Countries and Regions

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p. 3 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV.Portfolio Management Issues V. Country Performance and Lending Levels

Country Strategy and Program Update 2005-2006: Solomon Islands

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III. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

21. Solomon Islands and ADB signed a poverty partnership agreement in November 2003 to develop a poverty reduction strategy (PRS). The Government's goals for the PRS are to ensure that NERDDP and other development strategies effectively address poverty reduction, and that ADB's country assistance strategy fully supports the process. The Government's vision for the PRS is rapid economic growth and provision of education, health, and other services through better governance of policies, institutions, and markets. ADB will support the Government's efforts to analyze poverty in the country, prepare the PRS, and integrate it into NERDDP.

22. To implement a PRS and resume progress toward achieving the MDGs, the Government will need to continue progress in fiscal and monetary policies, provision of basic social services, public sector reforms, and development of the private sector. Much remains to be done to address growing disparities and pockets of hardship. While the achievement of law and order, economic stability, and sustained economic growth remain the Government's primary strategic objectives, greater efforts are needed to address the widening imbalances between the income levels of people in urban and rural areas to reduce the root causes of conflict.

B. Progress in the Country Strategy and Program Focus Areas

1. Transportation Infrastructure and Services

23. Pro-poor economic growth depends on increased productivity in rural areas, primarily from agricultural commodities. Improved transportation infrastructure and services are essential to connect producers to domestic and export markets, deliver social services to rural areas, and enable labor mobility. Outside Honiara however, Solomon Islands has always had a very limited infrastructure stock and the dismal state of road transport, unreliable interisland shipping, and the perennial problems of Solomon Airlines pose considerable barriers to market access and impede the growth of rural production. These factors have also had pervasive negative social effects by limiting rural-urban linkages, labor mobility, and inter-provincial trade. ADB's sector strategy has two strategic focus areas: (i) support the rehabilitation and maintenance of physical infrastructure, and (ii) facilitate the improvement of interisland transportation.

24. Supporting the Rehabilitation and Maintenance of Physical Infrastructure. Several years of conflict and economic and fiscal crises have severely damaged the country's infrastructure, deferred its maintenance, and weakened the capacity of the Ministry of Infrastructure Development (MID) to plan and coordinate a response. However, the severe constraints that prevented development and maintenance in recent years are lessening as aid resources are becoming available for rehabilitation, capital investment, and maintenance. To leverage scarce public-sector resources, greater reliance on the private sector for provision of works will yield significant positive benefits to the Government and the economy, allowing the Government to concentrate on policy development, regulation, asset management and contract administration. However, there is currently no strategic framework and government capacity for planning and management is weak. ADB will therefore provide TA to strengthen the capacity of MID. The TA will support the preparation of a national transport plan to guide development, create a Transport Policy and Planning Unit to ensure implementation, establish a Transport Development Trust Fund (TDTF) to provide the necessary finance, increase MID's capacity in project management and contract administration, and promote private sector involvement in infrastructure development. These measures will play a central role in aid coordination and facilitate effective expenditure of European Union Stabex funds.

25. Interisland Shipping and Aviation. Interisland transportation is a key input to connect producers to domestic and international markets as well as enable labor mobility and access to social services, but its availability has deteriorated dramatically. Most provinces operate ships, but services have been plagued by mismanagement, are essentially insolvent, and many have ceased operating. Although a few routes are serviced by the private sector, most are uneconomic and unreliable. In aviation, the financial troubles of the national airline have led to reduced schedules and unreliability, as revenues are insufficient to maintain and operate the domestic aircraft fleet. ADB is therefore proposing assistance in two phases to develop and implement reform agendas for interisland transport. In shipping, TA will be provided to work closely with a European Union initiative to ensure a minimum level of service on uneconomic routes and ensure its sustainability through the TDTF. In aviation, TA will be provided to determine the current operational and financial situation of the airline, assess models for private sector participation, identify constraints to reform, recommend institutional mechanisms for implementation, and prepare an action plan for eventual restructuring.

26. Other Assistance. ADB has reactivated the Post-Conflict Emergency Rehabilitation Project to restore essential services, basic infrastructure, and facilities for communities affected or damaged during the civil strife.² This project will rebuild damaged roads and bridges in economically important areas, as well as key water supply facilities and school buildings. A project management unit was established in March 2004 and activities are under way to implement the TA and begin procurement. Solomon Islands also participates in two ADB-funded regional TAs: in Civil Aviation Safety and Security³ that will determine the feasibility of a regional organization to provide regulatory and oversight functions, and in Pacific Regional Transport Analysis⁴ that will develop options to improve inter-regional shipping and aviation later in 2004.

