Document of The World Bank Report No: ICR00002857 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-H7450 and IDA-H8160) ON PROGRAMMATIC DEVELOPMENT POLICY GRANTS IN THE AMOUNT OF 5.8 MILLION SDR AND 1.2 MILLION SDR (US$9 MILLION and US$1.8 MILLION EQUIVALENT) TO THE KINGDOM OF TONGA FOR THE TONGA ECONOMIC RECOVERY OPERATIONS I&II December 11, 2013 Poverty Reduction and Economic Management Department Pacific Islands Country Department East Asia and Pacific Region Kingdom of Tonga GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 2013) Currency Unit Tongan Pa’anga US$1.00 TOP$1.86 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank MOE Ministry of Education AusAID Australian Agency for International MOH Ministry of Health Development CAS Country Assistance Strategy MTEF Medium-Term Expenditure Framework CEDAW Convention on the Elimination of All NGO Non-Government Organization Forms of Discrimination Against Women CFAA Country Financial Accountability NRBT National Reserve Bank of Tonga Assessment CPIA Country Policy and Institutional NZ-IDG New Zealand Ministry of Foreign Affairs Assessment International Development Group DSA Debt Sustainability Analysis PEFA Public Expenditure and Financial Accountability EU European Union PFM Public Financial Management EXIM Export-Import Bank of China PER Public Expenditure Review GEC Global Economic Crisis PFTAC Pacific Financial Technical Assistance Centre GDP Gross Domestic Product PHRD Japan Policy and Human Resources Development Trust Fund GNP Gross National Product PIAC Pacific Infrastructure Advisory Center GOT Government of Tonga PRIF Pacific Regional Infrastructure Facility HIES Household Income and Expenditure ROSC Report on the Observance of Standards and Survey Codes HIPC Heavily Indebted Poor Countries SDR Special Drawing Rights IBRD International Bank for Reconstruction and SMEs Small and Medium Enterprises Development IDA International Development Association SOE State-Owned Enterprise IFC International Finance Corporation TERM Tonga Energy Roadmap IMF International Monetary Fund TERM-IU Tonga Energy Roadmap Implementation Unit IPP Independent Power Provider TPL Tonga Power Limited JSAN Joint Staff Advisory Note TSD Tourism Sector Diagnostic LDP Letter of Development Policy TSDF Tonga Strategic Development Framework MDGs Millennium Development Goals UNDP United Nations Development Program MFNP Ministry of Finance and National Planning Vice President: Axel van Trotsenburg Country Director: Franz Drees-Gross Lead Economist: Vivek Suri Task Team Leader: Virginia Horscroft; Tobias Haque ICR Team Leader: Tobias Haque KINGDOM OF TONGA Economic Recovery Operations I&II CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design ............................................................. 1 2. Key Factors Affecting Implementation and Outcomes ............................................................... 6 3. Assessment of Outcomes ........................................................................................................... 11 4. Assessment of Risk to Development Outcome ......................................................................... 21 5. Assessment of Bank and Borrower Performance ...................................................................... 22 6. Lessons Learned ........................................................................................................................ 23 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ........................... 25 Annex 1 Bank Lending and Implementation Support/Supervision Processes .............................. 26 Annex 2. Beneficiary Survey Results ............................................................................................ 27 Annex 3. Stakeholder Workshop Report and Results ................................................................... 28 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ...................................... 29 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ........................................ 30 Annex 6. List of Supporting Documents ....................................................................................... 32 MAP A. Basic Information Program 1 Tonga Economic Country Tonga Program Name Recovery Operation Program ID P126453 L/C/TF Number(s) IDA-H7450 ICR Date 12/02/2013 ICR Type Core ICR KINGDOM OF Lending Instrument DPL Borrower TONGA Original Total XDR 5.80M Disbursed Amount XDR 5.80M Commitment Implementing Agencies Ministry of Finance and National Planning Program 2 Tonga Economic Country Tonga Program Name Recovery Operation II Program ID P130824 L/C/TF Number(s) IDA-H8160 ICR Date 12/02/2013 ICR Type Core ICR KINGDOM OF Lending Instrument DPL Borrower TONGA Original Total XDR 1.20M Disbursed Amount XDR 1.20M Commitment Implementing Agencies Ministry of Finance and National Planning B. Key Dates Tonga Economic Recovery Operation - P126453 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 06/21/2011 Effectiveness: 12/02/2011 Appraisal: 10/06/2011 Restructuring(s): Approval: 11/22/2011 Mid-term Review: Closing: 06/30/2012 06/30/2012 Tonga Economic Recovery Operation II - P130824 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/17/2012 Effectiveness: 01/15/2012 Appraisal: 09/17/2012 Restructuring(s): Approval: 11/15/2012 Mid-term Review: Closing: 06/30/2013 06/30/2013 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Substantial Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators Tonga Economic Recovery Operation - P126453 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status Tonga Economic Recovery Operation II - P130824 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status D. Sector and Theme Codes Tonga Economic Recovery Operation - P126453 Original Actual Sector Code (as % of total Bank financing) Central government administration 58 58 Energy efficiency in Heat and Power 7 7 Oil and gas 14 14 Other Renewable Energy 7 7 Other social services 14 14 Theme Code (as % of total Bank financing) Administrative and civil service reform 14 14 Macroeconomic management 14 14 Other economic management 14 14 Public expenditure, financial management and 44 44 procurement Social safety nets 14 14 Tonga Economic Recovery Operation II - P130824 Original Actual Sector Code (as % of total Bank financing) Central government administration 57 57 General agriculture, fishing and forestry sector 5 5 General energy sector 24 24 General public administration sector 14 14 Theme Code (as % of total Bank financing) Infrastructure services for private sector development 14 14 Macroeconomic management 14 14 Public expenditure, financial management and 43 43 procurement Tax policy and administration 29 29 E. Bank Staff Tonga Economic Recovery Operation - P126453 Positions At ICR At Approval Vice President: Axel van Trotsenburg James W. Adams Country Director: Franz R. Drees-Gross Ferid Belhaj Sector Manager: Vivek Suri Vivek Suri Task Team Leader: Tobias Haque Virginia Horscroft ICR Team Leader: Tobias Haque ICR Primary Author: Tobias Haque Tonga Economic Recovery Operation II - P130824 Positions At ICR At Approval Vice President: Axel van Trotsenburg Pamela Cox Country Director: Franz R. Drees-Gross Ulrich Zachau Sector Manager: Vivek Suri Vivek Suri Task Team Leader: Tobias Haque Tobias Haque ICR Team Leader: Tobias Haque ICR Primary Author: Tobias Haque F. Results Framework Analysis Program Development Objectives (from Program Document) Assist the Government of Tonga to implement key aspects of its medium-term reform agenda, while providing a predictable flow of resources in a challenging fiscal environment. Revised Program Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Tonga Economic Recovery Operation - P126453 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years The extent to which the variance in primary expenditure composition exceeds Indicator 1 : the overall variation in primary expenditure 0–5 percent in FY2006/07, 10–15 percent in 4.5 percent in Value 0–5 percent in FY2007/08, 5–10 FY2011/12 and 3.4 (quantitative or FY2011/12 and percent in FY2008/09, percent in Qualitative) FY2012/13 0–5 percent in FY2012/13 FY2009/10, percent in FY2010/11. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Highly Satisfactory achievement) Number of elements defined in the PEFA criteria for public access to key fiscal Indicator 2 : information (PI-10) that are satisfied Value Three elements One element One element satisfied in (quantitative or satisfied in satisfied in FY2010/11 Qualitative) FY2012/13 FY2012/13 Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Moderately Unsatisfactory achievement) Variance between budget and outturn for the government-funded public service Indicator 3 : wage bill Variance of an average 3.7 percent from budget Variance within Underspends of 8.6 estimate (FY2000/01– Value 2.5 percent of the percent in FY2010/11, excluding (quantitative or budget estimate FY2011/12 and 4.8 FY2005/06, when the Qualitative) for FY2011/12 and percent in civil service strike and FY2012/13. FY2012/13 major wage settlement occurred) Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Indicator 4 : Basis of calculating retailer’s margin for petroleum Retailers’ margin Value Retailers’ margin set on Retailers’ margin set on a per-liter (quantitative or a percentage-of-cost set on a per-liter basis from Qualitative) basis basis FY2011/12. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Indicator 5 : Percentage cost recovery from electricity tariffs Value 97.2 percent cost 100 percent cost 100 percent cost (quantitative or recovery. recovery. recovery. Qualitative) Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Indicator 6 : Source of energy supplied to the grid. Energy dispatched Energy dispatched Value Energy only dispatched from lowest cost from lowest cost (quantitative or from single available source of energy source of energy Qualitative) source of energy first. first. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Indicator 7 : Proportion of public enterprises undertaking commercial operations Value Less than one third 6 of 14 public One third of public (quantitative or of public enterprises enterprises. Qualitative) enterprises. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Number of communities experiencing incremental employment and income Indicator 8 : generation and community asset creation and/or rehabilitation. Value Number of beneficiary (quantitative or Unspecified. Dropped communities Qualitative) Date achieved 10/21/2011 07/01/2013 Comments (incl. % This indicator was dropped achievement) Tonga Economic Recovery Operation II - P130824 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years The extent to which the variance in primary expenditure composition exceeds Indicator 1 : the overall variation in primary expenditure 0–5 percent in FY2006/07, 10–15 percent in 4.5 percent in Value FY2007/08, 5–10 0–5 percent in FY2011/12 and 3.4 (quantitative or percent in FY2008/09, FY2011/12 and percent in Qualitative) 0–5 percent in FY2012/13 FY2012/13 FY2009/1 5–10 percent in FY2010/11. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Highly Satisfactory achievement) Number of elements defined in the PEFA criteria for public access to key fiscal Indicator 2 : information (PI-10) that are satisfied Value One element One element satisfied in Three elements (quantitative or satisfied in FY2010/11 satisfied Qualitative) FY2012/13 Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Moderately Unsatisfactory achievement) Variance between budget and outturn for the government-funded public service Indicator 3 : wage bill Variance of an average 3.7 percent from budget Variance within Underspends of 8.6 estimate (FY2000/01– Value 2.5 percent of the percent in FY2010/11, excluding (quantitative or budget estimate FY2011/12 and 4.8 FY2005/06, when the Qualitative) for FY2011/12 and percent in civil service strike and FY2012/13. FY2012/13 major wage settlement occurred) Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Cost of consumption tax and duty exemptions as a proportion of total revenue Indicator 4 : from these sources 28 percent in Value Less than 30 30 percent in FY2011/12 and 23 (quantitative or percent in FY2010/11 percent in Qualitative) FY2012/13. FY2012/13. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Highly Satisfactory achievement) Indicator 5 : Costs of acquiring business licenses as measured in the Doing Business Survey Value (quantitative or TOP$130 (DBS 2012) TOP$100 TOP$115 Qualitative) Date achieved 10/15/2012 07/01/2013 07/01/2013 Comments (incl. % Moderately Satisfactory achievement) Indicator 6 : Public availability of key financial information on major public enterprises Audited accounts Audited Financial of all designated Accounts of major public designated public enterprises are enterprises made Audited accounts of available to the Value publicly available designated major public public within 6 (quantitative or on their respective enterprises not available months of the end Qualitative) websites within 6 to the public of the previous months of the end financial year for of FY2010/11, FY2010/11, FY2011/12 and FY2011/12, and FY2012/13. FY2012/13. Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) Indicator 7 : Basis of calculating retailer’s margin for petroleum Value Retailers’ margin set on Retailers’ margin Retailers’ margin (quantitative or a percentage-of-cost set on a per-liter set on a per-liter Qualitative) basis basis basis Date achieved 10/21/2011 07/01/2013 07/01/2013 Comments (incl. % Satisfactory achievement) (b) Intermediate Outcome Indicator(s) Tonga Economic Recovery Operation - P126453 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Not Applicable Value (quantitative or Qualitative) Date achieved Comments (incl. % achievement) Tonga Economic Recovery Operation II - P130824 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Not Applicable Value (quantitative or Qualitative) Date achieved Comments (incl. % achievement) G. Ratings of Program Performance in ISRs Tonga Economic Recovery Operation - P126453 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 04/09/2012 Satisfactory Satisfactory 8.91 H. Restructuring (if any) 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. Tonga is a small, remote economy that is highly vulnerable to external shocks and dependent on a limited number of sources of foreign exchange. Tonga has a very small population of 104,000 and is extremely remote from its major markets. Small size and remoteness combine to push up the cost of economic activity, limiting the scope for Tonga’s exports of goods and services to be competitive in world markets, and to raise the cost of public services. Like other small, remote economies, Tonga depends on a limited number of sources for its foreign exchange earnings – the main one being remittances from the large number of Tongans who live and work abroad, which have averaged around 30 percent of GDP over the last decade. The openness of Tonga’s economy and the lack of diversification of its sources of foreign exchange make Tonga highly vulnerable to external economic shocks. Its geographical characteristics also make it highly vulnerable to natural disasters. 2. The Tongan economy entered the global economic crisis in a vulnerable state. Remittance flows to Tonga peaked as a proportion of GDP in 2004/05, following which they declined substantially in the years prior to the global economic crisis – possibly reflecting the aging of emigrant stocks and weakening relationship links. With heavy reliance on imported food products and energy, the global food and fuel crisis led to inflation of 12 percent in 2008. Price hikes disproportionately impacted on poor, urban households – highly reliant on cash incomes in the absence of subsistence opportunities – and the current account deficit widened to 14.7 percent of GDP by 2009. Growth momentum was further weakened by a contraction of domestic credit following a poorly-judged lending surge on behalf of commercial banks in late 2007 and 2008. Non-performing loans peaked at 20 percent in mid-2009, with a 25 percent contraction in credit to the private sector between 2008/09 and FY2010/11, as banks became increasingly risk-averse. The Government contracted a large loan in 2007 from the China EXIM bank for reconstruction work in Nuku’alofa following civil disturbances in 2006, reducing capacity for sustainable additional borrowing. 3. The global economic crisis had a severe impact on remittances and exports. With economic slowdown in key remittance sending countries – the US (where over 50 percent of Tonga’s remittances originate), New Zealand and Australia – the decline in remittances accelerated. From 31.1 percent of GDP in FY2007/08, remittance receipts fell by 13.6 percent and 10.1 percent over the next two years, to reach 22.5 percent of GDP in FY2009/10. At the same time, with New Zealand, Australia, and the United States also being Tonga’s largest tourist markets, Tonga’s tourist receipts declined by 13.3 percent in FY2009/10. Led by falls in agricultural and fish exports, merchandise exports also continued their declining trend in FY2008/09 and FY2009/10. 4. Natural disasters contributed to hardship and impeded economic management. In September 2009, Tonga was buffeted by a tsunami, causing loss of life and significant material damage, particularly in the outlying Niuas island group. In February 2010, a cyclone affected the whole of the archipelago, with the worst impact in the Vava’u island group, causing widespread material damage. In February 2011, a cyclone hit the Ha’apai island group, causing significant damage to infrastructure and housing. In February 2012, cyclone Jasmine caused widespread flooding in Nuku’alofa and associated damage to property and businesses. Aside from the private costs of the natural disasters, these events caused periodic diversion of public resources away 1 from implementing the development program of the Government and towards immediate reconstruction needs. 5. The crisis had a major impact on Government revenues. In FY2008/09 and FY2009/10, tax revenue fell 6.4 and 11.3 percent in nominal terms. Falling remittances fed through into declining imports, and consequent reductions in consumption tax, import duty and excise revenue. While revenue policy settings remain appropriate and in line with regional comparators, the revenue impacts of remittance declines have generated pressure to consolidate expenditure and identify alternative financing sources. 6. The programmatic series of two Tonga Economic Recovery Operations were designed to support the Government of Tonga in implementing key aspects of its medium- term reform agenda, while providing a predictable flow of resources in a challenging fiscal environment. The operations were implemented to help meet a clear need for budget support in the context of lingering impacts of the global economic crisis and the weak global recovery, including rising poverty, falling remittance flows, a large contraction in tax revenues, and poor export performance. The operations supported the reform agenda of Tonga’s first majority- elected parliament at a critical juncture in Tonga’s development process. 7. At appraisal, Tonga’s economic prospects were expected to improve, but downside risks were recognized. Tonga’s economy was expected to grow by 1.7 percent in FY2011/12 and by about 1.8 percent over the medium term, underpinned by sustained high levels of external support. The projection for FY2011/12 was based on modest recoveries in tourism and remittance receipts, significant levels of budget support to finance government expenditure, and high levels of construction activity financed by the China EXIM bank loans for civil works in and around Nuku’alofa.1 Inflation was expected to remain at around 5.8 percent, as a result of continued high global commodity prices, particularly for food and fuel, and reflecting historical trends. Fiscal pressures were expected to be met through both ongoing budget support assistance and fiscal consolidation on both the revenue and expenditure side – specifically through successful implementation of a public sector hiring freeze and various revenue administration and policy reforms. The risks associated with continued poor performance in remittance and exports, and vulnerability to broader global conditions, were explicitly recognized in both relevant IMF Article IV reports and in the program documents. 1.2 Original Program Development Objectives (PDO) and Key Indicators 8. The PDO for the operations was to “assist the Government of Tonga to implement key aspects of its medium-term reform agenda, while providing a predictable flow of resources in a challenging fiscal environment”. Key outcomes and indicators were specified against each of the policy areas (see Section 1.5) and are listed in the table below: 1 Following the initial loan for reconstruction of Nuku’alofa following the 2006 disturbance, an additional loan was contracted for a major road project in 2010. 2 Outcome Indicator The budget is credible at the level of The extent to which the variance in primary disaggregated expenditure expenditure composition exceeds the overall variation in primary expenditure Public access to key fiscal information increases Number of elements defined in the PEFA criteria for public access to key fiscal information (PI-10) that are satisfied Improved control of the wage bill Variance between budget and outturn for the government-funded public service wage bill Energy prices better reflect costs of supply Basis of calculating retailer’s margin for petroleum Electricity tariffs are set at a level that achieves Percentage cost recovery from electricity tariffs full cost recovery Tonga Power Limited dispatches electricity from Source of energy supplied to the grid. the lowest cost source of energy first. The existing public enterprise portfolio is made Proportion of public enterprises undertaking more focused on infrastructure services as a result commercial operations of the progressive disposal of enterprises that undertake commercial activities, to reduce their share to one third of the portfolio In communities targeted by the Community Number of communities experiencing incremental Public Works Scheme there has been incremental employment and income generation and community employment and income generation and asset creation and/or rehabilitation. community asset creation and/or rehabilitation. 1.3 Revised PDO and Key Indicators, and Reasons/Justification 9. The Program Development Objective was not revised. Several Outcome Indicators were revised, however. The following table lists outcome indicators that were removed between Board approval of the first and second operations and an explanation for these changes. Removed Outcome Indicators Explanation Electricity tariffs are set at a level that While these outcomes were ultimately achieved, the triggers most achieves full cost recovery closely related to their achievement were dropped. Therefore the outcome indicators were dropped from the program document for the second operation. These outcome indicators were to have been achieved through the following proposed trigger for the second operation: “The Tonga Power Limited dispatches recipient will implement a new electricity tariff that, inter alia, electricity from the lowest cost source provides for full cost recovery, establishes financial incentives to of energy first. generate and distribute electricity efficiently, and institutes a lifeline tariff”. This trigger was dropped. 