Document o f The World Bank FOR OFFICIAL USE ONLY Report No. 53496-SB INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION INTERIM STRATEGY NOTE FOR SOLOMON ISLANDS FOR THE PERIOD FYlO - F Y l l March 12,2010 Solomon Islands Country Management Unit East Asia and Pacific Region The International Finance Corporation This doc,ument has restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization Currency Unit = Solomon Island D o l l a r (SBD) US$l = SBD $8.2 FISCAL YEAR January 1st - December 3 1st ABBREVIATIONS AND ACRONYMS IAAA I Analvtical and Advisorv Activities I ADB . Asian Development Bank AML/CFT Anti Money LaunderingKombating the Financing o f Terrorism AusAID Australian Agency for International Development BOP Balance o f Payments CAS Country Assistance Strategy CBSI Central Bank o f Solomon Islands CDD I Community Driven Development CEWG I Core Economic Working Group I DPO I Develoument Policy Oueration I I IDA I International DeveloDment Association I IFC International Finance Corporation IMF International Monetary Fund ISN Interim Strategv Note J4P Justice for the Poor MID Ministry o f Infrastructure Development MoFT Ministrv o f Finance and Treasurv MTDS I Medium Term Development Strategy MP I Member of Parliament I NEAP I National Education Action Plan I NZAID I New Zealand Agency for International Development ODA I Official Development Assistance PER Public Expenditure Review PIC Pacific Island Country PFM Public Financial Management PNA Parties to the Nauru Ameement FOR OFFICIAL USE ONLY TRHDP Tina River Hydro Development Project UNDP United Nations Development Program UNFPA United Nations Fund for Population Activities UNICEF United Nations Children’s Fund WHO World Health Organization WBG World Bank Group IDA IFC Vice Presidentmirector: James Adams Karin Finkelston Country Director/Regional Manager: Kanthan Shankar (Acting) Gavin Murray Country Manager: Edith Bowles (TTL) Task Team: Tobias Haque, Annette Leith, Shaun Williams Piers Merrick This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. SOLOMON ISLANDS INTERIM STRATEGY NOTE Contents EXECUTIVE SUMMARY ............................................................................................................................................. i I. RATIONALE FOR AN INTERIM BANK GROUP STRATEGY .................................................................... 1 I1. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES ................................................................... 1 Geography ................................................................................................................................................. 1 Post-conflict Context ................................................................................................................................ 2 Recent Economic Developments .............................................................................................................. 3 Political Context ........................................................................................................................................ 6 Donor Engagement ................................................................................................................................... 7 Development Challenges .......................................................................................................................... 8 . I11 PRIOR ENGAGEMENT AND LESSONS LEARNED .................................................................................... 13 I V. WORLD BANK GROUP INTERIM STRATEGY 2010 - 2011 ...................................................................... 14 Strategic Framework ............................................................................................................................... 14 Strategic Area I: Addressing Surmountable Barriers to Growth ............................................................ 16 Strategic Area 11: Enhancing Benefits o f Regional and Global Engagement ......................................... 18 Strategic Area 111: Supporting Improved Public Administration and Management ............................... 20 V . R I S K S .................................................................................................................................................................... 22 Attachements Attachment A: Result Matrix .................................................................................................................. 24 Attachment B1: Table 1: World Bank Projects and Indicative Funding Allowances: 2010 - 201 1 .......26 Attachment B2: Table 1: International Finance Corporation ................................................................. 27 Attachment C: Summary o f Donor Activities ....................................................................................... 28 Annexes Annex A2: Solomon Islands at a glance ................................................................................................. 29 Annex B 2 - Solomon Islands .................................................................................................................. 31 Annex B3 - IBRD/IDA Program Summary ........................................................................................... 32 Annex B 4 - Summary o f Non-lending Services ..................................................................................... 33 Annex B6: Solomon Islands - K e y Economic Indicators ...................................................................... 35 Annex B7: Solomon Islands - K e y Exposure Indicators ....................................................................... 37 Annex B 8 - Solomon Islands Operations Portfolio (IBRD/IDA and Grants) ........................................ 38 EXECUTIVE SUMMARY 1. This 18-month Interim Strategy Note (ISN) presents the World Bank Group’s engagement in Solomon Islands for F Y l 0 - F Y I I . This is a joint International Development Association (IDA) and International Finance Corporation (IFC) ISN, developed in recognition of the critical and complementary roles o f the private and public sector in supporting Solomon Island efforts to move towards durable stability and economic growth. 2. Solomon Islands has had a relatively successful recovery from a period o f conflict between 1998 and 2003. The conflict was halted by the arrival o f the Regional Assistance Mission to Solomon Islands (RAMSI) in 2003, which moved quickly to restore security and basic functions o f the state. However, the country remains vulnerable to conflict - the economic outlook is uncertain, with fiscal constraints and a low-growth trajectory, the current stability i s widely perceived to be in good measure dependent on the international presence, and some o f the underlying causes o f the conflict remain unresolved. Against this background national priorities are reconciliation, security, economic revitalization, rural development, effective service delivery, pursuit o f the Millennium Development Goals, and greater devolution o f decision making to the local level, as referenced in the government’s Medium-Term Development Strategy (MTDS). Elections in mid-2010 contribute to uncertainty, although there i s no indication that broad national priorities are likely to change significantly. 3. The strategic goals o f the I S N are addressing surmountable barriers to growth, enhancing benefits o f global and regional engagement, and supporting improved public administration and management. These aim to support Government efforts to address the core challenges o f economic growth and fiscal constraint, vulnerability to conflict, and the need to optimize benefits o f international engagement. A s a small player in an uncertain but donor-rich environment, the WBG will be selective and flexible in i t s approach. Project and advisory activities focus on areas where there are gaps in the overall donor program such as private sector development and energy; where catalytic WBG investments enhance larger Government and donor programs such as health, education, and justice; and where the WBG brings technical expertise and global knowledge, such as economic analysis and technical assistance in the mining sector. 4. The WBG will deploy a range o f IFC and Bank advisory and investment instruments in support o f ISN objectives. These include IDA grants and/or loans, IFC investment transactions, Bank Analytical and Advisory Assistance (AAA), Technical Assistance, Trust Fund resources, and I F C Advisory Services. In several areas these instruments are used together, such as the Tina River Hydro Development. The Sources o f Growth analysis launched in late 2008, created a shared analysis which has informed the ISN. Deploying IFC/Bank instruments in complementarity i s central to optimizing the impact o f WBG activities. There are important risks during the I S N period, including the re-emergence o f unrest and deterioration in security; discontinuity in Government’s program and implementation, including weak institutional capacity, unpredictable costs, and governance challenges. Some risks the WBG has little capacity to directly address, notably security, and therefore will rely on close coordination with R A M S I . Concerted investment in Government-donor and intra-donor dialogue aims to mitigate the risks o f discontinuity in Government’s program. Measures to reduce implementation risks will include close cooperation with other donor programs, maintaining simplicity in project design, and sufficient implementation support. 1 I. RATIONALE FOR AN INTERIM BANK GROUP STRATEGY 1. The move to a stand-alone strategy document represents an important step in intensified engagement in Solomon Islands. To date, the country has come under the Bank Regional Engagement Framework (REF) 2006 - 2009 for the Pacific Islands, a broad strategy that identified thematic priorities in nine Pacific Island Countries (PICs). The REF emphasized the importance o f strengthening Government capabilities in service provision and improving incentives for private sector growth, but did not cover the International Finance Corporation (IFC) engagement, which has increased significantly since 2008. The move to a stand-alone strategy also reflects the stepped up World Bank Group (WBG) activity following the opening o f a joint country office with the Asian Development Bank (ADB) in November 2008. This is in line with overall expansion in the WBG’s Pacific Department and the recent decision by the WBG Board that the IFC should invest more in the IDA (International Development Association) countries in the Pacific. As the first WBG strategy document in Solomon Islands, the interim strategy note (ISN) has had to take into account a program o f activities that i s largely pre-set, as most activities were either under preparation or implementation at the start o f the I S N development process. The I S N therefore frames an existing program, guides implementation, and serves as a basis for future strategy development. 2. An ISN rather than a Country Assistance Strategy (CAS) is the appropriate strategy instrument, given contextual uncertainties, including the economic outlook, elections in 20 10, and ongoing conflict vulnerability combined with the recent establishment o f the WBG presence and absence o f some o f the standard WBG analytics which would inform a CAS. The 18-month ISN also allows for alignment with Government planning. The current Medium-term Development Strategy (MTDS) expires at the end o f 2010. In addition the MTDS i s a broad, aspirational investment program but i s not costed and as such does not offer detailed guidance on sequencing and prioritization o f donor programs. The country aims to develop a ten-year National Development Strategy, slated for release in 201 1. 11. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES Geography 3. Geography is one o f the most distinctivefeatures of Solomon Islands. The country i s an archipelago o f 997 islands stretching from Papua N e w Guinea in the northwest to Vanuatu in the south. The country has a total land area o f 29,900 km2spread over 1.34 million km2 o f ocean. The population o f an estimated 560,000’ is highly dispersed, across approximately 80 to 90 inhabited islands divided administratively into nine provinces. Population density, at only 18 persons per km2i s well below the small states average o f 200 per km2. The country has one o f the lowest levels o f urbanization in the world - only 17% o f the population lives in urban areas and most live farther from the capital than in other small states. Distances between islands are large and transport connections extremely limited, exacerbating the country’s remoteness from major markets. The capital city, Honiara, lies a weighted average o f 8,500 km from its main 1 WBG figure, derived from 1999 census, results o f the 2009 census have yet to be published. 2 international markets - Thailand, China, and the European Union.2 The terrain i s predominantly rugged or mountainous, with few large stretches o f flat land. The small, widely dispersed population has given rise to great cultural diversity, with 74 distinct language^.