Document of The World Bank FOR OFFICIAL USE ONLY Report No. 56630-TO INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY FOR THE KINGDOM OF TONGA FY 2011 - 2014 September 17, 2010 Papua New Guinea, Pacific Islands and Timor Leste Country Management Unit East Asia and Pacific Region The International Finance Corporation This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. KINGDOM OF TONGA CURRENCY EQUIVALENT 1 Tongan Pa'anga (TOP) = 0.53 US Dollar (USD) (Exchange rate effective as of September 2010) FISCAL YEAR July 1 ­ June 31 ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activities ADB Asian Development Bank AusAID Australian Agency for International Development CAS Country Assistance Strategy CPAR Country Procurement Assessment Report CPPR Country Project Portfolio Review DGF Development Grant Facility DPO Development Policy Operation DRR Disaster Risk Reduction EC European Commission EITI Extractive Industries Transparency Initiative FIAS Investment Climate Advisory Service FTI Education for All Fast Track Initiative GDP Gross Domestic Product GEF Global Environment Facility GFDRR Global Facility for Disaster Reduction and Recovery GFRP Global Food Crisis Response Program GNI Gross National Income HDI Human Development Indicators IBRD International Bank for Reconstruction and Development IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund ISN Interim Strategy Note JICA Japan International Cooperation Agency M&E Monitoring and Evaluation MDGs Millennium Development Goals MDTF Multi-Donor Trust Fund MOF Ministry of Finance NGO Non-Governmental Organizations NSPF Tonga National Strategic Planning Framework NZ New Zealand PALM Japan ­ Pacific Alliance Leaders' Meeting PASAI Pacific Association of National Audit Institutions PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFTAC IMF Pacific Technical Assistance Facility PF3 Pacific Facility III PIC Pacific Island Country PPCR Pilot Program for Climate Resilience PRIF Pacific Regional Infrastructure Facility PSD Private Sector Development QER Quality Enhancement Review REF Pacific Regional Engagement Framework RAMSI Regional Assistance Mission to the Solomon Islands RSE NZ Recognized Seasonal Employment Scheme SDR Special Drawing Rights SPREP South Pacific Regional Environment Programme TA Technical Assistance TERM Tonga Energy Roadmap TESP Tonga Education Support Project TOP Tongan Pa'anga TSCP Tonga Transport Sector Consolidation Project UNDP United Nations Development Programme UNICEF United Nations Children's Fund USAID United States Agency for International Development V-FLEX EC Swift Response Financing Instrument WFP World Food Programme WHO World Health Organization IDA IFC Vice President: James W. Adams Rashad Kaldany Country Director: Ferid Belhaj Karin Finkelston Task Team Leader: Robert Jauncey Gavin Murray KINGDOM OF TONGA WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY Contents EXECUTIVE SUMMARY..................................................................................................i I. RATIONALE FOR A COUNTRY ASSISTANCE STRATEGY............................................1 II. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES..........................................2 Economic Geography...................................................................................................2 Constitutional Reform..................................................................................................4 Recent Economic Developments......................................................................................4 Government Development Strategy: 2009-13........................................................................7 Donor Engagement......................................................................................................7 III. WORLD BANK GROUP ENGAGEMENT WITH TONGA.................................................9 Current and Recent Engagement......................................................................................9 Planned World Bank Group Engagement: FY11 ­ FY14........................................................11 Encouraging Economic Reform.................................................................................12 Generating Opportunities from Greater Global and Regional Integration.................................14 Building Resilience Against Shocks............................................................................15 Implementation: Partnerships, Selectivity, New Ways of Doing Business, and Accountability........17 Financing Envelope and Terms..................................................................................18 IV. RISKS...................................................................................................................19 Attachments Attachment 1: Pacific Islands ­ Overview of World Bank Engagement.......................................20 Attachment 2: Tonga Results Matrix................................................................................36 Attachment 3: Tonga: Country at a Glance........................................................................39 Attachment 4: Tonga: Selected Economic Indicators.............................................................42 Attachment 5: Selected Indicators of IDA Portfolio Performance and Management........................43 Attachment 6: IDA program Summary.............................................................................44 Attachment 7: IFC Portfolio..........................................................................................46 Attachment 8: Map of the Kingdom of Tonga.....................................................................48 KINGDOM OF TONGA WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY FY11 ­ FY14 EXECUTIVE SUMMARY i. Development outcomes in the remote island archipelago of Tonga are relatively strong compared with other Pacific island member countries ­ but progress has been volatile. Absolute poverty is rare, health and education indicators are relatively strong, and Tonga has made good progress against most MDG indicators. Like many other small and remote island economies, however, Tonga's development prospects are shaped by it economic geography. The economy is highly vulnerable to external shocks. Because of its narrow economic base and heavy reliance on remittances from citizens living overseas, Tonga has been hard hit by the slowdown in the US and other OECD countries, as well as by the food and fuel price shocks of 2008. ii. Renewing economic reform momentum will be vital for Tonga to bounce back more strongly from current economic difficulties. Policy reform is a necessary although not always sufficient condition for progress in many small and remote island states. While the Pacific island states are at the margins of the global economy and highly reliant on relationships with metropolitan countries, experience also shows that those countries that have done best have been those able attract new private investment to promote growth. Tonga made a strong start on economic reforms, particularly associated with WTO entry in 2007. More recent political reform has also marked Tonga's continuing transition to a Constitutional Monarchy. Still, significant challenges remain to further strengthen public expenditure policy and management, particularly in light of emerging fiscal pressures, and to reinvigorate structural economic reforms. iii. The World Bank Group is committed to increasing its support for Tonga, in close collaboration with other development partners. World Bank Group engagement will be structured around the themes of supporting economic reform; generating opportunities through greater global and regional integration; and building resilience against shocks. There is potentially room for the Bank to provide $50 million in grant funds to Tonga over the next 4 years, significantly more than the $33 million has been provided in the period since Tonga joined the Bank in 1985 until now. There is also scope for the Bank to provide flexible budget support to meet needs emerging from recent economic shocks, although this will depend on the development of a credible reform program by a new Government after elections in November 2010. The Bank anticipates working in close cooperation with other partners to undertake analytical work to help provide a new Government with the detailed information on which they can make policy choices. iv. Coordinated IDA and IFC engagement will also focus on encouraging opportunities for the private sector and on strengthening service delivery through the transparent and competitive contracting of functions to the private sector. New World Bank Group engagement with Tonga will build on the successes that have been achieved to date, such as the coordinated Bank Group support for the telecoms revolution that has swept the Pacific in the past few years, increasing the number of Tongans with access to mobile phone services from 6% to 60% of the population. Just as IDA and IFC were able to play complementary roles in encouraging the opening of the telecoms market, strengthening regulation, and supporting new private investment, there is considerable scope to exploit synergies across both institutions to make greater room for the private sector to generate opportunities. I. RATIONALE FOR A COUNTRY STRATEGY FOR THE KINGDOM OF TONGA 1. The World Bank Group is significantly scaling up analytical and financial support to help the Kingdom of Tonga and other small and remote Pacific island countries reduce the constraints of economic geography and make the most of opportunities. Reflecting this scale up, this is the first country strategy prepared for Tonga, as well as the first for any of the smaller Pacific island countries. The Bank's strategy for the Pacific island countries (PICs) was previously set out in a single Regional Engagement Framework (REF) covering the period 2006 to 2009. As Bank Group engagement intensifies, however, Pacific island clients are increasingly demanding individual "custom-tailored" strategies to reflect their individual circumstances, and to incorporate the support that can be provided from across the Bank Group, including both IDA and IFC. Of course, given the importance of greater regional integration if Pacific island countries are to increase opportunities, such bespoke strategies will draw from key elements of a common regional approach. An overview of current World Bank Group engagement across the Pacific island countries is provided in Attachment 1. This is not intended as a formal strategy document to replace the previous REF, but as a snapshot to provide a wider context for the individual country strategies that will be developed over the next few years. 2. Individual country strategies will allow for a greater acknowledgement of the different histories, development situation, and challenges of the Pacific island countries, as well as a more nuanced discussion of how common regional themes in the Bank Group's engagement with the region are translated into specific country contexts. While moving to a "custom-tailored" approach for individual island countries, there will be constraints. While the Bank Group is significantly scaling up the staff resources devoted to growing programs, strategies for each of the Pacific islands will inevitably need to be relatively streamlined and focused, and will not necessarily be able to have the same level of details as for some of the Bank Group's larger clients. Country-specific engagement will be framed in CASs or ISNs when possible and when data and substance are available (as with Tonga). Engagement in some countries will, however, be approached through a lighter, more indicative snapshot intended to give a broad and flexible framework for action. 3. A country strategy for Tonga is being presented now in order to provide a broader context in which to seek Board approval for the first development policy operation for Tonga, as well as investments in the transport sector and post-tsunami rehabilitation. The Government of Tonga requested the Bank in September 2009 to extend a DPO to assist the Government respond to the cumulative external shocks of the 2008 food and fuel price spikes, as well as the global economic slowdown. These shocks have resulted in the 3economy contracting in both FY09 and FY10, and to a significant decline in domestic revenue. While the Government has reduced expenditures in real terms, a significant fiscal deficit is emerging and the Government is now starting to face cash flow constraints. As is outlined in more detail through this document, Bank management considers that the reform program undertaken by the Government justifies a DPO. Other donors such as the ADB and EC have already provided or agreed to provide budget support, and further delays could potentially affect service delivery in Tonga. 4. Proceeding now with a DPO is important to provide the incoming Government that will be formed after elections in November 2010 with the breathing room to carefully consider expenditure priorities in the lead up to the FY12 budget. Management is presenting this strategy in combination with the proposed DPO in order to clearly set out the Bank's commitment to offer further budget support for any new Government following elections, subject to agreement on a reform program on which to base such support. Discussions with a new Government will obviously be required to reach agreement on the details any reform program that might underpin further budget support, although this policy dialogue is likely to include fiscal management, strengthened public financial management, and further encouragement to private sector led growth. It is anticipated that a joint public expenditure review being undertaken during 2010 and 2011 will provide a basis for partners to engage a new Government in a coordinated manner. 1 5. As well as being discussed with Government, the Bank has consulted Parliamentarians and other stakeholders from across the political spectrum in Tonga, who have emphasized the importance they place on the Bank signaling upfront ­ through this CAS ­ its commitment to engage constructively with any new Government. The strategy will clearly need to be implemented flexibly and take into account the priorities of a new Government. The Bank is, however, consciously moving ahead of the elections with a framework for engagement that could be construed as a white paper for a new Government's consideration. Wide consultations that underpinned the CAS suggest there is agreement from a broad range of stakeholders on the priority of investments outlined, including in the transport, energy and telecommunications sectors. In addition, the CAS provides a foundation to engage a new Government and to begin an early discussion to influence its economic and social development program. While there are inherent risks in presenting a strategy prior to elections, there are potentially greater risks to the Tongan economy and the Bank's credibility in delaying a DPO until after elections, or in providing budget support now without also setting out the Bank's commitment to engage constructively with any new Government and a potential framework for such engagement. II. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES Economic Geography 6. Tonga is a Polynesian country with a history of human settlement extending back 2-3000 years when the first Austronesian speaking voyagers reached the islands. As with other Polynesian cultures, Tongan society is highly structured. The current monarch, King George Tupou V, is the descendant of a royal line that has remained unbroken since 1845. Tonga is one of the few Pacific island countries never to have been formally colonized, although it was a British protectorate between 1900 and 1970. Tongan monarchs have in the past ruled territory encompassing parts of present day Fiji, Niue, Samoa, and Tokelau. 7. Absolute poverty is rare, and development outcomes are relatively strong. Average annual per capita incomes are approximately $3,200, higher than most of the Bank's member countries in the Pacific (although still well below some of those islands that are more integrated with metropolitan countries such as the French Territories, American Samoa, or the Cook islands). Strong family and church networks, as well as extensive subsistence agricultural production, means that food poverty is virtually non-existent. Unlike many of the Pacific island countries, Tonga remains broadly on track to meet most of the MDGs, and has among the best social indicators of any of the Bank's Pacific island member countries. There is almost universal literacy, with 98% of children ages 6­14 enrolled in school, and little or no difference between enrollment rates for boys and girls. As well as the Government, which provides free primary education, churches play a central role in Tonga's education system particularly at the secondary level. Health indicators have improved steadily, and access to safe water and sanitation is widespread. Life expectancy is 73 years for women and 70 years for men. About 98% of Tongan women give birth in the presence of skilled birth attendants. Under-5 mortality is 23 per 1,000 live births (the best of any of the Bank's Pacific island member countries), and continues to decline steadily. Maternal mortality is low, with an average of 2 reported deaths per year associated with birth related complications, although this has proven stubbornly resistant to further gains. Despite good health and education outcomes for women and girls, however, women's representation in Parliament is low. The key challenge for Tonga is to maintain achievements, with anecdotal reports of declining educational outcomes despite strong enrolments, and a rapid increase in lifestyle diseases such as obesity and diabetes. 8. Tonga, as with many of the other small Pacific island countries, is shaped very much by its economic geography. The country has a population of approximately 100,000, over half of which are concentrated in the main island of Tongatapu, but with small populations scattered across 36 inhabited islands among an archipelago of 171 islands. Tonga's total landmass is about 750 square kilometers, spread 2 over 800 km from north to south. The capital, Nuku'alofa, is over 2,000 km from its nearest large market, New Zealand, and over 3,000 km from Australia. 9. Development gains are fragile; although at the margins of the global economy, Tonga is highly volatile and subject to external shocks. Tourism is a growing source of foreign exchange, and has been a key destination for limited foreign private investment, although this sector still makes up only 10% of the economy. Agriculture also provides a source of livelihood for a large proportion of the population, although export potential is largely limited to niche products such as squash on some fisheries products (Tonga does not have the same size pelagic tuna resource as some of the more northerly Pacific island countries). Tonga's medium-term growth prospects are constrained by its geographic isolation, its narrow export base, and impediments to private sector activity. Systemic volatility is due to the narrowness of the economy and the limited scope for diversification. Comparative advantages are limited due to permanent cost wedges associated with Tonga's small size and remoteness from markets, making it difficult for the country to compete in all but a few niche markets. Volatility is exacerbated by Tonga's exposure to natural disasters. 