3 A tariff review was required to inform the development of a new electricity tariff. Cabinet agreement to that review was included as a prior action under the first economic recovery operation. Due to implementation delays, however, including in the mobilization of required technical assistance from development partners, the review was not completed in time for the implementation of a new tariff within timeframes for the second operation. The review has now been completed and is being considered by Government and donors. Changes to the electricity tariff based on review findings are expected over the next 18 months, following necessary consultation. Due to Government’s implementation of a Community Service Obligation for Tonga Power Limited, full cost recovery has been achieved. Grant-financed construction of solar generation assets has proceeded, leading to diversification in the energy mix. This progress occurred despite the fact that the tariff review was completed and revisions to the tariff not implemented. The existing public enterprise This outcome was expected to be achieved partly through the portfolio is made more focused on following proposed trigger for the second operation: “The infrastructure services as a result of Recipient will bring the Dateline Hotel to the point of transaction the progressive disposal of enterprises as recommended by an internationally-reputable transaction that undertake commercial activities, advisor”. This trigger was dropped. to reduce their share to one third of the portfolio Progress towards privatization was slower than expected due to changes in Government policy regarding the appropriate scope of private participation. The Government, with IFC support, remained committed to some form of public-private partnership. But the action could not be completed in the timeframes required by the second operation, given the time required for full consideration of options and necessary due diligence. The Government has since agreed to proceed with a concession contract for private participation in the Dateline Hotel. This policy action has been supported under a subsequent series of DPOs. In communities targeted by the This outcome was expected to be achieved through the following Community Public Works Scheme proposed trigger for the second operation: “The Recipient will there has been incremental complete the pilot of the community public works program and employment and income generation will take into account lessons learned for scaling up the and community asset creation and/or program”. This trigger was dropped. rehabilitation. Donor financing expected to support implementation of the community public works scheme was not made available. Government was unable to proceed with implementation of the scheme without expected donor support given broader fiscal pressures. 10. The following table lists outcome indicators that were added at the time the second operation was approved and explains these additions. 4 Additional Outcome Indicators Explanation Growth in the cost of exemptions is Under the first operation, a trigger was included regarding the curtailed implementation of reforms recommended by an ongoing tax policy and administration review. This review had been completed by the time of the second operation, leading to the inclusion of a more specific prior action: “Details regarding the cost by category of tax expenditure during the previous year have been published in the annual budget statement for FY2012/13”. This outcome indicator was therefore included to measure the impact of increased transparency in stemming the granting of exemptions. Costs of doing business are reduced Given unexpected delays in progress against certain reforms in the energy sector, the Government agreed to prioritize other structural reforms, including to the business regulatory environment. An additional policy action was included in the second operation: “The Recipient’s Cabinet has approved the submission to parliament of legislative changes to reduce the number of business license classes and extend license duration”. This outcome indicator reflects the improvements to the business regulatory environment expected to be achieved through this additional action. Financial transparency of major public This additional outcome indicator was included under the second entities is increased operation to capture progress in SOE management following the removal of the outcome indicator relating to changes in the portfolio of SOEs discussed above. 11. The full list of revised outcomes and indicators as approved for the second operation are shown in the table below: Outcome Indicator The budget is credible at the level of The extent to which the variance in primary expenditure disaggregated expenditure composition exceeds the overall variation in primary expenditure Public access to key fiscal information Number of elements defined in the PEFA criteria for public increases access to key fiscal information (PI-10) that are satisfied Improved control of the wage bill Variance between budget and outturn for the government-funded public service wage bill Growth in the cost of exemptions is Cost of consumption tax and duty exemptions as a proportion of curtailed total revenue from these sources Costs of doing business are reduced Costs of acquiring business licenses as measured in the Doing Business Survey Financial transparency of major public Public availability of key financial information on major public entities is increased enterprises Energy prices better reflect costs of Basis of calculating retailer’s margin for petroleum supply 5 1.4 Original Policy Areas Supported by the Program: 12. Four Policy Areas were initially identified: i) Strengthening Public Financial Management; ii) Strengthening Fiscal Policy; iii) Promoting Structural Reform; iv) Supporting Social Protection. 1.5 Revised Policy Areas 13. During approval for the second operation, the “Supporting Social Protection” policy area was dropped. This reflects Government’s decision that it was not able to proceed with implementation of the community public works scheme in the absence of expected donor financing. Implementation of the community public works scheme was the only policy action in this policy area. 1.6 Other significant changes None 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 14. The program was structured as a programmatic series of two development policy operations. Each operation supported seven prior actions. Amounts and prior actions are shown in the following tables. Amount AusAID Co- Expected Actual Release (IDA) Financing Release Date Release Date DPO I US$9 AUD$5 December December Regular million million 2011 2011 DPO II US$1.8 AUD$5 December January 2013 Regular million million 2012 First Operation Prior Actions Status Strengthening Public Financial Management 1. The Recipient has instituted an in-year budget Completed, but facing implementation constraints. reporting system that tracks key budget information Fiscal reports were prepared quarterly, and discussed by on a monthly and quarterly basis to strengthen budget Cabinet up to the third quarter of FY2012/13, but delays execution. have been experienced since then due to staffing constraints and not due to backtracking on the reform. 2. The Recipient has reformed the budget calendar so as Completed. Under the revised Budget Calendar, the to make budget proposals available to the public when budget proposal was made publicly available when tabled in the Recipient’s Legislative Assembly, in tabled in parliament during the FY2012/13 budget order to improve transparency in the process for process. adopting the budget. 6 Strengthening Fiscal Policy 3. The Recipient has brought recruitment in all parts of Completed. All recruitment for established staff now the public service under centralised control and has requires the approval of the Public Service Commission applied a partial hiring freeze in the Recipient’s fiscal and the Ministry of Finance. A hiring freeze has been year 2011-2012 to improve the management of the effectively implemented, with only vital positions being public service wage bill. filled. Vacancies have been pooled under the Ministry of Finance vote, allowing redeployment of positions across ministries to better reflect urgent needs. Promoting Structural Reform 4. The Recipient has approved guiding principles for Completed. Cabinet approved guiding principles for the reforming the electricity tariff structure, aimed at a review of the electricity tariff. These guiding principles financially sustainable and efficient electricity sector, informed the output that has recently been delivered to taking into account the planned shift to renewable TERM-IU by consultants. energy, with adequate protection for the poorest consumers. 5. The Recipient has amended the petroleum pricing Completed. Templates were revised with World Bank templates in general accordance with the technical assistance and are now being applied by the recommendations of the independent reviews of said authorities in carrying out regulatory functions in the templates, in order to ensure that consumer prices are petroleum sector. Revisions included the setting of an accurate reflection of existing costs. retailer margins on a per-liter basis, rather than a percentage-of-cost basis, facilitating lower prices to consumers. 6. The Recipient has published the audited accounts of Completed. Audited financial accounts of major SOEs the designated major public enterprises in order to were completed and made available on the websites of improve the transparency of the financial designated public enterprises. management of said designated major public enterprises. Supporting Social Protection 7. The Recipient has adopted a community public works Completed, but facing implementation constraints. program targeted to poor and vulnerable communities. The prior action was met in terms of Cabinet agreeing to the implementation of the community public works scheme. However, the scheme has not been implemented due to the unavailability of expected donor financing. Second Operation Prior Actions Status Strengthening Public Financial Management 1. A Treasury Single Account has been implemented for Completed. Following the closure of more than 100 all Government-funded operations bank accounts, Tonga now complies with IMF definitions for the operation of a Treasury Single Account. 2. Quarterly reports have been made available on the Completed, but facing implementation constraints. Ministry of Finance and National Planning website on Fiscal reports were made available on the Ministry of a timely basis (within 45 days of the end of the Finance website, within 45 days of the end of the reporting period) reporting period, up until the fifth month of FY2012/13, meeting the formal requirements for the prior action. However, with substantial staff turnover and capacity limitations in the budget team, publication of subsequent 7 reports has been significantly delayed. 3. The Recipient’s Cabinet has approved the submission Completed. Audited Financial Statements of to Parliament of the audited Financial Statements of Government were presented to Parliament in late 2012 Government up to FY2010/11 and have now been made publicly available via gazette. Strengthening Fiscal Policy 4. Details regarding the cost by category of tax Completed, but facing implementation constraints. expenditure during the previous year have been Full disaggregated details of tax expenditure were published in the annual Budget Statement for included in the annual Budget Statement for FY2012/13. FY2012/13 However, these details were omitted from the FY2013/14 Budget Statement due to administrative oversight in the context of high staff turnover and capacity constraints in the Ministry of Finance budget team. 5. The Recipient’s Cabinet has approved the introduction Completed. Cabinet agreed in-principle to the of a presumptive tax for SMEs, consistent with the introduction of a presumptive tax for small businesses recommendations of the PFTAC Tax Review subject to consultation and further detailed policy development. Further work towards the introduction of this tax is being supported by a new series of DPOs, with consultations now complete and legislation drafted for submission to parliament before the end of 2014. 