^ The country i s susceptible to significant natural disasters, in particular tsunamis. The inhabited islands are mostly high islands and there are few inhabited coral atolls, however climate change threatens coastal settlements and infrastructure. Post-conflict Context 4. Following 20 years o f reasonable growth and steady progress in social development since independence in 1978, the country, underwent a period o f conflict, known as the “Tensions” between 1998 and 2003. Armed conflict between militant groups from Guadalcanal and Malaita led to deaths, displacement, and widespread destruction o f property. Many state functions collapsed as the Treasury was repeatedly raided and the police force was drawn into the conflict. Real GDP (Gross Domestic Product) declined by 24% between 1998 and 2002..4 Churches and civil society organizations, particularly women’s groups, played key roles in averting violence where possible, maintaining services, and advocating for peaceful resolution. While often described as an “ethnic conflict”, the Tensions had multiple political and economic causes. These include slowing o f the economy since the early 1990s, elite competition, and the disproportionate concentration o f economic development in and around Honiara, which had led to tensions between Malaitan in-migrants and Guadalcanal landowners. The conflict further opened up long-standing questions about the structure o f the state and grievances surrounding the allocation o f resources. The conflict re-ignited calls for changes to the current central- provincial government structure, based o n the widespread perception that this would increase local benefits from economic activity and improve services. 5. The arrival o f the Re8onal Assistance Mission to Solomon Islands (RAMSI) in 2003 at the request o f the Solomon Islands Government halted the violence. A regional peace-keeping and state-building mission under the auspices o f the Pacific Islands Forum5, R A M S I moved with impressive speed to restore security, order, and basic functions o f the state. Since 2003 important progress has been made, including the restoration o f essential services, renewed economic growth, increased budget revenues, and the revitalization o f k e y oversight institutions. The RAMSI presence i s widely seen as the guarantor o f law and order, contributing to high levels o f popular s u ~ p o r t . ~ World Trade Organization Trade Profile2008 Gordon, Raymond G., Jr. (ed.), 2005. Solomon Islands in Ethnologue: Languages of the World, Fifteenth edition. Dallas, Tex.: S I L International. httu://m.ethnologue.codshow countrv.asD?name=Solomon+Islands . IMF World Economic Outlook data, 2009 The Pacific Island Forum i s a political grouping o f 16 independent and self-governing states comprising Australia, the Cook Islands, the Federated States o f Micronesia, Fiji, Kiribati, Nauru, N e w Zealand, Niue, Palau, Papua N e w Guinea, the Republic o f Marshal Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu. The 2009 Annual RAMSI People’s Survey found that 88% o f those surveyed supported the R A M S I presence and 53% believed violence would return should R A M S I depart. 3 Recent Economic Developments 6. The Global Financial Crisis (GFC) has highlighted important systemic weaknesses in the Solomon Islands economy. Growth declined to just 1% in 2009, due to falls in log exports, reduced commodity prices, constraints o n government spending, and the impact o f floods o n agricultural production. The collapse o f growth in 2009 ends a period o f strong growth following the restoration o f order after the Tensions. Between 2003 and 2008, the economy grew at an average o f 6.9% per annum, driven by the restoration o f security, large aid inflows, rapid expansion o f government expenditure, and a logging boom based on unsustainable extraction o f natural forest logs. Despite recent growth, output per capita remains more than 15% lower than before the Tensions. ~~~ ~~ Estimates Projections 2007 2008 2009 2010 2011 2012 2013 A. Output GDP (nominal $USmillion) 541.1 641.8 688.4 717.1 779.8 895.5 1001.7 Real GDP growth rate (%) 10.7 6.9 0.4 2.4 2.8 8.8 6.5 GDP per capita ($US) 1093 1266 1290 1351 1438 1617 1771 B. Prices CPI year-on-year change (%) 10.9 17.5 5.5 8.4 6.5 6.2 6.1 C. Exchange rates SI$/US$ end o f period 7.66 8 8.06 Real effective exchange rate (2005=100) 106.4 115.9 D. Foreign Exchange Gross official foreign reserves (US$ million) 120.6 90.1 88.3 63.2 45.9 64.7 93.8 In months o f next year's imports 3.9 2.9 2.5 1.7 .1.2 1.6 1.8 E. External Position Current account balance ($USmillion) -67.3 -120 -74.2 -130.7 -174.8 -136.5 -129.6 In YOGDP -12.4 -18.7 -11.1 -18.2 -22.4 -15.2 - 12.9 F. Fiscal Accounts (% o f GDP) Revenue and grants 33.5 46.9 47.3 50.2 48.9 50.6 51.9 Total Expenditures 27.6 44.2 45.6 49.7 41.3 51.1 51.1 Overall Balance 5.9 2.7 1.7 0.5 1.5 -0.4 0.8 E. Debt Gross external debt (% o f GDP) 32.1 25.4 22.2 19.4 17.7 15.5 14.1 External debt service (% o f GDP) 2.6 3.9 3.5 2.9 2.6 0 - L.L 1.9 Source: IMF Staff Report for the 2009 Art le I V Consultations. 4 7. Growth is expected to remain at low levels over the ISNperiod, highlighting the need to rebalance growth awayfrom logging. The impetus from post-conflict recovery appears to b e slowing, with insufficient new investment to maintain previous growth levels. According to the Central Bank o f Solomon Islands (CBSI), logging contributed 16% o f GDP and approximately 32% o f export receipts in 2008. The logging boom has, to some extent, masked the scale o f decline in other sectors, including in manufacturing and utilities. Non-logging output i s s t i l l around 30% o f where it would have been had growth continued the trend levels o f the mid- 1990s. The 2009 decline in logging and ancillary services due to the GFC has brought forward the inevitable impacts o f the long projected exhaustion o f commercially viable forest resources by 2013. The projected resumption o f growth after 2012 i s contingent on the re-commence o f the Gold Ridge mining operation. 8. Future growth prospects appear limited. The Sources o f Growth analysis has shown that potential growth in the tourism, fisheries, mining, and agricultural sectors i s unlikely in the short term to compensate for the loss o f logging in terms o f employment, exports, or government revenue. Agricultural productivity, especially in the dominant subsistence sector i s poor, with little productivity growth observed in several decades. Should operations recommence, Gold Ridge and potential nickel operations in Choiseul and Isabel will be an important source o f output growth and foreign exchange. These operations, however, may only make a limited contribution to employment and government revenues, and only Gold Ridge is likely to commence operations during the I S N period. 9. Emerging fiscal pressures pose risks over the ISN period. Government expenditure has increased at an unsustainable rate o f 20%-30% per annum, from around 25% o f GDP in 2003 to 50% o f GDP in 2009. This expansion has been made possible by rapid increases in donor support, increased export tax revenues associated with the logging boom, improved compliance and broadening o f the tax base, and general growth. With Official Development Assistance (ODA) to Solomon Islands leveling off, slowing growth, stocks o f natural forest logs near exhaustion, and the least-cost opportunities for increasing tax compliance and coverage largely implemented, Government i s likely to feel increased fiscal pressure over the medium-term. These risks were highlighted during 2009, with cash reserves reaching precariously l o w levels, and emergency cash management practices instituted leading to delays in payments to suppliers and disruption to programs. Government also instituted a range o f revenue measures, including the retrospective inflation indexing o f various fees and charges, and increases in custom duties for certain luxury goods. A significant adjustment o f fiscal policy is required over the I S N period. The extent o f emerging fiscal pressures may not be adequately reflected in Government o f Solomon Islands (GoSI) budget planning, with the 201 0 budget projecting ambitious revenue inflows. Loss-making SOEs, owned by central and various provincial governments, continue to represent an unnecessary drain on fiscal resources. Rapid increases in travel and entertainment expenditure and poorly specified grants within the recurrent budget need to be managed. 5 Figure 1: GDP and Government Figure 2: Current Account and Expenditure Index (100=2003) Trade ----Balance -__ 500 I ” I --I x I__- 400 __ $ ---_-_ I 300 ~ --.._ I ~ I -- 150 .______-___I 2003 2004 2005 2006 2007 2008 Current Account -Exports Government Expenditure Nominal GDP -Imports 10. The balance o f payments (Bop) position remains a source o f concern. Loose monetary policy since the Tensions, coupled with commodity price shocks, resulted in a period o f rapid inflation, and an appreciation o f the real effective exchange rate by more than 26% since 2003. Inflation reached 17% in 2008, but declined to 6.8% in 2009 due to policy measures and an easing o f food and fuel prices. Exports have grown rapidly, helped by buoyant log shipments and prices. But the rise in imports has been even greater, and the trade and current balances have moved into very substantial deficit (1 8% in 2008 and 11% in 2009). Foreign exchange reserves fell to around 2.6 months cover in early 2009, before recovering to more than 5 months currently. This recovery was largely driven by falling imports, and one-off factors such as emergency rescheduling o f aid inflows and International Monetary Fund (IMF) Special Drawing Rights allocations in response to the GFC. A further deepening o f the current account deficit i s expected over the I S N period to 22.4% o f GDP by 2011, driven by declining l o g exports and increased fuel imports, and the BOP position can be expected to continue to deteriorate over the medium-term. 11. The Government has taken some positive steps to address macroeconomic challenges. Solomon Islands has reduced debt to around 25% o f GDP, and has met debt repayment obligations under the “Honiara Club Agreement”. Current policy i s to avoid any new public debt. However, the Solomon Islands remains at moderate risk o f debt distress, given uncertain growth prospects. Government has implemented a new budget system and is working towards improved forecasting and cash management mechanisms, in order to maintain appropriate reserves, as articulated in i t s 2010 reform program. The Ministry o f Finance and Treasury (MoFT) i s leading a growth-focused program o f reforms centered on improved management and selective divestment o f SOEs, and improvements in the business enabling environment. Government has also launched a Public Expenditure Review (PER), supported by the WBG which i s expected to contribute to identification and sequencing o f policy reforms. 6 Political Context 12. The political context in the Solomon Islands has been characterized by frequent changes o f coalition governments. The National Parliament consists o f 50 Members o f Parliament (MPs). Political parties are not well-established. There is turnover o f 50% or more o f MPs at each election, and Government represents an aggregation o f interests rather than a party platform. Only one government has served a f i ~ l l - t e r m . ~ The need to maintain coalitions has driven pro-cyclical spending and a focus on short-term goals. Only one woman has ever served in the National Parliament. The 2006 elections were accompanied by violence, and the risk o f political violence remains. Elections are set for July/August 2010. There is widespread recognition o f the need for political reform which the current Government has promoted. 13. Mixed effectiveness in administrative structures and systems hamper service delivery and accountability, fueling grievance. Aside from basic health and education, there i s little state presence in rural areas. Provincial governments have been weakened by insufficient clarity on the roles o f provincial and central government, l o w levels o f funding, and planning and budget systems which do not align with local priorities. L o w capacity across the public administration, but particularly at the provincial level, hampers service delivery. Recognizing this constraint, Government has transferred administration o f a large proportion o f education services back to churches, which were the original providers o f education in Solomon Islands. Given the geographic and social realities o f Solomon Islands, optimal service delivery arrangements will necessarily need to draw on a wide range o f non-state actors. Since 1993, MPs in Solomon Islands have been provided with “constituency funds” to use at their discretion. These funds are equal to around 4% o f total Government spending, compared to 2% o f spending on provincial government. Fifty percent o f the costs are met by Taiwan, China. In some areas these funds are well-administered and address essential community needs, but in other instances are perceived as leading MPs to focus more on project administration rather than legislation. The existence o f multiple systems also weakens public financial management (PFM), although some important reform efforts, including moves toward greater accountability in the use o f constituency funds, are underway. 