10. Tonga is heavily reliant, and likely to remain so, on relationships with regional and metropolitan countries, through investment, trade, remittances and aid. As well as domestic policy performance, development outcomes will reflect global economic developments. Tonga is a small open economy. It is heavily reliant on imports, which are equivalent to about 40% of GNI, and faces a large structural trade deficit. The country is also heavily reliant on external investment in industries such as tourism. Development cooperation is an enduring feature of the economy, with official development flows equivalent to about 15% of GNI. ODA has been central to Tongan Government service delivery efforts, and is likely to remain so. Remittances are a key feature of the economy. As many Tongan nationals live and work abroad (primarily New Zealand and the United States, as well as Australia), as live in Tonga. In total, remittances have historically been equivalent to between about 40% of GNI. As shown below, Tonga is the leading recipient of remittances relative to GDP among all the Pacific island countries. Remittances are the largest source of foreign exchange, and a primarily used to fund consumption. Chart 1: Remittances (percent of GDP) 60 50 40 Tonga 30 Samoa Kiribati 20 Fiji 10 0 2001 2002 2003 2004 2005 2006 2007 2008 Source: IMF Article IV Report April 2010 3 11. In this environment, good domestic policies and leadership are necessary but not always sufficient for progress; external factors are crucial to development outcomes. Although there is always room for further improvement, the domestic policy environment has strengthened steadily, and Tonga's CPIA of 3.5 reflects not just a steady increase over the past few years but puts Tonga in the top half of all IDA recipients. Good macro and structural policies are necessary to ensure that economies are resilient and attract investment, and will also be important if Tonga is to attract concessional budget support from donors that will be required to respond to the global slowdown. Nevertheless, good domestic policies alone may not be enough by themselves in the small island states. Even where policy environments are strong, continued remittances and generous, well-targeted, foreign assistance flows are likely to be needed to support current levels of service delivery and lifestyles. More broadly, greater economic integration, more open labor markets by regional metropolitan countries, and regional shared service delivery, will be vital for Tonga's longer-term future, as with many other Pacific island countries. Constitutional Reform 12. Tonga is embarking on significant constitutional reforms that will increase democratic representation and embed a constitutional monarchy. The King appointed the first commoner to hold the position of Prime Minister in 2006. Parliament, with the support of King George Tupou V, has also now agreed to electoral reforms that will result in 17 of 26 members being directly elected through universal suffrage, with 9 continuing to be elected from the 33 hereditary nobles. This compares with a Parliament that now includes 9 elected members, 9 nobles, and up to 12 members of the King's appointed Privy Council. Following elections scheduled for November 25, 2010, it is anticipated that the Prime Minister will be elected by Parliament, and will appoint his own Cabinet, largely drawn from Parliament. Nevertheless, this transition is likely to require careful management to ensure that Tonga continues to be able to draw on the executive experience available. Recent Economic Developments 13. Tonga, like many of its Pacific neighbors, has been hard hit by the global economic crisis, particularly coming as it did on top of food and fuel price spikes which especially hurt remote island economies. While Tonga experienced reasonably strong growth during the latter part of the 1990s and early into the 2000s, recent economic performance has been volatile (as set out in the chart below). Declines in remittances, tourism and exports associated with the global crisis have led to a slowdown in the economy. This compounded difficulties caused by fuel price spikes in 2008, as soaring transport costs further limited export competitiveness, and increased import costs ­ particularly for imported diesel for electricity generation (fuel imports account for about 25% of all imports and about 10% of GNI). Economic activity contracted by about 0.5% in FY09, and by a similar amount in FY10. These shocks came just as the economy was starting to rebound following domestic disturbances in 2006 that led to riots in Nuku'alofa. Chart 2: Tonga: Real GDP Growth FY95 to FY10 5 4 3 2 1 0 1 2 200304 4 14. Volatility has been exacerbated because of Tonga's exposure to natural disasters. In September 2009, a tsunami devastated the communities on the remote northernmost Niuatoputapu islands. As recently as December 2001 Cyclone Waka ripped through the Vava'u and Ha'apai island groups, causing significant crop losses and damaging or destroying approximately 850 houses, with total losses estimated at $50 million (equivalent to 15% of annual GNI). Tonga was subsequently hit again in 2010 by Cyclone Rene. 15. As with many countries, the Tongan authorities responded to the economic slowdown by loosening fiscal and monetary policy, and this will hopefully provide a foundation for recovery. Fiscal pressures were also increased as a result of civil service salary rises during 2007 to 2009, although these were partially offset by an associated rationalization of the public service and a redundancy program that saw the civil service decline from 5,000 to 4,000 people. The accommodative policy responses, with additional support from donors, appear to have provided some relief from external shocks. A modest rebound in growth performance is anticipated in FY11, based on increased construction, tourism, and remittances ­ although this is subject to considerable uncertainty and downside risks associated with the strength of the global recovery and commodity prices. Tonga: Medium Term Macroeconomic Outlook, FY2009/10­FY2013/14 2009/10 2010/11 2011/12 2012/13 2013/14 Proj. Output and prices (annual percent change) Real GDP -0.5 1.7 1.7 1.8 1.8 Consumer prices (period average) 2.2 4.2 4.1 5.1 6.0 Central government finance (percent of GDP) Total revenue and grants 25.3 29.2 27.2 26.2 25.7 of which Total revenue 18.7 18.8 19.7 20.1 20.3 Total expenditure and net lending 29.2 34.3 32.0 31.4 28.6 of which Current expenditure 23.9 22.8 22.3 21.2 21.1 Overall balance -3.9 -5.1 -4.7 -5.2 -2.8 Balance of payments (percent of GDP) Current account balance -17.4 -19.9 -20.2 -18.1 -16.2 Gross international reserves (end of period) In months of imports (goods and services) 5.3 4.8 4.5 4.2 3.8 External debt (percent of GDP) Public sector external debt 44.2 50.7 52.7 51.1 48.5 Source: World Bank/IMF 16. The room for continued expansionary policies is, however, constrained. The impact of expansionary policies in small open economies is likely to be limited. In addition, the authorities will also need to make a sustained effort to reduce the fiscal deficit, which has reached 4% of GNI, and which will require external financing from bilateral and multilateral donors. Tonga's fiscal balance has not deteriorated to the extent of other small islands, such as the Maldives, but is now among the highest in the Pacific after Kiribati. As well as increasing fiscal deficits, Government decisions to borrow significant funds from China ­ although on terms that are broadly concessional - will result in a rapid increase in external debt, which is projected to rise to over 50% of GDP in nominal terms (and over 30% of GDP in NPV terms) 1. As a result, 1 Tonga's external public debt has increased from under 30% of GNI in 2006 to over 45% of GNI in 2010 largely as a result of two loans from China's EXIM Bank that became effective between 2007 and 2010 to finance reconstruction of the central business district following the 2006 riots and road investments. These loans bear a 2% interest rate, a 5 year grace period, and 20 year maturity. Even in the current low interest rate environment, these loans carry a concessional element of about 34%, and are focused on specific and priority infrastructure investments. As such, they are not necessarily incompatible with the Bank's policy on non-concessional borrowing. Elsewhere in the Pacific, 5 Tonga is in the "high risk" range of debt distress. This level of debt could leave the economy vulnerable and will limit fiscal space to respond to future shocks or to scale up support for emerging development priorities. In this context, the Government's FY11 budget adopted realistic revenue forecasts, and attempts to limit recurrent spending while protecting key service delivery functions in health and education. Other spending increases are limited to an increase in donor funded activities. Nevertheless, fiscal management and medium-term budgeting process will need further strengthening, as will efforts to improve revenue collection and rationalize expenditure while maintaining services. The 2011-12 budget is likely to require difficult decisions to reduce spending in lower priority areas, and efforts to strengthen revenue collection, especially at the border. While external financial support from the donor community is likely to reduce the impact of the crisis, the level of such financing is likely to be linked to reform progress. Chart 3: Tonga: Fiscal Balance and External Debt FY05 to FY11 60 50 40 % of GDP 30 20 10 0 10 200405 200607 200809 201011 External Debt (Nom) PV of PPG External Debt Fiscal Balance 17. Structural reforms undertaken by the Government promise to improve prospects for private sector growth, although reform momentum will need to be maintained. The current Government has sought to stimulate private sector-led growth, and Tonga is now rated as number 52 in the World Bank's Doing Business survey, the highest among all the Bank's Pacific island countries. After a period of largely inward looking economic policies, Tonga has since 2002 gradually adopted a more outward looking approach. Efforts initially focused on trade reform, with Tonga becoming a member of the WTO in 2007, and ratifying all regional trade agreements. A consumption tax was introduced in 2005 to replace most import duties. Trade reform has been complemented by new foreign investment legislation, which came into effect in April 2007. An amendment to the Companies Act in December 2009 streamlined the process for registering a company and introduced an electronic registry system using New Zealand registry software. This system will reduce both the time and cost involved with registering a business. New business licensing legislation was introduced in 2009, although did not remove ministerial discretion on the granting of business licenses as recommended by IFC. 18. Despite gains, however, renewing momentum for structural reforms will be important. Relatively stronger growth over the past decade in neighboring Samoa illustrates the potential benefits of continuing with reform over a longer time period than has yet been the case in Tonga. Priorities are likely to include further reform of public enterprises, which control about 20% of fixed assets, and encouraging investment by improving transparency and predictability of the business environment, including more narrowly defining or repealing the list of industries reserved for domestic investment. Land tenure systems are intimately tied up China has in the past also modified some loans to become grants. Nevertheless, further borrowing by the Government, even on concessional terms, should be avoided. 6 with the structure of society and reform will require sensitivity, but options to increase the length of leases could encourage further investment. A Royal Land Commission report, for instance, found that the administration of the land system required greater transparency and efficiency, and experience in Samoa ­ where the transition from a deed to a title system in 2009 and a new IT system for property registration has reduced processing times by 4 months ­ highlights options for reducing transaction costs. Finally, strengthening governance and further improving transparency will remain priorities. Maintaining the integrity of the judiciary will be especially important in this regard. Government of Tonga's Development Strategy 19. The Tongan Government's broad development strategy is set out in the National Strategic Planning Framework 2009 ­ 13 of February 2009. The NSPF is a focused document that focuses on the key determinants of economic and social progress, and concentrates on a limited number of uniquely national and whole of government priorities that will need, by their nature, to be addressed in a flexible way over longer-term period. The Government's vision is "to create a society in which all Tongan's enjoy higher living standards and a better quality of life through good governance, equitable and sustainable private sector-led economic growth, improved education and health standards, and cultural development". To fulfill this vision, the strategy sets out seven primary outcome objectives, underpinned by four enabling themes: Facilitating community development by involving district and village communities in meeting their service needs; Support private sector led growth through better engagement with government, appropriate incentives and streamlining of rules and regulations; Facilitate the continuation of Constitutional reform; Maintain and develop infrastructure to improve the everyday lives of the people; Increase the performance of technical and vocational education to meet the challenges of maintaining and developing services and infrastructure; Improve the health of the people by minimizing the impact of non-communicable diseases; Integrate environmental sustainability and climate change into all planning and execution of programs; Continue the progress to smaller and more efficient government to transfer resources to improved services and maintenance of assets; Ensure state owned enterprises are accountable to government as the owner and provide dividends for the benefit of the people in proportion to capital invested; Improve the effectiveness of revenue collection to ensure a level playing field and to ensure that services to the people can be appropriately funded; and Ensure a more coordinated whole of government approach to donor funding. Donor Engagement 20. Tonga, like many small island states, is heavily reliant on international development cooperation flows which on a per capita basis are some of the highest in the world. Net flows to Tonga average almost $50 million per annum, equivalent to about 15% of GNI or $500 per capita per annum. 7 Australia is the largest donor in Tonga, as in most of the rest of the Pacific, providing assistance worth slightly more than A$25 million (USD 22 million) per annum. The framework for Australian cooperation with Tonga is set out in the Partnership for Development signed by respective Prime Ministers in August 2009. The partnership commits Australia and Tonga to focus on four priority outcomes, including (i) improving infrastructure to provide people with reliable and efficient links to markets and services, (ii) reducing the prevalence of non-communicable diseases and improving primary health care, (iii) building a more highly skilled workforce linked to industry demand, and (iv) developing a more efficient public sector. The Asian Development Bank has had a long-term engagement in Tonga, based around an integrated program of analytical work and investments. The ADB's base allocation to Tonga is $14 million over 4 years, although with room to increase. Given Tonga's debt position, current ADB support is provided as grants. ADB has traditionally played a leadership role in economic analysis and advisory support, including on SOE reform, and is scaling up given pressures on Tonga from the current global slowdown. ADB approved a two tranche budget support grant in December 2009, with the first tranche released in early 2010. ADB has supported urban development, and will also be taking a more central role on climate change adaptation issues in Tonga, and will be the lead donor for Pilot Program for Climate Resilience (PPCR) support. The ADB is also exploring options for greater support in the energy and social protection areas. China's support for Tonga has increased significantly in recent years, with significant concessional lending for the reconstruction of the central business district, as noted above. After negotiations with the Tongan Government, China has relaxed usual rules and increased the scope for local contracting allowed under these investments. The European Commission has 5.9 million ($USD 7.5 million) available for Tonga under the 10th EDF National indicative program: 2008-2013. This is intended to focus on energy sector reform. The EC is also in the process of approving a grant of approximately $1 million for the reconstruction of the Niuas hospital damaged by the tsunami. The EC has scope to significantly scale up budget support to Tonga in response to the global crisis through its V-FLEX facility, and is considering a 6.5 million grant linked to the ADB's current program of economic support. Previous EC assistance has supported household level solar supply, and on community development in Vava'u. Japan has provided assistance worth an average of $6 million per year to Tonga over the past decade. The Government of Japan recently provided Tonga with a new ferry to replace the Princess Ashika, which sank with tragic results in 2009, and was extensively engaged in the reconstruction of Vaiola hospital in Nuku'alofa. Tonga is also eligible for support from the 6.8 billion yen (USD 66 million) Pacific Environment Community Fund (PEC Fund) provided to the Forum Island Countries that the Government of Japan announced in 2009 at PALM 5, and which will focus on solar power generation and sea water desalination projects in the region. New Zealand has a significant presence in Tonga, reflecting links between historically Polynesian countries. The partnership with Tonga is New Zealand's fifth largest bilateral program, with flows of approximately NZ$18 million (USD 13 million) per annum. As outlined in a September 2008 strategy, New Zealand assistance is focused on: (i) Lifting economic performance (particularly in the areas of energy, transport and tourism); (ii) strengthening governance, (including political reform, police and justice), and (iii) improving education outcomes. NZ has recently committed NZ$1.5 million (about USD 1 million) in budget support, linked to the completion of analytical work on public expenditure issues. The United Nations system is active in Tonga, with UNDP and UNICEF providing support in response to the tsunami in Niuas, and UNICEF and WHO providing technical assistance to the Parliament, and to strengthen education and health service delivery respectively. 8 21. Almost all donors recognize the importance of greater coordination to strengthen development outcomes in Tonga and throughout the Pacific, as highlighted by Pacific Island Leaders in the Cairns Compact agreed in August 2009. Greater coordination will be especially important to ensure a coordinated policy dialogue as donors increasingly move to scale up budget support to assist Tonga respond to external shocks and an economic slowdown. The importance of coordination is reinforced as ODA flows through much of the Pacific, including Tonga, are set to increase further as major bilateral and multilateral actors increase their engagement in the region, and with very significant new and additional financing anticipated for climate change adaptation. III. WORLD BANK GROUP ENGAGEMENT WITH TONGA Current and Recent Engagement 22. The central element of the World Bank Group's engagement in Tonga ­ as across most of the Pacific islands over the past few years ­ has been to connect people more fully with the world. This has been achieved by encouraging policy change that has enabled people to take advantage of new opportunities from greater economic integration between Tonga and the global economy. Particular successes have been achieved in encouraging temporary labor migration schemes, and in the telecoms revolution that has occurred in the Pacific in the past 4 years. 23. By supporting efforts by New Zealand and Australia to open their labor markets to temporary unskilled workers from the Pacific islands, the Bank has helped to provide significant new opportunities for Tongans. Labor is one of the few viable exports for the small and remote Pacific island countries, as illustrated by the extensive remittances already received by Tonga. The Bank played a strong role in the advancing labor mobility in the Pacific through the 2006 report `Home and Away' (titled after a popular Australian television series), advice to Australia and NZ on international best practice, and technical assistance to strengthen the capacity of island countries to manage labor selection. The NZ Recognized Seasonal Employer Scheme (RSE) has been operating for about 3 years. During that time, almost 9,000 Pacific islanders have been placed in horticultural industry jobs (primarily fruit and vegetables picking) for periods of between 2 and 6 months. The cap for the number of people able to be employed under the scheme has increased twice, and is now 8,000 people per year. Approximately 20% of these placements have been provided to Tongans, in part reflecting the strong ties between Tonga and NZ. Studies suggest that workers in NZ have, on average, earned approximately $4,400 after deductions and living expense). This could generate a potential injection to the Pacific island economies of over $40m per year, including perhaps $6m per year for Tonga. Australia is also introducing a similar scheme and, while this has got off to a slow start, there is considerable potential for this to provide opportunities for thousands more Pacific islanders. As well as the immediate financial returns, broader benefits have also flowed back into Pacific countries including new found skills in agriculture, as well as computer literacy and English language skills. In a win-win situation, New Zealand industry estimates that the scheme has produced benefits to NZ equivalent $150­200 million in terms of increased agricultural output, with the certainty of labor availability allowing firms to win new export contracts. Building on these schemes, the Bank Group has been engaged with NZ regulators to reduce the cost charged by financial institutions for remittances. 