6. The Recipient’s Cabinet has approved the introduction Completed. Cabinet agreed in-principle to the of a natural resource revenue regime, consistent with introduction of a natural resource tax regime subject to the recommendations of the PFTAC Tax Review consultation and further detailed policy development. Further work towards the introduction of this tax is being supported by a new series of DPOs, with consultations now complete and legislation drafted for submission to parliament before the end of 2014. Promoting Structural Reform 7. The Recipient’s Cabinet has approved the submission Completed. Proposed legislative changes were to Parliament of legislative changes to reduce the submitted to parliament and have since been number of business license classes and extend license incorporated into legislation. duration 2.2 Major Factors Affecting Implementation: 15. Political commitment remained strong in relation to PFM, fiscal policy, and business environment reforms. This commitment was maintained for three main reasons:  Firstly, unfavorable economic conditions encouraged continued political focus on PFM, fiscal policy, and business environment reforms. Remittance and tourism receipts continued to decline in real terms throughout the period of the program, placing pressure on government revenues. With limited space for new borrowing and pressure to maintain public services in the face of declining revenues, Government remained committed to ensuring efficient use of available resources, raising revenue from new sources, and opening new avenues for economic growth. In the context of declining real Government expenditure, difficult reforms were successfully implemented, including the exertion of control over wage bill growth and use of the contingency fund, while new external borrowing was avoided. 8  Secondly, supported policy areas and actions reflected the genuine priorities of the Government and were championed by successive Ministers of Finance. 2 The program was designed to support Government’s reform program through a coordinated process of policy dialogue between government and donors. A Government/donor committee was established to facilitate policy dialogue between Government and donors, chaired by the Secretary of Finance. Through this process, the Ministry of Finance maintained a strong voice in identifying a limited number of its own reform priorities for inclusion as prior actions for budget support. Successive Ministers of Finance, as key champions of supported reforms, provided important political support and were repeatedly consulted during program design. This process ensured that problems with the implementation of policy actions within the Minister of Finance’s areas of responsibility could be addressed at an early stage.  Thirdly, donors working on economic and business environment reforms coordinated closely to support the process. Donors worked together to develop a joint policy matrix, with several donors providing budget support against the same policy actions and using a common monitoring framework. Donors conducted several joint missions during the preparation of both operations to ensure joint understanding of the process and monitor progress with implementation of policy actions. Close coordination ensured clear and open dialogue with Government, avoided proliferation of policy actions, and ensured reform efforts were targeted towards a small number of shared priorities. 16. Political support for reforms in the energy sector was uneven. Between the first and second operations, emphasis moved significantly away from planned reforms in the energy sector. This reflected the absence of a political champion for energy reforms and disagreements at the political level regarding the appropriate model for energy sector development in Tonga. As a consequence, progress with revising the electricity tariff and implementing broader petroleum sector regulatory reforms took longer than initially expected and these triggers were dropped. The Bank has continued to support progress in these areas under a subsequent DPO series as well as through TA and project-level engagements. 17. The operation drew on extensive background analysis. The operation was informed by extensive analytical work and knowledge acquired through existing project engagements in all policy areas. PFM and fiscal reforms were informed by a World Bank expenditure mapping exercise, which provided a detailed picture of budgetary allocations and execution performance over the previous decade. Reforms in the energy sector were informed by World Bank energy sector TA, relating to both petroleum sector and electricity reforms. Revenue reforms were informed by a detailed IMF/PFTAC review, with World Bank participation, completed in 2011. Structural reforms, including reform of SOEs, were informed by ADB analytical products and TA engagements. Existing knowledge and relationships helped ensure that policy actions were well- focused and that reforms could be supported through technical assistance when required. 18. Risks relating to capacity constraints were identified and planned for, but capacity gaps slowed progress in some areas. The team accurately identified potential risks from capacity constraints within the Tongan Government. While many highly skilled and committed officials played key roles in implementing supported reforms, staff shortages and high turnover led to problems in several areas. Failure to maintain progress with quarterly fiscal reports and 2 The Minister of Finance changed during a Cabinet reshuffle during preparation of the second operation. 9 reporting on tax expenditure in the budget statement reflected the departure of key staff from the Ministry of Finance’s budget team. Energy sector reforms were hampered by a lack of capacity within the Tonga Energy Roadmap Implementation Unit. Donors, however, coordinated carefully to ensure sufficient technical assistance was available to support other reform actions that strained available government capacity. At various times, technical assistance from the World Bank, Asian Development Bank, and IMF/PFTAC was provided to the Ministry of Finance, the Ministry of Revenue, the Tonga Energy Roadmap Implementation Unit, the Ministry of Commerce and the Ministry of Public Enterprises to assist with reforms included in the joint matrix. The need for technical assistance support was explicitly recognized by donors and Government from an early stage, with technical assistance requirements being defined as policy actions were agreed. Without this assistance, progress against more actions may have been delayed given very thin capacity in many areas of the Tongan bureaucracy. The program document also explicitly recognized the need for flexibility in the choice of actions, given the inevitable risks associated with very thin capacity in Pacific Island contexts. 19. Other identified risks did not pose major obstacles to program implementation. Risks were also identified in relation to: i) political instability following recent democratizing reforms; ii) exposure to external economic conditions and shocks; and iii) reliance on continued grant support for the maintenance of fiscal sustainability. A Cabinet reshuffle occurred during preparation of the second operation, leading to a change in the Minister of Finance. Government commitment to reforms remained strong, however, as discussed above. This reflected the team’s efforts to build support and consult widely beyond the Minister of Finance when selecting reform actions. While external economic conditions remained unfavorable, Tonga did not face major economic shocks or natural disasters. Unfavorable economic conditions and fiscal pressures may have contributed to stronger reform commitment. Donors were able to mobilize required project and budget support grants to avert the need for large fiscal contraction during the term of the program. 20. The design of the operation was satisfactory. The program was designed as a programmatic series of two operations, with a focus on PFM, fiscal policy, structural, and social protection reforms. These policy areas were highly relevant, given the context of economic slow- down and fiscal pressures driven by the decline in remittance and tourism receipts. The objectives of improving efficiency in the use of public resources, expanding the revenue base, opening new opportunities for growth through structural reforms, and supporting social protection reflected a coherent response to the challenges faced by Tonga. While the second operation saw some narrowing of focus, with actions relating to the energy sector and social protection being dropped, this was an appropriate response to unforeseen changes in circumstances – specifically, capacity constraints to and uneven political support for energy sector reforms, and a shortfall in resources available to the Government of Tonga to implement the planned community public works scheme. The need for a flexible approach and the risks associated with capacity constraints in a small Pacific Island Country context were clearly identified at the outset. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 21. M&E design was intended to reflect a collaborative and coordinated approach between donors and government. The Budget Support Management Committee was established during the first operation as a means of both reaching agreement on policy actions to be included in the joint policy matrix between government and donors and monitoring progress against actions. Secretaries of all relevant ministries were represented on the committee, along with the World Bank as coordinating donor. Budget Support Management Committee meetings were to be held bi-monthly and allowed progress towards policy actions to be regularly monitored and 10 technical assistance to be mobilized when problems arose. The approach was intended to reflect the status of the joint policy matrix as a statement of government’s own policy priorities, with the Budget Support Management Committee allowing information sharing both with donors and within Government on progress with reform implementation. 22. M&E design was intended to avoid additional burdens on overstretched government capacity. M&E was intended to be undertaken largely through the same mechanism used for program design (i.e. the Budget Support Management Committee). Donors also worked hard to harmonize outcome indicators and evidence requirements for prior actions. This approach reflected the importance of streamlined M&E approaches in data-poor and thin-capacity Pacific contexts, where elaborate quantitative M&E frameworks would risk distracting available capacity from program implementation. 23. Implementation of M&E was generally effective. The Budget Support Management Committee approach worked well as a mechanism for information sharing and coordination. Through Budget Support Management Committee meetings, the Bank was able to effectively monitor progress against reform actions, collect evidence of reform implementation, and gather data to monitor progress against outcomes. The process, however, was resource intensive for both the Ministry of Finance, as secretariat for the committee, and for the Bank as coordinating donor. Large investment in the establishment of this committee during the early stages of the process is likely to have been worthwhile, however, with resource requirements on both the Bank and the Ministry of Finance subsequently declining as the process (including institutional procedures of participating donors, data needs, and information requirements) came to be better understood by all parties. 