14. During the immediate post-conflict period, donors increased direct assistance to rural areas, often with only partial integration into Government decision-making processes. These programs addressed the needs o f rural communities immediately following the conflict. However, constituency funds, governmentlline ministry budget, and community-level donor programs constitute three parallel financing systems, o f which the government/line ministries are the most poorly resourced - encouraging communities to look to donors or MPs rather than Government for services. There i s widespread discussion among donors o f the need to balance efforts to address rural service delivery needs with strengthening national systems, which informs both WBG approaches and increased donor efforts to work through Government. Sir Allan Kemakeza’s parliamentary term ran from December 2001 to December 2005, but he remained in office leading a caretaker administration until April 2006. 7 Donor Engagement 15. Solomon Islands has one o f the highest levels of aid per capita in the world. The country has received US$200 million or more in ODA annually since 2005. Aid was 40% o f GDP in 2008, compared to 14.6% o f GDP in 1990 and a low o f 7.1% o f GDP in 1996. However, these figures mask the amounts available for development spending against Government priorities as a large proportion, 38%, goes on security and policing and another 13% on justice through RAMSI.8 There i s no set time-frame for the withdrawal o f RAMSI. The Forum has maintained that there will be a gradual phasing out or handing over o f key functions, but no withdrawal until “the job i s done.” Australia, which funds 96% o f R A M S I costs, has provided budget to 2013. The security presence provided by R A M S I i s generally perceived as essential to overall progress. 16. There is a large number o f donor programs, presenting challengesfor coordination. In 2009 there were a total o f 126 separate programs spread across 26 government agencies.’ A comparatively small proportion o f aid goes through the budget. Currently 93% o f aid i s not formally appropriated through the Government’s budget process. In 2009, 24% o f all education expenditure in Solomon Islands was funded by donors, while 35% o f all health expenditure was funded by donors. AusAID and NZAID lead Sector Wide Approaches (SWAPS) in the health and education sectors respectively. In early 2009, the M o F T launched the Government-donor Core Economic Working Group (CEWG)” in response to the effects o f the GFC. Supported by the WBG, ADB, and RAMSI, the CEWG is the first Government-donor dialogue forum o f i t s kind in Solomon Islands. The group paved the way for a donor response, including the development o f budget support programs, and i s regarded by both donors and Government as substantially improving dialogue on crucial economic and fiscal matters. Figure 3: ODA to Solomon Islands I----- E 300 ODA to Solomon Islands - ,O .- 250 3 200 2 150 100 50 0 2000 2001 2002 .2003 2004 2005 2006 2007 2008 17. R A M S I and other donors have significant capacity and institution-building programs. In recent years, R A M S I has sought to shift from i t s primary focus on security to capacity- * R A M S I has a current complement o f approximately 280 police, 250 military, and 100 civilian personnel in administrative or advisory roles. This does not include spending on the R A M S I military contingent. Government o f Solomon Islands Development Budget 2009. lo This group includes Ministry of.Finance and Treasury, Ministry o f Development, Planning and Aid Coordination, Central Bank o f Solomon Islands, AusAID, EU, NZAID, R A M S I , ADB, and WBG. 8 building and institution-building. l1RAMSI’s Participating Police Force still carries out some executive policing functions but is seeking to move toward more o f an advisory role. Capacity building and some in-line support in core institutions i s likely to remain a need for years to come, although R A M S I will continue at approximately current levels o f support and personnel for the next four years. During this time i t will be crucial to determine which Government entities will still require post-RAMS1 capacity and institution building efforts, and if so which international agencies may be best placed to take on this role in which areas. In addition, the ,AusAID led SWAP in health and NZAID led efforts in education both have capacity-building elements. Several current WBG activities have important capacity-building elements, including the rehabilitation o f agriculture extension services under the Rural Development Program, health sector TA, support to the telecommunications commission, and management reform in the energy utility. The mining sector TA and technical assistance to support a skills development strategy will also lay the groundwork for future capacity building activities. Against the background o f R A M S I transition, an expanded capacity building role for the WBG in the next strategy period could be considered. Development Challenges 18. Geography. Geography i s among the most significant barriers to private sector development and service delivery in Solomon Islands. Distance from major markets increases the costs o f exporting, and the costs faced by domestic producers reliant on foreign inputs. More importantly, a widely dispersed population magnifies the difficulty o f providing basic infrastructure and services and precludes economies o f scale. Transport from production centers to export points in Honiara is a major cost for exporters o f important commodities (more than 20% o f Free on Board (FOB) value for copra’*, and more than 10% o f FOB value for coconut oil). The overall small size o f the economy and population magnifies this disadvantage. Geography also leaves the country particularly vulnerable to deadly natural disasters. 19. Economic growth. Improved growth, with lower volatility, is essential to reducing poverty and engendering long-term stability. Solomon Islands i s a low-income country, with a GNI per capita o f US$1,O82.l3 The formal economy employs only about 50,000 out o f a working age population o f about 250,000. Roughly two thirds o f the population works in subsistence agriculture combined with periodic cash income. However food security constitutes a critical asset. Customary land tenure gives most people access to productive land for gardening and the collection o f forest and sea products. The wantok14 system provides a basic social safety net in the absence o f formal social protection systems. The 2006 Household Income and ” Institutions with a R A M S I in-line or advisor presence include Ministry o f Finance and Treasury (Economic Reform Unit, Customs & Excise, Inland Revenue, Budget, Treasury), Royal Solomon Island Police Force, Ministry o f Justice & Legal Affairs, Ministry o f National Security, Corrections Service Solomon Islands, Courts (High Court, Magistrates Court, Sherriffs Office, Case Support Unit), Public Solicitor’s Office, Department o f Public Prosecutions, Attomey-General’s Chambers, L a w Reform Commission, Ministry o f Public Service, Institute o f Public Administration and Management, Auditor General’s Office, Ombudsman’s Office, Leadership Code Commission, S I Electoral Commission, I T C Support Unit. The dried white flesh o f the coconut from which o i l i s extracted l3 International Monetary Fund, StaffReport Article I V Consultations, 2009. l4 Literally “one talk”. Wantok refers to an individual from the same tribal group, sharing a common language. The term “wantok system” refers to the nexus o f practices surrounding reciprocal obligations between kin and interactions between members o f kin groups and outsiders. 9 Expenditure Survey (HIES) provides the most recent poverty data. l5 According to the HIES, the average incidence o f basic needs poverty was 22.7% overall, while the incidence o f food poverty was 10.6%. Female-headed households were found to be somewhat over-represented in the lowest three expenditure deciles. The study concluded that poverty in the Solomon Islands context does not mean hunger or destitution but a struggle to meet living expenses, frequently leading to indebtedness. 20. The presence of immutable geographical barriers magnifies the importance o f policy settings. Policy, regulation, and targeting o f public spending need to encourage private sector development, competition, and basic conditions for investment, and not impose unnecessary costs on this sector. Policy development and reform i s currently constrained by mixed strategic planning and coordination, and an absence o f a well-articulated strategic vision to guide donor investment, vital in a context where donors fund the majority o f development expenditure. 2 1. Improved macroeconomic management is vital. Failure to manage emerging macroeconomic pressures i s likely to further constrain private sector development. Continued inflation, appreciation o f the real exchange rate and balance o f payments volatility has impacted negatively on exporters, and weakened overall investment confidence. Improvements to public expenditure management are essential. Currently, P F M i s uneven. A Public Expenditure and Financial Accountability report in 2008 gave the country l o w scores in most areas. Areas o f particular concern are budget credibility and relationship o f allocation to output; transparency and oversight o f provincial and SOE budgets; forecasting and multi-year planning; orderliness o f budget process; and allocation o f tax exemptions. Execution o f the development budget i s particularly poor, with project delays common and little monitoring or evaluation o f Government development investments. Improvements in P F M are also essential to improving local level service delivery. 22. Quality of regulation in Solomon Islands is mixed, with Solomon Islands coming 104th in the WBG's 2010 global Ease o f Doing Business Survey.I6 Regulations, land laws, zoning restrictions, and taxes and duties are onerous. Access to finance i s limited and costly. Administrative and regulatory functions are distributed between .a large number o f different departments. Eight-five percent o f land is under customary tenure, with the existing statutory system for identifying, registering, and titling customary land posing risks to customary owners and therefore seldom used. State land i s also inefficiently administered. Central and provincial government hold ownership interests in a wide range o f commercial or quasi-commercial SOEs, which drain budget resources and crowd out private investment. Recognizing this problem, Government has moved to update SOE accounts and begin privatizing, and introduce a new Companies Act 2009. 15 Government o f Solomon Islands and UNDP, Household Income and Expenditure Survey, 2005/2006. The HIES did not use the usual PPP values for measuring poverty, as the PPP indices are not available. Instead the study used Food Poverty Lines (FPL) and a Basic Needs Poverty Line (BNF'L) for Honiara, provincial-urban, and rural households. Poverty was then calculated as proportion o f household and populations less than poverty lines. l6 Out o f 183 countries, this i s down from 89' place in 2009. 10 23. Improvement in the use and distribution o f benefits from natural resource extraction is fundamental to growth, improved social well-being, and long-term stability. While supporting short-term budget revenues, logging operations ,are widely perceived as not having translated into sustained benefits, either nationally or locally. Royalties have often been spent on short- term consumption, while favorable pricing arrangements and uneven compliance have deprived Government o f revenues, while grievances over the distribution o f the benefits o f economic development growth contributed to the conflict. The fisheries sector i s growing but may well be below potential, making up 6% o f export receipts in 2008. The current Vessel Day Scheme allowance, administered by the Parties to the Nauru Agreement (PNA), does not take full advantage o f the potential market power held by P N A member states, which account for more than 60% o f the global tuna catch. The P N A i s moving toward a more strictly enforced regional regime, which could lead to higher international prices and protect the sustainability o f stocks. 24. Mining has potential to play an important role in future growth, however the equitable sharing and transparent management o f benefits is fundamental. The industry i s still in early stages, but a significant number o f prospecting operations are underway. Translating growth in the minerals sector into broad-based opportunities for Solomon Islanders will require effective negotiation and implementation o f tax regimes, sound management o f royalties paid to communities, and effective use o f revenues by Government. Good governance in the mining sector i s a frequently articulated priority o f both Government and communities, and has led to a request to the WBG to provide assistance with updating the policy, legislative, and institutional framework, which i s currently inadequate. Following awareness-raising efforts by RAMS1 and the WBG there is interest in signing up to the Extractive Industries Transparency Initiative (EITI). 