24. The mobile telephone revolution throughout the Pacific, with Tonga one of the early adopters, has also provided enormous opportunities for people. The Bank Group has played a significant role in the past few years in encouraging telecoms reform to encourage competition and allow new private sector operators, with Tonga being one of the first Pacific island countries to open its market. The Bank has been helping to secure reforms by providing policy advice to strengthen regulation. Maximizing synergies across the Bank Group, IFC investments have played a key role in encouraging the entry of new private operators. In Tonga, for instance, an IFC investment of $6.8 million encouraged total new investments by Digicel of $29 million ­ the largest single investment in the country. Across the Pacific, IFC has now invested $170 million to 9 promote new telecoms markets entrants investing a total of over $500 million in Fiji, PNG, Samoa, and Vanuatu. The end result of reforms has been to dramatically lower telecoms costs and improve coverage ­ with mobile phone usage increasing from about 6% of the Tongan population to almost 60% in only a few years. Improved telecommunications has literally opened up the world to those previously disconnected. Connectivity allows fishermen to access timely price information; enables mobile banking services; better connects people to schools and health services, and provides entrepreneurs with better information. 25. Providing credibility for our broader efforts to encourage policy change, the Bank has approved 6 investments in Tonga with IDA financing of $28 million since the country became a member in 1985, mobilizing a further $5m in trust funds. Despite being above the usual operational cut-off for IDA, Tonga remains eligible for concessional assistance from the Bank under IDA's small island state exception, intended to reflect the particular vulnerability and volatility of such countries. The Bank has been a relatively small source of development finance for Tonga, and most activities have been undertaken in close collaboration with other partners, with many seeing the Bank's advantage as its ability not just to finance activities but in the global knowledge it can bring. In addition to IDA support, co-financing of $5 million has been mobilized through trust funds, with Bank activities also coordinated with and influencing parallel investments by partners even when resources were not directed through coordinated systems. Given Tonga's debt position, all new IDA support since 2007 has been provided on grant terms. Tonga: IDA and Trust Fund Operations Year Approved IDA Trust Fund Completed projects Tonga Development Bank 1987 2.0 Tonga Development Bank 2 1990 3.0 Cyclone Waka Emergency Recovery 2002 5.8 1.0 Tonga Health Sector Support 2003 10.9 0.2 Current projects Tonga Education Support 2005 1.0 3.8 Transport Sector Consolidation Project 2008 5.4 Total 28.1 5.0 26. World Bank Group investments over the past decade have been effective in improving development outcomes in Tonga. While individual counterparts have been very strong, given capacity limitations inherent in a small country like Tonga, a key element of recent success has been to ensure that projects have been focused, built on areas where Tonga has done well or replicated successes elsewhere in the region, and because significant implementation support has been provided. While we have experienced significant portfolio difficulties elsewhere in the Pacific, recent portfolio performance in Tonga has been relatively strong. Lessons from engagement highlight the importance of ensuring that activities are simple and focused, and that significant downstream implementation support is provided. Following Cyclone Waka on December 31, 2001, the Bank moved quickly to begin an emergency recovery project within 5 months. The project was successful in restoring the standard of living for affected people, building 470 houses and rehabilitating a further 370. New houses were "climate proofed" and the project strengthened nationwide resilience to natural hazards and new building codes. The success of these efforts was evident when Cyclone Rene hit a wider area in 2010 ­ although wind speeds were comparable to Cyclone Waka, infrastructure damage was limited. The health sector program supported successful efforts to rehabilitate Tonga's hospital services. By strengthening core tertiary care, this has provided a foundation to underpin continuing improvements in health service delivery. Tonga's key health indicators ­ already among the best in the Pacific ­ have continued to improve during this period. The Vaiola hospital reconstruction was undertaken in close cooperation with parallel Japanese and Australian investments. 10 Education sector support has focused on the introduction of school grant mechanisms to provide principles, teachers, and parents with greater input into decisions at the school level, increasing local level oversight and accountability in an effort to improve education outcomes given already very high primary enrolment rates. Through the Education for All Fast Track Initiative (EFA FTI) and in conjunction with AusAID and NZAID, the Bank has also supported assessments of reading ability in the early grades of primary education. This initiative is expected to help Tonga make a transition from a focus on enrolments to a focus on improved learning outcomes. Education investments have been an example of close donor coordination, with NZ financing exceeding that provided by the Bank. A transport sector consolidation investment aims to replicate the successful experience in Samoa over the past decade of strengthening the management of infrastructure assets2 and to improve civil aviation and maritime safety. This has got off to a slow start, and is being restructured to increase the focus on maritime safety after the tragic sinking in 2009 of the Princess Ashika ferry. Australia will be providing $9.3 million through this investment, primarily to support improved road maintenance by increasingly contracting such functions to local private sector firms, providing counter-cyclical employment opportunities, at a time of economic slowdown. 27. Underpinning growing World Bank Group engagement in Tonga, a joint liaison office was established with the ADB in early 2009. The office, which is staffed by a local professional, has been instrumental in improving dialogue with the Government and encouraging better cooperation with the ADB and with other partners present in Nuku'alofa. This has been the first shared rather than simply co-located office between the Bank and ADB, and has provided a model for similar joint offices being established elsewhere in the Pacific. Planned World Bank Group Engagement FY11 ­ FY14 28. World Bank Group engagement over the next four years is anticipated to reflect the particular circumstances of Tonga, as well as key features of the Bank Group's broader approach to the Pacific islands which face a range of common challenges. A four year framework has been chosen as this will align the strategy with the electoral cycle in Tonga, although there will obviously be scope to tailor the program to the priorities of a new Government that is formed in late 2010 after elections. Such a timeframe will also align this strategy with the IDA replenishment cycle. Key themes running through Bank Group engagement with Tonga, as with most of the rest of the Pacific, include: Supporting policy reform to strengthen growth prospects and improve service delivery; Generating opportunities through greater global and regional integration; and Building resilience against shocks. 29. As outlined in the introduction, a strategy is being presented now in order to provide a broader context in which to seek Board approval for the first development policy operation for Tonga. The Government of Tonga requested the Bank in September 2009 to extend a DPO to assist the Government respond to the cumulative external shocks of the 2008 food and fuel price spikes, as well as the global economic slowdown. These shocks have resulted in the economy contracting in FY09 and FY10, and a significant decline in domestic revenue. While the Government has reduced expenditures in real terms, a significant fiscal deficit is emerging and the Government is now starting to face cash flow constraints. Responding to these shocks, the Government is continuing with reforms, and other donors such as the ADB and EC have already provided or agreed to provide budget support. 2 The success of the Samoa experience was illustrated in the way the Government was able to mobilize private firms to respond to the devastating tsunami in 2009 11 30. Proceeding now with a DPO is important to provide the new Government that will be formed after elections in November 2010 with the breathing room to carefully consider expenditure priorities in the lead up to the FY12 budget. Given reforms to date and the movement by other donors, delaying a proposed DPO would damage the Bank's credibility, affecting the scope to influence policy over the medium term. Delays would also adversely affect the Government's fiscal position and ability to continue programs. As a result of declining revenues, the Government is facing a significant fiscal deficit despite real cuts to expenditures, and is also now starting to have to manage cash flow constraints. 31. Presenting a country strategy at the same time as the DPO provides an opportunity to reassure all parties in Tonga that the Bank is committed to working with any new Government, and to provide a framework for early dialogue to engage a new Government and influence policy priorities. A new Government will face significant fiscal pressures over the next few years, and is likely to need further budget support from partners. By setting out the Bank's willingness to engage constructively with any new Government, the CAS minimizes risks that the Bank could be seen as playing politics by proceeding with the current DPO. At the same time, while setting out the Bank's commitment to work with any new Government, the CAS also provides an opportunity for early dialogue with a wide range of stakeholders to influence the discussion about economic and social priorities. In this sense, the CAS is potentially a `white paper" upon which to base dialogue. While agreement will need to be reached with any new Government on a detailed reform program to underpin further budget support, this is likely to depend on fiscal adjustment, strengthening public financial management, and further encouraging private sector led growth. A joint public expenditure review being undertaken by the ADB, IMF PFTAC and the Bank in conjunction with key bilateral partners during the remainder of 2010 and 2011 will provide a basis for coordinated policy dialogue with a new Government regarding reform priorities. 32. Although the shape of a new Government will depend very much on the elections in late November, there does appear to be a broad consensus for key reform programs in Tonga. Discussions with the Government, Parliamentarians, and business and civil society groups suggest that there is broad agreement for efforts to: (i) continue opening the Tongan economy and encouraging outward looking private sector led growth; (ii) improve public financial management; (iii) address acknowledged fiscal pressures in a way that will maintain key Government services; and (iv) continue reforms outlined in the Tonga energy roadmap including the opening of the generation market and increased investment in renewable energy. While there are obviously differences in approach and nuance between different groups, the Government intends to seek Parliamentary commitment to key reform programs currently underway with World Bank and other international support. Similarly, extensive discussions with a wide range of stakeholders in Tonga suggest there is widespread support for key elements of the Bank Groups proposed engagement. Supporting Economic Reform 33. A central feature of Bank Group engagement in Tonga ­ as well as elsewhere in the Pacific region ­ will be to scale up analytical and financial support for policy reform. World Bank engagement on economic reform issues in the Pacific has been limited over the past decade, but is now being scaled-up in order to respond to demands from Pacific clients as a result of the global economic slowdown, and reflecting the Bank's global comparative advantages. This will be done in close cooperation with other partners, many of which have been more engaged on these issues in the Pacific in recent times. 34. Joint public expenditure analysis will be especially important to engage and support the potential efforts of a new Government to rationalize expenditures while maintaining and improving core service delivery functions. Building blocks for this work are in place with health and education sector expenditure analyses supported by the Australian Government. The Bank intends to contribute substantially to joint public expenditure analytical work to be undertaken with the ADB, the IMF Pacific Financial Technical Assistance Center (PFTAC), and key bilateral donors. This is intended to provide a foundation for initial 12 engagement with a new Government, as well as to support more detailed analysis of options to streamline expenditure while maintaining service delivery at the sectoral level. 35. Joint analytical work will be critical to provide a foundation to underpin a more coordinated discussion between the Government and partners on potential budget support. Such operations will aim to support both shorter-term economic recovery as well as help strengthen growth prospects and service delivery over the medium-term. Given needs, a range of donors are likely to provide such support, with ADB having approved $10m fast disbursing financing in 2009 linked to the prioritization of essential public expenditure including protection of health and education spending, continued public financial management and SOE reform, and social protection. The EC is considering providing approximately 5.5 million (USD 7 million) in budget support through its V-FLEX facility, linked to the 2nd tranche of the ADB operation. And Australia and NZ have both provided or are considering limited sector specific budget support. A World Bank energy sector policy operation of $5m will also provide fast disbursing support, reflecting the progress in this sector (discussed further below) as well as progress in strengthening PFM systems. By helping to meet immediate needs, this will ensure the Bank maintains credibility with the authorities and has a "seat at the table" for more coordinated future discussions. Nevertheless, beyond the immediate round of support in 2010, a greater degree of coordination will be vital if such support is not just to fill short-term gaps but is to encourage necessary reform to put the Tongan economy on a more sustainable footing. 36. Should a new Government wish to engage in a substantive discussion on reform, there is scope for the Bank to prepare a multi-year development policy operation, starting in FY12, to underpin an agreed and coordinated program of reforms and to respond to the aftermath of current economic shocks. Elsewhere in the Pacific, the Samoan Government and donors were able to agree of a single coordinated matrix underpinning the provision of budget support by all partners. Similarly, in Solomon Islands, the Core Economic Working Group has proved an effective mechanism to strengthen coordination. These might be coordination models that could potentially be replicated in Tonga. The provision of budget support will, however, require a commitment and action by the new Government to continue strengthening public financial management systems, make hard fiscal decisions to reduce lower priority budget expenditures and strengthen revenue collection, and pursue further structural economic reform. 37. The Bank will continue to support the Tongan Government's efforts to further strengthen governance. Bank engagement is occurring against the backdrop of broader Constitutional reforms designed to strengthen further the role of a more representative, popularly elected, legislature in overseeing executive functions. Transparency International notes that since 2007, the Government's "anti-corruption drive has earned the support of local civil society organizations". Reflecting this, Transparency International's corruption perceptions index (CPI) rating for Tonga has improved more than any other country between 2007 (when Tonga was first included in the index) and 2009. Tonga is now ranked 99 out of 180 countries on TI's CPI ­ and while this provides room for improvement, it also places Tonga in the top quarter of all IDA- eligible countries. Bank support will focus especially on strengthening public expenditure management systems and policy dialogue to support efforts to reduce discretion in the implementation of business licensing legislation. The Government has moved ahead with a range of PFM reforms over the past few years, including the establishment of an internal audit unit and new procurement regulations to be introduced in 2010. A recent Public Expenditure and Financial Accountability (PEFA) assessment led by the Australian Government, acknowledged a range of recent improvements in transparency, policy based budgeting, and strengthened predictability and controls in budget execution, but which also highlighted the critical importance of further strengthening audit functions. PEFA and PFM issues will need to be a key element in any potential further DPO program. On the structural side, IFC advisory support since 2008 has assisted the Government to introduce a new electronic company registry, streamlining procedures required to start a business ­ strengthening the overall governance environment and reducing discretion and opportunities for rent seeking. In the short to medium term, further business licensing reform to reduce `reserved' industries and provide greater certainty for potential investors in key sectors of the economy is likely to be especially important, although broad progress on this front has been limited to date. 13 Generating Opportunities from Greater Global and Regional Integration 38. While domestic reform is crucial, greater global and regional integration will also be vital for small island states such as Tonga to overcome the constraints of economic geography. Rather than trying to swim against the tide by spreading out economic activity in more remote areas, the 2009 World Development Report and initial work by the World Bank on `Pacific Futures' suggests that Pacific island countries are more likely to achieve success by carefully planned economic integration, by reducing frictions to ensure that peripheries can be more closely connected to economic hubs. 39. The Bank anticipates building on success to date in temporary labor migration schemes, which have provided opportunities for thousands of Tongans. This includes continued support to encourage the further expansion of such schemes in the region. In addition, the Bank anticipates supporting efforts to strengthen financial literacy among temporary laborers to help them make the most of opportunities to start their own businesses on return. IFC's Pacific micro-finance initiative will also potentially be a mechanism to support a wide range of budding entrepreneurs, including returned seasonal laborers. 40. The telecommunications revolution in the Pacific has been perhaps the major success story in the region in the past 5 years, and an area in which continued World Bank Group engagement is anticipated. IFC is exploring options for mobile phone banking in the Pacific, to build on the dramatic expansion in the use of mobile telecoms technology in the region. The next key challenge in the ICT sector will be to improve broadband connectivity for many of the smaller islands. The Bank is working closely with the Government, as well as both major telephone service providers in Tonga, ADB and IFC, to explore options for a public-private partnership to finance a broadband cable between Tonga and one of the major cross Pacific cables. This might also potentially involve a broader regional network with Samoa, Solomon Islands, and Vanuatu. Just as broadband connectivity has revitalized many small towns in the U.S., this has the potential to provide opportunities to people in countries like Tonga to participate in and benefit from the global economy. While the focus will be on maximizing the private investment that can be obtained while ensuring that there is open access to bandwidth for all domestic service providers, Bank support for remaining Government investments in landing a cable can be provided on grant terms and ­ due to IDA's regional facility ­ almost totally in addition to Tonga's regular IDA allocation. 41. In time, consideration by Tonga of further opportunities for service delivery to be undertaken through cooperative regional arrangements could help to generate economies of scale, and the Bank stands ready to assist Tongan Government efforts that may emerge in this regard. 