2.4 Expected Next Phase/Follow-up Operation: 24. A follow-up series of development policy operations is now underway. The World Bank has prepared a programmatic series of two development policy operations focused on the same policy areas. The new series provides a continuation of budget support assistance into subsequent fiscal years. The new program will build on the achievements of the first programmatic series. Key reforms expected to be supported by the new series of development policy operations include: i) further PFM reforms, including the implementation of tighter controls on the use of the contingency fund; ii) cabinet agreement to a new procurement reform action plan; iii) preparation of legislation for the natural resource and presumptive tax regimes following policy decisions supported under the previous series of operations; iv) restructuring or the introduction of private participation in the operation of key SOEs, including Tonga Telecommunication Corporation and the International Dateline Hotel; and v) further progress with business licensing reforms, including the introduction of an online system for registration of business names. 25. The new series of development policy operations has benefited from the coordination and monitoring arrangements developed under the previous operations. Policy actions for the new series of operations were agreed through the Budget Support Management Committee. The proven success of this mechanism has encouraged continued participation by other donors providing budget support in the development of a joint policy matrix through coordinated dialogue. The European Union, the Asian Development Bank, and AusAID are now providing budget support assistance alongside the World Bank against the joint policy matrix. 3. Assessment of Outcomes 11 3.1 Relevance of Objectives, Design and Implementation Relevance to Country Priorities 26. The program was relevant to country priorities as stated in the national development plan - the Tonga Strategic Development Framework. Public financial management reforms were generally aligned with the objective of good governance specified in the development strategy, particularly with respect to accountability and transparency, as well as the enabling theme on good fiscal management. The fiscal policy reforms aligned with enabling themes on good fiscal management and the efficiency and effectiveness of government. The structural reforms were aligned with private sector and infrastructure objectives, as well as the enabling theme on public enterprises. Social protection reforms were aligned with the first objective, of building strong, inclusive communities. 27. The program was relevant to immediate challenges and priorities. Policy areas and actions were focused on addressing immediate challenges in the context of declining remittances and tourism receipts. The Bank and Government shared a common concern with improving efficiency in the use of public resources, supporting a recovery in government revenues, and opening opportunities from new sources of private sector growth. Extensive dialogue with government through the Budget Support Management Committee process was useful in ensuring continued consensus regarding policy priorities. Government’s broad commitment to Relevance to Bank Priorities 28. The program was well-aligned with Bank priorities as stated in the CAS. The first theme in the CAS is supporting policy reform to strengthen economic growth prospects and to improve service delivery. The program contributed mainly to this theme through focus on policy actions aimed at: i) strengthening critical aspects of public financial management; ii) supporting fiscal policy reforms that underpin the delivery of services, including revenue effort, expenditure quality and control of the civil service wage bill; and iii) supporting essential structural reforms, including in the energy sector, in the public enterprise portfolio and in private sector development. Development policy operations are specifically mentioned in the CAS as a potential mechanism to support policy engagement and vital reforms. 29. The operation was aligned with other Bank operations in Tonga. The program occurred during a period in which the Bank was rapidly scaling up its investments in Tonga, especially in the roads, aviation, and energy sectors. Through the program of DPOs the Bank was able to influence key policy issues to support the achievement of development objectives from investment projects. At the same time, project engagements provided a knowledge base from which to engage in discussion of policy priorities across a broader range of areas. The program of DPOs served a useful purpose in broadening the Bank’s policy dialogue with government to include macroeconomic challenges and fiscal management issues where the Bank has since become an important partner. Relevance of Design and Implementation 30. Program design was appropriate to context. Building on lessons learned in other small Pacific Island Countries, both operations focused on small number of strategic policy actions (seven policy actions supported under each operation). Policy actions were selected to take account of capacity constraints facing government, ensuring that actions could either be delivered with available capacity or that additional technical assistance would be available from 12 development partners. With several donors providing budget support, heavy emphasis was appropriately placed on coordination to avoid the proliferation of policy actions and the diffusion of reform capacity. Monitoring arrangements were appropriate and relatively streamlined, with the Budget Support Management Committee serving as a mechanism for agreeing policy actions between donors and Government, mobilizing required support, and monitoring progress. 31. Relevance of outcome indicators was somewhat mixed. While most outcome indicators represented a clear and measurable metric for assessing progress towards development objectives, others were not as clear and not as strongly linked to development objectives as they might have been. With hindsight, the outcome indicator for control of the wage bill was specified inappropriately, with greater-than-expected progress towards the specified outcome (limiting overspending in the wage bill) leading to an underspend that exceeded the target variance (the underspend was greater than the variance allowed for in the outcome indicator, which was based on the implicit assumption of continued overspending). 3.2 Achievement of Program Development Objectives 32. Progress towards Program Development Objectives is assessed in terms of achievement of the program’s outcome indicators. The PDO for the program was quite broad and framed as an input. Progress towards this objective is not easily assessed. For this reason, achievement of the PDO is assessed in terms of the progress towards outcome indicators. As discussed above, outcome indicators were adapted to changing circumstances between the first and second operations. The following table shows baselines, targets, and a rating for all outcome indicators included under both the first and second operations. 13 Outcome Outcome Indicator Baseline DPO II Rating Target DPO I Strengthening Public Financial Management The budget is credible at The extent to which the X X 0–5 percent in FY2006/07; 0–5 percent in FY2011/12 4.5 percent in FY2011/12 and HS the level of variance in the primary 10–15 percent in FY2007/08; and FY2012/13 (equivalent 3.4 percent in FY2012/13 disaggregated expenditure composition 5–10 percent in FY2008/09; to at least a ‘B’ on PEFA expenditure. exceeds the overall 0–5 percent in FY2009/10; Performance Indicator 2). 5–10 percent in FY2010/11. deviation in primary expenditure Public access to key Number of elements X X One element satisfied in Three elements satisfied One element satisfied in MU fiscal information defined in the PEFA FY2010/11 (equivalent to a ‘C’ (equivalent to a ‘B’ on PEFA FY2012/13 (equivalent to a ‘C’ increases criteria for public access to on PEFA PI-10). PI-10). on PEFA PI-10). key fiscal information (PI- 10) that are satisfied Strengthening Fiscal Policy Improved control of the Variance between the X X Variance of an average 3.7 Variance within 2.5 percent Underspends of 8.6 percent in S wage bill. budget and outturn for the percent from budget estimate of the budget estimate for FY2011/12 and 4.8 percent in government-funded public (FY2000/01–FY2010/11, FY2011/12 and FY2012/13. FY2012/13 service wage bill excluding FY2005/06, when the civil service strike and major wage settlement occurred) Growth in the cost of Cost of consumption tax X 30 percent in FY2010/11 Less than 30 percent in 28 percent in FY2011/12 and 23 HS exemptions is curtailed and duty exemptions as a FY2012/13. percent in FY2012/13. proportion of total revenues from these sources. Promoting Structural Reform Costs of doing business Cost of acquiring business X TOP$130 (DBS 2012) TOP$100 TOP$115 MS are reduced licenses as measured in the 14 Doing Business Survey Financial transparency Public availability of key X Audited accounts of designated Audited accounts of all Financial accounts of Tonga S of major public entities financial information on major public enterprises not designated major public Power Limited, the Tonga Water is increased major public enterprises. available to the public enterprises are available to Board, Tonga Airports Limited, (FY2009/10). the public within 6 months Ports Authority of Tonga, Tonga of the end of the previous Post Limited, and the Tonga financial year (FY2010/11, Development Bank were made FY2011/12, and publicly available on their FY2012/13). respective websites within 6 months of the end of FY2010/11, FY2011/12 and FY2012/13. Energy prices better Basis of calculating X X Retailers’ margin set on a Retailers’ margin set on a Retailers’ margin set on a per- S reflect costs of supply3 retailers’ margin for percentage-of-cost basis per-liter basis liter basis from FY2011/12. petroleum. Electricity tariffs are set Proportion of long-run X 97.2 percent cost recovery 100 percent cost recovery. 100 percent cost recovery S at a level that achieves marginal cost of electricity (mid-2011) (including explicit Community full cost recovery generation recovered from Service Obligation Subsidy). tariffs Tonga Power Limited Source of generation. X Energy only despatched from Energy despatched from Energy despatched from lowest S despatches electricity single available source of lowest cost source of energy cost source of energy first. from the lowest cost energy (mid-2011) first. sources of energy first The existing public Proportion of SOEs X 6 of 14 public enterprises (43 One third of public Less than one third of public S enterprise portfolio is undertaking commercial percent) (mid-2011) enterprises. enterprises. made more focused on activities infrastructure services, as a result of the 3 In the first operation this indicator was worded differently: “the cost savings resulting from the implementation of reform to the petroleum supply chain are shared with consumers” 15 progressive disposal of public enterprises that undertake commercial activities Improving Social Protection In communities targeted Number of beneficiary X None Unspecified. None. NR by the community public communities works scheme, there has been incremental employment and income generation and community asset creation and/or rehabilitation 16 33. Adequate progress was achieved against outcome indicators in the area of ‘strengthening public financial management’.  