25. The provision and quality o f infrastructure in Solomon Islands is very low, constraining growth and service delivery. There are only 5 kilometers o f road per square kilometer in Solomon Islands, the lowest density in the Pacific, and 60% o f them on Malaita and Guadalcanal. Inter-island shipping, scheduled air travel, and local transport by outboard i s run by central or provincial government SOEs, is very expensive, and mostly intermittent. Electricity i s unreliable and costly, with 98% o f power generated using imported diesel. Eighty percent o f generated power i s consumed in Honiara, and only 16% o f households nationwide have access to electricity. Telecommunication liberalization was initiated only in mid-2009, and until then was supplied under a monopoly license. Access to telecommunications remains poor. Only about 11% o f the population has access to phones. Most internet access i s through dial-up, with fewer than 1,000 broadband subscribers across the country. Recognizing these challenges, Government has introduced competition in the telecommunications sector and i s moving to improve management o f the water and, power utilities, with WBG support in power utility and telecommunications. 26. Human Development - Solomon Islands is unlikely to achieve several o f the Millennium Development Goals, including those relating to child mortality, prevalence o f disease, and school enrolment. In health, both the quality and quantity o f services i s undermined by weak planning and budgeting, which results in poor use and maintenance o f the workforce, facilities, drugs, and equipment. Education is o f variable quality and widely perceived to have experienced a long- term decline. Estimates o f adult literacy vary greatly, with the 1999 census figure cited at 11 76.6%. However a detailed literacy assessment undertaken by the Asia Pacific Bureau o f Adult ~ Honiara and Malaita in 2007 found literacy rates o f 17% overall (27.8% in E d ~ c a t i o n 'in Honiara and 7% in Malaita). Only 28.1% o f students completing primary school were found to be literate, and under half o f secondary graduates. Lack o f basic numeracy and literacy skills appear to inhibit school to work transition, contribute to skills shortages, and potentially constrain economic growth. Both health and education systems face continued pressure from population growth (2.3%).'* Government expenditures have been biased towards urban curative care in health and tertiary education. As in other PICs, lifestyle diseases are emerging as a costly public health problem. 27. Although social indicators continue to lag, there have been some important gains in health and education. In education, net primary enrolment i s 94%. Secondary enrolment i s 3 1% at junior secondary and 19% at senior secondary (2008). l 9 The recent introduction o f a fee- free policy through year 10 i s likely to yield further increases.*' While enjoying considerable political backing, the fee-free policy is costly. Recognizing the challenge o f maintaining i t s commitment to fee-free education, the Ministry o f Education and Human Resource Development has undertaken an education sector public expenditure review, which resulted in identification o f significant savings as well as a costing o f the National Education Action Plan (NEAP) with the support o f NZAID and the WBG. A committed workforce and consistent donor support have led to these gains. In 2009, Australia alone provided over one-third o f total public expenditure in the health sector, supporting pharmaceuticals, technical advisors, and provincial grant funds. NZAID has led a significant program o f education sector planning 'strengthening and budget support to major initiatives such as school grants as part o f the fee-free basic education. 28. Health indicators compare favorably with countries at similar income levels. Free healthcare and a relatively good outer-island health infrastructure ensure high levels o f access. Maternal mortality declined to 103/100,000 live births in 2007, but was still well-above rates achieved in the late 1 9 9 0 ~ . ~Approximately ' 77% o f babies receive all basic vaccinations, and over 80% o f women give birth in health facilities.22 The infant mortality rate o f 24 per 1,000 live biiths is below that o f other low-income countries in the East Asia Pacific (EAP) re ion.23 Malaria incidence has declined from 450 per 1,000 in 1990 to 128 per 1,000 in 2007'4, but remains the highest incidence outside o f Africa. AusAID and the Global Fund support eradication measures which have led to some early success in lowering incidence in the first target provinces. HIV prevalence remains l o w at 11 identified cases by 2008 but the incidence 17 Educational Experience Survey. Education, Language and Literacy Experience in the Solomon Islands. October, 2007. Asian South Pacific Bureau o f Adult Education and Coalition on Education Solomon Islands. 18 World Development Indicators ,2009. 19 Performance Assessment Framework (PAF) 2006-2008, July 2009. Ministry o f Education and Human Resources Development. 20 A small sample survey conducted by the Ministy o f Education and Human Resource Development on fee-free basic education impact in 2009 indicated a 9% enrolment increase. 21 2008 Annual Report Volume III. Ministry o f Health & Medical Services and Health Sector Support Program, April 30,2009. 22. Solomon Islands Demographic and Health Survey 2000-2006, May, 2009. National Statistics Office, Honiara, Solomon Islands. 23 ibid. 24 Ministry of Health & Medical Services and Health Sector Support Program, op cit. 12 o f other sexually transmitted infections has risen rapidly.25 Against this background o f improvement but still lagging M D G s there is an opportunity for the WBG to contribute in partnership with other development/donor partners to improved social indicators. 29. Gender. Good quality data is unavailable, but women’s participation in the formal economy i s significantly lower than that o f men. Only 27% o f public service positions are occupied by women, o f which only 19% are senior positions.26 Available evidence suggests that women have significantly fewer opportunities for tertiary education, with implications for employment. An estimated 54.3 % o f women over 15 are ‘economically active,’ but tend to work in selling cooked food, handicrafts, or in running micro-businesses, such as kiosks.27 Women play a significant role in agriculture, but have less access than men to formal agricultural extension services. Gender-based violence, including sexual abuse, affects a large number o f women. In a recent study 64% o f ever-partnered women aged 15 - 49 reported physical or sexual abuse from partners.28 Few formal services for women seeking to move out o f abusive relationships exist. Pending Cabinet approval, a National Policy o n Eliminating Violence Against Women aims to address the inequalities which perpetuate gender-based violence, address risk factors, strengthen prevention efforts, and raise awareness o f women’s rights. 30. Women’s representation in decision-making positions in formal institutions is low. M e n are more likely to have broader decision-making roles at the national and community level, as ministers, officials, priests, project managers, or chiefs, although women’s representation in these roles does occur. Women often face more barriers than men in administrative processes, such as acquiring land, business registration, or accessing credit. In addition women tend to be excluded from decision-making around large economic projects or the use o f land for development purposes. Studies suggest that increased commercialization has undermined women’s customary decision-making authority, particularly in areas o f matrilineal land-holding. 3 1. However, low representation in formal decision-making roles can obscure the voice women do have. Women play key roles in churches, which are central to community life. Some churches actively promote women’s literacy and capacity-building programs. There are a large number o f women’s organization^.^^ Additionally women have increasingly sought to influence political and economic decision-making, including o n improving use o f royalties from logging operations. WBG mining sector activities will support these efforts through awareness raising surrounding the importance o f women’s role in negotiating and managing benefits from extractive industries. In late 2009, Government approved an updated Gender Equality and Women’s Development Policy. 25 From 4-8 notifications per 1000 until 2004, thm has risen sharply to 13 notifications per 1000 in 2008. Evaluation o f Australian Aid to Health Service Delivery in Papua New Guinea, Solomon Islands and Vanuatu, Working Paper 2 Solomon Islands County Report, June. 2009 26 Ministry o f Women, Youth, and Children’s Affairs 21 AusAID and International Finance Corporation (2008) Draft Women in Business Survey. 28 Secretariat o f the Pacific Community, Solomon Islands Family Health and Safety Study on Gender Based Violence and Related Child Abuse, 2008. 29 AusAID Solomon Islands Smallholder Agricultural Study, volume 2, 2005 cited in AusAID, Solomon Wands - Australia Rural Livelihoods Program, Program Design Document, 2009 - gives a figure of3,000 community groups and ten national women’s organizations 13 32. Vulnerability to conflict. Many o f the underlying causes o f the conflict have not been addressed. The 2009 Report on the Inquiry into the Facilitation o f International Assistance Notice 2003 and RAMSI Intervention by the Foreign Relations Committee o f the National Parliament o f Solomon Islands as well as academic literature and media reports identify the “root causes” that remain.30 Prominent among these are the poor linkages between customary and introduced authority systems, particularly in the area o f justice. Other frequently cited “root causes” include: i)land tenure; ii) ethnic and cultural differences; i ii) poor access to Government services and public resources; iv) narrow economic base and maldistribution o f economic benefits; v) centralization o f economic and political activity in Honiara; and vi) the grievances o f Guadalcanal as the capital island. Without addressing these issues; security may remain a fundamental constraint to growth and improved standards o f living. Government and donors are seeking to address “root causes” though a truth and reconciliation commission, building capacity in justice and oversight institutions, economic reform and growth, and support to and review o f sub-national governance arrangements. 33. Weak administration and capacity hampers state capability to address perennial and emerging social tensions. Weak institutions have difficulty consistently mediating conflict, including over land and sharing o f economic benefits - two o f the most common sources o f dispute. The formal justice system functions, and i s perceived not to be corrupt, but i s largely confined to the capital and main towns. Its absence in rural areas means most people rely on the strong customary dispute resolution systems, but linkages between the two systems are poorly defined, leading to parallel processes and conflicting outcomes. The formal system i s currently highly reliant on foreign personnel funded by RAMSI. 34. Government is constrained in its capacity to respond to emerging social challenge, such as urban youth unemployment. Despite a significant drop in total fertility rates since the 1970s, from 7.09 to the current average o f four (3.4 urban areas, 4.8 rural areas), 44% o f Solomon Islands population is under 15. However with an estimated 7,500 young people entering the workforce each year, only one among every six school leavers will find paid employment as the creation o f job opportunities has not been able to keep up with the rapid population growth. In addition, according to the 2005/06 HIES, the incidence o f basic needs poverty affects some 32.3% o f people in Honiara compared with 18.8% in rural areas. While there is widespread concern about the threat to stability posed by the large youth population, issues o f urbanization in general are often overlooked. The current Government is the first to seek to develop programs to address urban youth unemployment. 111. PRIOR ENGAGEMENT AND LESSONS LEARNED 35. A member o f the World Bank since 1978, Solomon Islands has received 11 I D A operations totaling approximately USD$63.4 million. These projects addressed education, roads, rural development, health and energy, and a structural adjustment operation. O f these 11 operations five closed prior to 1995, and three between 2000 and 2006. The Bank has 30 National Parliament of Solomon Islands, Foreign Relations Committee, Committee Report on the Inquiry into the Facilitation of International Assistance Notice 2003 and RAMSI Intervention, November 2009, pp. 193 - 209. 