42. The Bank Group will support further structural reform by the Tongan Government that could encourage new private investment and growth. Increasing opportunities for small and medium enterprises to gain access to finance will be a focus of efforts to encourage greater opportunities from private sector led growth. Only about 20% of small and medium firms throughout the Pacific have access to finance through the banking system. The Bank Group is working around the region to improve financial infrastructure. In Tonga, IFC is currently in discussion with the central bank and commercial banks with the aim of establishing a credit bureau, which is a key constraint limiting expansion of financial services. IFC is also engaging at the firm level through the Pacific Microfinance Initiative, to expand outreach and access to financial services for the under-served population of the country. IFC has engaged with South Pacific Business Development Foundation to assist its proposed plans to expand microfinance operations in Tonga. IDA and IFC have been collaborating in PNG to establish a "first loss" facility that could potentially encourage commercial banks to increasingly provide finance to the vibrant SME sector, and will explore options to replicate a similar facility on a regional basis across the rest of the Pacific islands ­ for which additional regional financing could potentially be made available over and above countries' standard allocations. IFC is also exploring opportunities to support new tourism and agribusiness investments in Tonga, that have scope to encourage growth and employment in these areas where Tonga has a natural comparative advantage. 14 Building Resilience Against Shocks 43. Given the systemic volatility and vulnerability of many of the Pacific island countries, building resilience will be a key theme of Bank Group engagement in Tonga and throughout the region. As well as vulnerability to natural disasters, climate change adaptation will be central to development outcomes in the Pacific and will become an increasing focus. Similarly, support to strengthen oil supply chain management and open the electricity market to new private sector generation investments, including in renewable energy, will reduce vulnerability to potential future oil price shocks. 44. Building on successful reconstruction efforts after Cyclone Waka, the Bank will support reconstruction of houses and public buildings on the Niuas islands that were hit by the 2009 tsunami. An emergency reconstruction grant is being presented to the Board in parallel to this CAS, with financing additional to Tonga's normal allocation, and with the scope to retroactively finance work already undertaken by the Tongan Government. As well as reconstruction or rehabilitation of 145 houses, investments will support further efforts to strengthen the disaster management and response capacity of the National Disaster Management Office. Investments will be closely coordinated with NZ efforts to provide temporary housing through the Red Cross, EC support for the Niuas hospital reconstruction, and NZ support. Disaster risk reduction efforts will be complemented by exploration of the feasibility of a possible catastrophe risk sharing facility, as has been established in the Caribbean, as one element in a layered risk management framework that could provide a quick response and potentially supplement donor support following natural disasters. 45. Many of the Pacific islands are on the front line with climate change, and increased and better coordinated support for adaptation efforts will be crucial. The ADB is leading efforts in Tonga under the Pilot Program for Climate Resilience (PPCR), with the World Bank leading in Samoa. Japan has also been active in this area. Nevertheless, Tonga is likely to be one of the priority countries for the Global Facility for Disaster Reduction and Recovery (GFDRR), which will allow the Bank to provide some support for integrated adaptation and DRR activities, in coordination with other donors ­ particularly in support of the ADB led PPCR effort. A key lesson from previous adaptation and disaster risk reduction engagement is that such work is likely to have most value if integrated closely with efforts to "climate proof" infrastructure investments. The Bank will also ensure that adaptation measures are built into all infrastructure investments, including road transport, energy, and school construction. 46. Good coordination in the infrastructure sector has been achieved through the Pacific Regional Infrastructure Facility (PRIF), and this could provide an example to strengthen coordination of the variety of donors engaged in supporting climate change adaptation in the region. Reflecting commitments to support adaptation made by countries at the Copenhagen summit, considerable additional support is likely to be made available to assist the vulnerable Pacific island countries to adapt to climate change. While vital, better coordination of these flows will be critical. Australian leadership was crucial to establish PRIF, which now includes New Zealand, the ADB, and the World Bank ­ with the European Union in the process of joining. PRIF has been instrumental in better linking investments to longer-term reforms in the way island countries plan, manage, and finance their infrastructure needs. It has proven an effective mechanism to marshal coordinated donor support for investments in economic infrastructure, and as a means to address the problem of funding for infrastructure asset maintenance. In looking at options for better regional coordination of climate change, South Pacific Regional Environment Programme (SPREP) ­ which has been tasked by Pacific leaders to play a convening role ­ will also need to be closely involved. 47. Reflecting the food and fuel price spikes of 2008, efforts to reduce reliance on volatile imported fossil fuels and improve energy supply chain management are becoming a larger area of focus, particularly in Tonga and the North Pacific. Early experience in Tonga with the development of an integrated "energy roadmap" provides a potential model for donor coordination elsewhere in the region, and provides a potential opportunity to strengthen collaboration with non-traditional donors such as China, which is a highly competitive supplier of photovoltaic systems. With reforms focused on providing opportunities 15 for new private investment in generation capacity, there is also considerable scope to exploit synergies across the public and private sector arms of the Bank Group. An energy development policy operation, presented with this CAS, reflects the significant progress with the roadmap, and accelerated this reform agenda and these reforms will be further supported through any potential future DPO program. The Bank also plans an IDA investment, potentially supplemented with PRIF financing, in late FY11 to support these reform efforts. 48. Given the successful experience with Samoan infrastructure management, where the Bank has been engaged for over a decade, there is potentially scope during the IDA-16 period to begin a new phase the current Tonga transport sector consolidation project. A key element of Bank engagement in this sector ­ with support from the Australian Government ­ will be to increase local capacity to undertake road maintenance and infrastructure work. As well as meeting urgent maintenance needs, this will provide counter-cyclical employment opportunities for thousands of Tongans. The Princess Ashika tragedy highlights the importance of renewed efforts to strengthen maritime safety. A new phase of the TSCP during IDA-16 is also an opportunity to further mainstream disaster risk reduction and climate change adaptation issues into infrastructure planning and management. The Bank Group is also considering initial approaches from the Government to support the rehabilitation of airports throughout Tonga as part of a broader strategy to open the domestic airline market to great competition. 49. The Bank has successfully supported health and primary education service delivery in Tonga, but reflecting principles of selectivity and donor coordination anticipates being less involved in these sectors in future. Tonga is making relatively good progress toward the MDGs, with generally strong social indicators. The Bank has supported service delivery, through the successful health sector support project (2003 ­ 2009) that was undertaken in coordination with Japan and Australia and the continuing education support project in conjunction with NZ that has focused on school grants as a mechanism to increase parent and teacher oversight of investments at the school level. There are issues with increasing lifestyle diseases and with educational quality. Nevertheless, there is also very significant ­ and growing ­ support from other donors for Tongan Government efforts. The Bank will remain engaged in analytical work, particularly with early grade reading assessments financed through the Education for All Fast Track Initiative (EFA FTI) and in terms of options to reduce the prevalence of non-communicable diseases. New investments in the education and health sectors are not planned at this stage, although this could be revisited if clear gaps emerge and the Government and lead donors in each sector request further Bank support. 50. Gender issues will continue to be mainstreamed into the Bank program. Gender outcomes in Tonga are relatively good. Maternal and child health care is strong. There is little difference in school enrolment between girls and boys (girls have slightly higher enrolment rates than boys at the secondary level). And while there is almost universal literacy, rates among women are slightly higher than men. Bank health and education programs have supported these outcomes, although other donors are likely to play a stronger role in these sectors in future. Research by the Pacific Institute for Public Policy3 in Vanuatu indicates that while men were initially more likely to adopt new communications technology, women quickly follow and that telecoms reform has reduced the gender gap between women and men's access to phones that existed prior to market liberalization (although differences still remains significant in rural areas). The study shows a clear link between economic productivity and access to mobile phones, with women successfully making use of new opportunities (over 80% of the women in the main market, where women dominate activity, are using mobiles to pre-arrange transport, contact suppliers, communicate with clients, and confirm payment). Similar outcomes can be anticipated in Tonga, where women have higher literacy rates and face fewer inequalities. The needs of women are being considered in post-tsunami housing reconstruction plans. Experience elsewhere has shown that women also tend to benefit significantly from extended access to electricity (as women tend to be prime collectors of fuel otherwise). Although energy reform in Tonga will focus primarily on reducing price volatility (given already high grid access), global experience suggests that 3 "Going Mobile: Social and Economic Impact of Introducing Telecommunications Throughout Vanuatu", Pacific Institute of Public Policy, December 2009. 16 increases in available household income ­ as would be encouraged by reform ­ is positively correlated with increased spending on education, especially for girls. 51. As well as activities on Tongatapu, the Bank will be ensuring that the program reaches the outer islands. Tsunami reconstruction will obviously be focused on Niuas. School rehabilitation currently underway will include schools in Ha'apai and Vava'u. Road maintenance investments will include the outer islands, and potential support for airports in Ha'apai and Vava'u could be considered in future along with potential support for Fua'amoto airport. Efforts to widen access to the grid ­ although connection rates are generally high ­ will especially focus on the outer islands. Implementation: Partnerships, Selectivity, New Ways of Doing Business, and Accountability 52. As highlighted by leaders in the Compact agreed at the Pacific Island Forum in Cairns in August 2009, better use of all resources available for development will be required to accelerate progress in the region. This will require policy reform and more stringent public expenditure allocations and controls by the island countries. On the donor side, stronger coordination, greater flexibility, and new approaches to building long-term capacity will be important. It is in the small island states that the issues highlighted by the Paris Declaration and the Accra Accords are thrown into starkest relief. 53. The Bank is committed to coordinating more closely with partners in Tonga. Strong donor and government coordination on economic reform issues in Tonga will be especially important, and the Bank will contribute to joint analytical work to support a more coordinated policy dialogue. At the activity level, virtually everything we are doing in Tonga is being done in partnership with other donors. The energy roadmap has been one example where the Bank has taken the lead role among donors to support Government efforts to improve coordination behind a strategic plan for the sector. Ongoing education projects are being undertaken in close cooperation with New Zealand and the EFA FTI, while current transport investments are being implemented in close collaboration with Australia. The proposed telecoms broadband investment will be undertaken in partnership with ADB ­ potentially the first co-financed activity with ADB in the Pacific. Tsunami reconstruction is being undertaken in coordination with UN and NGO support. 54. While scaling up support for Tonga, Bank Group activities will be highly selective. The Bank has historically provided only about 10% of total development assistance provided to the country, and selectivity reflects coordination efforts. In particular, the Bank Group will be playing an increasing role in economic reform dialogue, will continue strong experience in telecoms and energy, and will be looking to replicate successful experience elsewhere in the region on transport infrastructure maintenance. As noted, however, Bank engagement in the health and education sectors is anticipated to decline. 55. A central element of Bank Group engagement will be to encourage competition and private sector investment in the economy. The telecoms revolution throughout the Pacific illustrates the potential benefits that can be generated by opening markets to competition and new private sector investment. While a broadband cable investment is likely to require public and private investment, the Bank Group will be encouraging as much private investment as possible. A central element of energy sector reform will be opening of the generation market to new private sector investors. A key element of transport sector asset management will be to increase local private sector contracting for road maintenance. ADB has taken the lead in the broader discussion of SOE reform in Tonga, and this will be complemented by engagement by the Bank Group in the transport and telecoms sectors. 56. Reflecting the particular challenges of small island states like Tonga, we will try to be more nimble in project preparation, and give greater attention to implementation support. The Bank can at times be more of an elephant than a lynx. The EAP region has particularly been characterized by long preparation times and, with such a focus on managing risk upstream, limited downstream implementation support. This presents particular challenges for capacity constrained small island states. Without lowering 17 fiduciary standards, we intend to try to further streamline and accelerate activity preparation, and to rebalance Bank engagement toward greater support throughout the project cycle. To do this, there is scope to more fully use the suite of instruments that have been approved by the Board. The broadband connectivity investment will be prepared as a "horizontal APL" that will allow the Bank to roll out similar investments elsewhere in the Pacific in response to demand, streamlining preparation costs. OP 8.00 also allows for streamlined procedures for emergency operations, such as Cyclone and tsunami reconstruction support. And there is considerable scope to use additional financing and vertical APL instruments to increase support for successful investments and to provide certainty about long-term Bank engagement. 57. A results matrix at Attachment 2 sets out key objectives and anticipated outcomes and provides an accountability framework for the Bank Group in its engagement with Tonga. Financing Envelope 58. There is scope for the Bank to commit about $50 million in IDA and trust fund resources to Tonga over the next four year period. This would be significantly more than has been provided since Tonga joined the Bank until now. Tonga's regular allocation during the three year IDA-15 cycle (from FY09 to FY11) is approximately $7 million. With proposed changes currently being considered by IDA deputies to increase the minimum base allocation received by all countries and remove per capita caps, Tonga's IDA- 16 allocation (from FY12 to FY14) could increase to perhaps $13-14 million. On top of this base, additional IDA funding has been agreed to support a response to the Niuas tsunami, the proposed energy policy DPO will be financed in addition to Tonga's regular allocation (either through IDA's crisis response window or from reallocations within the department), and most financing for Government involvement in a broadband cable could be provided from IDA's regional pool. Australian Government funds for road maintenance, and additional grant financing through GEF and/or PRIF for investments to support the energy roadmap reforms will also increase the total funds available. An outline of potential new IDA and trust fund commitments over the next four years is below. Inevitably, however, there will need to be a degree of flexibility in implementing the program outlined, particularly for the latter half of the CAS period. IFC remains very interested in further private sector investments, although deals will need to be taken opportunistically. Tonga: Proposed IDA and Trust Fund Operations (FY11 ­ FY14) Year IDA IDA Trust Total Regular Additional Fund ($m) ($m) ($m) ($m) IDA15 Niuas Tsunami Reconstruction FY11 1 4 5 Transport (Road Maintenance) FY11 9.3 9.3 Energy sector DPO FY11 1 4 5 Energy Roadmap Investment FY11 5 3 8 IDA16 Tonga Broadband Connectivity FY11 1 9 10 Development Policy Operation #1 FY12 5 5 Development Policy Operation#2 FY13 5 5 Adaptation/Infrastructure FY14 3 TBD 2+ TOTAL 21 17 12.3 50.3 59. Given Tonga's debt position, new assistance during the remainder of the IDA-15 period will continue to be provided as grants. Terms will be reviewed on a regular basis. Should debt indicators improve, it is possible that IDA terms for Tonga could revert to concessional credits during IDA-16. 60. Analytical work will be focused around the proposed joint public expenditure review designed to provide a basis for a coordinated engagement with the Government to underpin potential future budget 18 support. A selective program of analytical work is also proposed in sectors where the Bank has been active or is scaling up engagement. Analytical work for the first part of the CAS period is set out below. Tonga: Proposed Analytical Work and Technical Assistance FY11 ­ FY14 FY11 Joint Public Expenditure Review (continuing in FY12) Tonga Energy Roadmap Support Broadband Connectivity: Regional Least Cost Options and Regulatory Strengthening IFC Business Enabling Environment TA FY12 Education: Early Grade Reading Assessment Health: Non-Communicable Disease Prevention Options IV. RISKS 61. Risks in Tonga are moderate. The country is generally making reasonably strong progress toward MDGs. Constitutional reform has eased tensions that erupted in the 2006 unrest. The composition of a new Government following elections scheduled for November 2010 is obviously unknown, although it is likely that many new Ministers will have limited executive experience, and this will obviously require significant support from the civil service, as well as donor partners and others, in managing the transition period in a way that provides both a degree of certainty as well as room for a new Government to implement their own priorities and legislative agenda. Reflecting this, the proposed country assistance strategy has been discussed extensively with Government, Parliamentarians, as well as business and civil society to attempt to ensure widespread support for the broad agenda outlined. The Bank Group will also engage closely with any new Government on reform issues, and to ensure the program continues to be tailored to emerging priorities. In this context, this CAS is intended to be a living document. 62. Perhaps the most significant country level risk is the volatile economy, and the sustainability of reforms efforts. Tonga has been hard hit over the past few years by commodity price shocks, the global economic slowdown, and natural disasters. Further shocks could put the economy and government finances in a very difficult position. At the same time, this CAS is built around efforts to help the Government to improve expenditure efficiency while protecting service delivery, and to support business development. If implemented, such a reform program could ensure that the economy is well placed to bounce back even more strongly from current circumstances. The central focus on DPO instruments reflects both the financial needs that the government currently faces as well as a judgment that this could be an effective instrument to support real reforms. Nevertheless, while potentially having high rewards, the use of DPOs carries significant risks ­ including both policy and fiduciary risks. Mitigating risks will require more extensive analysis to underpin a coordinated donor dialogue with the authorities on reform, as well as further support for PEFM reform. In the event that it is not possible to reach agreement with a new Government on a reform program to be supported by DPO instruments, we will need to be ready to deploy investment instruments in sectors where the Bank has a track record, or where development gains can be made. 63. As in any capacity constrained small island state, investments face implementation risks. We will attempt to address risks through simplicity of design, a greater focus on downstream implementation support, a willingness to flexibly restructure activities as needed, and greater use of the instruments available to ensure more flexibility and to rebalance support through the project cycle. Relatively good portfolio performance in Tonga in recent years suggests that these issues can be addressed with attention. As well as traditional capacity building support, a key theme running through many investments will be to increase the scope for private sector engagement, which has proven elsewhere to be a successful way of overcoming constraints on government service delivery in small states. . 