Progress towards increased budget credibility was achieved, with variance in the primary expenditure composition exceeding the overall variance by less than 5 percent in FY2011/12 and in FY2012/13. This reflects continued efforts by the authorities towards close monitoring of expenditure at the ministry level, with Ministry of Finance officials periodically briefing Cabinet on budget execution trends. The outcome also reflects reduced allocations to the “contingency fund” – historically used to finance a broad range of between-budget expenditures, rather than just unavoidable contingencies – from TOP$6 million in FY2009/2010 to just TOP$2 million by FY2012/2013. The rating for achievement against this outcome indicator is highly satisfactory.  Public access to key fiscal information increased during the FY2012/13 budget, but these gains were not sustained. For the FY2012/13 budget process a complete set of budget documents were able to be obtained by the public through the Ministry of Finance website at the time it was submitted to the legislature. In the FY2013/14 budget, however, while the approved budget was made publicly available, the budget proposal was not made publicly available. In-year budget execution reports were prepared and routinely made available to the public on the Ministry of Finance website (within one month of their completion) until the second half of FY2012/13, when staff changes led to delays in the preparation of reports and staff capacity was diverted during the budget process, amid significant staff turnover and several vacancies. Year-end financial statements for FY2011/12, however, were made available to the public through government gazette within six months of completed audit. The rating for achievement against this outcome indicator is moderately unsatisfactory. 34. Significant progress was achieved against outcome indicators in the area of ‘strengthening fiscal policy’.  The specified outcome target was over-achieved (the outturn for the government-funded public service wage bill was less than the budgeted allocation) and the associated policy outcome of wage bill control has been achieved. This is largely due to the implementation of the prior action relating to centralization of hiring authority within the Ministry of Finance and the Public Service Commission. In contrast to the historical experience of the wage bill exceeding initial appropriations because of inadequate controls, variance in both FY2011/12 and FY2012/13 was due to substantial under- expenditure in the context of the recently-implemented hiring freeze. The hiring freeze has been effective in arresting uncontrolled growth in the wage will, with all establishment appointments now requiring joint approval of the Public Service Commission and the Ministry of Finance. All new appointments continue to be required to meet objective criteria for ‘vital’ appointments as assessed by the Public Service Commission. The rating for achievement against this outcome indicator is satisfactory.  The cost of exemptions on consumption tax and duties decreased as a proportion of total revenue from consumption tax and duties to 28 percent in FY2011/12 and 23 percent in FY2012/13. The supported policy action relating to increased transparency regarding tax expenditures has contributed towards the achievement of this outcome. Progress is also due to reduced implementation of additional exemptions under a newly established government revenue committee (comprising the Secretaries for Finance, Commerce and 17 Revenue). The creation of this committee, which formed part of the Bank’s dialogue with the Government, has facilitated more coherent and coordinated advice to cabinet on the revenue implications of exemption decisions. The rating against this outcome indicator is highly satisfactory. 35. Significant progress was achieved against outcome indicators related to ‘structural reform’. Outcome indicators were specified in relation to business environment reforms, energy sector reforms, and SOE reforms.  Business environment reforms. While the outcome target for reduction in business license fees was not achieved, business license fees have been substantially reduced nonetheless, following completion of the prior action relating to business license regulatory reforms. Following reforms to the license regime, the costs of a business license have been reduced from TOP$138 to TOP$115 – a 17 percent reduction compared to the target reduction of 23 percent. The business license fee reported in the DBS 2012 was incorrect, leading to the baseline for the indicator being set at TOP$130 rather than the actual applied business license fee of TOP$138. Had the baseline been set using accurate information, the target may have been achieved. Business license changes have also provided important improvements to the ease of doing business that are not captured by the indicator. Reforms supported under the operation allow all firms to operate with a single business license, rather than requiring multiple licenses for different activities. License processing times have also been reduced, with an online system soon to be implemented that is likely to lead to further cost reductions. The rating for achievement against this outcome indicator is satisfactory.  Energy sector reforms. In accordance with the specified prior action, petroleum pricing templates were revised to ensure that the retailer’s margin for petroleum is now set on a per-liter rather than a percentage-of-cost basis. These regulatory changes are being applied, leading to closer alignment between energy prices faced by consumers and the cost of supply. The rating against this outcome indicator is satisfactory. The planned revision of the electricity tariff – originally identified as a trigger for the second operation – did not occur, however, due to weak capacity within the TERM-IU, delays in mobilizing technical assistance, and a lack of political consensus regarding the appropriate direction of broader energy sector reforms. The new tariff was expected to deliver 100 percent cost recovery while also creating incentives for greater utilization of renewable energy generation by the vertically-integrated utility and introducing measures to protect the poor. Despite the fact that a revised tariff design has not yet been implemented, progress towards both outcome indicators was achieved. Renewable generation capacity has been increased, with a 1MW solar plant now despatching to the Nuku’alofa grid, and is providing lower cost energy than existing diesel plants. Tonga Power Limited is now also fully recovering the long-run costs of electricity generation through a combination of electricity tariff revenues and an explicit public service obligation subsidy to Tonga Power Limited, under a specific appropriation in the annual budget. Achievement against outcome indicators relating to cost recovery from electricity tariffs and dispatch of lowest-cost generation is rated as satisfactory.  State-Owned Enterprise Reforms. In accordance with the specified prior action, financial accounts of Tonga Power Limited, the Tonga Water Board, Tonga Airports Limited, Ports Authority of Tonga, Tonga Post Limited, and the Tonga Development Bank were made publicly available on their respective websites within 6 months of the end of 18 FY2010/11. Progress has been sustained, and audited accounts for the FY2012/13 year are soon to be made available. The rating for achievement against this outcome indicator is satisfactory. The program was also initially intended to support privatization of the International Dateline Hotel, contributing to a reduction in the number of SOEs undertaking commercial activities. The trigger relating to privatization of the International Dateline Hotel was dropped, however, in order to provide government with additional time to consider a broader range of options for private participation. Despite this, significant progress has been achieved with the SOE reform agenda during the term of the program. Seastar – a fisheries SOE – is no longer operating, and the Ministry of Public Enterprises is working towards liquidating associated assets. Tonga Print has been merged with Tonga Post. Tonga Investments Limited has ceased operations, with most of its assets liquidated. SOEs competing with private sector providers of the same service and not providing a clearly identified public good comprise four out of a total SOE portfolio of 13 public enterprises. 4 On this basis, the rating for achievement against this outcome indicator is satisfactory. Progress is now occurring in relation to the introduction of private participation in the operation of the Dateline Hotel, with a request for expressions of interest in a concession contract over the hotel recently issued. 36. Progress was not achieved against outcome indicators relating to ‘improving social protection’. The planned community public works scheme was not implemented, with expected donor financing not forthcoming. Given that this was beyond Government’s control, this outcome indicator is left unrated. In the absence of progress towards implementation of the community public works scheme, however, Government has taken steps to improve social protection through the introduction of alternative social safety net schemes for the disabled and the elderly. 3.3 Justification of Overall Outcome Rating Ratings: Satisfactory 37. The rating for relevance is ‘satisfactory’. The program was implemented during a period when Tonga faced rapidly declining remittances and falling tourism receipts, placing immediate pressure on revenues and endangering the delivery of basic services. Through the program, vital resources to maintain service delivery were mobilized in the face of real revenue declines. The program provided support to the first government of Tonga to be elected following broad democratizing reforms, in the context of recent civil service strikes and popular unrest. The program policy areas and actions were coherent and focused. They combined actions to improve efficiency in the use of public resources with actions to broaden the revenue base and support broadened economic growth and opportunities. The program also initially supported specific measures to assist the poor and vulnerable in the context of increasing poverty and hardship. In hindsight, outcome indicators could have been applied more consistently between operations and some of the outcome indicators could have been better specified. But inconsistency in outcome indicators generally reflected necessary changes in the actions supported by the program. The 4 Tonga Timber Limited, Shipping Corporation of Polynesia, International Dateline Hotel, and Tonga Market Limited. Tonga Investments Limited, Tonga Print, and Seastar are no longer operating as SOEs. An additional SOE, Tonga Cable Limited, was established during the term of the project, but serves a clear public good role and is soon to be restructured to allow increased private participation. 19 range of final indicators provided an adequate basis for assessing progress towards development objectives. 38. The rating for achievement of PDOs is ‘satisfactory’. The program development objective was specified quite broadly, reflecting the broad goals of the DPO program, and did not facilitate direct assessment of progress. Significant and measurable progress towards outcome indicator targets was achieved across all policy areas, however, with the exception of social protection. Achievement of outcome indicator targets in the energy and SOE sector was not easily attributable to policy actions supported by the program. Conversely, the program supported policy actions in relation to the wage bill and business license reforms that had substantial positive impact, despite outcome indicator targets not being fully achieved. Overall, the program achieved the intended objective of assisting government in implementing key aspects of its reform agenda while providing a predictable flow of resources in a challenging fiscal context. Improvements were made in various areas of fiscal transparency, although some of these gains were not entrenched over the medium term. In fiscal policy, supported reforms led to greater control over the wage bill while the cost of exemptions declined and improvements in tax policy were progressed. In structural reform, important gains were made in reducing the time and costs associated with obtaining a business license. Delays in electricity tariff reform did not prevent broader progress towards the achievement of full cost recovery on behalf of the energy utility, while diversification of the energy mix towards renewable sources was achieved. In social protection, however, government’s decision not to implement the planned community public works scheme in the absence of expected donor support undermined expected social protection benefits. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 39. The program is expected to have had a positive impact for poverty reduction. Budget support, including that mobilized through other donors under the program, helped the Government to maintain the provision of core services to the public in the context of significant revenue declines. Government was able to accumulate modest cash reserves and avoid cash rationing that has disrupted service delivery in the recent past. Fiscal policy reforms, including implementation of effective control over the wage bill and the reduction in the costs of exemptions, have provided further fiscal space at a time when government is prioritizing allocations to basic social services. Over the medium- and long-term, improvements in budget transparency and the governance of public enterprises may improve accountability and efficiency in the use of public resources, contributing to greater equity of public resource use following recent democratizing reforms. Improvements in the business license regime are aimed to contribute to faster private sector development with the potential for additional job creation. Lower and more stable energy prices arises from regulatory changes are expected to reduce the share of household incomes required for energy needs, allowing increased consumption of other basic needs, and reducing exposure to severe hardship during periods of high imported energy prices. 40. Reforms are expected to have had a positive impact on women. Reforms to the business license regime addressed some of the regulatory constraints cited as barriers to business development by women in Tonga in a recent IFC study, where accessing business licenses was considered an especially onerous process. This reform is considered to have disproportionately benefited women, given that women: i) have less time available to deal with business license processes because they spend a disproportionate amount of time engaged in unpaid work within 20 the household; ii) are more likely to suffer from harassment from regulatory officials; iii) have less exposure to and confidence in dealing with officialdom and less sophisticated networks for obtaining permits and licenses; iv) have less access to information about permits and licenses than their male counterparts; and v) have less disposable income with which to meet the costs of license fees. Budget transparency reforms will, over the longer-term, build accountability on Government for adequate resourcing and efficient delivery of social services to improve women’s health and education outcomes. (b) Institutional Change/Strengthening 41. The program has had direct and indirect impacts on institutions. Technical assistance provided to the achievement of policy actions supported increased organizational capacity within the Ministry of Finance and the Ministry of Revenue. Technical assistance was provided to support the development of in-year fiscal reports, review existing tax exemptions, and provide policy advice on tax policy changes. More generally, the program has supported the development of institutional capacity, in the form of the Budget Support Management Committee, to manage multi-donor budget support processes, which are likely to provide a vital source of resources over the medium-term. Through the operation of this committee, government has been able to ensure policy actions for budget support are limited in number and aligned with government priorities. Processes have also been established to facilitate the meeting of all donors’ information and procedural requirements without imposing undue strain on Tonga’s thin bureaucratic capacity. The usefulness of the committee has been acknowledged by both government and donors and the committee is likely to remain the primary mechanism for policy dialogue around budget support over the medium-term. (c) Other Unintended Outcomes and Impacts 42. The program supported increased dialogue with government on a broad range of economic issues. Through the joint-donor budget support process, the Bank was able to engage on a broad range of economic policy issues. The Bank and ADB became trusted sources of advice for officials within the Ministry of Finance. Through the Budget Support Management Committee and discussions with political leaders related to the budget support process, donors were able to convey joint messages on broad economic issues (such as debt management and tax exemption reforms) where there was no direct project-level engagement. This contributed to a broadening of the Bank’s relationship with the client and more open and frank policy dialogue. Such engagement facilitated the provision of technical assistance on key policy issues, for example policy dialogue around tax reform has led to joint IFC/World Bank work reviewing existing exemptions. 4. Assessment of Risk to Development Outcome Ratings: Substantial 43. Likelihood of reforms being sustained is heavily dependent on a range of factors. Risks include capacity risks, macroeconomic risks, and political risks.  Tonga faces the capacity constraints common in small Pacific Island Countries. While many staff are highly trained and extremely competent, staff turnover is very high. In the current context of wage bill constraint, and with a limited numbers of specialists available to play particular roles within government, vital positions sometimes remain 21 unfilled for significant periods. Staff turnover in the Ministry of Finance constituted an important barrier to the achievement of some outcome indicator targets. Staff shortages and changes could pose risk to process-based reform measures supported through the program, including those related to fiscal reporting, improvements in budget execution, and publication of SOE financial statements.  Tonga continues to face major macroeconomic challenges. Remittances have not recovered to pre-crisis levels and are not expected to do so. Tonga now faces a significant challenge in achieving required fiscal consolidation while broadening its economic base and identifying new sources of growth. In the current context, Tonga remains extremely vulnerable to external economic shocks and natural disasters which could both distract available capacity from maintaining the gains achieved under the program and generate political pressure to reverse important reforms, especially in the energy sector.  A general election will take place in Tonga in 2014. This will be only the second election since important democratizing reforms in 2010. Political dynamics are not yet understood, and Tonga lacks a strong political party system. Political pressures in the lead-up to and aftermath of elections may slow progress with the current reform agenda. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry 44. Bank performance was satisfactory in ensuring quality at entry. The Bank worked closely with government and donors to ensure that the program was tightly focused on government reform priorities. The Bank’s effectiveness in this coordinating role was appreciated by government and development partners. Choice of prior actions was informed by analytical work carried out by the Bank and other partners such as ADB and PFTAC. Expectations were realistic regarding the likely possible pace and extent of reform. Risks were clearly identified and made explicit in formal program documentation. The level of ambition was appropriate, striking a balance between optimism and realism. The program development objective was formulated quite broadly and as an input. Further, some outcome indicators were imperfectly matched to the outcomes being sought. This, however, was to some extent inevitable in the context of severe data constraints and process-based actions. Outcome indicators changed between the first and second operations, reflecting some flux in the actions being supported and Government’s broader reform program. Nonetheless, the outcome indicators presented in the program documents provided an adequate basis for assessing progress. (b) Quality of Supervision 45. Bank performance was satisfactory in supervision. The Bank invested heavily in supporting the government in implementing reforms and monitoring progress. Appropriate technical assistance was mobilized, and through multiple missions the Bank built strong relationships with key staff of implementing agencies and developed an adequate understanding of progress and constraints. Through the Budget Support Management Committee, the Bank helped build a shared understanding of the extent of progress, key risks, and required corrective actions between government and donors. Throughout implementation, the Bank continued to play 22 an important coordinating role between Government and development partners. An ISR was completed in mid-2012. (c) Justification of Rating for Overall Bank Performance 46. Overall Bank performance is rated as satisfactory. Because Bank performance for Quality at Entry was rated Satisfactory and Quality of Supervision also rated as Satisfactory, overall Bank performance was rated Satisfactory in accordance with the harmonized evaluation criteria guidelines for ICRs. 5.2 Borrower Performance 47. Overall borrower performance is rated as satisfactory. The program was implemented during a period in which government faced several serious challenges, including declining revenue and increasing poverty. Government worked closely with the Bank to leverage the possible benefits of the program both in terms of fiscal resources through budget support, and also in terms of additional impetus for planned reforms. Government was very active in developing the joint policy matrix and pressing for multi-donor budget support, and pursued an open and constructive dialogue with donors regarding a broader range of macroeconomic management and fiscal policy issues throughout the process. The current Minister of Finance was a key champion of reform and remained strongly committed to delivering reforms under his jurisdiction. High staff turnover and the departure of several key officials involved in the development of the budget support program within the Ministry of Finance constituted an unfortunate and largely unavoidable constraint to the full achievement of all outcome indicator targets under Ministry of Finance control. Commitment and effort of officials in the Ministry of Commerce and the Ministry of Public Enterprises was a key factor in the achievement of several outcome indicator targets. Political commitment was more variable in relation to energy sector reforms, with inertia and important inconsistencies emerging in the desired direction of reforms. While policy actions in the energy sector had to be dropped, sufficient reform progress was achieved to see outcome indicator targets met. 6. Lessons Learned 48. Experience with the program largely reinforced lessons learned during previous development policy lending operations in small Pacific Island Countries. These include:  Budget support can serve as a solid platform for government-donor dialogue on economic policy issues. An important benefit of the program was increased and more open policy dialogue with government on a range of economic management issues, including public debt and new borrowing, expenditure allocations and priorities, and economic reform priorities. Through contact with officials and ministers in preparation and implementation of the operation, the Bank became a trusted source of advice on a broader range of economic issues. Budget support discussions became a key forum for conveying coordinated donor perspectives on major economic issues, supporting reformers within government.  