14 consistently collaborated closely with ADB, NZAID and AusAID. The Bank has had few recent operations, but has drawn on extensive consultations and research with other partners, particularly in the design o f the Rural Development Project (RDP). Important lessons have emerged from the post-2003 engagement by the international community in Solomon Islands, including the importance of: i)long-term engagement and an acknowledgment that rebuilding formal institutions, service delivery, infrastructure, and marketing channels takes time; i i)re- establishing linkages between the national and provincial governments and rural communities is vital - in the post-2003 period projects bypassed government to produce quick results, but further disconnected communities from government; i ii)communication, outreach, and transparency i s vital to building confidence and managing risks. 36. Lessons learned from recent exits and the Quality Assurance Group review o f the Pacific Islands3’ are also being taken into consideration with the new program. The Bank’s three most recent exits were rated as unsatisfactory. This experience underlines the challenges o f operating in a conflict-affected state, as all three operations were carried out during the Tensions. Implementation was severely affected by the unrest, leading to the suspension o f IDA credit. The experience o f structural adjustment in the late 1990s highlighted the importance o f political economy considerations and sequencing o f reform in a context o f deteriorating security and economic situation. 37. Drawing on IDA’S experience with Engagement in Fragile States32 and the E A P regional strategy, the Bank Group has expanded its field presence in Solomon Islands. The establishment o f a country office and the decentralization o f many team leaders to the Sydney office will ensure intensive project implementation support and improve the Bank’s understanding o f the operating environment. Project design is to be kept simple in line with implementation capacity. Enhanced supervision and implementation support is needed particularly in fiduciary management. Partnerships with other donors are essential, and project re-design should be considered favorably. However, Solomon Islands still has many elements o f fragility including weak institutions and limited implementation capacity. IV. WORLD BANK GROUP INTERIM STRATEGY 2010 - 2011 Strategic Framework 38. The WBG strategy for Solomon Islands draws on the Bank’s E A P regional strategy. The regional strategy calls for the Bank to assist the poorest and most fragile states in preventing a rise in instability, maintaining capacity building and accountability as areas o f focus, and supporting efforts to address the effects o f the GFC. This last element also echoes calls by the Pacific Island Forum leaders in August 2009 for the International Financial Institutions t o assist the Pacific Islands countries in responding to the global economic crisis, including through supporting better coordination mechanisms. The WBG has been at the core o f donor efforts to help address the effects o f the GFC in Solomon Islands, through its role in the C E W G and a 31 Qual@ Enhancement Review Pacific Islands, Volume I, Quality Assurance Group, June 30,2008. 32 Strengthening the World Bank’s Rapid Response and Long-Tern Engagement in Fragile States (SECM2007- 0018), March 30,2007. 15 possible Development Policy Operation (DPO or budget support). Further, the WBG in Solomon Islands aims to help Government address some o f the issues most likely to spark instability, specifically economic slowdown, fiscal constraint, unemployment, and uneven service delivery. Paragraph 17 details current WBG capacity building efforts. The ISN period also lays the groundwork for possible future capacity-building efforts, particularly in implementing the skills strategy, health, and PFM. 39. The W B G strategic approach to Solomon Islands also reflects strategic directions o f the Pacific Department. Core to the evolving department strategy is an appreciation o f the ‘Pacific paradox’ - that the Pacific Islands are highly remote but highly connected, vulnerable to economic shocks and particularly subject to economic and other developments beyond their borders. Further most face long-term aid dependency. “Putting together the accidents o f geography and the expectations o f citizens, the reality most Pacific countries face i s that aid will not be a transitional, pump-priming phenomenon. Aid may need to be a semi-permanent’ ‘wedge’ to offset the ‘tyranny o f distance’ .’733 The department’s proposed strategic direction frames WBG engagement in the Pacific as assisting countries in managing the challenges o f distance and size, reducing vulnerabilities to external shocks, and increasing access to the benefits associated with deepened regional and global integration. The Pacific Paradox i s particularly relevant to Solomon Islands. International relationships with investors, trade partners, neighbors, and donors play a central role in the country’s development trajectory. With health, education, security, justice, and financial management institutions to a large extent reliant on international funding and capacity, aid i s likely to remain a feature o f both state function and the economy for the foreseeable future. As the experience o f the recent food, fuel, and financial crises demonstrates the country i s also highly vulnerable to international shocks but very constrained in i t s capacity to mitigate these shocks. 40. While much can be achieved through improved policy and private sector-led growth, these alone are unlikely to deliver the level of revenues necessary to maintain stability and service delivery at current levels over the medium term. Remoteness, geographic fragmentation, and small size constitute insurmountable barriers to growth which conventional policy reforms, investment, and aid are unlikely to address. Government has expressed clear interest in increasing the benefits o f international relationships, including attracting more socially and environmentally responsible investment, increasing the effectiveness and impact o f aid in the local economy, and increasing labor migration. Over the medium-term, seizing the opportunities afforded by global and regional engagement and integration will mean ensuring better sustained capture o f natural resource rents, greater regional cooperation, and long-term predictable aid. 41. The ISN has also been informed by consultations with Government, donors, private sector, and civil society. Discussions encompassed both broad challenges and WBG strategic engagement. The most prominent country challenges articulated were: i) economic growth, particularly given the decline in logging; ii)the need to articulate plans, strategies, and vision both nationally and within specific sectors, and improved policy making; i ii)the need for the state to address the challenges posed by land administration, urbanization, and demand for . changes to center-province administrative arrangements. Interlocutors felt that the value o f the 33 WB EAP VP James Adams remarks, Post-Forum Dialogue, Cairns, Australia, August 7,2009. The 2006 - 2009 REF also noted aid reliance as a reality o f the Pacific Island Countries. 16 WBG lies most prominently in providing high-quality analysis and advice o n economic issues - the development o f the private sector, assisting Government in working with international investors, the articulation o f a comprehensive growth strategy, and increasing the equitable and transparent allocation o f revenues from natural resource extraction, particularly mining, and PFM. Government expressed a desire for the Bank to deepen engagement in the infrastructure sector, specifically energy, but also to maintain the current ongoing activities in rural development, health, and education. Government has also asked the I F C to explore investment transactions in key areas such as tourism, mining, fisheries, and forestry. Such transactions will fuel growth while also introducing improved standards for socially and environmentally responsible investment. 42. The ISN defines three areas o - f strategic engagement i) Addressing surmountable barriers to growth; ii) Enhancing benefits o f regional and global engagement; and iii) Supporting improvedpublic administration and management. The choice o f strategic area I addresses the core challenge o f economic growth and fiscal stability, supporting the national priority o f economic revitalization; as well as reflecting WBG expertise and Government priorities for WBG engagement. Strategic area I1 i s based o n the recognition o f the centrality o f international relationships to efforts to address national challenges and priorities, and the long- term benefits Solomon Islands stands to gain through greater regional and global engagement. Strategic area I11is chosen based o n analysis that changes in administrative arrangements and the management o f public resources i s essential to improved service delivery, mitigating vulnerability to conflict, including tensions surrounding center-sub-nationsil and customary- formal arrangements, and addressing social challenges such as urban unemployment. A s such this area contributes to the national priorities o f improved service delivery, rural development, reconciliation, and devolution o f decision-making t o the local level. A s well as WBG resources, implementation will draw on trust funds for both projects and administrative costs. Use o f trust funds will include regional funds, such as the Pacific Regional Infrastructure Facility and the Pacific Facility, as w e l l as global trust funds such as the GFDRR, GEF and SPF. The program also leverages relatively modest IDA contributions through co-financing with other donors. 43. A three tiered approach will be taken to incorporating gender across the strategic areas. Analytical work will incorporate gender-specific data and analysis. Projects, particularly the large-scale community projects RDP and the Rapid Employment Program (REP), include measures to ensure women’s participation and benefits. The WBG will also undertake analytical and advisory activities specifically aimed at increasing women’s participation in the formal economy. While there are numerous donor supported gender efforts, there i s a striking lack of data o n women’s role in the formal economy and activities specifically targeted at helping women overcome barriers to starting businesses. Strategic Area I:Addressing Surmountable Barriers to Growth 44. Economic growth and fiscal stability constitute core national challenges. The medium- term objective for the WBG i s to contribute to durable and less volatile growth and stability by helping the country reduce the infrastructure, policy, and regulatory barriers to growth, including promoting greater macro-economic and fiscal stability. The results matrix in Attachment A provides a framework for measuring WBG engagement while laying out the relationship 17 between I S N period activities and medium-term country goals. Attachment B and C provide additional details o f WBG and donor activities. 