that Tonga’s public enterprises outperform those of the

Appendix 3 45

other Pacific Islands in the study, with an average return on equity between FY2001/02 and FY2008/09 of 6 percent and an average return on assets of 3.6 percent. Tonga has also set the pace for public enterprise reform, including through legislative reforms, strengthened governance frameworks, restructuring of boards, and the rationalization and privatization of public enterprises. Public enterprise reforms have slowed in the last year, due to the difficulty involved in the next phase of reforms, which requires the consolidation of existing reforms and further progress on the rationalization and privatization agenda. 22. Analytical work by the IFC and the ADB has highlighted areas of Tonga’s business licensing system that are in need of reform. The IFC, in its 2009 study Reviewing the Business Licence in Tonga, reviews and provides recommendations on the reform of the general business licence process and the nine activity-specific business licences that operate in Tonga. The ADB’s recent Private Sector Assessment reinforces the message about the need to reform business licensing. E. Poverty Analysis

23. The Social Protection Issues Paper prepared for the MFNP by the ADB shows that basic needs poverty in Tonga has risen over the last decade, and that there are significant gaps in Tonga’s social protection framework. The paper analyses the results of the 2009 Household Income and Expenditure Survey (HIES), to show the increase in basic needs poverty since the 2001 HIES. The analysis shows poverty to be highest outside Nuku’alofa on Tongatapu, but to have risen most sharply on Tonga’s other islands. While the proportion of women with expenditure below the basic needs poverty line is quite similar to the population averages in each region, the incidence of poverty among children is notably higher. The paper highlights that a significant portion of the population lives just above the basic needs poverty line, thus a small event could push many more households below the poverty threshold. The paper shows that the Government provides good access to basic education and health and gives annual grants to a number of non-government organizations that provide social services to the disadvantaged. F. Government’s Sector Policy and Planning Framework26

24. One of the four enabling themes supporting the achievement of the objectives of the Tonga Strategic Development Framework 2011-2014 involves improving the macro-economic environment and fiscal management, including effective revenue services to ensure a level playing field and that services to the people can be appropriately funded. 25. In this regard, the key strategies of the Government identified in TSDF are:

Ensuring a prudent budget based on available revenue and a sustainable debt level, delivered through sound public financial management and quality government financial reporting; and improving fiscal and monetary policy coordination.

26. TSDF notes that one of the consequences of weak economic growth and the stagnation in real incomes has been a decline in government revenues as taxable incomes, household consumption expenditure and profits have themselves stagnated or declined. As a consequence government has had to seek substantial budgetary support from donors over the past two years.

26

This section draws on the Tonga Strategic Development Framework 2011–2014.

46 Appendix 3

This is estimated to be equivalent to 17.2% of domestic current revenue in 2010/11 and is forecast at 20.3% in 2011/12. 27. To bring the budget back onto a sound and sustainable basis the government will institute a thorough review of all ministry expenditure to identify activities and programmes of low priority that can be cut and resources reallocated to higher priority areas. This will be done through greater attention to the corporate and annual management planning processes. 28. Core reforms to PFM include the strengthening of the budget execution, transparency of the budget process, credibility of the budget, strengthened revenue efforts and improved quality of expenditure. In continuing the process of strengthening of public expenditure management, government has been working with the Parliament Finance and Public Accounts Committee to improve public expenditure management, transparency and accountability. There is also a need to strongly enforce compliance with the Procurement Regulation 2010. 29. Specific PFM reform actions being pursued include:

• More frequent budget reports to help monitor budget execution in a more effective and timely manner, to facilitate early identification and correction of any divergences from the

approved budget during the year, and distribution of reports to Parliament and the public.

• Making documents such as the budget proposal available to the public when it is tabled

in Parliament, to help clarify the distinction between what Cabinet proposes for the

budget and what Parliament approves, and facilitate public scrutiny of the budget process.

• Tabling the audited Annual Financial Statements and the Annual Reports of the Auditor-

General in Parliament and making these documents available to the public to improve

the transparency of the audit process and strengthen its effectiveness.

• Modifying the operations of the Contingency Fund to avoid undermining the credibility of

the budget, by avoiding the allocation of public resources to activities that have not been approved by Parliament during the year and are not unforeseen, urgent and vital.