19 ATTACHMENT 1 Pacific Islands: Directions in IDA-15 Summary 1. This note provides an overview of Bank Group's approach in the 10 smaller Pacific island countries4 covered by the Bank's Pacific, PNG and Timor Leste department5. The countries are shaped by their economic geography, perhaps more so than any others. Because of their small size and remoteness, the Pacific island nations are highly volatile and subject to external economic shocks. Geographical constraints don't end there. Within many countries, populations are often widely dispersed and located great distances from capital cities and economic hubs. This has affected many Pacific island citizens' ability to participate in the formal economy and access services. Likewise, it has eroded many governments' capacity to deliver services to far-flung constituents. They are also highly vulnerable to natural disasters, with regular cyclones and recent tsunamis and flooding. 2. The development situation in the region is mixed. Although some countries have made relatively good progress toward MDGs, progress in other countries has been extremely limited. In general, most countries in the region will not meet most MDGs. Progress is correlated very closely with domestic policies; those countries with stronger institutions and policies that encourage private investment and growth have generally achieved better outcomes. But good domestic policies are a necessary but not always sufficient condition for growth. The Pacific island nations are highly reliant on their relationships with regional and metropolitan countries for aid, for investment, and for employment opportunities for their people. Decisions made outside the region also have a significant impact on outcomes. 3. World Bank Group engagement in the Pacific is structured around the themes of: (i) generating opportunities through greater global and regional integration, and (ii) building resilience against external shocks. As highlighted by the 2009 World Development Report, Reshaping Economic Geography, countries at the margins of the global economy are more likely to achieve success by carefully planned economic integration, by reducing frictions to ensure they can be more closely connected to economic hubs, and generating opportunities for trade, investment, and growth. Given the fragile nature of many institutions in the region, efforts to build capacity will be mainstreamed throughout the Bank's program. This may also require a different approach to service delivery, including exploring opportunities for greater regional or sub- regional cooperation, as well as the potential to increasingly contract service delivery in a transparent and competitive manner to the private sector. 4. The World Bank Group is significantly scaling up its engagement with the countries of the Pacific region, building on a solid platform put in place over the past couple of years. Support for the smaller island countries is being particularly expanded, reflecting their vulnerability and volatility, and could reach $130 million during IDA-15 compared to $40-50 million in IDA-13 and IDA-14. Not only does the Bank anticipate providing record levels of IDA and trust fund support to the region during IDA-15, but rapidly expanding new IFC investments in the region each year are now broadly equivalent to annual IDA commitments. There is considerable scope for the Bank Group to exploit synergies across both institutions to make greater room for the private sector to generate opportunities. The clearest example of this has been the telecoms revolution throughout the Pacific. Bank support for policy change to promote competition and to strengthen regulation has been combined with major investments by IFC to encourage new private market entrants. The end result has been a dramatic increase in connectivity, with mobile phone subscribers 4 Federated States of Micronesia, Fiji, Kiribati, Palau, Marshall Islands, Samoa, Solomon Islands, Tonga, Vanuatu, and Tuvalu (which joined the Bank in June 2010). While Papua New Guinea and Timor Leste share some similar development challenges, the focus is primarily on the smaller island countries. 5 This note is not intended to be a Regional CAS; but is meant to provide an overview of the approach being taken across the region in order to provide a broader context for country specific CASs that will be prepared and discussed individually with the Board over the next few years. 20 ATTACHMENT 1 increasing from 6% to 60% of the population in several countries in the space of a few short years. Particularly for remote island communities, this has been life changing. 5. Although the Bank Group is increasing resources to the region, in terms of assistance it remains a relatively small player. As important as finance is the global expertise the Bank Group can bring to build coalitions for change with partners ­ governments, donors, regional bodies, the business community, and civil society. In this, the World Bank Group is committed to the "Cairns Compact" set out by Pacific leaders in 2009 to better coordinate all the resources available to encourage development, in order to make tangible improvements in the lives of the people of the region. Regional Context 6. The economic geography of the Pacific countries shapes their development, perhaps more than any other region. The Pacific islands are, on the whole, considerably smaller and more remote from key export markets than even the Caribbean islands. In total, the countries of the region include approximately 2 million people, living on hundreds of islands, scattered across an area of ocean equivalent to about 15% of the surface of the globe. This compares to 40 million people the Caribbean, in a sea equivalent to 0.5% of the world's surface area. Figure 1: World Bank Pacific Region Member Countries 7. Throughout the region, people face common challenges of remoteness and fragmentation. The countries of the Pacific are marked by their diversity, evident most clearly in the 1,000 language groups across Melanesia. "One size fits all" solutions are not appropriate. The development challenges facing some of the larger, resource rich, Melanesian countries, are very different from Polynesian countries like Samoa and Tonga, and even more so from the most remote Micronesian countries, which in some cases have total populations of less than 20,000 people and very few natural resources beside fish. 21 ATTACHMENT 1 8. Although at the margins of the global economy, Pacific countries are highly volatile and vulnerable to external shocks. The Pacific island countries were some of the worst hit in the world by the food and fuel price spikes of 2008. Many of the more remote countries are heavily reliant on imported foodstuffs, as well as imported diesel for electricity generation, and transport costs soared. And the impact of the global slowdown, although delayed, is now being felt though out much of the Pacific region. Transmission mechanisms have varied from country to country, with the Polynesian countries being affected particularly by declining remittances as well as job losses in nascent manufacturing industries; several of the Micronesian countries hurt by declining value of trust fund revenues; and others such as Fiji by slowing tourism as well as a loss of competitiveness in traditional garment and sugar industries. The economies of most of the Pacific island countries are expected to contract in 2010. Only PNG and Timor Leste, buoyed by continuing demand for their very significant resource deposits, have been largely immune from the slowdown to date. The global crisis has been merely the latest manifestation of more systemic vulnerabilities. The tsunami in Samoa and outlying Tongan islands in September 2009, as well as the series of cyclones over the past 6 months in Solomon Islands, Fiji, Tonga and the Cook Islands, also highlighted the vulnerability of these countries to natural disasters. On average, each decade one of the island countries in the region has suffered a natural disaster causing damage equivalent to as much as 25% of annual GDP. 9. Mixed development outcomes in the region partly reflect domestic policy and institutional performance. As outlined in Table 1, there have been gains but progress has generally been less than hoped. In most countries, most MDGs are unlikely to be met. Those countries with the strongest policy settings have generally made best progress. Samoa, for instance, was in the mid-1990s among the first in the Pacific to undertake a comprehensive program of structural reforms to strengthen macro-economic management, improve the business environment, and deliver services. Although the country has recently been affected by natural disasters and the global slowdown, growth over the past decade has been relatively strong ­ at least compared to other small island states ­ and it remains on track to meet most MDGs. Similarly, policy reform and domestic stability over the past decade has helped to make Vanuatu a "go to" tourist destination. Vanuatu's improved revenue collection and relatively strong growth allowed the country to press ahead with temporary stimulus measures, including infrastructure, in response to the global slowdown. On the other hand, despite some gains in difficult environments such as the Solomon Islands, most MDGs will not be met in that country. 10. Most of the countries of the region are fragile, and sustained development progress is likely to require long-term cooperation to build leadership and institutions, as well as manage rapid social and economic transitions. The Pacific region contains one of the highest concentrations of fragile states anywhere in the world. At one extreme, both Timor Leste and Solomon Islands are still emerging from conflict. In Solomon Islands, a low-level conflict from 1998 to 2003 was the result of ethnic divisions associated with rapid change, internal migration, and perceived inequities in resource distribution. In both countries, respective Governments invited international intervention to assist in restoring security, and in both a very sizeable international presence remains and is responsible in practice for in-line support for security and other services. To differing degrees, however, issues around natural resource sharing, land alienation, and unrealized expectations regarding limited government service delivery, are putting pressure in many countries on both formal institutions as well as coexisting traditional customary structures, which are often the main source for authority outside urban centers. In several countries, strong national leadership will also be important to overcome capacity constraints and build institutions. Capacity constraints are partly a factor of very small populations, but also in some case reflect governance issues. In such a fragile environment, building a coalition and capacity for change in several countries will require a long-term, disciplined, and coordinated effort to strengthen representative and accepted institutions that can effectively meet the expectations of citizens to transparently and equitably manage the development process. Of course, given the diversity of the Pacific, this will require very different approaches in individual island countries. 22 Table 1. Pacific Region: Country Comparisons: MDG Progress, Average Growth, and Policy Performance Melanesia Polynesia Micronesia Fiji PNG Solomon Islands Vanuatu Samoa Tonga FSM Kiribati Palau RMI MDG 1. Eradicate extreme Low food poverty, Low food poverty, Low food poverty, Low food poverty, Low food poverty, Low food poverty, Low food poverty, Low food poverty, Low food poverty, poverty and hunger but off track to but off track to but off track to but off track to but off track to but off track to but off track to but off track to but off track to Halve between 1990 and 2015 the Off track halve basic needs halve basic needs halve basic needs halve basic needs halve basic needs halve basic needs halve basic needs halve basic needs halve basic needs proportion of people whose income is poverty poverty poverty poverty poverty poverty poverty poverty poverty less than $1 per day. MDG 2. Achieve universal Slightly off track Off track Slightly off track Slightly off track On track On track Slightly off track On track On track Of concern primary education MDG 3. Promote gender equality On track education On track education On track education On track education On track education On track education and empowerment equality, off track Slightly off track Off track Slightly off track equality, off track equality, off track Slightly off track equality, off track equality, off track equality, off track Eliminate gender disparities in empowerment empowerment empowerment empowerment empowerment empowerment primary and secondary education MDG 4. Reduce child (Under 5) Slightly off track Off track Slightly off track Slightly off track On track On track Slightly off track Slightly off track On track On track mortality by two thirds MDG 5. Improve maternal health Reduce maternal mortality by three Off track Off track On track Off track On track On track Of concern Off track On track On track quarters MDG 6. Reverse the spread of Off track Off track Slightly off track Slightly off track On track Slightly off track On track Off track On track Slightly off track HIV/AIDS, malaraia and TB MDG 7. Ensure environmental sustainability Slightly off track Off track Off track Slightly off track On track On track On track Off track On track Of concern Integrate principles of sustainable development into country policies MDG 8. Global Partnership for Slightly off track Slightly off track Slightly off track Slightly off track On track On track Slightly off track Slightly off track On track Slightly off track Development Average Annual GDP Growth 2000 0.7 2.9 1.6 3.2 3.5 1.1 0.1 1.6 0.9 1.9 2009 World Bank IDA Country N/A 3.1 2.6 3.3 4.0 3.5 2.8 3.0 N/A 2.8 Performance Rating 2009 23 11. As well as domestic factors, however, systemic volatility also partly reflects the fact that, as a result of their geography, most Pacific island economies are narrowly based, with limited diversification. The Micronesians are highly reliant on fisheries, and the Polynesian countries on tourism and remittances. Comparative advantages are limited as many of the countries face permanent cost wedges associated with their small size and remoteness from markets, making it difficult for the islands to compete in all but a few niche markets. 12. In something of a "Pacific paradox", the island countries are at the periphery of the global economy, but remain heavily reliant on relationships with regional and metropolitan countries ­ through investment, trade, remittances and aid. As noted, those countries that have done well tend to have good domestic policies. But closer integration with the global economy has also brought improved development outcomes, although this can also be associated with a degree of volatility. Foreign investment is crucial in allowing countries to make use of natural resources, whether fisheries, forestry, resource extraction, our through tourism. Across the region, foreign direct investment is equivalent to approximately 6.5% of GDP, almost double the 3.7% average for developing economies as a whole. The small open nature of island economies is evident in the high levels of trade, which averages almost 80% of annual GDP across the region as a whole compared to less than 60% across all developing economies (in fact, total imports and exports are well above 100% of GDP in some of the smaller Pacific island economies). Exports are narrowly based and are primarily commodities (gas and minerals in PNG and Timor, forestry in Solomon Islands) and tourism (which is equivalent to over 16% of total GDP in the region, and as much as 60% of GDP in countries such as Palau). Many countries are heavily reliant on imports, including for food and energy. Across the region, remittances from foreign nationals make up an average of almost 12% of GDP, compared to 2% for developing countries as a whole. In Tonga, where more nationals live overseas than "on island", remittances are equivalent to about 40% of GDP. Remittances from have been a major benefit, but are also one of the transmission mechanisms through which the economy has been affected by the global slowdown. Island economies are heavily reliant on development cooperation flows, which are equivalent to about 10-15% of regional GDP. The North Pacific, which receives significant funding from the Compact of Free Association with the US, and Solomon Islands, given the significant size of the Regional Assistance Mission to the Solomon Islands (RAMSI), receive some of the highest levels of aid per capita of any countries in the world (as much as $1,000 in some of the North Pacific countries). 13. In this environment, good domestic policies and leadership are necessary but not always sufficient for progress; external factors are likely to remain crucial to development outcomes in the Pacific. Good macro and structural policies are necessary to ensure that economies are resilient and attract investment, but may not be enough by themselves. Given geographic impediments, the reality that most Pacific countries face is that aid will not be a transitional, pump-priming phenomenon. Even where policy environments are strong, continued generous, well-targeted foreign assistance flows are likely to be needed to support current levels of service delivery. Aid may need to be a semi-permanent wedge to offset the tyranny of distance. More broadly, greater economic integration, more equitable natural resource agreements, and more open labor markets will also be vital for the longer-term future of the Pacific. Some Pacific island economies are unlikely to be economically viable without external financial support and opportunities for citizens to gain overseas employment. 24 Transforming World Bank Group Engagement in the Pacific 14. The Bank Group is scaling up its support for the Pacific islands very significantly. Concessional and grant flows from both the International Development Association (IDA) and trust fund are expected to reach over $130 million during IDA-15, compared to $50 million in IDA-14 and $35 million in IDA-13. International Finance Corporation (IFC) investments over the same period are anticipated to reach a similar amount. Table 2: World Bank Group Pacific Island Commitments: FY00 - FY11 $120.0 $100.0 $80.0 $60.0 IFC IDA and TFs $40.0 $20.0 $ FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 15. Reflecting this scale-up, programs in the Pacific islands are likely to make up almost half of the total IDA and trust fund support provided by the EACNF department during the IDA-15 period. Bank engagement in Papua New Guinea also increased considerably during IDA-14, and this is expected to be maintained during IDA-15. In Timor, however, significant World Bank engagement immediately after independence has now slowed. Gaining access to potential IBRD financing for both PNG and Timor will be a central element in opening scope for greater Bank engagement. Table 3: IDA-15 and Trust Fund Resources: FY09-FY11 $30m $115m Timor PNG Pacific Islands $130m 25 16. World Bank Group engagement has made a real difference in the lives of people throughout the Pacific. Bank Group assistance has helped to strengthen health and education service delivery for villagers, improved telecoms and other critical infrastructure, and encouraged new opportunities for people. 17. World Bank Group engagement is, however, only one small part of the overall effort to improve development outcomes in the Pacific region. While growing, Bank financing is still a relatively modest portion of the approximately $2 billion in annual aid flows provided to the region. And while aid is significant, particularly in many smaller countries, it is equivalent to between 10-15% of annual GDP across the region ­ a similar amount to receipts from tourism or remittances. This reinforces the importance of selectivity in Bank Group engagement. 