45. During the ISNperiod, the WBG will undertake the following activities in support of this medium-term objective: a. Supporting Government’s reform to address fiscal and BOP pressures. This will involve four complementary activities: i) participation in C E W G dialogue; ii)PER; iii)Debt Management advice; and iv) a DPO. The C E W G provides a forum for reform dialogue and monitoring o f donor budget support operations. These currently include general budget support from ADB and European Union (EU) (under development) and sector budget support from AusAID and NZAID. These support a Government reform program focused on PFM, SOE reform, and the business enabling environment. Government i s also actively pursuing an 1MF.program. The WBG w i l l move toward a modest DPO in FY2011 in order to support select P F M reforms, encourage coordination, selectivity, and sequencing among the overall donor budget support program, and help to move the country away from narrow project aid modalities. A gradual shift to budget support could also over the medium- term become a more cost effective use o f aid funds, given the high transaction costs of project implementation in Solomon Islands. Aside from supporting the CEWG the WBG will not during the I S N period seek to take o n a greater role in aid coordination in general. b. Assisting Government in growth-oriented policy-making. As noted in paragraph 20, the presence o f immutable geographic barriers renders Government policy that much more important. The Sources o f Growth analytics will provide a basis for Government to enact policy changes and target public spending, including donor funds, toward investments which support economic growth, including their incorporation into the coming National Strategy Planning Framework. The work encompasses analysis o f the near and longer-term economic outlook, growth prospects in key areas, and growth diagnostics to identify binding constraints. The Justice for the Poor (J4P) program will contribute a series o f case studies on Doing Business in the Context o f Customary Tenure, looking at instances o f successful collaboration between enterprises and customary resource owners, in which a gender component w i l l look at women’s voice in these transactions. A micro-study o n Women and Sources o f Growth will explore potential entrepreneurial opportunities for women specifically related t o the aid economy. c. Improvements in telecommunications and energy infrastructure. Building o n advice to Government in the drafting o f the telecommunications bill that led to the recent de- monopolization, the WBG will support a program o f telecommunications development, including the establishment o f the independent telecommunications commission. In the energy sector, the WBG-supported Tina River Hydro scheme stands to reduce cost, improve reliability, and cut imported diesel for power generation on Guadalcanal by 45% to 100% depending on the size o f the scheme. During the I S N period, the Bank’s Solomon Island Sustainable Energy Project (SISEP) will undertake management reform aimed at making the power utility 18 commercially viable in order to make i t a credible off-taker from the Tina River scheme. Concurrently the I F C will provide transaction advice for the mobilization o f an independent power producer to build and run the Tina River scheme, while the Bank will provide an IDA partial risk guarantee to encourage investment. The team i s also exploring use o f the project for carbon offsets. The WBG will also work with Government o n a rural electrification strategy, which could lay the groundwork for fbture investment in this sector. T h i s effort will focus specifically on renewable energy as the most feasible option for provision o f electricity across the island geography. An important element o f the strategy will be creating a framework for donor investment, given the high cost o f energy infrastructure. Currently there i s limited engagement from other donors in this sector, aside from a small-scale ADB renewable energy project. d. Support Government efforts to improve the regulatory environment and encourage investment. The IFC’s promotion o f public-private dialogue aims to address specific barriers to doing business which includes a gender component aimed at reducing gender-based barriers to private sector participation. The recent I F C Tourism Impediments Diagnostic focuses o n tourism investment as one o f the areas most likely to generate jobs and foreign exchange. The J4P program will collaborate with IFC to examine how customary authority interacts with formal procedures o n questions o f business licensing. e. Expanding access to finance. T h e RDP Component I11 expands access to finance by offering supplemental equity grants to medium-sized enterprises in rural areas. T o date, this financing has gone mostly to agriculture and transport businesses. The I F C will continue to explore avenues for investment and advisory engagement in the financial services sector, including supporting the development o f a Pacific Islands Regional Credit Bureau and a Pacific Islands microfinance scheme, with coverage o f Solomon Islands. f. Climate change adaptation and disaster risk reduction. The impacts o f climate change pose a fbndamental challenge to development in Solomon Islands, including threats to coastal settlements, loss o f coastal infrastructure, and potential impacts o n tuna migration. The WBG i s assisting Government in addressing the vulnerability o f coastal communities to the impact o f climate change related hazards, as well as other disasters such as tsunamis and earthquakes, by integrating disaster risk management in government policies and investment plans and increasing climate resilience o f costal infrastructure and water resources. The WBG will also preliminarily explore options for combining support to critical biodiversity efforts with carbon sequestration projects in communities, as exploration o f carbon financing is a priority o f both Government and Solomon Islands’ significant environmental community. Strategic Area 11: Enhancing Benefits o f Regional and Global EnPaPement 46. Solomon Islands stands to accrue long-term benefits from deepened regional and global engagement. The medium-term objective i s to assist Solomon Islands to create a more level playing field in order to derive greater domestic economic benefits from international investment and in common with other PICs maximize the economic benefits o f and realize economies o f scale through deeper regional integration. In the near-term this responds to Government requests for assistance in attracting more socially and environmentally responsible investment, helping to create systems for stepped up labor migration, and increasing the proportion o f aid spent in the local economy. 47. During the ISN.period, the WBG will undertake the following activities in support of this medium-term objective: a. Supporting Solomon Island participation in labor migration schemes. The WBG will assist in developing a labor export strategy, assess the viability o f several potential markets, and review current institutional arrangements for facilitating labor migration, including policy relating to the registration o f agents. These efforts can lay the groundwork for institution and capacity building efforts during the next I S N period. b. WBG support to the new Parties to the Nauru Aaeement (PNA) Secretariat. A regional initiative aimed at increasing the fisheries revenues o f Pacific Island nations, while reducing incentives for over-fishing o f key species, the P N A i s seeking to establish a secretariat to support the new fisheries regime. The Bank and I F C will collaborate in providing technical assistance to the initiative once an engagement strategy has been developed and approved by both institutions. c. Assisting Government in updating mining sector regulatory and institutional framework. Technical assistance will support the review o f policy, regulatory, and institutional arrangements currently governing the mining sector. The project includes activities to raise awareness o f the importance o f women’s role in the negotiation and management o f royalties and other community benefits34 and support for Solomon Islands to s i g n up to the EITI. These I S N period activities will lay the basis for a second phase involving the redrafting o f policy and legislation and capacity-building. Over the medium-term these activities are designed to contribute to improved oversight, equitable benefits, and sound management o f revenues in the mining sector. d. Attracting sociallv and environmentallv responsible investment. The I F C i s exploring opportunities to invest in sectors such as mining, fisheries, forestry, tourism, and agriculture. Such investments will be important to export earnings and j o b creation, but will also support Solomon Island efforts to enhance the quality o f investment, including greater attention to benefit distribution and environmental and social issues. The I F C i s committed to delivering i t s first investment in the Solomon Islands and to having at least two well advanced business development opportunities during the I S N period. A s a first instance, the WBG Board has approved an US$30 M i l l i o n I F C investment to support the re-commissioning o f the Gold Ridge gold mine operation. Following a takeover o f the Australian owner by another publicly listed company negotiations have slowed but the IFC remains committed to further engagement in the extractives industry sector and i s in discussion with other interested parties. 34 Buildingon the WBG Women in Extractive Industries Initiative. 20 e. Supporting enhanced aid effectiveness. This is in line with the Cairns Compact o f 2009 through which Pacific Island Forum leaders seek to “...drive more effective coordination o f available development resources from both Forum Island countries and all development partners, centered on the aim o f achieving real progress against the MDGs.”~~ The WBG will support Government and donor efforts to use aid more effectively, specifically through: i)identifjmg steps, through the CEWG, to increase the local economic impact o f aid, informed by a RAMS1 commissioned study by the Peace Dividends Trust and the Sources o f Growth analysis; and ii) drawing on the results o f the PER to define the gap between the level o f service delivery which Government revenues can support and the level o f funding that will be necessary to sustain or improve current levels o f service delivery, for which Government will turn to donors. Defining this gap i s an essential first step in improved medium to long term aid planning. Strategic Area 111: Supporting Improved Public Administration and Management 48. WBG activities in this area support Government efforts to improve public administration and management o f public resources. Reducing vulnerability to conflict will require medium to long term changes to create a more effective administration, reflective o f the social and geographic realities o f Solomon Islands and responsive to citizen needs. This will necessarily include changes in allocation o f resources across and between central and sub- national government and building links between customary and formal systems. In the short run, increased analytical clarity and dialogue on these issues can support the development o f longer term strategies, including consultation mechanisms, to address them. 49. During the ISNperiod, the W B G will undertake the following activities in support of this medium-term objective: a. Supporting service delivery. The RDP36 Component I supports service delivery in rural areas through provision o f grants for small-scale infrastructure using community driven development (CDD) modalities. The project seeks to address community level needs, while linking to provincial government decision-making and resource allocation processes. Component I1 o f the project provides for the rehabilitation o f agriculture extensions services. One o f the most tangible and important elements o f the public sector for rural communities, extension services collapsed during the Tensions period, and their re-commence i s one o f the most frequently articulated demands from rural areas. RDP i s providing training programs, rehabilitation o f offices and other infrastructure, vehicles and equipment, and some recurrent costs. The WBG support in the health and education sectors use relatively small IDA and Trust Fund (TF) commitments to play a catalytic role on key questions that augment the effectiveness o f much larger donor and Government programs. Further the WBG i s well placed to work cross-sectorally on issues like P F M and planning. The health 35 Forum Commique: Fortieth Pacific Islands Forum. Cairns Compact on Strengthening Development n the Pacific, August 2009. Coordination i Cofinanced by EU and AusAID and managed by World Bank. 21 sector TA provides assistance aimed at improving expenditure management, planning, and budgeting. In education, the WBG i s supporting analytical work in preparation for eligibility for Fast-Track Initiative funding, including an education PER completed in 2009, the costing o f the NEAP, and an Early Grade Reading Assessment (EGRA). The WBG i s also providing technical assistance for skills strategy development, which may be a first step toward addressing the constraints to growth posed by skills shortages. Both the EGRA and the skills TA are first steps in addressing the critical quality issues affecting education. b. Assisting Government efforts to address urban unemployment. In response to a 2008 request from Government, the WBG is working with the Honiara City Council (HCC) and the Ministry o f Infrastructure Development (MID) on the REP designed to produce 500,000 labor-days between 2010 and 2014. Currently focused on Honiara and peri-urban areas, the rogram has the potential to expand to the provincial urban centers o f Auki and G i z o l Activities will focus o n labor-intensive public works and include pre-employment training. Measures to encourage participation o f women may include targeting at least 33% women’s participation in sub-projects, prioritization o f women on community committees overseeing projects, and all women labor crews. The project aims to help Government address the immediate problem o f urban unemployment but also demonstrates the potential o f labor- intensive works for maintaining urban infrastructure. c. Improving effectiveness, efficiency, and planning in public spending. The PER will ~~ provide comprehensive data and analysis o f public e ~ p e n d i t u r e ,at the national and provincial level. Other analytical work, including an education PER and costing o f the N E A P contribute to gaining a picture o f current public expenditure practice. The analysis will provide an essential basis for long-term expenditure planning; reforms to administrative structures and systems; and more efficient and effective use and allocation o f public resources. Building on the PER, the WBG i s also prepared to assist Government with the review and costing o f different options for sub-national government d. Supporting policy changes to land administration and the justice system. The WBG w i l l assist the Lands Commissioner in carrying out an inventory o f state land (15% o f land), a crucial first step in making more land available for development purposes, recouping Government revenues from land rents, and reducing vulnerability to conflict surrounding land. J4P will assist the Ministry o f Justice and Legal Affairs and RAMSI’s Justice Delivered Locally program through research and pilot activities to explore administrative and policy options for improving access to justice in remote areas. 37 This will be contingent to funding and successful implementation in Honiara. 38 The PER will also cover donor programs, given that these considerably exceed Government spending in some areas. The PER i s the first conducted in Solomon Islands. 22 V. RISKS 50. Risks in the Solomon Islands are significant. Most prominent among these i s the possibility o f renewed unrest brought on by economic distress or unresolved grievance. The WBG will seek to mitigate the first o f these through ongoing support to Government efforts to deal with fiscal constraint, in coordination with other donors. The WBG has limited capacity to directly address the security situation, although the RAMSI security presence makes widespread conflict unlikely. However, the WBG will maintain flexibility and the possibility o f scale up o f community-level programs, RDP and REP, as a means to mitigate community-level tensions. The WBG will remain closely coordinated with Government and partners, particularly RAMSI, in assessing potential pressure points, particularly the stability implications o f actions taken to address the fiscal imbalances. The risks to sustained Government-donor dialogue and intra- donor coordination are considerable. Political instability, discontinuity in policy, and the characteristically short-term, localized focus o f policy-making pose particular risks, and these may become more pronounced following the mid-2010 elections. T o mitigate these risks the WBG i s investing heavily in Government-donor and intra-donor dialogue, engaging a broad range o f stakeholders, and working closely with officials to ensure continuity. In this context o f political and economic uncertainty and institutional fragility, elevated expectations o f the WBG and the ADB also require careful management in order to avoid reputational risk and maintain the current sound relationships. 5 1. Projects face ,several implementation risks. Capacity limitations and unpredictable costs pose risks in this small country with a limited number o f highly trained professionals, almost complete reliance o n imported goods, and recent inflation. This risk i s best addressed by maintaining simplicity o f design and willingness to re-structure projects as needed. Project cost structures must also build in cushion and flexibility to absorb variance. The WBG will also address capacity limitations through close collaboration with other donors. For instance, the REP will draw on existing technical assistance in the MID and HCC. Underlying fiduciary weaknesses and corruption also poses a risk. Assessments o f fiduciary risk during project preparation and a 2008 procurement review have identified both systemic and project specific risks. These are best mitigated through intensive supervision and training to ensure adherence to Bank fiduciary standards, as well as ongoing attention to strengthening o f country procurement systems as part o f wider analytica1,work o n P F M systems. 52. Some o f the projects set out in the ISNprogram, including the Tina River Hydropower Project, are flagged as high risk since they involve complex social and environmental issues. These projects will require early and thorough due diligence o n safeguards, as well as careful consultation with Government, resource owners, the private sector sponsors, and communities. This must include adequate documentation o f consultation outcomes and WBG responses, early identification o f safeguard policies triggered by these operations, and implementation o f appropriate measures. Robust communications and outreach plans will be incorporated into high risk projects at early stages in order to maximize transparency, respond to public and institutional concerns, and draw out potential problems during the early stages o f project design and implementation. Where project communications strategies do not currently exist, efforts will be made to add these. 23 53. Finally some outcomes, particularly under strategic area 1 1, the WBG has limited capacity to control This risk will be mitigated through the definition o f quite specific activities which the WBG will undertake and the related outcomes, through the results matrix, and through coordination with other donors as stipulated under the Cairns Compact. Above all, the WBG staff in the field w i l l continue to strengthen their understanding o f the local political and operating environment and apply this knowledge and experience to meet the needs o f Solomon Islands effectively. ro 0 a a a . a a * a a m a a I d n 8 Y I. . . 0 . &I . 0 . . . 01 . . 0 . . L 0 26 Attachment B1: Table 1: World Bank Projects and Indicative Funding Allowances: 2010 2011 - Solomon Islands Sustainable Energy 7.040 7.0 Project (SISEP) Tina River Hydropower 4.0 PRIF4' 1.25 5.25 Development Project (TRHDP) Sustainable Energy Finance (SEFP) GEF4' ,507 SO7 Mining Sector Technical Assistance SPF43 .9 .9 EU 10.06 Rural Development Program (RDP) 1 AusAID GFRP44 SPF I 6.61 3.0 2.0 22.87 Rapid Employment Program (REP) 3.1 7.1 PRIF ~ 2.0 Health Sector Support Program 1.6 1.6 I Technical Assistance (HSSP) Telecommunicationsand I C T 3.25 AusAID 2.67 5.92 Technical Assistance Project Climate Change Adaptation and GEF 5.0 7.0 Disaster Risk Management Project GFDRR4' 2.0 (tbc) Development Policy Operation Tbc @PO) Education Sector Support 0 EFA-FTI tbc Total 22.15 35.997 58.147 Activity Activity Sources of Growth Public Expenditure Review Extractive Transparency Initiative Implementation Center-Sub-national Options (TBC) Justice for the Poor (i) Doing Business in the Context of Assessment of Anti-Money Laundering Combating Customary Authority (ii) Justice Delivered Locally the Financing of Terrorism Energy Strategy Debt Management Performance Assessment Early Grade Reading Assessment (Regional) Labor Migration Advice (Regional) Skills Strategy TA State Land Inventory 39 This includes IDA and Trust Funded, current operations and additional financing in pipeline. IDA estimates are based on the IDA14 and IDA 15 allocation to Solomon Islands o f approximately USD$9.3 million and USD $9.79 million respectively, and potential regional reallocation o f IDA funds. The FY11 allocation i s indicative only and can change depending on: (i) the country's performance rating; (iii) total IDA resources available; (ii) the performance and assistance terms o f other IDA borrowers; (iv) the terms o f IDA'Sassistance to Solomon Islands (grants or credits); and (v) the number o f IDA-eligible countries. 40 US$3m additional financing pending reallocation o f regional IDA hnds 4' Pacific Regional Infrastructure Fund 42 Global Environment Facility 43 State and Peace Building Fund 44 Global Food Crises Response Trust Fund 45 Global Facility for Disaster Reduction and Recovery 27 Attachment B2: Table 1: International Finance Corporation ISN Indicative Program FY 2010 - 2011 Sponsor Equity ($m) Quasi Equity Total ($m) ($m) $Om $Om $Om i IFC Investment Services PiDeline idvanced Stage mi - --A? 11egunauu11 ’ -- _L-. Early Stage Discussion I Lead or Identified Prospect I Mining 1 1 Agribusiness 1 1 Banking 1 1 Telecommunications 1 IFC Advisory Services Portfolio Title Country IFC Business Line 4mount ($m) Startlend I Financial Markets Infrastructure wific Region Access to Finance $1.175m* FY08/FY10 IFC: 561592 Solomon Islands Regulatory Simplification, Investment olomon Islands Investment Policy and Climate Promotion IFC: 566507 Tina River PPP Infrastructure FY2010 Q1- olomon Islands $1.5 m IFC: 00028681 Advisory F Y l l Q1 * Regional funding envelope IFC Advisory Services Pipeline Expected Country IFC Business Line Amount ($m) start Microfinance Initiative Pacific Access to Finance TBC FY2010 43 Tourism Promotion Pacific Investment Climate TBC FY2010 43 28 Attachment C : Summary o f Donor Activities In addition to AusAID; W H O (World Health Organisation); U N F P A (United Nations Fund for Population Activities); Japan; Global Fund; Taiwan, China; and U N I C E F (United Nations - I-- --- --- - Children's Fund) have health sector I 2008 Overseas Development Assistance by Donor ! involvements, many o f which are currently ADB Other I ..., separate from the SWAP. However, most are signatories to the SWAP Partnership Arrangement and progress i s being made on 4% I much stronger coordination among New b Zealand I development partners. UNICEF; Taiwan, 6% China; EU; AusAID; Papua N e w Guinea; and f Japan are also involved in education. AusAID; i RAMS1 52% EU; and Taiwan, China are the most ruropean I Union I significant donors in agriculture, rural 11% I development, and forestry. NZAID, EU, and Australia ' Japan support fisheries. A range o f donor (Bilateral) programs address different areas o f i ~ 13% I_ infrastructure, which accounts for around 9% o f aid. In transport, including shipping, maritime infrastructure, and roads, the ADB) is the lead donor, but EU, AusAID, Japan, AusAID, and NZAID also work in this sector. Japan, EU, and ADB also have programs in the water sector. 1Sector I Development Partners I Amiculture I AusAID: EU: Taiwan. China I I Climate Change Adaptation I UNDP, WBG, NZAID Education I NZAID (lead); UNICEF; WBG; Taiwan, China; EU; AusAID; PNG; Japan Enerev WBG (lead). RAMSVAusAID. Jauan. ADB ~~~~ Environment UNDP, GEF, ADB Fisheries NZAID, EU, Japan Forestry AusAID, E U Governance R A M S I (Office o f Auditor General, Ombudsman, Leadership Code Commission, elections, media, uublic Service) UNDP fParliament strenpthenine) Health AusAtD (lead), WHO, WBG, UNFPA, Japan, EU, Global Fund, UNICEF Justice R A M S I , E U (TRC), UNDP (TRC), WB (J4P), IFC Land. housing I AusAID. R A M S I I Mining WBG, Japan Transpodhfrastructure ADB (lead), EU, RAMSUAusAID, Japan, AusAID, NZAID Private Sector Development IFC, WBG, ADB, AusAID Public Financial Management R A M S I (MoFT, Inland Revenue Bureau, Customs), ADB (SoE reform), WB/IFC (SoG) Rapid Employment WBG Rural Development RAMSI/AusAID; EU; UNDP; WB; Taiwan, China; UNICEF Security RAMS1 Telecommunications WBG, R A M S I Water Japan, E U NZAID, AusAID, UNDP, UNICEF, Secretariat of the Pacific Community, Commonwealth Youth Secretariat 29 Annex A2: Solomon Islands at a glance t2/9/09 East Lower- POVERTY and SOCIAL Solomon Asia 8 middle- D e v e l o p m e n t d iamond' Islands Pacific income 1008 Population, mid-year (millions) 0.51 1,9 3 1 3,702 Life expectancy GNIpercapita (Atlas method, U S $ ) 690 2,631 2,078 GNI(Atlasmethod, US% billions) 0.35 5,081 7,692 Average annual growth, 2002-08 Population (%) 2.5 0 .8 1.2 L a b o r f o r c e (%) 2 .8 12 1.6 GN I Gross per primary M o s 1 recent estimate (latest year available. 2002-08) capita nrollment Poverty ( % o f population below natio nalpo vertyline) Urban population ( % o f totalpopulation) 17 44 41 Life expectancyal birth (years) 66 72 68 Infant mortality (per 1,000live births) 30 22 46 Child malnutrition & o f children under 5) n 26 Access todmproved water source A c c e s s to an improved watersource (%ofpopulation) 70 87 86 Literacy(%ofpopulation age 15+) Gross primary enro llment ('4 o f scho 01-age popirlatio n ) Male 100 102 93 111 112 83 109 112 - Solomon Islands s__ Lower-middle-income group Female 98 110 x16 KEY ECONOMIC RATIOS and LONG-TERM T R E N D S ' 1988 1998 2007 2008 E c o n o rn ic r a ti0 S* G D P (US$ billions) 0.21 0.32 0.39 0.47 Gross capital formationlGDP 34.8 23.3 67.5 82.9 Exports o f goods and serviceslGDP 50.6 57.2 62.4 56.4 Trade Gross domestic savingslGDP 17.5 20.3 73.1 62.9 Gross national savingslGDP 38.8 21.7 74 8 52.7 Current account balancelGDP -n.2 -1.8 -17.3 -25.4 Interest paymentslGDP 1.8 1.3 0.9 Domes tic Capital 0.9 savings formation T o t a l debtlGDP 48.5 47.7 45.4 3 4 .8 T o t a l debt servicelexports 6.7 6.3 5.9 5.2 Present v a l u e o f debtlGDP 36.3 24.6 Present value o f debtlexports 55.8 40.1 Indebtedness ' 1988-98 1998-08 2007 * 2008 2008-12 (average annualgro wth) - - GDP 5.7 1.8 m.2 7.4 3.3 Solomon Islands G D P per capita 2.7 -0.9 75 4.7 1.3 Lower-middle-Incomegroup Exports o f g o o d s and services STRUCTURE o f the ECONOMY (%ofGDP) ' 1988 1998 2007 * I G r o w t h o f capital and GDP ( % ) I Agriculture .. 33.7 33.5 Industry 112 8.7 M anufacturing 5.4 3 .8 Services .. 55.1 57.8 Household final consumption expenditure 56.4 64.8 2.2 General gov't final c o n s u m p t i o n expenditure 26.1 14.9 24.7 imports o f goods and services 68.0 60.1 75.4 1988-98 1998-08 2007 ' 2008 (average annualgro wth) Agriculture 5.2 4 .o 6.3 8.6 lndus try 8.5 -1.9 ' 8.6 11.3 M anufacturing 4.6 -4 2 4.5 4.3 Services 6 .O 0.6 9.3 9.3 Household final consumption expenditure General gov't final c o n s u m p t i o n expenditure Gross capital formation Imports o f goods and services N o t e 2 0 0 6 data are preliminary estimates This table was produced from the Development Economics LDB database 'The diamonds s h o w f o u r k e y indicators in the counlry(in bo1d)compared with its income-group average If data are missing,thediamond will be incomplete 30 I PRICES and GOVERNMENT FINANCE I988 1998 2007 2008 D o m e s t i c prices 20 (%change) Consumer prices 16.7 9.4 7.7 17.2 15 Implicit GDP deflator 30.5 5.6 6.0 14.3 10 Government finance 5 (%of GDP, includes current grants) 0 I - I Current revenue 24.2 38.4 40.4 03 04 05 06 07 Current budget balance 3.2 6.6 8.0 Overall surplus/deficit 0.0 0.8 0.6 2.1 GDP deflator --+-CPI O8 I TRADE 1988 1998 2007 2008 E x p o r t a n d import levels ( U S mill.) (US$ millions) T o tal exports (fob) 82 P6 160 297 Fish 18 41 1x1 e7 Timber 38 40 20 24 Manufactures Total imports (cif) P8 240 296 Food 29 34 42 Fuel and energy 22 57 91 Capital goods 7 rz t3 Export price index (2000=MO) 96 02 03 04 05 06 07 Import price index (20OO=MO) 98 .Exports .Imports Terms o f trade (2000=MO) 97 BALANCE o f PAYMENTS I 1988 1998 2007 2008 Current account bdance toGDP(%) (US$ millions) Exports o f goods and services x14 185 215 244 30T Imports o f goods and services I71 295 331 374 20 Resource balance -67 -0 -116 -00 10 Net income -9 -8 -37 -95 0 Net current transfers 47 -1 0 Current account balance -28 -6 -67 -PO -20 Financing items (net) 33 23 04 93 30 Changes in net reserves -5 -7 -7 27 Memo: Reserves including go Id (US$ millions) 40 49 PO x1l Conversion rate (DEC. /ocal/US$J 2.1 4.8 7.7 7.7 E X T E R N A L D E B T and RESOURCE FLOWS I 1988 1998 2007 2008 Compositionof 2008 debt(US$ mil.) (US$ millions) To tal debt outstanding and disbursed 04 E5 176 I65 IBRD 0 0 0 0 G 3 IDA 1 1 33 46 44 Total debt service 7 P E 5 IBRD 0 0 0 0 IDA 0 0 1 1 E23 Composition o f net resource flows Official grants 21 0 40 149 Official creditors 10 14 -4 -11 Private creditors 0 -4 I7 1 Foreign direct investment (net inflows) 2 x1 67 76 Portfolio equity(net inflows) 0 0 0 0 D69 World Bank program Co mmitments 0 0 0 Disbursements Principal repayments Net flows Interest payments 2 0 2 0 0 0 1 -1 0 -1 0 1 I A - IBRD B IDA C IMF - - D other rnultilaterd ~ E - Bilaterd F - Private - G Short-term Net transfers 1 -1 -1 ~~ ~ ~ Note This table was produced from the Development Economics LDB database P/9/09 31 Annex B2 - Solomon Islands Selected Indicators* of B a n k Portfolio Performance and Management As Of Date 219120 10 Indicator 2007 2008 2009 2010 Portfolio Assessment Number o f Projects Under Implementation a 0 2 3 3 Average Implementation Period (years) 0.0 0.5 1.4 2.0 Percent o f Problem Projects by Number .o.o 0.0 33.3 0.0 Percent o f Problem Projects by Amount 0.0 0.0 46.0 0.0 Percent o f Projects at Risk by Number *' 0.0 0.0 66.7 66.7 Percent o f Projects at Risk by Amount 0.0 0.0 63.2 63.2 Disbursement Ratio (%) e 12.0 0.0 8.1 6.7 Portfolio Management CPPR during the year (yesho) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum I t e m Since FY 80 Last Five FYs Proj Eval by OED by Number 8 1 Proj Eval by OED by Amt (US$ millions) 43.9 3.5 % o f OED Projects Rated U or HU by Number 62.5 100.0 70 o f OED Projects Rated U or HU by Amt ' 70.5 100.0 a. As shown in the Annual Report o n Portfolio Performance (except for current FY). b. Average age o f projects in the Bank's country portfolio. c. Percent o f projects rated U or HU on development objectives (DO) andor implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio o f disbursements during the year to the undisbursed balance o f the Bank's portfolio at the beginning o f the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception o f Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 32 Annex B3 - IBRD/IDA Program Summary As Of Date 2/2/2010 Proposed IBRD/LDA Base-Case Lending Program ' Strategic Rewards Implementation b Risks Fiscal year Proj ID US$(M) b (H/M/L) P/M/L) 2010 SB - Rapid Employment Project 3.2 H M SB: Telecommunications TA Project 3.3 M L Result 6.4 Overall Result 6.4 33 Annex B4 - Summary o f Non-lending Services As Of Date 2/2/2010 Completion Cost Product FY (US$OOO) Audience Objedive Recent completions P116378- DeMPA FYlO 12,624 Government To highlight the strengths in debt management Assessment-EW functions, operations and performance and develop dialogue with the authorities to guide design o f reform plans. - PO90246 Solomon FY07 252,27 1 Government To help government o f Solomon Islands to Islands Education - develop a national skills Training Plan (NSTP) TA P096426- - Solomon FY07 859,345 Government Joint preparation with EU and other interested Islands Rural Sector partners o f a rural secstor strategy for the Strategy - E W Solomon Islands Underway P111953 - Solomon FYlO 21,828 Government Aims to provide Government, business Islands Sources o f community, donors, & civil society, with a Growth -TA review o f constraints and opportunities for broad based inclusive growth. Against the backdrop o f an expected dramatic decline in logging the analysis encompasses: (i) potential new areas o f growth & their contribution to government revenue, export earnings & employment, with a focus on mining, agriculture, tourism, & fisheries; (ii)macro- economic outlook based o n different growth scenarios; & (iii) diagnosis o f the binding constraints to growth & how regulatory frameworks, fiscal policy, management o f aid flows and public financial management may alleviate growth constraints. P118635 - Solomon FY11 10,862 Government T o assist the government in their efforts to Islands PER-EW conduct a public expenditure review which w i l l help them making an assessment o f current expenditure patterns/allocations and to identify realistic and practicable changes in budget processes. - P112016 Solomon FYlO 42,s 19 Government To produce a policy note to assess the Islands Health feasibility o f different options for financing the Financing -EW health sector in the Solomon Islands taking into account economic, financial and institutional constraints. 34 P117718 - Solomon FYlO 70,000 Government Research and advisory activities in relation to Islands - Doing (i) interactions between the private sector & Business in the customary groups in Solomon Islands, led by Context o f the J4P in collaboration with the I F C with a Customary view to informing future Bank group - Authority E W operations, the SoG AAA and Solomon Islands Government policy, (ii) Reforms being lead by the Minister for Justice and Legal Affairs in relation to the establishment o f new procedures for the resolution o f land disputes in hybrid (customary /judicial) tribunals and revitalization o f the local courts and (iii)the preparation o f a program framework document for ongoing J4P engagement in Solomon Islands - P120302 Solomon FYlO 83,000 Government Review, analyze and rate compliance o f - Islands AMLEFT Solomon Islands laws, regulations and Assessment E W - implementation against the international standards using the Methodology agreed by the WB Board on March 2004. On this basis, define and discuss with authorities sequenced and prioritized set o f recommendations to improve Anti Money Laundering /Combatting the Financing o f Terrorism (AMLKFT) compliance and effectiveness o f policies. This Report will produce an AMWCFT Report on Observance o f Standards and Codes and will be used in the Solomon Islands Mutual Evaluation for the purposes o f Asia Pacific Group Planned P120727 - Solomon FYlO Government The work w i l l be on formulating a "Debt Islands Debt Management Reform Plan". The focus will be Management on identifying the areas for strengthening Reform Plan - TA capacity in government cash and debt management while presenting a detailed and sequenced reform plan for improving capacity in the identified areas The focus o f the "Debt Management Reform Plan" w i l l be on three critical aspects: (i) governance and strategy development; ( ii)functions and organizational structure; and (iii)staff capacity. a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem- solving. 35 Annex B6: Solomon Islands - K e y Economic Indicators Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 National Accounts (YOof GDP) Gross Domestic Product a/ 100 100 100 100 100 100 100 Agriculture 36 36 35 33 32 31 30 Industry 8 9 8 9 9 9 9 Services 56 56 56 58 59 60 61 Total Consumption 59 50 45 27 37 40 40 Gross Domestic Fixed Investment 35 Government Investment Private Investment Exports (GNFS) b/ 49 47 52 62 56 53 65 Imports (GNFS) 41 59 64 75 75 73 64 Gross Domestic Savings 41 50 55 73 63 60 60 Gross National Savings c/ 57 52 61 86 65 Memorandum Items Gross Domestic Product 262 293 334 541.1 641.8 668.4 717.1 779.8 895.5 (US$ million at current prices) GNI per capita (US$ Atlas method) 600 630 680 690 690 Real Annual Growth Rates (%, calculated from 1990 prices) Real Annual per Capita Growth Rates (% calculated from 1990 prices) Gross Domestic Product at market prices 4.9 5.4 6.9 10.7 6.9 0.4 2.4 2.8 8.8 Gross Domestic Income Real Annual per Capita Growth Rate (%, calculated from 1990 prices) Gross Domestic Product at Market Prices 5.3 2.4 3.6 7.7 4.9 1.6 1 .o Total Consumption Private Consumption Balance of Payment (US%millions) 2004 2005 2006 2007 2008 2009 2010 2011 2012 , Exports (GNFS) b/ 127 139 175 215 244 210 200 195 280 Merchandise FOB 97 103 121 160 197 160 145 135 215 Nonfactor Services 55 48 50 55 60 66 Imports (GNFS) b/ 108 173 214 331 374 370 424 451 474 Merchandise FOB 85 144 184 235 262 258 308 331 347 Nonfactor Services 96 112 113 116 120 127 Resource Balance 19 -34 -39 -116 -130 -161 -224 -256 -194 36 Factor Services (Net) -37 -95 -52 -64 -73 -87 Net Current Transfers 86 105 139 158 155 145 Current Account Balance 61 -28 -19 -67 -120 -74 -131 -175 -136 Net Private Foreign Direct Investment 6 18 12 57 86 68 107 149 144 Long-term Loans (net) -45 4 -27 5 -9 -5 -3 -4 -7 Official 0 2 2 -4 -11 -6 -6 -7 -7 Private -45 2 -29 9 2 1 3 3 0 Other Capital (net. Incl. errors & ommissions) 21 22 44 22 16 10 1 13 18 Change in reserves d/ -43 -16 -9 17 27 2 25 17 19 Memorandum Items Resource Balance (% o f GDP) 7.3 -116 -117 -29.7 -27.4 -3 1.5 Real Annual Growth Rates (YR 90 Prices) Merchandise Exports (FOB) Primary Manufactures Marchandise Imports (CIF) Public Finance (YOof GPD at Market Prices) e/ 2004 2005 2006 2007 2008 2009 2010 2011 2012 Revenues and Grants 33.5 46.9 47.3 50.2 48.9 50.6 51.9 Current Expenditures 27.6 44.2 45.6 49.7 47.3 51.1 51.1 Overall Balance 5.9 2.7 1.7 0.5 1.5 -0.4 0.8 Capital Expenditure 12.2 26.1 23.6 26.9 23.5 25.8 26.9 Foreign Financing (net) -0.2 2.3 1.6 2.3 -1.6 -0.9 -0.1 Monetary Indicators M2/GDP 34.5 39.2 42.7 46.3 40.3 37.7 Growth o f M2 (%) 28.2 27.3 25.7 26.5 6.9 6.4 Private Sector Credit Growth/Total Credit Growth - 14.3 134 156.6 Price Indices (YR90=100) Merchandise Export Price Index Merchandise Import Price Index Merchandise Terms o f Trade Index Real Exchange Rate (US%/LCU) E/ 97 100 107.5 106.4 115.9 150 Real Interest Rates Consumer Price Index (% change) 6.9 7.4 11.2 7.7 17.2 8 6.9 GDP Deflator (% change) 5.7 7.2 8.5 6 14.3 9.5 7.4 - Note: a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services" c. Includes net unrequited transfers excluding official capital grants d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. o m : e C d- C o m :el d C o m : m s C d o m : d C d C C O b :c? : q . . . . . . : d : 3 z d C o m :\D c d C C .* .. : m 2 C d . . : m c d C C 7 C . . :l- d C I 4 ( 1 J 4 n E I 156°E 158°E 160°E 162°E 164°E 166°E 168°E 170°E Ontong Java Atoll PA P U A NEW GUINEA 6°S 6°S Roncador Reef CHOISEUL Taro Island Sasamungga Choiseul SOUTH PACI FI C SOLOMON Shortla nd I s. Luti M A L A I TA OCEAN ISLANDS Ne Mono w Kia Ge Vaghena ISABEL Vella Lavella Sosolo or gi Kolombangara a Santa Isabel 8°S So Dai 8°S Kundu un Buala Ranongga Gizo New Georgia d Dadale Hapai Tatamba New Georgia Vangunu San Jorge Daringali Rendova Seghe Group Auki Tetepare Nggatokae CENTRAL Florida Is. Malaita WESTERN Russell Is. Tulagi Su'u Maravova Tarapaina Tutumu Guadalcanal HONIARA Maramasike Mt. Makarakomburu So l o mo n (2,447 m) Avu Avu Paruru Ulawa Duff Is. 10°S 10°S S ea GUADALCANAL Heuru MAKIRA Reef Is. Kirakira Tinakula Apaora San Cristobal Noka Lata Nendo Mwaniwowo Santa Cruz Islands TEMOTU 0 50 100 150 Kilometers Bellona RENNELL AND Utupua Tigoa 0 50 100 150 Miles BELLONA Vana Vanikolo Anuta Rennell Tinggoa Fatutaka 12°S 156°E 158°E Tikopia Indespensable Reefs SO LOMO N IS LAN D S Coral Sea SELECTED CITIES AND TOWNS VANUATU 14°S 14°S PROVINCE CAPITALS NATIONAL CAPITAL MAIN ROADS IBRD 33482 This map was produced by the Map Design Unit of The World Bank. MARCH 2005 PROVINCE BOUNDARIES The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank INTERNATIONAL BOUNDARIES Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 164°E 166°E 168°E 170°E