• Further improvement to the credibility of the budget through linking budget allocations to

prioritized and costed annual management plans at the Ministry level.

• Consolidating the large number of government bank accounts to improve cash

management.

• Completing the revision to the chart of accounts to address anomalies and to prepare for

the shift to sub-program level allocation and monitoring of budgets.

• Ensuring all cash and in-kind expenditures financed by donors are correctly recorded.

• Undertaking a tax policy and administration review to assess the tax potential of the

country and identify the level of revenue, and hence level of expenditure, that is

consistent with an efficient and equitable economy.

• Setting clear policies and having effective decision making processes in place for setting

priorities among competing uses of public resources.

• Developing a medium term fiscal framework for sound macro-economic planning and

reallocation of expenditure priorities over time, and improvement in the debt position.

Appendix 3 47

G. Implementing tax reform and modernization programmes to enhance revenue services and taxpayers’ compliance.

30. TSDF also notes that with weak economic growth, and little scope to increase tax rates, it becomes even more important that compliance with existing tax measures is enhanced. Government cannot afford revenue losses through unwarranted exemptions, tax evasion or other forms of non-compliance. 31. Revenue and customs services will therefore be based on three key outcomes: (i) improved services and customer relations, (ii) improved compliance; and (iii) increased level of revenue. The tax reform and modernization programmes are still in progress; they concentrate on simplifying the tax and customs bases with clearly defined and modern procedures which will enhance revenue services. 32. The implementation of simplified and transparent tax procedures, coupled with lower tax rates and easier filing of tax returns will help to reduce the burden on businesses and encourage both their growth and also international investment. Completion of these broader reforms will help businesses to get their goods to the Tongan market more easily. 33. Another of the enabling themes supporting the implementation of TSDF 2011-2014 deals with ensuring that Public Enterprises are sustainable and accountable, and where appropriate moved to the private sector. 34. The key strategies of the Government in relation to public enterprise reform, set out in TSDF, are:

• Improving profitability, accountability, and return on equity of public enterprises.

• Continuing to implement public enterprise reforms.

• Privatizing public enterprises where appropriate.

35. The Ministry of Public Enterprises was set up in response to the need to develop PEs so that they could become profitable and assist government achieve its economic and social obligations, rather than being a burden on the public purse. Government will continue to seek ways to promote more efficient management of PEs through training and performance incentives, associated with closer monitoring. 36. While appropriate functions should be transferred to the private sector, the government, in cooperation with international partners, is also evaluating ways to improve the efficiency and accountability of its existing PEs. Over the life of this framework, the government will seek to accelerate the reform of PEs, taking appropriate measures for each enterprise based on careful analysis of benefits and costs. 37. Government will review the functions of all the PEs to decide which ones might best continue with majority government shareholding to meet national objectives, and which ones can be partially or fully sold off to the private sector. Where government requires a PE to provide a specific social function, which has negative commercial consequences, Government will ensure a clear and transparent subsidy is provided.

48 Appendix 3

H. Government’s Institutional Arrangements and Capacity in the Sector

38. The Government has established a Budget Support Management Committee to facilitate discussion and monitoring of progress around actions under the Government reform program and the joint policy matrix linked to budget support. The Ministry of Finance and National Planning (MFNP) provides secretarial support to the committee and it includes representatives from various agencies involved in all key areas of the reform program, including the Ministry of Public Enterprises, the Ministry of Labor, Commerce and Industry, Revenue Services, and, recently, Tonga Power Limited and the Tonga Energy Roadmap Implementation Unit. I. ADB Sector Experience

39. ADB is providing budget support to the Government of Tonga, in a program coordinated with the Government and other Development Partners and linked to a jointly agreed policy matrix. 40. ADB is the lead agency in relation to technical assistance supporting public enterprise reform, and is also providing technical assistance associated with the implementation of a PFM strengthening and reform roadmap. J. Role of Other Development Partners in the Sector

41. The lead agency in relation to the coordinated program of budget support to Tonga is the World Bank. AusAID is also participating in the program linked to the jointly agreed policy matrix. The joint policy matrix (the Multi-Year Reform Program for Budget Support) includes phased policy actions under the headings of strengthened public financial management reform (strengthened PFM building blocks, strengthened budget execution, increased transparency in key budget processes, and increased budget credibility), strengthened fiscal management (strengthened revenue effort, improved expenditure quality, and improved management of the civil service wage bill), structural reform (energy sector reform, public enterprise reform, and private sector development), and social protection. 42. EU is also providing budget support to Tonga, which is linked to renewable energy and energy efficiency indicators. 43. New Zealand has provided sector specific budget support in the education sector, but is not currently doing so in recognition of the broader program of budget support now in place.

Appendix 3 49

IV. PRIVATE SECTOR DEVELOPMENT ASSESSMENT

A. Sector Situation and Key Issues27

1. The 2012 update of the Private Sector Assessment (PSA) for Tonga notes that interviews with government, banks, and the private sector indicate that the global economic crisis caused a decline in private sector investment, which has continued into 2012. The impact on the private sector has been substantial. However, the rebuilding program in the center of Nuku‘alofa provided a countercyclical influence and is probably the main reason why the economy registered positive growth over the past 4 years. 2. The private sector was also impacted by the commercial banks’ consolidation of their balance sheets, in response to the doubtful debts that arose from the lax lending practices in the period to 2008. As a result, private sector credit has contracted for nearly 3 years. 3. Tonga is a small, remote economy and, over the long term, its prosperity crucially depends on its ability to connect with the outside world. Telecommunications and maritime and air transport facilities are the channels through which these connections occur. The global economic crisis has negatively impacted the capacity and frequency of both shipping and aircraft services to the country. When Tonga and Samoa stopped providing flight subsidies in 2010, Air New Zealand withdrew the weekly Boeing 767 service from Auckland to Los Angeles, which had landed in both countries. Shipping lines have also reduced the frequency of services in response to increased costs and reduced volumes. Connectivity through telephone services has, however, increased, and international call costs have continued to decline as a result of competition. The project to connect Tonga to the western arm of the Southern Cross fibre optic submarine cable will greatly improve internet speed and capacity while reducing costs. This development could open up new business opportunities, such as the development of international call centers, and support growth in tourism and the private sector in general.

B. Impact of the Global Economic Crisis on the Private Sector

4. Following civil service strikes in 2007, there was a sudden and substantial increase in public sector wages (50%), as documented in the 2008 Private Sector Assessment (PSA). The 2008 global economic crisis has subsequently resulted in a continuing rise in public sector wages and salaries in total government expenditure, with further increases expected. To contain the public deficit, the government has sharply cut other government expenditure items, including purchases from the private sector. 5. The tax authorities have also been searching for additional sources of revenue and cash flow savings. Two particular measures have had a powerful adverse effect on the private sector. There has been substantial pressure on business cash flows from delays in refunds of the consumption tax, which in some cases are more than 12 months in arrears. Refusal by the tax authorities to allow offsets, where taxes owed can be set off against refunds that have not been paid, has compounded the impact. Businesses have been prosecuted for the non-payment of consumption taxes, even though they were owed hundreds of thousands of pa’anga in tax refunds. Good tax policy allows for offsets unless there is strong evidence that there is a legitimate dispute regarding refunds.

27

This section draws on Continuing Reform to Promote Growth - Update of the Private Sector Assessment for Tonga, 2012.

50 Appendix 3

6. In interviews, government officials claimed that there had been a sharp rise in cases where consumption tax returns were incorrect, while private sector business owners felt that this was a stratagem to delay refunds. 7. While the government undoubtedly needs to improve revenue collection, it should not do so without considering the impact on the private sector. While tax evasion should be prosecuted, if the government simultaneously owes tax refunds to the very firms that it is pursuing for revenue payments, the impact is bound to be negative. Moreover, attempting to raise revenue, which is being spent on public sector wages and salaries, will not increase the willingness of the private sector to cooperate. In all countries where good quality governance exists, there is an implicit compact that the public sector provides value in the form of public goods and services. If these appear to be deficient, then the compact breaks down. 8. Furthermore, there is evidence that public spending that is dissipated in the form of public sector wage and salary spending has little stimulus impact on the economy compared with infrastructure investment, which is needed urgently. Bringing the wage and salary bill under control is a matter of critical priority. 9. A further issue results from the increase in taxes and business license fees to raise revenue, combined with much more vigorous enforcement. Tonga’s system of business licensing harms the private sector and discourages investment, which over the longer term will reduce government revenue. The health of Tonga’s economy—and the funds available to the government to implement social programs—depends on a vigorous private sector that actively invests. Viewing business simply as a source of revenue will ultimately harm both investment and government income. 10. Thus, the global economic crisis has adversely affected Tonga’s private sector both directly, through lower domestic demand, and indirectly, through various other channels, including taxation, licensing, and government purchasing.

C. Policy Continuity

11. The government that was formed in 2011 following the introduction of full democracy emphasized that its policies will reflect continuity with those of the previous government. The business community affirmed that they preferred to have no radical change in policy reform initiatives. They also recognized the constraints under which the new government had been placed by the global economic crisis. In addition, the business community expressed the hope that the positive reforms that had begun under the previous government would be continued. D. Recent Reforms to Promote Private Sector Development

12. The PSA update notes that Tonga has been one of the Pacific region’s leading reformers in a number of areas. In many cases, reforms followed the recommendations of the 2008 PSA. It is instructive to compare reform priorities outlined in the earlier document with what has been achieved. The next section outlines the recommendations and progress to date. The most important include:

• Amendment to the Companies Act 1995, to more closely reflect Tonga’s needs and to

provide for an electronic registry. The International Finance Corporation (IFC) funded an

interim electronic solution to support the company registry. ADB, through the Private

Appendix 3 51

Sector Development Initiative (PSDI), is providing financial and technical assistance for

the installation of an electronic company registry during 2012.

• Reform of the Personal Property Securities Act 2010 and a new electronic registry that went live in April 2011.

• Rationalization of a number of SOEs.

• Introduction, in 2010, of amendments to the Public Enterprises Act 2002, which specify

the principal objective of SOEs (requiring them to operate commercially) and the way in

which they should be organized, and include enhancements to corporate governance

rules as well as the roles and duties of directors and managers.

• Initiatives to improve the corporate governance of SOEs.

• Corporatization of the biosecurity heat treatment facility, which is being primarily funded

by the Government of New Zealand.

13. Both private sector and public sector stakeholders indicated strong support for the reforms. 14. Despite the decline in consumption expenditure—which has adversely impacted their businesses—private business owners indicated that the reforms have provided a strong foundation for future economic growth. Senior government officials interviewed expressed similar views. 15. Examples provided in the PSA update of how the reforms are being implemented include:

• The Minister of Public Enterprises has been using the criteria set out in the Public

Enterprises Act to insist that Tongan SOEs improve their performance.

• All ministers have resigned from the SOE boards, as required by the amended Public

Enterprises Act, and have been replaced by private sector directors.

• Banks have transitioned to the new secured transactions framework. In doing so, they

found a number of instances of property that had been pledged to several people

simultaneously, something that would not have been discovered under the old system.

16. Many of these reforms were supported by ADB through the regional Private Sector Development Initiative and associated technical assistance projects, as well as technical assistance provided by other development partners, including the Australian Agency for International Development (AusAID), the IFC, and the Government of New Zealand, through the New Zealand Aid Programme. 17. The revised Companies Act has substantially reduced the time it takes to establish companies and has improved the transparency of the process. The speed of registration will improve markedly with the new electronic company registry. 18. Nevertheless, much remains to be done before Tonga has a business-friendly environment. The government still has a pervasive and dampening impact on the private sector, particularly regarding the issues surrounding the licensing regime. During the 2012 Tongan Economic Dialogue, the private sector expressed the view that government employees do not provide good service and treat business with suspicion. These issues take place against the deepening gloom on the part of the private sector with respect to its economic prospects. A National Reserve Bank of Tonga survey of the private sector shows that expectations are for

52 Appendix 3

further deterioration in economic conditions, with the manufacturing, wholesale and retail, and tourism sectors all anticipating that the economy will worsen. 19. Recommendations of the 2012 update of the PSA for further reforms are:

• Reform the license and permit processes involved in establishing and running

businesses, both for Tongans and for foreigners. This involves repealing or streamlining several processes, namely:

o Repealing the Business Licenses Act 2002 (a Business Licenses Amendment Bill

was subsequently passed in October 2012) and replacing it with legislation and

processes that provide for licensing businesses rather than activities, including abolishing sector licensing except for health and liquor licenses; and

o Modernizing and simplifying the requirements for obtaining a business visa.

• Restructure revenue collection and processing to speed up tax refunds, initially by

allowing offsets of taxes owed by businesses against refunds owed to businesses by

government.

• Enact key business laws on bankruptcy, contracting, trusts, electronic transactions, and

arbitration to fill in the gaps in the commercial legal framework. Complete the transition

to a fully electronic company registry and amend the Companies Act to provide for

community companies.

• Although a preliminary financial analysis indicated the viability of establishing a fuel tank

farm as a possible way to bring down the cost of electricity, a decision to proceed with

the proposal should be based on a comprehensive evaluation, which considers the issue

from all aspects including finance and the environment.

• Continue with the commercialization and privatization of state-owned enterprises (SOEs)

and develop shared services to counteract the lack of capacity and capabilities.

• Prohibit ministries from undertaking commercial activities unless there is a clear need

that is not already met by the private sector.

• Reduce the public sector’s wage and salary bill, as a share of total public expenditure, in

line with the fiscal responsibility ratios.

• Reform the Ministry of Agriculture and Food, Forests and Fisheries to make it client

friendly.

• Commercialize and privatize the chemical biosecurity facilities and contract out the

agricultural extension services.

• Upgrade infrastructure through greater use of contracting out.

• Seek to develop a credit bureau at the earliest opportunity.

• Use the National Growth Committee as a vehicle for meaningful engagement between

the government and private sector, and use this as a joint government and private sector

task force to improve international airlines and shipping services. It is essential that government representation on the committee be at the highest levels to ensure that its

deliberations feed into policy discussions more generally.

E. Government’s Sector Policy and Planning Framework28

20. Outcome objective 2 of the Tonga Strategic Development Framework 2011-2014 calls for a dynamic public and private sector partnership as the engine of growth, by promoting better

28

This section draws on the Tonga Strategic Development Framework 2011 to 2014.

Appendix 3 53

collaboration between government and businesses, appropriate incentives, and streamlining of rules and regulations. 21. One of the four enabling themes supporting the TSDF is ensuring that Public Enterprises are sustainable and accountable, and where appropriate moved into the private sector. 22. Within the framework of economic restructuring the Government notes that the public and private sectors must work closely together in a partnership that will create the engine of growth to generate the necessary employment and income for the people, and which will in turn generate revenue to pay for the operation of government. Supporting Tongans and foreign investors to open businesses and engage in lawful commerce is a key of element of the government’s programme. 23. Strategies identified in TSDF to help facilitate the development of a vibrant and expanding private sector in Tonga are:

F. Creating the enabling environment for the private sector to flourish.

i. Maintaining macroeconomic stability

24. TSDF notes that private sector investment and decision making cannot occur in an atmosphere of uncertainty, especially in regards to prices, exchange rates, and inconsistent and non-transparent government actions. To avoid these undesirable effects, the government, in conjunction with NRBT, will continue to maintain prudent fiscal and monetary policies, including undertaking careful reviews of expenditures and maintaining international good practices in budgeting, debt levels and financial management.

ii. Promoting financial sector development.

25. High levels of domestic and foreign investment are needed to promote growth. Government recognizes that access to capital is a key prerequisite for a market economy. The government will also focus on the development of microfinance and financial inclusion, targeting those who are presently not well served by the existing financial system.

iii. Investing in a healthy, well-educated, and skilled workforce.

26. The private sector cannot function without skilled, healthy and committed workers and to this end the government will continue to support both primary education and vocational training. Appropriate skills training, coupled with opportunities for life-long learning, will benefit all Tongans. The government will also utilize local businesses and organizations for broader business training, advisory training for businesses/private sector and continue its cooperation with international organizations willing to impart business knowledge.

iv. Establishing an appropriate level of business supervision. Involving the private sector more closely in policy formulation and implementation.

27. For the private sector to make a greater contribution to GDP and employment the government will engage more closely with the sector to better understand the challenges and opportunities that are being faced by entrepreneurs. The government resolves to continue and further improve its successful public consultations regarding policies impacting on business, as well as continuing successful public/private institutions such as the Task Force on Regulatory Reform and its Working Groups. The Ministry of Labor, Commerce and Industries has completed the formulation of the Private Sector Development Strategy with regular inputs from the private sector to be considered by government. The National Economic Development

54 Appendix 3

Committee (NEDC) has been established to support and engage with the private sector. This is being reviewed to ensure that it operates effectively. 28. Areas for specific action identified in TSDF include:

• Reform business services (licensing, certification, visas, registries and inspectorates) to

be more efficient.

• Improve effective policy response capacity of Government to ensure stable business

environment, relevance of regulations, promote fair competition, investment and

development markets to restore integrity to the business community.

• Promoting registration of corporate bodies and facilitating business and consumer credit

to secure and increase private sector growth.

• Promoting Intellectual Property Rights (IPR) protection and ensuring that Tongans

benefit from the effective use of IPR particularly through increased innovation,

investment and trade.

v. Fostering technological development

29. The adoption of new technologies is an essential prerequisite for faster and more sustained economic growth. Tonga has a pool of reasonably well educated young people, many of them studying abroad, who can be utilized to foster technological development. To encourage both the transfer and development of technology within the Kingdom, the government will continue to encourage foreign investment and the opening of foreign businesses in the country to complement those established by domestic investors. The government will also provide appropriate policies to facilitate access to highly-skilled workers by facilitating recruitment of foreign experts not available in Tonga.

vi. Promoting international and regional trade.

30. The Tongan economy is dependent on trade to meet the needs of its people for a wide range of modern consumer and capital goods. Exports also provide a larger market for domestically produced goods. Government will establish the Tonga Trade and Investment Board. Government will also focus on improving access to international shipping to help keep down transport costs. Government will continue to liberalize trade policy, and seek opportunities for overseas employment. Tonga has already begun several initiatives to open its markets and will build on these successes in the coming years. This will include continuing its active membership in international and regional trade bodies such as the World Trade Organization (WTO) and the Pacific Island Countries Trade Agreement (PICTA). 31. Regional trade will be encouraged by the elimination of non-tariff barriers in the short term and progressively removing all tariff barriers over a longer period, to be replaced by alternative revenue raising options. Establishing the foundation for negotiating membership in the Pacific Agreement on Closer Economic Relations (PACER) is underway. Finally, through the Pacific Islands Forum and in concert with African, Caribbean, and Pacific Island countries, the government will finalize an Economic Partnership Agreement (EPA) with the European Union. 32. A National Export Strategy (NES) will be formulated and implemented over the life of this framework, based on Tonga’s comparative advantages, addressing constraints and forging a closer and realistic partnership between government and private sector businesses.

Appendix 3 55

G. Improving output of the productive sectors.

33. TSDF notes that strong productive sectors are important both to increase incomes and employment.

vii. Tourism

34. The government considers tourism a key sector for private investment contributing to future growth. Investment in tourism will provide new livelihood opportunities complementing those available in agriculture and fisheries in the rural areas; it has the potential to generate additional employment opportunities and increase foreign exchange earnings. 35. Positive cooperation between the private and public sector partners in tourism has gained pace recently. Government will continue with and enhance the underpinning role it has in supporting this partnership. Government will continue to encourage investment in tourism by addressing issues and impediments to the industry as identified by the Ministry of Tourism and other stakeholders. This will include supporting further investment in destination marketing for Tonga. Recognizing that Tonga is a relatively high cost destination the focus will be on high value-added tourism with clear links to the domestic economy that supports local culture and environmental protection, rather than mass tourism. This means that substantial new investment in high-end resorts, where possible linked into the local community, and the upgrading of existing facilities, will be needed.

viii. Agriculture, Forestry and Fisheries

36. The agriculture, forestry and fisheries sector has shown zero growth over the past five years, agricultural exports, mostly squash, have declined sharply. This repeats a common pattern both in agriculture and fisheries where promising new export markets expand rapidly only to crash due to a mix of poor management and lack of sustainability. Government will seek to learn the lessons from these previous ventures to ensure that the constraints and issues are correctly addressed to avoid similar results in the future.

ix. Seabed Minerals

37. The opportunities for oil exploration and seabed mining remain in the future, however, government recognizes the potential contribution these could make to the future development of the Kingdom. Government also recognizes that there are many lessons to be learned from other countries where oil and mineral wealth has greatly disrupted political reform and social solidarity.

x. Remittances and seasonal labor

38. The development of formal and informal business opportunities in the country is the main source of employment, but overseas opportunities, both related to overseas labor mobility schemes and longer term migration, are also major sources of earning and remittances. Remittances from Tongan communities abroad are essential to sustain economic growth and help to lift people out of poverty. H. Government’s Institutional Arrangements and Capacity in the Sector29

39. The National Economic Development Council (NEDC), established prior to 2008, was seen by many as an indication of the government’s commitment to support private sector

29

This section draws on Continuing Reform to Promote Growth - Update of the Private Sector Assessment for Tonga, 2012.

56 Appendix 3

development. The NEDC was chaired by the Prime Minister and comprised key ministers, such as the ministers of finance; labor, commerce and industries; agriculture, food, forestry and fisheries; and tourism, plus representatives from the Tonga Chamber of Commerce and Industry and, more specifically, representatives from the agriculture, fisheries, and tourism sectors. The intention was that NEDC would establish overarching policies and initiatives to encourage private sector growth. However, it failed to live up to expectations and became ineffective, as it was not supported by the active participation of the Prime Minister and other key ministers. 40. The government that was formed after the 2010 elections decided not to revive the NEDC, but use the Cabinet Economic Development Committee (CEDC) as the main economic coordination and planning body. However, the private sector is not represented on the CEDC as it was on the NEDC and, as a consequence, there is no body that currently acts as an effective formal link between government and the private sector to debate and set policies that impact on the private sector and the economy. 41. The National Reserve Bank of Tonga, in conjunction with the Ministry of Finance and National Planning, sponsored an economic summit in Nuku‘alofa, held on 7–8 March 2012. The private sector, relevant government ministries, nongovernment organizations, and representatives from community groups and churches attended the summit. A summary of the main findings and recommendations from the PSA were used as an input to the summit deliberations. 42. An agreed outcome was the establishment of a formal structure to facilitate government– private sector dialogue, the National Growth Committee. At this stage, the relationship of the committee with the CEDC is unclear, and it is too early to tell how effective this structure will be. Nevertheless, its establishment is an important positive development. How the structure of the committee evolves will determine its long-term success. 43. The Tonga Chamber of Commerce and Industry has continued to be an effective lobbying and coordinating body. The industry representative groups, comprising agriculture, fishing, manufacturing, and tourism, established under the chamber’s umbrella, have been one of the few successes to come out of the NEDC structure. I. ADB Sector Experience

44. ADB’s support to private sector development has come via the regional Private Sector Development Initiative, and has included funding of the Private Sector Assessment in 2008 and the update in 2012. 45. ADB is also the lead agency in providing technical assistance to Government’s efforts to strengthen and reform state-owned enterprises, supporting the SOE reforms set out above. J. Role of Other Development Partners in the Sector

46. New Zealand is the main development partner supporting private sector development in Tonga. The Business Opportunity Support Scheme, funded by the Government of New Zealand, is designed to provide grants to entrepreneurs to undertake continuing Reform to Promote Growth project feasibility studies. As of October 2012, this scheme is administered by the Tonga Chamber of Commerce and Industry.

Appendix 3 57

47. Another ongoing initiative, fully funded by the Government of New Zealand, is the Tonga Business Enterprise Centre. The Centre commenced in November 2010 and also functions within the Tonga Chamber of Commerce and Industry. The Tonga Business Enterprise Centre’s mandate is to support existing private sector small to medium-sized enterprises by providing business advisory services. The Tonga Business Enterprise Centre also provides training using both local and international trainers, and assists businesses and investors with information on available business support resources and the relevant government regulations. 48. New Zealand also funds the Tourism Support Program which includes support for destination marketing, heritage site development, a quality accommodation standards system, and research. Upgrading of ‘Eua airport runway and terminal was also funded under this program.

58 Appendix 4

RISK ASSESSMENT AND RISK MANAGEMENT PLAN

Area of Risk Risk Levela Management of Risk

Risk Level after Mitigation

Changes in the level of political and bureaucratic ownership of and support for the measures required under the joint policy matrix, and other aspects of program implementation.

High This risk is being managed through steps to reinforce the joint policy matrix. The policy matrix is now well established, and both Government and Development Partners recognize its effectiveness in pursuing a reform program which is well targeted and achievable. In relation to this and other aspects of program implementation, ADB is seen as an effective and responsive Development Partner, due in no small part to the work of the ADB/WB Group Joint Country Office in Tonga. Management of this risk also requires an understanding that Tongan society is conservative, and that proposals for change are often subject to lengthy deliberation before acceptance.

Medium

Capacity constraints in Tonga in relation to policy reform, and in project implementation and operation.

High While Tongan institutions are capable and staffed by educated, experienced and motivated personnel, these institutions are small and can lack breadth and depth in technical skills. This can put policy reform and project implementation at risk, and requires that reform and project design be supported by relatively high levels of technical support for extended periods.

Medium

Ongoing slow growth and fiscal vulnerability, leading to a potential need for ongoing budget support.

High There are many inherent factors contributing to relatively slow growth in Tonga’s economy (smallness, dispersion and isolation being among them). Uncertainty in global economic prospects also contributes to uncertainty in Tonga’s future growth path. In managing this risk, budget support is considered in a broader and longer term development context rather than as purely a stop-gap measure.

High

Macroeconomic shocks from natural disasters or other unforeseen events.

Medium Tonga’s growth path suffers shocks from time to time from natural disasters and other unforeseen events. These setbacks can disrupt development activities and reform initiatives, and in response there is a need for conservative projections of the pace of implementation and impact of reforms.

Medium

Inability for investment programs to address all areas of risk in relation to climate resilience, with adverse impacts and

Medium Tonga is extremely vulnerable to natural disasters, and this vulnerability is likely to be exacerbated by climate change. This risk is managed by making the climate resilience program

Medium

Appendix 4 59

Area of Risk Risk Levela Management of Risk

Risk Level after Mitigation

unforeseen events overshadowing successes from the program.

as comprehensive and flexible as possible, with careful assessment of the likelihood and severity of adverse impacts from climate change.

Support provided to state owned enterprises (SOEs) entrenching their position and crowding out investment and competition from the private sector.

Medium SOEs are key institutions in many sectors of the Tongan economy, and support for measures to improve their efficiency can make an important contribution to the economy. The associated risk of crowding out the private sector is managed by pursuing a coordinated program of SOE reform and private sector development.

Low

Lack of financial and economic viability in some infrastructure investments, generating future burdens from operating and maintenance costs without sufficient contribution to future growth.

Medium It is recognized that Government’s development strategies emphasize equity as well as growth. The risk from underperforming infrastructure investments is managed through ensuring that financial and economic viability, and provision for operating and maintenance costs, are key considerations in appraising investment proposals.

Medium

Coordination problems associated with renewable energy programs (relating to equipment specifications, maintenance standards, and management systems), due to the large number of Development Partners and the range of local institutions active in this sector.

Low This risk is being managed by the Tonga Energy Road-Map (TERM) Implementation Unit, and close coordination is needed to ensure that the benefits to the economy of investments in renewable energy are maximized.

Low

Overall Medium Medium

a Risk level is estimated as Low, Medium or High, depending on a combination of an assessment of the

likelihood of a risk event occurring and an assessment of the consequences if the risk event does occur.

60 Appendix 5

COUNTRY COST-SHARING ARRANGEMENTS AND

ELIGIBLE EXPENDITURE FINANCING PARAMETERS, 2016–2018a

Item

Parameter

Remarks/Explanation

Country Cost-Sharing

Ceilingb for Loans

(2015−2017)

Up to 99%

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

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

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

Country Cost-sharing

Ceilingb for TA

and Other Grants

(2015−2017)

Up to 99%

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

Country Cost-sharing

Ceilingb for

Specific Sectors

None No sector-specific variations are proposed.

Limits on Recurrent Cost

Financingc

None

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

Taxes and Duties

None

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

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

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

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

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

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