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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2004-2006: Vanuatu
III. Implementation of the Country Strategy and ProgramA. Progress toward a Poverty Partnership Agreement16. Vanuatu, with a human poverty index of 46.4, is ranked the third poorest country among PDMCs. About 40% of its population lives below the $1 per day poverty line, and 23% of children under 5 suffer from malnutrition (Table A2.1). With a human development index of 0.425, Vanuatu also scores poorly in social development. ADB has helped Vanuatu prepare a poverty reduction strategy, which comprises further improving governance, enhancing the quality and coverage of education and health services, strengthening government and nongovernment organizations' social support systems, and removing impediments to private sector growth.4 Ongoing TAs are helping improve the effectiveness of Parliament and of selected frontline public services; a proposed loan project for outer island infrastructure development (OIIDP) may help improve accessibility to markets and social services; and an ongoing TA for technical vocational education and training (TVET) and a proposed TA for rural productive skills development will help improve the labor force, reduce unemployment, and increase cash income. The Government has agreed to participate in a poverty partnership with ADB. The poverty partnership agreement, signed on 12 September 2003, confirms the Government's commitment to analyze poverty, to develop appropriate strategies to reduce it and to implement these strategies through its policies and budgets. B. Progress in the Country Strategy and Program Focus Areas1. Good Governance and Economic Management 17. For the past 5 years, ADB's program in Vanuatu has been formulated in consistency with the CRP policy matrix. ADB's CRP project aimed to enhance and sustain private sector-led economic growth with its benefits distributed equitably within Vanuatu. This ambitious objective was to have been achieved by (i) redefining the role of Government and enhancing the quality and delivery of its services, (ii) increasing the productivity and growth of the commercial and private sectors, and (iii) supporting improvement of social indicators. The CRP was also intended to rescue and restructure the NBV and VNPF. The CRP achieved some of the envisaged outcomes. Measures to redefine the role of government and restructure financial institutions were successful, while the objective of increasing economic growth has not been achieved and this has threatened the improvement of social indicators. 18. It is clear that reforms remain unfinished in several areas, particularly with regard to economic development. These areas include (i) lack of consistency, transparency, and accountability in economic and financial decision making; (ii) poor governance and/or weak management of state-owned enterprises (SOEs) and regulatory agencies; (iii) granting of protection, exemptions, and monopoly rights to selected industries and/or business persons without examination of the impacts of the action; (iv) inconsistent policy on the sale of government-owned assets; (v) worsening fiscal situation arising from unbudgeted payouts, lack of control over the wage bill, and laxity in revenue collection; and (vi) consistent weaknesses in the public service, particularly in senior positions. 19. The Government's Priorities and Action Agenda (PAA) has been developed with a view to linking the long-term CRP action matrix to short-term budget and action priorities. It calls for stepped-up efforts to focus on the productive sectors, particularly agriculture and tourism. The Government is placing priority on provision of support to these sectors. ADB has offered to help further develop the PAA, if so requested by the Government. Ongoing and proposed ADB assistance to help improve the financial sector will help in agriculture and tourism sector development. The European Union and the Government of France are providing support for development and marketing of agricultural products and other funding agency support is likely for the tourism sector. 20. The CRP involved stakeholder consultation in every facet of the reform process. The national summit meetings held in 1998, 2000, 2001, and 2002 were excellent opportunities for communities to participate in reviewing and assessing the progress of the CRP and in setting new strategic directions for reforms. ADB assisted the summit meetings and their preparatory work, and has been asked to assist them in the future. Similarly, ADB assisted in the preparation of the PAA. The first Business Forum organized by the private sector in October 2002 established a basis for building a strong government-private sector partnership. A Decentralization Commission Report, launched following wide consultation in 2001, is under review along with other recommendations contained in the Rural Economic Development Initiative report developed for each of the six provinces. With the benefit of hindsight, the decentralization policy would seem to have been rushed through with inadequate attention given to issues of capacity, resources, and views of the provincial councils. This has contributed to stagnation in service improvements in the outer islands. 2. Private Sector Development 21. The lack of political and policy stability and consistency, as well as external economic uncertainties have created an environment of diminishing business confidence, and remain the biggest impediment to private sector development in Vanuatu. The Government is failing to supply essential public goods that underlie effective and efficient private sectors-secure property rights, a legal system that allows contracting with confidence, efficient and low-cost infrastructure, and regulations that are consistently enforced. 22. Neither government nor private provision of infrastructure provides a low-cost service in Vanuatu. Government provision regularly fails due to little incentive for efficiency, political interference, and the tendency to overstaff and under maintain. Private provision, such as in the telecommunications and utilities sectors, is deficient because private suppliers have been granted nontransparent, long-term monopoly concessions that are poorly regulated, resulting in efficient yet very costly services in Port Vila and Luganville and hardly any service provision in rural areas. In effect, the current system exacerbates rather than reduces the effects of the country's natural endowment constraints such as isolation and size-inappropriate government intervention further pushes up costs, reduces competition, and tends to crowd out the private sector. As recognized in the CRP policy matrix and reconfirmed as priority actions by the Business Forum, progress in SOE reforms and privatization, which has been sluggish due to lukewarm political commitment, should be accelerated; private sector concessions should be reviewed and rectified; existing monopolies should be regulated to guarantee competitive market prices; and private participation in infrastructure projects should be promoted. 23. Vanuatu's underdeveloped onshore financial sector provides a minimal range of banking services that hardly reach beyond main urban areas; commercial banks have little outreach to low-income households; high interest rate spreads reflect high unit costs and risk premiums; and microfinance is in its infancy. Major impediments to the development of the financial sector include the lack of an effective secured transactions framework and the inability of the customary land tenure system to provide ni-Vanuatu investors with adequate collateral. The process to unlock the potential of land should be seriously considered, while however preserving the cultural role that land ownership plays in Vanuatu. The establishment of a well-functioning secured transactions system, especially for movable assets and crop liens, would generate economic and social gains especially for ni-Vanuatu investors who presently do not have access to credit, as it reduces transaction costs, lowers interest rates, and enhances credit intermediation. Creation of better credit information would be a useful adjunct for lowering the cost of borrowing by providing records of payment history and credit risk. ADB support is proposed in these areas. In addition, ADB is funding a study by the Foreign Investment Advisory Service to identify and reduce administrative barriers to investment. 24. Both the NBV and VNPF were restructured and recapitalized under the CRP. Both public financial institutions have made a tremendous turnaround and now operate satisfactorily. Strong management, external leadership, and good financial governance frameworks have contributed to the financial stability of the two institutions with no political interference. The successful restructuring of the two public financial institutions has helped restore public confidence in the banking and financial system in Vanuatu. ADB is providing assistance to these institutions in the area of a pilot microfinance project (NBV) and information systems and training (VNPF). ADB is also helping develop a proposal for a sustainable microfinance program. 3. Infrastructure 25. Inadequacy in transport infrastructure provision continues to be a major obstacle to economic growth, particularly in the outer islands. Despite numerous funding agency-assisted initiatives, little tangible progress has been made in addressing this problem. The latest offer of assistance from ADB, the proposed OIIDP, has been deferred for reasons of (i) lack of counterpart funds and (ii) unwillingness to borrow. There is no question that Vanuatu's infrastructure investment needs far outstrip the resources available. However, the Government has been unable to put together a strategy for funding the necessary improvements. The continuing degradation of existing infrastructure through deferred maintenance translates into huge losses in essential infrastructure assets. The Ministry of Infrastructure and Public Utilities is aware of the unfolding crisis, and with European Union funding is acquiring equipment and training staff in improved maintenance programs. