Regions and Countries

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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 Assistance Levels

Country Strategy and Program Update 2007-2009: Solomon Islands

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III. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

12. Solomon Islands and ADB signed a poverty partnership agreement in 2003. In the intervening period, poverty initially increased as a result of the conflict, weakened governance and institutional structures, a largely interrupted delivery of essential services, and poor social cohesion. The country is far behind in meeting the Millennium Development Goals (MDGs) by 2015 (see Table A.2.1, Appendix 2). Moreover, for all indicators there are great variations between the provinces. However, some significant progress has been made over the past 3 years in implementing the RAMSI-supported recovery and development agenda. The restoration of law and order has laid the foundation for a partial resumption of basic services and an improved business environment. Education and health, as well as community services, have been significantly improved, especially in areas affected by the conflict. Government finances have been stabilized and significantly improved, facilitating service delivery. Economic growth has been exceeding population growth, raising income per capita. Large private sector projects are being re-established and jobs created. Recent economic growth has been driven by cocoa and copra production, benefiting the rural population. Likewise, the anticipated increase in palm oil production is expected to have a positive effect on poverty reduction in rural areas. More infrastructure projects are being implemented, which are connecting rural communities to social services and markets. Commercial banks have made more efforts to serve rural areas.

13. It is widely recognized that the road to recovery from the 1999–2003 tensions will be long, and much remains to be done to

• generate economic growth especially in rural areas, increase income-generating opportunities, and improve social indicators
• address some of the important reasons behind the tensions, namely the perceived inequitable distribution of resources, opportunities, and basic services.

B. Progress in the Country Strategy and Program Focus Areas

1. Transportation Infrastructure and Services

14. Pro-poor economic growth and improvements in social and health indicators depend on revitalizing the rural economy. Improved transportation infrastructure and services are essential to remove barriers to market access and promote the growth of rural production, which will ultimately reduce poverty. ADB’s sector strategy has two strategic focus areas:

• support the rehabilitation and maintenance of physical infrastructure
• facilitate the improvement of interisland transportation services

15. Rehabilitation and Maintenance of Physical Infrastructure. The extremely poor condition of rural roads (with about 80% in very poor or impassable condition) makes it difficult or impossible to move people and commodities to markets and services. The ongoing ADB Post- Conflict Emergency Rehabilitation Project⁷ has been instrumental in rehabilitating roads and bridges on Guadalcanal and Malaita that were damaged during the conflict. About 30% of physical works were complete as of mid-2006, and project completion is expected in March 2008. ADB will also implement a new Road Improvement (Sector) Project⁸ that will rehabilitate high-priority roads in rural areas throughout the country, in support of the Government’s renewed focus on rural development. A strong focus on poverty reduction has been adopted through geographical targeting of poor areas, increased use of labor-based construction and maintenance methods, and integration with other rural transport services. The project will also include a significant capacity development component for the Ministry of Infrastructure and Development (MID) to enable it to plan, maintain, and manage the infrastructure sector and to consolidate reforms begun under previous TA.⁹ Initial progress on management of key risks involved in infrastructure development in the areas of public health, land acquisition, and community participation is being consolidated and lessons should be incorporated in future projects and TA.

16. Institutional Strengthening and Reform. To leverage scarce public sector resources and promote opportunities for the private sector, MID is decreasing its direct provision of works to concentrate on policy development, regulation, asset management and contract administration. To support this transition, ADB is providing a TA for the Institutional Strengthening of MID.¹⁰ The TA is preparing a National Transport Plan to guide development, creating a transport policy and planning unit to ensure implementation, and establishing a national transport fund to provide finance. These measures will increase MID’s capacity to improve maintenance, conduct project management and contract administration, promote private sector involvement in infrastructure development, and play a central role in aid coordination and facilitate effective expenditure of European Commission (EC) Stabex funds.¹¹ The long-term goals are to prepare for the eventual implementation of a sectorwide approach and to reduce the reliance on project management units, by developing increasing capacity for responsibility within MID. The TA will be completed by the end of 2006.

17. Interisland Shipping. Interisland transport is required to connect producers to domestic and international markets, enable labor mobility, and facilitate access to social services, all of which are essential components of the overall poverty reduction strategy. Improvement of interisland transport is a Government priority. ADB is providing assistance in three phases to develop and implement a reform agenda. A TA for Diagnostic Assessment of Interisland Transport conducted a needs assessment and prepared recommendations for policy and institutional reform.¹² A TA for Implementation of Interisland Transport Reforms,¹³ now being implemented, will improve the legislative and regulatory frameworks, restructure public enterprise shipping companies, facilitate development of private sector operators, and provide training in both public and private sectors. A TA for Strengthening Interisland Shipping in 2006 will complement the previous two projects by further implementing recommended reform measures.¹⁴ These TA activities have supported the development of the National Transportation Plan, and ADB has coordinated closely with a European Commission (EC) initiative to ensure a sustainable minimum level of service on uneconomic routes.

18. Aviation In January 2005, the Government requested priority assistance to reform Solomon Airlines. In response, ADB provided two phases of TA.¹⁵ In the first phase, Development of a Privatization Strategy for Solomon Airlines, ADB determined the operational and financial situation of the airline and prepared an action plan for restructuring. This was then implemented with Australian funding. In the second phase, ADB assessed models for private sector participation, recommended institutional mechanisms, and proposed a transaction structure. Support for further reform has been mixed, and there has been no policy decision by the Government on whether to proceed. ADB is waiting for a Cabinet-level policy decision, and guidance from the Government on its commitment, before continuing the TA.

19. Other Assistance. ADB’s support for transportation complements assistance underway or being considered by other development partners. EC is providing provincial wharves and considering financial support to promote shipping services on uneconomic routes. Grant aid from the Government of Japan has upgraded the runway of the international airport and built bridges. Australia is considering providing road maintenance equipment and services through its Community Support Program. These programs are coordinated by MID through the National Transport Plan. Solomon Islands also participates in two ADB-funded regional projects in

• civil aviation¹⁶ (the project has established a regional organization to provide regulatory and safety oversight) and for
• a regional transport analysis¹⁷ that will develop options to improve interregional shipping and aviation.

2. Enabling Business Environment

20. An ADB–sponsored private sector assessment (PSA) for Solomon Islands¹⁸ in 2005 emphasized the need to rationalize the state-owned enterprise (SOE) portfolio; improve infrastructure and infrastructure services; enhance access to credit; reform business law and regulations; encourage rural development; and resolve property rights issues by unlocking customary land for productive and economic uses within a traditional landownership framework. Key crosscutting challenges include the extent of Government commitment to reform and capacity to implement policies; adequate mechanisms and processes to implement the reform agenda and the private sector’s response to microeconomic incentives. A road map for the enabling business environment will guide ADB’s operations (Appendix 4).

21. State-owned Enterprise Reform. ADB TA has supported government-wide SOE reform since May 2005.¹⁹ However, progress has been slow. There has been little Government support for SOE policy and legislation; the establishment of reporting and monitoring mechanisms; or private sector solutions for the airline (para. 18), the water and power sectors (supported by World Bank), or other SOEs. It is vital that the new Government accelerates the reform process. The passing of an SOE Act is a priority if an effective and consistent framework for good governance across all state-owned enterprises is to be introduced and up-to-date audited financial statements produced. The act is also essential for the national planning process currently underway to clarify SOE objectives, performance expectations, community service obligations, and their links to the Budget and for progress in restructuring utilities and the national airline. Through ongoing TA, ADB will seek to engage and support the new Government with respect to SOE policy and legislation, economic regulation, selected privatization transactions, continued capacity development, and awareness building through consultation, participation, and communication.

22. Access to Finance. On the basis of a diagnostic study on secured lending in Solomon Islands in 2005,²⁰ ADB is preparing an initiative to support comprehensive secured transactions reform, starting in late 2006. Likewise, based on interest from commercial banks and a Government request, ADB is considering a viability study for a credit reference facility. Commercial banks have, to various degrees, made efforts to expand branch networks, introduce electronic networks, and launch mobile banking initiatives. ADB will consider providing short-term expertise to support promoting expansion of rural finance on a commercial basis and through new microfinance technologies. Progress has been made, by Central Bank of Solomon Islands (CBSI) as the courtappointed manager, in stabilizing the balance sheet of the insolvent Development Bank of Solomon Islands (DBSI). The CBSI Board has determined that the formal winding up of DBSI is the most appropriate course of action, and the legal mechanism for achieving this is being worked out. The completion of the liquidation process will send an important signal to lenders and development partners interested in developing innovative and commercially viable initiatives in support of access to finance.

23. Business Law. ADB’s report on Reforming Commercial Law in Solomon Islands²¹ in 2005 concluded that virtually every aspect of doing business—start-up, operation, closure—is difficult and expensive. The regulatory system is burdensome, forcing businesses to spend substantial time and money running a gauntlet of rules, taxes, and licenses that do not have any compensating public policy objective. The procedures for incorporation are time-consuming and costly because of complicated procedures, filing requirements, slow processing of applications, and poor security of information and documentation. Discretionary authority in business licensing and company registration processes leads to delays and may invite corruption. The World Bank’s Doing Business survey confirmed Solomon Islands’ weaknesses in relation to its legal and regulatory business environment.²²

24. A public–private Business Law and Administrative Reform Steering Committee was established in 2005, with support from ADB and the Foreign Investment Advisory Service (FIAS), to guide the development of an effective and efficient legal and regulatory framework governing business activity. ADB’s PSA and the Commercial Law Report have helped formulate the immediate reform agenda, and the new Government has reconfirmed its commitment to carry out reforms. A new Foreign Investment Act was passed in November 2005. An electronic foreign investment registry has been established and staff trained at the Department of Commerce, Industries and Employment to implement the act’s provisions. With FIAS support, progress has been made in speeding up procedures for work and residency permits. The Government is preparing a comprehensive reform of the taxation system, with the support of the Pacific Financial Technical Assistance Centre (PFTAC), which will initially address income taxes, export duties, and excise taxes. ADB TA for business law reform, fielded in July 2006, is reforming the Companies Act and designing reform of the companies’ registry.²³ In addition to the potential economy-wide impacts, these reforms measures will be crucial to improving private sector investment in shipping (see para. 17), and link in well with the Government’s plans to mobilize customary land for economic and productive uses through legal and regulatory reforms.

C. Highlights in Coordination of External Funding and Partnership Arrangements

25. In response to the post-conflict situation, donors have committed generous aid packages. Government estimates indicate total aid flows in 2005 of around $123 million, and $132 million in 2006. RAMSI is developing a medium-term strategy, including a performance framework, which should be available towards the end of 2006. The Governments of Australia and New Zealand, in cooperation with the Government’s Department of National Planning and Aid Coordination and local stakeholders, are preparing a pilot results management scheme in the context of the OECD Development Assistance Committee’s Principles of Good International Engagement in Fragile States. Table A2.5, Appendix 2 contains an overview of donor activities. Donor coordination has generally improved and coordination meetings are held regularly. The Department of National Planning and Aid Coordination is in the process of improving its skills, systems, and processes.

26. ADB’s assistance is increasingly harmonized with the programs of other partner agencies, with a long-term goal of preparing Government to implement a sector-wide approach in infrastructure. The reform program in MID is coordinating sectoral development through a National Transport Plan and continuing to strengthen MID’s transport policy and planning unit. The MID reform program will catalyze the delivery of other donor resources by establishing a national transport fund. ADB, AusAID, and NZAID have developed a constructive partnership that has led to significant grant cofinancing for transport infrastructure. Donor coordination and partnerships in business environment reform have been further enhanced. TA projects for business law reform and SOE reform have been supported by Australian cofinancing. Close collaboration with FIAS helped to establish mechanisms for reform of business law and reductions in administrative barriers. ADB’s work to reform SOEs have been aligned with the World Bank’s efforts to reform the power and water sectors. ADB will support, through its strategic thrust areas and related activities, joint efforts by the World Bank, AusAID, and EC in assisting the Government to formulate, and then implement, an agricultural and rural development strategy and program.

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