2. Enabling Business Environment

27. The Government has recognized the vital role the private sector must play as the engine of growth in rehabilitating the economy. The RAMSI-led process has been providing a window of opportunity for the private sector, as well as for reforms to improve the enabling environment for businesses. Key strategies for overcoming the constraints on the business environment include regulatory reforms, development of transport infrastructure and utilities, SOE reform, financial sector reforms, provision of policy and governance advice to provincial governments, development of statistics to inform policy formulation, monitoring and evaluation, and formulation of sectoral policies to promote investment and growth. To assist in formulating and implementing economic reforms, the ERU has been proposed within the MFNRP.

28. Legal and Regulatory Business Environment. ADB will support the Government, in cooperation with the proposed ERU, in improving the legal and regulatory frameworks governing private business activity. Legal institutions are often ineffective, outdated, flawed in design, and applied improperly, resulting in high transaction costs for businesses that exacerbate the impediments of an unfriendly business environment. Improvements are required in the areas of business laws and regulations, the foreign investment regime, the tax and duty regime, work permits and migration procedures to reduce risk, uncertainty, and transaction costs; improve corporate and public governance; and increase productivity and investment. ADB has committed, as part of a regional TA (RETA),⁵ to help the Government formulate (and partly implement) a related reform agenda. The Foreign Investment Advisory Services (FIAS/World Bank) is also considering assistance to reform the foreign investment regime. Additional ADB TA will be provided to implement the reform agenda once this is established.

29. ADB will also support the development of a comprehensive secured transactions framework to promote the effective use of collateral as security for loans. Banking institutions provide few services, seldom reach beyond urban areas, and have high collateral requirements. In particular, the inadequate framework for collateralizing debt denies access to credit to many, largely due to land tenure issues and the apparent lack of a functioning secured-transactions framework. A sound legal framework for secured transactions would permit farmers, consumers, and businesses to use movable property as collateral for loans. This would broaden opportunities and increase the rate of investment by businesses and individuals. This TA will build on a RETA programmed for 2004 that will develop options for reforms.

30. State-Owned Enterprise Reforms. ADB will support the Government, again in cooperation with the proposed ERU, in building on progress made during the 1998 Public Sector Reform Program and in strengthening government capacity to implement SOE reforms. It is important to base SOE-specific decisions on a sound policy on SOE ownership, performance and divestment, as well as on effective regulatory frameworks.

31. The focus of SOE reform should be on improved efficiency, productivity, and service delivery at reasonable prices. These goals can best be attained through enhanced private sector participation in areas traditionally serviced by SOEs. Appropriate mechanisms include corporatization, commercialization, licenses, concessions, and sale of shares to private investors-preferably strategic partners that will bring advanced technology and management skill, access to new market channels, and industry knowledge in addition to capital. It should be noted, however, that the loss of assets and overall financial setback experienced by SOEs as a result of the civil unrest could mean that full privatization may be premature in many cases. To strengthen the operations of SOEs that will remain in the public sector, a new SOE reporting and monitoring regime needs to be developed and implemented, and appropriate reform strategies and action plans formulated and delivered.

C. Highlights in Coordination of External Funding and Partnership Arrangements

32. Recognizing the opportunity for Solomon Islands to recover from the socioeconomic hardships imposed by the civil conflict and develop mechanisms that will prevent such a crisis from re-occurring, external sources have pledged funds on the order of US$100 million for 2004 alone. The international community, led by RAMSI, is assisting the Government in implementing the first phase of support (addressing law and order, budget stabilization, and restoration of essential government services). Three key challenges for the Government and the aid community are (i) to shift the focus from the short-term stabilization process toward a medium and long-term program for equitable growth and development; (ii) to deliver programs and visible results in a timely and effective manner, despite extreme capacity weakness; and (iii) at the same time, to rebuild the key institutions of government.

33. The Government and aid agencies have agreed that systematic and strategic aid coordination and management will be critical. NERRDP provides the framework; NERRDP action plans (still to be completed) provide sectoral action plans, and the annual development budget provides the detailed basis for coordination. The Department of National Reform and Planning is establishing measures to enhance communication and donor coordination.

34. Upon the Government's request and based on agreements with key aid agencies, ADB will provide sectoral leadership in transport infrastructure and services to leverage the delivery of other resources, especially European Union Stabex funds. Proposed ADB TA will be supplemented with inputs provided by the European Union for counterpart positions, establishment of a TDTF, and financial support for necessary but uneconomic interisland air and sea routes. ADB assistance will include coordination with, and support to, the proposed ERU in the areas of SOE reforms, privatization, public-private partnerships, and infrastructure policy and regulation.

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