Adequate investment in policy dialogue is vital but resource intensive. Success of the program relied on development of close working relationships with both government and other donors providing budget support. Through the Budget Support Management 23 Committee, the team were able to ensure that a small number of policy actions were supported in areas that were closely aligned to Government priorities. This prevented a proliferation of policy actions and a diffusion of scarce reform capacity, despite the fact that four donors were providing budget support. This was only possible through the allocation of sufficient resources to finance staff time and missions for dialogue purposes.  Project-level engagement can assist in identifying key priorities to be supported through policy-based operations. Prior project engagement provided a vital foundation for identifying key policy reforms to drive further progress in important sectors, assisting the implementation of the reforms, and tracking progress closely with relatively little additional monitoring effort.  Close coordination and engagement with other development partners in the identification of policy priorities is useful in sectors where the Bank has limited knowledge and engagement. In key sectors where the Bank did not have active project or policy engagement, task teams drew selectively on analytical work and advice from other development partners to quickly build knowledge and make judgments regarding policy priorities across a broad range of sectors. The task team worked very closely with the ADB and IFC in the area of public enterprise reform and PFTAC in relation to revenue reforms.  Coordinated management of international aid flows, in the context of prudent fiscal policy, can provide vital support in mitigating the impacts of external shocks in the Pacific Islands. Without the budget support provided to Tonga, the impacts of economic shocks would have been more extensive and prolonged. Development assistance played a vital role in financing essential government services, while maintaining macroeconomic stability. 49. In addition, the program illustrates the importance of flexibility in the design of programmatic DPO series in Pacific contexts. The program relied on the ability to significantly modify indicative triggers when it came to identifying prior actions for the second operation. In the context of political fluidity, macroeconomic vulnerability, and capacity constraints, such flexibility is likely to be a required feature of budget support programs in small Pacific Islands. Even with the provision of substantial technical assistance to the achievement of reform actions, unforeseeable capacity gaps arising from the departure of key staff substantially slowed progress in key areas. Capacity risks cannot be entirely mitigated through provision of technical assistance, and programs may need to be designed to take account of capacity gaps as they emerge. The need for such flexibility can usefully be reflected in the selective choice of program outcome indicators and Program Development Objectives that would remain relevant across operations under a plausible range of changes to policy actions. 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 25 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Virginia Horscroft Senior Economist EASPR TTL Tobias Haque Economist EASPN TTL Vivek Suri Lead Economist EASPR Oversight Isabella Drossos Country Lawyer LEGES Legal Roberto Aiello Senior Energy Specialist EASNS Energy Tendai Gregan Energy Specialist EASNS Energy Stephen Hartung Financial Management Specialist EAPFM FM Patricia Hoyes Senior Finance Officer CTRLN Disbursement Saia Faletau Country Liaison Officer EACNF Liaison Samantha Evans Team Assistant EASPR Administration Than-Long Ton Economist EASPR Processing Manohar Sharma Senior Poverty Specialist EASPR Social Protection Richard Bontjer Consultant EASPR PFM Willy McCourt Senior Public Sector Specialist EASPR Public Sector Supervision Virginia Horscroft Senior Economist EASPR TTL Tobias Haque Economist EASPN TTL Vivek Suri Lead Economist EASPR Oversight (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending Total: 60 300.00 Supervision/ICR Total: 20 100.00 26 Annex 2. Beneficiary Survey Results (if any) 27 Annex 3. Stakeholder Workshop Report and Results (if any) 28 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR   - The Government of Tonga wishes to thank the World Bank for this budget support operation. It came at a time when it was most needed and while the change in the country’s debt sustainability assessment affected the grant status of the operation, this will help build much needed reserves. - The government welcomes the way in which the disbursements were made, it was fast and fairly simple to undertake. The prior conditions and performance indicators mutually agreed to between the Government and the World Bank were designed to support the ongoing reform program lead by Government. - The government is grateful for the support and leadership role the World Bank provides on behalf of the other development partners through the Budget Support Management Committee responsible for the monitoring and implementation of the Joint Reform Policy Matrix. - This modality is consistent with the emphasis on country ownership, systems and capacity, key elements of the Paris Declaration. It also enables a focus on overall progress and direction rather than on individual project results and contributes to longer term sustainable development. - The government foresees the use of this model into the future as through this process progress has been sustained - Government welcomes proposals and new ideas on possible reform actions for further discussion. Comments provided by Natalia Latu, Principal Economist, Aid Management Division, Ministry of Finance and National Planning, via email on 3rd December, 2013. 29 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Summary of Australian Government comments General  The Australian Government welcomes the leadership role played by the World Bank in coordinating joint donor budget support for Tonga. In our view, the Tonga model of joint donor budget support has worked well: it has helped drive important economic and public sector reforms in Tonga, notably better prioritisation of public expenditure, revenue strengthening and reform of state-owned enterprises.  Key to the success of the program has been the strong ownership and support for the program within the Tongan Government, both at the political level and from officials. Notable successes include a commitment to ‘no new debt’, reduction in the costs of doing business, implementation of tax legislation and increases in the transparency of budgetary processes, including the publishing of audited financial statements. The recent progress with introducing private participation in the management of the Dateline Hotel is also noted, given earlier setbacks.  Another important contributor to program success has been effective coordination and dialogue through the Budget Support Management Committee and joint donor missions. Australia has appreciated the opportunities provided for productive coordination, joint missions and information sharing.  In our view, the World Bank’s Independent Completion Report is an accurate and useful document. Lessons learned will be incorporated into broader budget support arrangements in the Pacific, financed by the Australian Government. Changes to Performance Triggers under the Policy Matrix  To date, Australia believes changes to performance triggers and policy actions have been generally justified and appropriate, given the inherent need for flexibility in a small state context. However, if too frequent or significant, the changing and dropping of actions risks undermining the credibility of the program. It will be important for donors to work closely with the Tongan Government to minimize such changes under future programs.  Australia agrees that changes to triggers in the energy sector have reflected uneven political support. Future operations could usefully encourage accelerated reform progress in this area, including much-needed reforms in areas other than renewable energy (which has so far been the focus). We note that the previously dropped triggers will be included in the next iteration of the matrix, which is supported and will build on progress achieved to date. Policy Actions and Lessons Learned  Australia recognises the importance of the analytical work undertaken by the Bank to underpin this program, in particular the expenditure mapping work. It may be useful 30 for this to be updated. Australia would welcome any joint analytical work in the future.  Success of measures to control the wage bill is notable. However, the ICR could perhaps also describe some of the less-desirable consequences of the current freeze, such as an increase in the use of ‘daily paid’ staff and capacity gaps arising from a large number of vacant positions. These issues will need to be addressed going forward. The upcoming World Bank remuneration review may be a useful vehicle for constructive recommendations in this area.  The lessons learned are accurately reflected in the document, especially in relation to the importance of policy dialogue and the ‘buy-in’ that this achieves. Future Operations Australia supports continued World Bank involvement in joint-donor budget support in Tonga. Appropriate areas of focus under subsequent operations might include:  Debt management. With recent changes in Tonga’s rating for risk of debt distress, it is likely that Tonga will begin to access concessional debt from multilaterals over coming years. Future operations could support Government’s intention to develop a debt policy to guide the use of concessional debt in order to ensure long-term debt sustainability.  Expenditure quality, fiscal transparency and budget execution. Progress has been made in these areas (including controls on the use of the contingency fund) which should be continued and built on. Policy decisions outside the scope of the matrix, however, could jeopardise this program. Australia would welcome ongoing attention to policy actions and performance indicators in future operations that ensure the improvements in expenditure quality are maintained and further progressed.  Gender. Gender issues are a joint priority of Australia and the World Bank and it would be useful to see a more direct focus on gender related actions in future operations.  Procurement. Significant progress has been achieved to date, and it would be useful to maintain momentum under future operations.  Revenue reforms, including reform of the exemptions regime. Significant progress has been made in this area and the upcoming World Bank review of tax incentives may provide additional momentum for much-needed consolidations in tax expenditure.  Private sector development reforms have been supported and successful to date, albeit in a challenging environment. Australia would like to see this focus continue. 31 Annex 6. List of Supporting Documents World Bank Documents  Program Document, “Economic Recovery Operation” Report No. 64671-TO  Program Document, “Second Tonga Economic Recovery Operation” Report No. 72879-TO  ISR (Implementation Status and Results Report)  Agreed Minutes of Negotiations (First and Second Operations)  Letter of Development Policy (First and Second Operations)  Financing Agreement (First and Second Operations) 32 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