18. The "Cairns Compact" outlined by Pacific leaders at the annual Forum in 2009 reflected the importance of better development coordination to improve the effectiveness of all resources ­ domestic and external ­ available to promote development in the region. The Bank strongly supports efforts to improve the effectiveness and efficiency of development resources through better coordination among both donors and governments across the region. The value of the World Bank's engagement in the Pacific is not principally defined in terms of the size of the lending program, but rather in the extent to which the Bank can collaborate with other development partners to transfer global knowledge, build capacity, and provide timely technical assistance and analysis that has an impact on Government policy. 19. Although the World Bank Group is far from the largest financier, it potentially brings several comparative advantages to its engagement in the Pacific region: The Bank can "bundle" its global expertise and knowledge, and the high quality analytical work it is able to bring, with financial resources (either from IDA or other donors) to assist countries undertake policy reform and associated institutional change; The Bank Group is able to exploit potential synergies available from its public and private sector arms to support policy reform and directly encourage foreign investment in the region; As a perceived impartial actor, the Bank is potentially able to collaborate with both Pacific island countries and partners on sensitive issues and to influence broader relationships between the islands and regional powers; and Given its convening capacity, the Bank has the scope to undertake complex, large and difficult investments. World Bank Group: Pacific Engagement Themes 20. World Bank Group engagement with the broader Pacific region over the next 4-5 years (through the IDA-15 and IDA-16 periods) will be structured around the broad themes of: (i) Promoting opportunities from greater regional and global integration; and (ii) Building resilience against shocks, including both economic volatility and climate change and associated environmental vulnerabilities. 21. Reflecting the fragility of many countries in the region, a concerted effort to enhance capacity will be integrated throughout all aspects of the program. 22. These themes set out a broad structure for engagement; detailed implementation strategies will be set out at the country level. The department anticipates developing more bespoke tailored approaches for the 26 countries previously covered by a single Pacific Regional Engagement Framework. This reflects the specific features, challenges and expectations of the other Pacific island countries. The first individual strategy for these countries was the Solomon islands ISN (April 2010), and a Tonga CAS is anticipated (October 2010) Promoting Opportunities from Greater Regional and Global Integration 23. The 2009 World Development Report, Economic Geography and Development, highlights the importance of "sea locked' Pacific island countries becoming more integrated with the global economy if they are to overcome the challenge of their geography. One of the key messages from the WDR is that growth is likely to remain geographically unbalanced. Rather than trying to swim against the tide by spreading out economic activity in more remote areas, countries are more likely to achieve success by carefully planned economic integration, by reducing frictions to ensure that peripheries can be more closely connected to economic hubs. 24. As well as greater global integration, regional cooperation offers significant potential benefits for the Pacific countries. Greater regional and sub-regional cooperation, for instance, potentially offers countries the opportunity to strengthen returns from regional resources, such as pelagic fisheries. And there is potentially scope for regional efficiencies in public service delivery, as highlighted by successful efforts over the past decade to rationalize and commercialize airline services across the Pacific, by cooperating to improve fuel purchases and supply chain management, or regional approaches to strengthen telecoms regulation or public sector audit institutions. The Pacific island countries generally remain less integrated than the Caribbean islands. This reflects in part the greater distances between the Pacific nations, and the differing interests of varying Pacific islands. In this, regional approaches need to be highly sensitive to national identities and are likely to require long-term engagement for success. 25. The Bank Group will continue to work collaboratively with clients and partners to help the island countries derive greater benefits from closer integration with the metropolitan powers in the region and stronger regional cooperation. Bank engagement will build on the success achieved in working closely with Australia and New Zealand ­ as well as island countries ­ to assist with the expansion of temporary labor migration schemes. This included the landmark "At Home and Away" report (2006), and technical advice to both labor receiving and sending countries. The New Zealand Recognized Seasonal Employment (RSE) scheme has now provided over 9,000 Pacific islanders from Kiribati, Samoa, Tonga, and Vanuatu, with opportunities to work in the horticultural industry, returning home with skills and approximately $40 million in remittances. In a win-win situation, the scheme has helped to provide growers with greater certainty of labor supply, with Horticulture New Zealand estimating that this has increased output by between $150 ­ 200 million. The Bank will build on this by working with regulatory agencies in Australia and New Zealand to reduce the cost of remittances; exploring opportunities for returning workers to use the skills and funds they have obtained to open businesses; and by encouraging greater opportunities for skilled migration ­ as Australia is offering to 90 Kiribati nurses currently undertaking their degrees. More broadly, a flagship "Pacific Futures" study anticipated during 2010 will explore options for longer-term integration between the island economies and the rest of the world. As the Pacific Island Forum countries begin negotiations on a new regional free trade arrangement, the Bank anticipates undertaking analytical work to assist Pacific island countries take advantage of the potential benefits from a more open trade environment, particularly should discussions lead to greater opportunities for trade in services and further steps toward a regional labor market. 26. Structural economic reform will be vital if the island countries are to participate more fully in global growth and attract and benefit from private sector investment. The Bank Group intends to re- engage with clients and major development partners in a longer-term dialogue to encourage policy and institutional changes needed to attract greater private flows and better use all available development resources. Reforms over the past decade in countries such as Samoa and Vanuatu, for instance, have helped to restore macro-economic stability; improve the environment for investment and private sector led growth; 27 and strength service delivery. This has led directly to improved development outcomes. As well as appropriate policy settings, improved governance and policy implementation will also be vital to encourage growth and investment. 27. The Bank anticipates working increasingly closely with the IMF, the Asian Development Bank, and key bilateral partners to re-engage in a coordinated macro-economic policy dialogue, with associated financial support through development policy operations ­ where needed and where justified by the policy environment. To do so, the Bank will need to rebuild its economic expertise and engagement, which has been limited over the past decade as a result of the opportunity costs associated with the temporary labor migration work and the difficult experience in adjustment programs in some countries the early parts of the decade. Efforts to rebuild engagement are evident in the key role the Bank has taken with other partners to establish a coordinated economic policy reform dialogue with the Solomon Islands' Government, which has already generated an articulation of policy reforms against which Australia, ADB, and EU have provided or pledged coordinated support. In Samoa, the Bank has worked closely with the Government and other partners to finance a coordinated reform program to allow the government to respond to tsunami losses and the global slowdown. A similar effort is now underway in Tonga. More broadly, the Bank expects to collaborate more closely with an expanded IMF engagement, having recently joined Fund missions in the North Pacific, Fiji, and Tonga. At the regional level, greater Bank engagement with the IMF's Pacific Financial technical Assistance Center (PFTAC) is envisaged, to provide additional services to Pacific clients and build institutional cooperation. Economic policy dialogue will also be underpinned by IFC technical assistance to strengthen the business environment in PNG, Tonga, and Vanuatu. IFC is also playing an increasingly active role in supporting foreign investment in the region, where policy environments are appropriate and opportunities exist. 28. Support for countries to strengthen management and gain better returns from the export of natural resources will be a growing focus for the Bank Group over the next five years. In Solomon Islands, the Bank anticipates increasing support for these countries to ensure gains from mineral and forestry revenues respectively are able to flow through to benefits for citizens. Discussions on possible participation in the Extractive Industries Transparency Initiative (EITI) are underway with both governments. In PNG, the Bank and IFC are collaborating to explore options for a risk sharing facility that could help to support local firms to participate in the increased economic activity resulting from the construction and operation of the potentially transformative LNG project and other major resource projects. Options will be explored to roll out a similar instrument at the regional level across the Pacific region as a whole. Potential IFC engagement in the mining sector in Solomon Islands also offers opportunities to encourage reputable foreign investors in this sector. 29. Countries are increasingly requesting support from the World Bank Group to assist them explore options to gain a better return from the world's largest tuna resource. Even a relatively small increase in the 3-4% of the wholesale value of the fisheries catch received by island countries could make a very significant difference in the resources available for development. The Bank anticipates providing support to the newly established secretariat of the Parties to the Nauru Agreement (comprising those island countries with the largest fisheries resource; as much as 30% of the global tuna stocks) to explore options to improve returns while strengthening incentives for sustainable commercial management of the fisheries. Potential support from IFC to could encourage private investment to increase the value added activities associated with the fisheries industry in the region. Engagement will, however, reflect the considerable regional architecture already in place in the fisheries sector. 30. The telecommunications revolution in the Pacific has been an outstanding example of the potential gains from global integration, and an area in which continued World Bank Group engagement is anticipated. The Bank Group has played a significant role in the past few years in encouraging telecoms reform to encourage competition and allow new private sector operators. The Bank is helping to secure reforms by strengthening independent telecoms regulators, with activities in Samoa underway since 2002 and 28 new investments this year in Solomon Islands and Vanuatu. The Bank is also exploring options to assist Kiribati and the North Pacific countries potentially open their markets. At the regional level, the Bank will assist efforts to strengthen regulation of competitive telecoms markets by supporting the establishment of a Pacific Regional Telecommunications Regulatory Resource Centre. This will encourage sharing of information and industry data, improve awareness of sector performance across the region, and provide direct assistance to policymakers and regulators. Maximizing synergies across the Bank Group, IFC investments of about $100 million over the past 3 years in the Pacific islands (excluding PNG) have played a key role in encouraging over $200 million in investments by new private sector telecoms operators. The next key challenge in the ICT sector will be to improve broadband connectivity for many of the smaller islands; and this is currently being explored by the Bank in conjunction with the Asian Development Bank, with a view to mobilizing both public and private sector resources to finance a broadband cable between Fiji and Tonga and, potentially, also with Samoa, Solomon Islands, and Vanuatu. Putting in place such infrastructure will inevitably require significant degree of regional cooperation. Box 1: The Telecoms Revolution in the Pacific Telecoms reforms throughout the Pacific in the past five years have yielded enormous benefits for remote and far flung communities. Most of the Bank's Pacific island member countries have now opened their telecoms markets to new private operators. This includes Tonga (2002), Fiji (2006), Samoa (2006), Papua New Guinea (2007), Vanuatu (2008), and Solomon Islands (2010). The resulting competition has seen prices for mobile telephones fall dramatically and coverage improve. There has been a rapid increase in mobile telephone use throughout the region. In Fiji, where reforms started, mobile telecoms coverage has increased from 25% to over 75% of the population in 4 years. In Samoa, Tonga, and Vanuatu, about 60% of the population now subscribe to mobile phone services, compared to as little as 6% prior to reforms. Improved connectivity offers a key opportunity for people in the islands to overcome the tyranny of distance and take advantage of global economic opportunities. Improved telecommunications literally opens up the World to those previously disconnected. Connectivity allows fishermen to know where the best price of the day is; enables mobile banking services; better connects people to schools and health services, and provides entrepreneurs with better information on which to base decisions. Building Resilience against Shocks 31. Given the systemic volatility and vulnerability of many of the Pacific island countries to exogenous shocks, building resilience will be a key theme of Bank Group engagement. Just as structural economic reform will be vital for the island economies to better participate in and benefit from global growth, so too will reform be vital to build resilience. Those countries with dynamic and entrepreneurial private sectors and those able to attract investment are likely to be those able to bounce back the quickest from shocks. Commodity price shocks of 2008 highlighted the need to reduce dependency on highly volatile oil prices for energy will important, as will investing in rural development as a front-line defense against volatility in food prices. The Bank will assist countries develop infrastructure and facilities to better prepare for environmental and natural disaster risks. Many of the Pacific islands are on the front line with climate change, and support for adaptation efforts will be crucial. Improved health, education and social investments will be vital to make progress toward the MDGs and ensure that people are able to lead fulfilling lives. And all efforts to strengthen resilience and service delivery will need to be underpinned by further support to enhance governance and institutional effectiveness. 29 32. Reflecting the food and fuel price spikes of 2008, efforts to reduce reliance on volatile imported fossil fuels and improve energy supply chain management are becoming a larger area of focus. The Bank is now working with Tonga and the North Pacific countries, and Vanuatu has also expressed interest in support to improve oil supply chain management. Early experience in Tonga with the development of an integrated "energy roadmap" provides a model for donor coordination, and provides perhaps the best opportunity in the region to strengthen collaboration with non-traditional donors (such as UAE and potentially China). With reforms focused on providing opportunities for new private investment in generation capacity, there is also considerable scope to exploit synergies across the public and private sector arms of the Bank Group. In Solomon Islands, for instance, the Bank and IFC are collaborating closely in order to encourage a new private hydropower generation investment at Tina River, which will significantly reduce reliance on imported diesel. This complements efforts currently underway through the Solomon Islands sustainable energy project to improve operations in the state dominated energy sector. 33. Improving agricultural productivity is being given higher priority, reflecting the predominance of rural poverty, especially but not only in Melanesia, and the importance of building resilience from volatile global food prices. Smallholder agricultural production is often the de facto safety net for many villagers. In Solomon Islands, for instance, the Government identified rural development as integral to its efforts to reestablish lasting peace and security, and rural service delivery is currently the key element of the Bank's program in that country. Analytical work on strengthening agricultural supply chains in Samoa, and is expected to lead to further support. Tonga has expressed interest in monitoring initial work in Samoa, and in replicating this should the Samoa experience prove successful. 34. The Bank anticipates continuing efforts to improve infrastructure asset management, and to mainstream disaster risk reduction and climate change adaptation into infrastructure planning and management. The Bank has a successful record of working in Samoa and, more recently, in Tonga, to strengthen the management of infrastructure assets, which are an essential backbone for economic growth. Road maintenance work by local private contractors has also proven an effective response to generate employment at a time of global slowdown. Ensuring that maintenance is fully funded has been a critical issue, rather than just continuing inefficient new capital expenditures. In addition, considerable additional support is likely to be made available to assist the vulnerable Pacific island countries to adapt to climate change. This reflects the commitments to support adaptation made by countries at the Copenhagen summit. A key lesson from previous adaptation and disaster risk reduction engagement is that such work is likely to have most value if integrated closely with efforts to "climate proof" infrastructure investments. The Bank also has successful experience in supporting reconstruction and disaster risk reduction efforts following cyclones in Samoa and Tonga, and more recently in response to the tsunami in Samoa and outlying islands in Tonga. Disaster risk reduction efforts will be complemented by further work to explore the feasibility of a possible catastrophe risk sharing facility, as has been established in the Caribbean, as one element in a layered risk management framework that could provide a quick response and potentially supplement donor support following natural disasters. 35. Good coordination in the infrastructure sector has been achieved through the Pacific Region Infrastructure Facility (PRIF), and this could provide an example to strengthen coordination of the variety of donors engaged in supporting climate change adaptation in the region. Australian leadership was crucial to establish PRIF, which now includes New Zealand, the ADB, and the World Bank ­ with the European Commission in the process of joining. PRIF has been instrumental in better linking investments to longer-term reforms in the way island countries plan, manage, and finance their infrastructure needs. It has proven an effective mechanism to marshal coordinated donor support for investments in economic infrastructure, and as a means to address the problem of funding for infrastructure asset maintenance. 36. Translating stronger growth into strengthened service delivery and progress towards MDGs is vital if the skills of people are to be fully utilized, and to increase opportunities for people to lead fulfilling 30 lives. The Bank has worked closely with other donors in the development of sector-wide programs in health and education in Tonga, Samoa, and Solomon Islands. Health and education investments in Samoa and Tonga have supported these countries in their successful progress toward the MDGs. In Solomon Islands the Bank-managed Rural Development program has introduced community driven-development approaches to rural service delivery while also supporting revitalized agriculture extension services. This will be backed up by joint analysis with donor partners to review the experience with early-stage SWAPs, and incorporate lessons into future sector programming. Given the extensive bilateral support for health and education activities in the Pacific, future Bank engagement in these sectors is likely to be focused primarily in Melanesia, where MDGs are significantly off track. 37. Providing greater opportunities for women and youth will be important. While there have been recent improvements, in most countries girls remain under-represented in primary school, again particularly in Melanesia. And despite some very high profile women in the region, a gender gap remains in representation of women at the most senior levels of government and business. In many countries, youth also comprise more than half the population and are a significant proportion of the poor and vulnerable. In Solomon Islands, the Bank will support government to provide training and work experience opportunities to thousands of disadvantaged urban youth. This will help improve their individual prospects, education and income; contribute to social stability, and match the needs of employees to the local labor market. As part of this, the Bank will be specifically exploring the needs of adolescent girls. 38. Stronger governance and institutions have been identified by leaders in the Cairns Compact as vital to improve service delivery and development outcomes. Building and strengthening the institutions of government remains a key priority for many of the young and capacity constrained countries in the region. While performance varies widely, World Bank measures of government effectiveness suggest that even the better performing countries in the region are only just above global averages. Perceptions of corruption remain high in several countries. One key element in addressing these challenges will be to improve public financial management. Without addressing PFM issues, interventions in key sectors of infrastructure, health and education will tend to be project-based, ring-fenced and ultimately unsustainable. There is potentially a significant role for the Bank to work with clients to improve the overall functioning of government and public sector institutions. The Bank is also committed to supporting the Pacific Regional Audit Initiative, which is a Pacific Plan initiative and was endorsed by Forum Leaders in 2008. The Bank will provide financial and technical support for the Pacific Association of National Audit Institutions (PASAI) to support PASAI improve the quality and timeliness of the audit in some members with lesser capacity and to developing a medium term plan to strengthen audit skills in the region. Increasing Bank engagement in this area will need to be coordinated closely with the Pacific Association of National Audit Institutions (PFTAC) and the ADB, as well as key bilateral partners, which also have a long-term engagement in these issues. Enhancing Capacity and New Ways of Doing Business 39. Given the fragile nature of many of the countries in the region, building leadership and institutions needed to manage change will require a longer-term effort to enhance capacity. The situation across the region varies greatly. In most countries there is considerable expertise at the senior levels of government, although thin, and impressive recent graduates emerging. But most partner governments face real problems in attracting and retaining domestic expertise, and this is likely become more marked as their economies further globalize. Several depend for core governance functions (policy setting, financing, expenditure management, security) on external partnerships. Many services are 'co-produced' with external partners. This dependence on external service providers will continue to increase, and as transnational investments in resource exploitation increase, new kinds of high-end regulatory expertise will be required. 39. Given the vital need to strengthen capacity throughout the region, this issue will be mainstreamed throughout the program. Building capacity and ensuring the sustainability of investments will be more successful if addressed at the design stage for all interventions, rather than treated as a separate standalone 31 activity. The Bank's long-term engagement for over a decade with the Samoan Government to strengthen infrastructure asset maintenance, for instance, has significantly strengthened capacity in this area. Different approaches to strengthening capacity will also require exploring opportunities for greater regional or sub- regional cooperation in service delivery. Greater use of competitive and transparent contracting of service delivery functions to the private sector also provides scope to improve outcomes (for instance, local contracting of maintenance functions to the private sector, and with opening the telecoms and generation markets to new private investment). 41. The Bank will work with partners to explore opportunities to strengthen capacity at the regional level. The Bank is one of the partners supporting the Pacific Association of National Audit Institutions, as well as the Pacific Regional Telecommunications Regulatory Resource Centre. These offer opportunities to share experience and build capacity across the region on these key issues. Anticipated Bank technical placements with PFTAC will help to ensure that countries are able to access financial sector technical assistance. The Bank intends to work with Australia and other partners to explore the potential scope to replicate in the Pacific successful initiatives elsewhere in the world, such as the African Economic Research Consortium, a not-for-profit organization devoted to advanced policy research and economics training. 42. Nevertheless, effective capacity building is an area in which a renewed effort is potentially required from both island countries and partners. Further support is needed to build credible national educational institutions and enhance academic and professional capacity, which are essential building blocks to strengthen national institutions. Stronger public financial management and governance arrangements will be vital to increasingly move toward using country systems in the delivery of development assistance, and to move away from "ring-fenced" donor investments. More broadly, the Bank's Pacific Futures work may provide a chance to consider in a more systematic way: (i) the scope for greater regional collaboration in delivery of some services, including how some countries and partners are strengthening government-to- government links to improve service delivery; (ii) options to translate the extensive international technical assistance being provided to the region into longer-term institutional capacity; and (iii) opportunities available from contracting out service delivery functions to the private sector in a transparent and competitive environment with the government increasing focused on ensuring a level playing field rather than directly providing services. 43. Portfolio performance throughout the Pacific broadly reflects the operating environment in differing countries. Portfolio performance in Samoa and Tonga has generally been strong, with the Bank's Independent Evaluation Group (IEG) confirming that all 5 activities exiting the portfolio since 2000 have been broadly satisfactory in achievements. In contrast, in less strong policy environments, the Bank's portfolio in the Pacific region has a mixed history. While indicators suggest that the implementation of the current portfolio is now proceeding relatively well (problem and risk projects in the department are especially concentrated in Timor rather than the Pacific islands), a range of activities still remain at risk. Performance records in the region highlight the importance of keeping project designs simple and realistic, strong supervision, and extensive procurement and fiduciary support given capacity constraints in these areas in many clients. Particularly as the Bank looks to expand engagement in non-traditional clients, it will be to keep these principles in mind, as well as to focus on areas in which the Bank already has a proven track record of success elsewhere in the region. 44. The Bank will need to be creative about new ways of doing business if we are to effectively meet the needs of small clients to respond quickly and in a less bureaucratic way. In particular, this will require a shift in balance from upstream risk mitigation to downstream risk management. We will need to significantly expand the implementation support we are able to provide, including more "hand holding" by our teams during project implementation to address issues as they emerge and downstream risk management as well as upstream risk mitigation. This will require an increase in supervision resources, as well as greater on the ground presence ­ particularly a focus on development for our local staff and counterparts. Greater fiduciary support will be especially important, and we are moving to increase our own capacity in this regard. 32 44. Similarly, we need to move away from a "projects based" approach to provide longer-term, policy driven assistance in a more flexible way. This will be a multi-year agenda...but is critical and can be started now. In order to respond faster and more effectively to client needs, further efforts will be required to make use of the flexibility provided by the range of Bank instruments. Additional financing instruments and the use of streamlined crisis response processes allowed us to respond flexibly to the tsunami in Samoa in FY10. During FY11, we intend to use a "horizontal APL" to seek Board agreement to a program of regional broadband connections for differing clients. This instrument allows individual country investments to be set within a broader regional context, streamline requirements for each individual investment, and potentially helps to allow access to additional regional IDA financing over and above individual country allocations. A similar approach could potentially also make sense for climate change adaptation, petroleum supply chain management, and transport investments, which have been sought by a range of our Pacific clients. Similarly, the successful experience in transport in Samoa over a decade and in agriculture in PNG over two decades highlights the importance of long-term engagement, and "vertical APLs" might be one mechanism that could be increasingly used in future to provide greater certainty on long-term engagement in these areas. Country Focus 45. In scaling up, the Bank will be looking both to deepen engagement with more traditional Pacific island clients, such as Solomon Islands, Samoa and Tonga, as well as widen the program to scale up in non-traditional clients such as Vanuatu, the North Pacific, and Tuvalu. 46. In Solomon Islands, World Bank Group engagement is transitioning from post-conflict assistance to focus on longer-term reform and development efforts. This represents the particular challenges of the Solomon Islands, which are still emerging from the tensions of the early part of this decade, and in which there is still a very large international military, policing and civilian presence through the Regional Assistance Mission for the Solomon Islands (RAMSI). As with other Melanesian countries, Solomon Islands society is highly fragmented. The opening of a World Bank Group office in late 2008, led by a Country Manager, has been accompanied by a significant increase in activity. The Bank invested $20m in IDA and trust funds during IDA-14, and expects a similar amount of business in IDA-15. The single largest project, making up over half of the current portfolio, is the Solomon Islands Rural Development Program, which commenced in 2008. The program aims to improve standards of living in rural areas through small-scale infrastructure, revitalized agriculture extension services, and promotion of rural enterprises. Since the opening of the office, three entirely new project and two major new pieces of analytical work have been added, including the Sources of Growth report and a Public Expenditure Review. In addition the WBG has played an important role in dialogue, particularly on economic reform issues. Significant co-financing has been mobilized to support these activities, illustrating the fact that trust funds currently make up a larger proportion of the portfolio than IDA. There is scope for the Bank to potentially back up this dialogue with policy based support for the government, although this will depend critically on the policy environment that emerges in the country during the course of what is an election year. In collaboration with IFC, the Bank is engaging with the Solomon Islands Government in policy dialogue on resource management issues, and in encouraging reputable private investors to the minerals sector. IFC invested $35m in FY09 to assist with the restarting of production at the Goldridge mine. The Bank is working with IFC to assist in the reform of the energy sector. This includes management reform of the Solomon Islands Electricity Authority, essential to attracting private sector investment in the Tina River Hydro scheme. For Tina River, IFC is providing transaction advice to Government, while the Bank and other donors are supporting Government in the overall management and coordination of this complex but vital project. 47. The Bank has provided extensive support to Samoa's successful reform program since the mid- 1990s. Samoa, like Tonga, is a highly structured and cohesive Polynesian society. Longer term reform efforts over almost two decades have helped Samoa raise the speed limit for growth and improve social indicators (it is now broadly on track to meet most MDGs). Reflecting reform efforts, the Bank has had the most extensive engagement with Samoa of all Pacific island countries, providing a total of $100m in 33 financing since the country joined the Bank. Nevertheless, Samoa was hit hard in FY09 by the global crisis and by a devastating tsunami in September 2009. In response, the Bank more than doubled the available IDA-15 resources to $40 million. Following the tsunami, Bank staff were in Samoa within 48 hours to work collaboratively with the Government and donors to prepare a comprehensive damage and loss assessment. The Bank worked closely with the Government and other partners to ensure a coordinated set of policy actions to underpin financing support for this well performing country in response to the tsunami and the effects of the global slowdown. The Bank will expand support for health and transport operations in tsunami-affected areas, building on successful interventions in these sectors over a long-period. Looking ahead, future engagement will focus on strengthening agricultural competitiveness, and further work to build on successful investments to improve infrastructure asset maintenance, and "climate proofing" investments. 48. Tonga is undergoing major Constitutional reforms as part of a transition from an absolute to a constitutional monarchy. Over the past few years, Tonga has embarked on a program of economic reform, and has made good progress toward most MDGs. Like Samoa, Tonga has been hard hit by the global slowdown as well as the previous food and fuel price spikes. The Bank is preparing, in conjunction with other partners, a package of support to assist the Government respond to the effects of the global slowdown. The Bank is also replicating the successful experience with infrastructure maintenance in Samoa, and is receiving significant financing from the Australian Government to support local road maintenance activities as a means to provide employment opportunities given slowing growth. The Bank is working with the Government and other partners to prepare a comprehensive energy road map and to explore options for a broadband cable connection to improve connectivity. These activities will require close collaboration between partners. Potential IDA and trust fund assistance of about $40-50 million to Tonga during the IDA- 15 and IDA016 period compares favorably with the $33 million provided by the Bank since Tonga became a member in 1982. Tonga will be the first Pacific island country in which the Bank Group will prepare an individual country assistance strategy. 49. Given strong policy performance in Vanuatu, the Bank is actively exploring options to increase support. Current Bank Group engagement with Vanuatu is focused on strengthening regulatory oversight of the telecoms regulator as well as water and electricity utilities. Technical assistance is also being provided by IFC for successful efforts to strengthen the business environment, and by the Bank on sensitive land issues. The Bank's engagement in Vanuatu is being supported by the Australian government. Although Vanuatu last borrowed from the Bank in 1991, the Government has expressed interest in potentially accessing IDA to assist with the landing of a broadband cable, as well as in petroleum supply chain management and other key infrastructure investments. 50. The Bank is responding to requests from Kiribati for additional financial and analytical support. Comprised of remote atolls, Kiribati is extremely vulnerable to climate change. GEF financed adaptation work being undertaken in conjunction with Australia and New Zealand is anticipated to continue and be integrated even more closely with other investments. The Bank and ADB intend to jointly explore the feasibility of strengthening transport infrastructure asset management in Kiribati, particularly maintenance of the main road. GEF financing is potentially available for a grid-connected solar system in Tarawa to reduce reliance on imported diesel, while oil supply chain management work in the North Pacific also holds potential for Kiribati. At the request of the Government, the Bank is providing analytical advice regarding options to open the mobile phone market to competition given the benefits elsewhere in the region, and could potentially provide financing support if needed to support outer islands connectivity. Board approval for the first ever IDA investment in Kiribati is anticipated during FY11. 51. Like Kiribati, the other Micronesian countries of RMI, FSM and Palau are some of the most remote and isolated communities in the world. These countries rely largely in their fisheries resources, and the Compact of Free Association with the United States. Bank staff anticipate seeking Board approval in later 2010 to make IDA resources available for the first time to FSM and RMI. The Bank has been working with both these countries, as well as Palau, on options to strengthen oil supply chain management, and PRIF 34 financed technical assistance will be provided to both RMI and FSM to respond to requests for assistance to reap the benefits of telecoms competition. The Bank is also working increasingly closely with the IMF to engage in a dialogue on broad economic management. 52. Tuvalu is the Bank's most recent member country, having joined in June 2010, and is also the smallest, with 10,000 people. During FY10, staff anticipate seeking Board approval to classify Tuvalu as an IDA country. Proposed changes to the IDA allocation formula for IDA-16 could also potentially allow the Bank to make about $10 million available to Tuvalu over that period. Assistance will be very selective, and focused on replicating successful investments elsewhere in the region (telecoms, transport, energy) and on supporting successful investments by other donors already active in Tuvalu. Given capacity constraints close coordination by the bank with other partners will be especially important. 53. Fiji is facing structural economic difficulties as a result of the longer-term decline of the sugar and garment industries, which relied in part on preferential trade access. There has also been some redirection of tourist flows away from the country, partly as a result of political uncertainty associated with a series of coups over the past 20 years. Current World Bank engagement with Fiji is undertaken in accordance with OP 7.30, which sets out policy for engaging interim governments. The Bank is currently implementing a GEF financed sustainable energy financing investment in Fiji, and is providing technical advice on telecoms reform, the management of the national provident fund, options to better target social safety net systems, and broader economic issues. Backing-Up an Expanded Program with Expertise 54. Underpinning the World Bank Group's expanded engagement with the broad Pacific region is a strengthened backbone of decentralized offices, building client relations and allowing the rapid deployment of sectoral expertise. The Sydney office has now become a real hub for technical expertise able to be deployed by both the Bank and IFC. Approximately 50 staff are now based in Sydney across both institutions, more than double the number a few years ago. This includes over a dozen international staff and an expanded complement of Australian-hired professionals. A new country manager position was placed in Solomon Islands in FY09, complementing country managers leading offices in Timor and PNG. Country offices have been expanded significantly, including by the placement of internationally recruited deputies in Dili, Honiara, and Port Moresby. A structure of "lean and mean" liaison offices are being opened jointly with the Asian Development Bank through the Pacific to strengthen client interactions. Such offices are now open in Samoa and Tonga, and are underway in Vanuatu and, potentially, Kiribati. These are the only places anywhere in the world where the ADB and the World Bank share staff. 55. Generous support from Australia and New Zealand has been crucial to allow the expanded staffing presence supporting expanded engagement. Arrangements for this support will need to be renewed in FY11 if the current staffing profile is to be continued. 35 Attachment 2: Tonga Results Matrix Medium-term Key Issues CAS Outcomes Milestones WBG Instruments and Country Goals Expected (FY11 ­ FY14) International Partners for ISN Period Strategic Area I: Accelerating Economic Reform to Strengthen Fiscal Stability and Public Expenditure Effectiveness Sustainable Fiscal Public expenditure under Budget revenue estimates to be Joint public expenditure review AAA: Joint policy notes for Policy Framework significant pressure as a result improved, including through completed identifying options incoming government (2010), of global slowdown, with better data systems for improved expenditure Joint public expenditure review growing fiscal deficit as Debt management system management (2011) revenues decline functioning with new external Strengthened dialogue between Operations: DPO series (FY12, External debt in "high risk" assistance on grant or donors and Government on FY13) range (over 50% of GDP in concessional terms only economic and PFM reforms nominal terms and 30% in Quality of PFM systems linked to budget support Donor Partners: ADB, IMF, NPV terms) improved as reflected in New procurement regulations Australia, New Zealand, European Lack of expenditure review improved PEFA scores ­ consistent with WB/ADB Commission mechanism particularly in audit - from 2010 advice to be gazetted and in 2010 Joint PEFA noted baseline force in 2010 significant improvements Treasury Instructions to Line since 2007 in budget Ministries issued credibility, comprehensiveness and transparency, and policy based budgeting. The 2007 Public Audit Act provides a framework to address continuing weaknesses in terms of external scrutiny, audit, and the quality and timeliness of annual financial statements 36 Strategic Area II: Generating Opportunities from Greater Global and Regional Integration Medium-term Key Issues CAS Outcomes Milestones WBG Instruments and Country Goals Expected (FY11 ­ FY14) International Partners for ISN Period Improved connectivity Telecoms reform in Tonga Internet use to increase from Fibre optic cable linking Tonga AAA/ TA: Telecoms/ to provide expanded mobile phone 15% to 40% of the population with trans-Pacific cables connectivity regulatory TA (2011) opportunities for coverage from 6% to 60% of Wholesale Connectivity Operations: Pacific regional growth the population in past 5 years (bandwidth) costs to be reduced connectivity program Horizontal Internet use limited due to from $3,500 megabits per APL (2011) constraints in satellite capacity second per month to $800 and associated costs Mbps/month or lower, flowing Donor Partners: ADB, PRIF International studies suggest through to reduced retail that for 10% increase in internet and telecoms costs broadband penetration, growth Regulatory environment that increases by 1.3% allows competition with equal access by all market players to buy international bandwidth on a fair and transparent basis at the cable landing station Strengthened business Significant reform associated Improved business Ability to use personal property AAA/TA: IFC Business enabling environment with Tonga's 2007 WTO entry environment, as reflected in as collateral for access to environment TA has resulted in an increasingly Doing Business indicators finance is improved Operations: DPO series (FY12, open and outward looking Reduced cost of connectivity Investment approvals process is FY13), IFC Pacific Micro-finance economy translating into reduced simplified and made more initiative 2009 Companies Act business transaction costs transparent, including licensing introduced electronic registry Reduced number of procedures systems for business operations Donor Partners: IFC, ADB, and simplified process for obtaining a business license Establishment of a credit bureau Australia, New Zealand, EC Business environment still to improve access to finance characterized by discretion, fragmentation amongst far too many agencies, and lack of coordination 37 Strategic Area III: Building Resilience Against Shocks Reducing reliance on Tonga is reliant on imported Improve petroleum supply chain Open electricity generation AAA/TA: Tonga Energy price volatile imported petroleum products for 75% to reduce price and volatility of market to new private Roadmap (TERM) fuel and increasing of energy generation energy supply investment, with 4 new private Operations: Energy sector affordability of energy Imported fuel accounts for Increase efficiency of grid power investments by 2013 policy DPO (2010), energy 10% of GDP and 25% of all system, including reducing 1 MW on-grid solar PV roadmap investment (2011) imports technical and non-technical generation capacity to be 95% of the population has losses from 17.5% on Tongatapu introduced Donor Partners: IFC, ADB, access to grid supplied grid Landfill gas IPP implemented Australia, New Zealand, EC, electricity, but prices are high Increase renewable energy for Proof of concept coconut oil Japan (peak $0.50/ kWh in 2008) grid power to 20% by 2014 investment initiated Improve transport Maritime and aviation safety Consolidate MOT as unified 75 km of roads designed, Operations: Transport Sector infrastructure and issues highlighted by the transport sector policy, planning supervised and maintained by Consolidation Project (2008) and provide tragic sinking of Princess and regulatory ministry local Tongan companies Australian PRIF grant (2010) countercyclical Ashika ferry in 2009 Improve civil aviation and ICAO compliance levels to Donor Partners: Australia Unemployment and maritime sector compliance with improve from 48-56% to 80% employment underemployment increasing international safety standards opportunities as a result of global economic Strengthened domestic private slowdown sector road maintenance capacity Improved resilience to Tonga highly vulnerable to Niuatoputapu reconstruction Construction of 85 cyclone AAA/TA: Regional DRR/CAA natural disasters natural disasters and climate Improved national disaster resistant houses, and risk analysis change management and planning rehabilitation of 60 houses Operations: Post-tsunami Outlying Niuatoputapu capacity Institutional strengthening of Reconstruction project (2010) islands hit by tsunami in Ministry of Land Survey and September 2009 Natural Resources and Donor Partners: NZ, UN, Red preparation of community Cross disaster risk management plans Improve education Relatively high enrolment Net enrolment, dropout, School grants program AAA/TA: Early grade reading outcomes rates but early grade reading retention rates and student test operational, with all schools assessments assessments highlighting performance improved from receiving grants on schedule Operations: Tonga Education some issues about quality 2005 baselines School rehabilitation Support Program (2005) Increase local participation and completed at 20 most needy accountability through sites Donor Partners: NZ introducing school based management, with schools engaging communities in planning, budgeting, and results assessment 38 Tonga at a glance 9/1 8/1 0 East Lo wer Ke y D e v e lo pm e nt Indic a t o rs A sia & middle To nga P acific inco me Age distribution, 2008 (2009) Male Female P o pulatio n, mid-year (millio ns) 0.10 1,930 3,703 75-79 Surface area (tho usand sq. km) 0.8 16,299 32,309 60-64 P o pulatio n gro wth (%) 0.4 0.7 1.1 Urban po pulatio n (% o f to tal po pulatio n) 25 44 41 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 0.3 5,102 7,675 15-19 GNI per capita (A tlas metho d, US$ ) 3,260 2,644 2,073 GNI per capita (P P P , internatio nal $ ) 3,980 5,426 4,593 0-4 10 5 0 5 10 GDP gro wth (%) -0.4 8.0 7.4 percent of total population GDP per capita gro wth (%) -0.8 7.2 6.1 ( m o s t re c e nt e s t im a t e , 2 0 0 3 ­ 2 0 0 9 ) .25 P o verty headco unt ratio at $ 1 a day (P P P , %) .. 17 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) .. 39 .. Life expectancy at birth (years) 73 72 68 60 Infant mo rtality (per 1,000 live births) 19 23 45 Child malnutritio n (% o f children under 5) .. 12 25 50 40 5 A dult literacy, male (% o f ages 1 and o lder) 99 96 87 30 5 A dult literacy, female (% o f ages 1 and o lder) 99 90 73 Gro ss primary enro llment, male (% o f age gro up) 1 16 1 12 101 20 Gro ss primary enro llment, female (% o f age gro up) 1 10 1 13 106 10 0 A ccess to an impro ved water so urce (% o f po pulatio n) 100 87 86 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 96 66 52 1990 1995 2000 2007 Tonga East Asia & Pacific a N e t A id F lo ws 19 8 0 19 9 0 2000 2009 (US$ millio ns) Net ODA and o fficial aid 16 30 19 26 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2008): A ustralia 5 9 5 12 8 New Zealand 3 4 4 6 6 Japan 0 10 7 4 4 A id (% o f GNI) 27.3 25.5 9.9 7.3 2 A id per capita (US$ ) 169 315 191 248 0 -2 Lo ng- T e rm E c o no m ic T re nds -4 95 05 Co nsumer prices (annual % change) 22.4 9.7 5.9 1.8 GDP implicit deflato r (annual % change) 7.9 12.2 3.3 -1.2 GDP GDP per capita Exchange rate (annual average, lo cal per US$ ) 0.9 1.3 1.8 2.1 Terms o f trade index (2000 = 100) .. .. .. .. 19 8 0 ­ 9 0 19 9 0 ­ 2 0 0 0 2 0 0 0 ­ 0 9 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 0.1 0.1 0.1 0.1 -0.2 0.4 0.6 GDP (US$ millio ns) 53 1 14 189 311 2.0 2.6 1.0 (% o f GDP ) A griculture 38.5 35.6 22.8 19.6 0.4 1.3 0.2 Industry 14.5 13.9 21.3 18.5 1.8 2.6 -0.5 M anufacturing 7.0 6.1 10.5 8.1 5.6 -1.3 0.4 Services 47.1 50.5 55.9 61 .9 2.5 3.1 1.7 Ho useho ld final co nsumptio n expenditure 92.8 93.6 91.6 99.6 .. .. .. General go v't final co nsumptio n expenditure 14.8 19.1 18.2 19.7 .. .. .. Gro ss capital fo rmatio n 30.1 18.5 21.7 26.1 .. .. .. Expo rts o f go o ds and services 30.1 33.9 15.4 13.2 .. .. .. Impo rts o f go o ds and services 67.7 65.1 46.9 58.5 .. .. .. Gro ss savings 17.6 18.5 8.7 24.1 39 Tonga B a la nc e o f P a ym e nt s a nd T ra de 2000 2009 Governance indicators, 2000 and 2008 (US$ millio ns) To tal merchandise expo rts (fo b) 10 5 To tal merchandise impo rts (cif) 71 148 Voice and accountability Net trade in go o ds and services -46 -127 Political stability Current acco unt balance -9 -24 as a % o f GDP -4.8 -7.7 Regulatory quality Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 53 100 Control of corruption Reserves, including go ld 25 60 0 25 50 75 100 2008 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings 2000 (% o f GDP ) Current revenue (including grants) 21.5 25.3 Source: Kaufmann-Kraay-Mastruzzi, World Bank Tax revenue 15.9 14.5 Current expenditure 21.3 25.5 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2008 Overall surplus/deficit -0.3 -3.5 P aved ro ads (% o f to tal) 27.0 .. Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual .. .. 00 subscribers (per 1 peo ple) 10 73 Co rpo rate .. .. High techno lo gy expo rts (% o f manufactured expo rts) 0.0 .. E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 65 101 A gricultural land (% o f land area) 42 43 To tal debt service 5 5 Fo rest area (% o f land area) .. .. Debt relief (HIP C, M DRI) ­ ­ Terrestrial pro tected areas (% o f surface area) .. 25.5 To tal debt (% o f GDP ) 34.6 32.6 Freshwater reso urces per capita (cu. meters) .. .. To tal debt service (% o f expo rts) 15.5 7.0 Freshwater withdrawal (billio n cubic meters) .. .. Fo reign direct investment (net inflo ws) .. .. CO2 emissio ns per capita (mt) 1.2 1.3 P o rtfo lio equity (net inflo ws) .. .. GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) .. .. Composition of total external debt, 2008 Energy use per capita (kg o f o il equivalent) .. .. Short-term, 0 Private, 0 IBRD, 0 IDA, 22 Bilateral, 18 Wo rld B a nk G ro up po rt f o lio 2000 2008 (US$ millio ns) IMF, 0 IB RD To tal debt o utstanding and disbursed ­ ­ Disbursements ­ ­ P rincipal repayments ­ ­ Other multi- Interest payments ­ ­ lateral, 50 US$ millions IDA To tal debt o utstanding and disbursed 4 22 Disbursements 0 1 P riv a t e S e c t o r D e v e lo pm e nt 2000 2009 To tal debt service 0 0 Time required to start a business (days) ­ 25 IFC (fiscal year) Co st to start a business (% o f GNI per capita) ­ 8.2 To tal disbursed and o utstanding po rtfo lio ­ ­ Time required to register pro perty (days) ­ 108 o f which IFC o wn acco unt ­ ­ Disbursements fo r IFC o wn acco unt ­ ­ Ranked as a majo r co nstraint to business 2000 2008 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt ­ ­ n.a. .. .. n.a. .. .. M IGA Gro ss expo sure ­ ­ Sto ck market capitalizatio n (% o f GDP ) .. .. New guarantees ­ ­ B ank capital to asset ratio (%) .. .. 40 Millennium Development Goals Tonga With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) T o nga G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2008 .25 P o verty headco unt ratio at $ 1 a day (P P P , % o f po pulatio n) .. .. .. .. P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. .. .. .. Share o f inco me o r co nsumptio n to the po o rest qunitile (%) .. .. .. .. P revalence o f malnutritio n (% o f children under 5) .. .. .. .. G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) 97 .. 96 96 P rimary co mpletio n rate (% o f relevant age gro up) 133 14 1 105 105 Seco ndary scho o l enro llment (gro ss, %) 98 107 101 103 Yo uth literacy rate (% o f peo ple ages 15-24) .. 99 .. .. G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) .. .. 102 99 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) .. .. .. .. P ro po rtio n o f seats held by wo men in natio nal parliament (%) .. .. .. .. G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 32 29 26 23 Infant mo rtality rate (per 1,000 live births) 26 24 22 19 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 86 94 95 99 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) .. .. .. .. B irths attended by skilled health staff (% o f to tal) .. .. 95 98 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. .. .. .. G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) .. .. .. .. Incidence o f tuberculo sis (per 100,000 peo ple) 34 31 28 25 Tuberculo sis case detectio n rate (%, all fo rms) 72 67 88 53 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) .. .. 100 100 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) .. .. 96 96 Fo rest area (% o f to tal land area) .. .. .. .. Terrestrial pro tected areas (% o f surface area) .. .. .. 25.5 CO2 emissio ns (metric to ns per capita) 0.8 1.1 1.2 1.3 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) .. .. .. .. G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt 00 Telepho ne mainlines (per 1 peo ple) 4.6 6.8 9.8 24.7 00 M o bile pho ne subscribers (per 1 peo ple) 0.0 0.3 0.2 48.7 00 Internet users (per 1 peo ple) 0.0 0.1 2.4 8.1 00 P erso nal co mputers (per 1 peo ple) .. 0.6 1.3 5.9 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 80 70 100 75 60 75 50 50 50 40 25 30 25 20 0 10 2000 2002 2004 2006 2008 0 0 1990 1995 2000 2007 2000 2002 2004 2006 2008 Primary net enrollment ratio Ratio of girls to boys in primary & secondary Tonga East Asia & Pacific Fixed + mobile subscribers Internet users education 41 Attachment 4. Tonga: Selected Economic Indicators, FY2006­FY2011 1/ FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Output and prices (Annual percent change) Real GDP 2/ 0.5 1.2 2.0 0.4 0.5 1.7 Consumer prices (period average) 7.0 5.1 9.8 5.0 2.2 4.2 Consumer prices (end of period) 6.4 5.6 12.2 1.2 4.3 4.1 Central government finance (In percent of GDP) Total revenue and grants 26.6 28.3 26.3 24.0 25.3 29.2 Total revenue 24.9 24.6 24.9 17.4 18.7 18.8 Grants 1.7 3.7 1.3 6.6 6.6 10.4 Total expenditure and net lending 29.4 27.3 24.7 27.3 29.2 34.3 Of which: Current expenditure 28.8 26.2 24.3 24.1 23.9 22.8 Capital expenditure 0.8 0.9 0.4 2.3 2.7 8.6 Overall balance 2.8 1.1 1.5 3.3 3.9 5.1 Overall balance (excl. China's EXIM bank loans) ... ... ... 3.3 2.4 2.5 External financing (net) 0.4 0.1 0.2 0.7 3.6 5.4 Domestic financing (net) 2.4 1.2 1.7 8.6 0.5 0.3 Privatization receipts 0.0 0.0 0.0 4.6 0.2 0.0 Money and credit (Annual percent change) Total liquidity 3/ 13.3 13.3 6.7 1.1 4.3 1.4 Of which: Broad money (M2) 16.6 11.9 8.2 1.8 2.0 2.5 Domestic credit 25.8 11.6 11.6 4.2 11.2 1.3 Of which: Private sector credit 22.6 9.5 18.0 2.9 11.0 2.0 Interest rates (end of period) Average deposit rate 5.2 5.6 5.7 5.3 ... ... Base lending rate 9.0 9.4 10.0 10.0 ... ... Balance of payments (In millions of U.S. dollars) Exports, f.o.b. 15.4 13.3 12.4 5.5 5.2 6.3 Imports, f.o.b. 122.2 108.6 138.1 130.1 115.7 131.5 Services (net) 7.8 17.9 3.3 2.6 3.3 5.0 Investment income (net) 2.8 3.5 3.4 4.6 3.2 3.1 Services and investment income (net) 5.0 14.4 0.1 2.0 0.1 1.9 Current transfers (net) 88.9 84.2 94.7 75.8 59.1 66.7 Of which: Private transfer receipts 102.0 93.3 106.7 84.0 63.0 70.7 Current account balance 22.8 25.5 30.9 46.9 51.5 60.5 Current account balance (excl. China's EXIM bank 22.8 25.5 30.9 46.8 42.6 45.0 (In percent of GDP) 7.9 8.4 9.0 14.3 17.4 19.9 Overall balance 0.6 4.2 1.4 22.6 2.9 1.3 Terms of trade (annual percent change) 12.0 21.9 6.1 0.1 ... ... Gross official foreign reserves In millions of U.S. dollars 40.4 47.1 48.2 67.7 70.6 72.0 In months of goods and services imports 3.1 3.9 3.2 4.7 5.3 4.8 External debt (in percent of GDP) External debt 29.0 27.1 25.3 31.5 44.2 50.7 Debt service ratio 1.1 1.1 1.4 1.2 1.1 1.5 Exchange rates Pa'anga per U.S. dollar (period average) 2.0 2.0 1.9 2.1 ... ... Pa'anga per U.S. dollar (end of period) 2.1 1.9 1.8 2.0 ... ... Nominal effective exchange rate (1990=100) 70.5 68.4 66.0 67.6 ... ... Real effective exchange rate (1990=100) 103.6 103.5 105.9 111.7 ... ... Nominal GDP (millions of T$) 580.1 604.1 652.2 685.0 704.9 747.1 Notes: 1/ Fiscal year beginning July. FY2010 and FY2011 data are projections. 2/ Including preliminary data. 42 Tonga CAS Annex 5 Selected Indicators* of Bank Portfolio Performance and Management As of 08.16.2010 Indicator 2008 2009 2010 2011 Portfolio Assessment Number of Projects Under Implementation a 2 3 2 2 Average Implementation Period (years) b 4.0 3.7 3.5 3.6 Percent of Problem Projects by Number a, c 0.0 33.3 0.0 0.0 Percent of Problem Projects by Amount a, c 0.0 31.3 0.0 0.0 Percent of Projects at Risk by Number a, d 50.0 66.7 0.0 0.0 Percent of Projects at Risk by Amount a, d 8.4 37.1 0.0 0.0 Disbursement Ratio (%) e 52.2 24.9 40.6 0.4 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 3 1 Proj Eval by OED by Amt (US$ millions) 10.5 6.1 % of OED Projects Rated U or HU by Number 33.3 0.0 % of OED Projects Rated U or HU by Amt 21.7 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 43 Tonga CAS Annex 6a- IBRD/IDA Program Summary As Of Date 8/16/2010 Country: Kingdom of Tonga Proposed IBRD/IDA Base-Case Lending Program a Strategic Implementation IDA TF Fiscal year Proj ID Rewards b b Risks (US$M) (US$M) (H/M/L) (H/M/L) 2011 Tonga Energy Develop. Policy Operation 5 H H Tonga Energy Roadmap Project 5 H M Tonga Post Tsunami Reconstruction 5 3 M L Pacific Islands Regional Connectivity (Tonga 10 H M Broadband Connectivity) Tonga Transport Sector Consolidation Project 9.3 2012 Development Policy Operation # 1 5 H H 2013 Development Policy Operation # 2 5 H H 2014 Transport Sector Follow up 4 TBD Result 39 12.3 Overall 39 12.3 Result a. This table presents the proposed program for the next three fiscal years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), 44 Tonga CAS Annex 6b Operations Portfolio (IBRD/IDA and Grants) As Of Date 8/16/2010 Closed Projects 4 IBRD/IDA * Total Disbursed (Active) 1.83 of which has been repaid 0.00 Total Disbursed (Closed) 18.13 of which has been repaid 0.74 Total Disbursed (Active + Closed) 19.96 of which has been repaid 0.74 Total Undisbursed (Active) 4.35 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 4.35 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementation Fiscal Frm Project ID Project Name IBRD IDA GRANT Cancel. Undisb. Orig. Objectives Progress Year Rev'd P079657 TO-Tonga Education Support Project S S 2005 1 0.032991 3.818 P096931 TO-Transport Sector Consolidation S S 2009 5.44 4.3177536 2.47787485 Overall Result 6.44 4.3507446 6.29587485 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal 45 Tonga CAS Annex 7a IFC Committed and Disbursed Outstanding Investment Portfolio As of 7/31/2010 (In USD Millions) Committed Disbursed Outstanding **Quasi Partici **Quasi Partici FY Approval Company Loan Equity Equity *GT/RM pant Loan Equity Equity *GT/RM pant 2009 Digicel Tonga 6.79 0 0 0 0 6.79 0 0 0 0 Total Portfolio: 6.79 0 0 0 0 6.79 0 0 0 0 * Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types. 46 Tonga CAS Annex 7b Tonga: IFC Investment Operations Program 2008 2009 2010 2011* Commitments (US$m) Gross 6.79 Net** 6.79 Net Commitments by Sector (%) Loan 100 Total 0 100 0 0 Net Commitments by Investment Instrument (%) Loan 100 Total 0 100 0 0 * As of March 31, 2011 ** IFC's Own Account only 47 IBRD 33498 176°W 174°W TO N GA Niuafo'ou DIVISION CAPITALS NATIONAL CAPITAL NIUAS Tafahi Niuatoputapu REEFS 16°S DIVISION BOUNDARIES INTERNATIONAL BOUNDARIES 172°W 0 25 50 75 Kilometers 0 25 50 Miles TONGA 18°S 18°S Fonualei Toku VAVA ' U Vava'u SOUTH Neiafu Late Vava'u Group PACIFIC OCEAN Ofolanga Kao Ha'ano Tofua Ha'apai Lifuka Foa Group Pangai Uoleva Uiha Kotu 20°S 20°S Group H A ' A PA I Nomuka Nomuka Fonuafo'ou Group Otu Tolu Group Hunga Hunga Tonga Ha'apai Albert Meyer Reef TONGATAPU NUKU'ALOFA Tongatapu Eua EUA Ohonua This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any 176°W 174°W endorsement or acceptance of such boundaries. NOVEM BER 2004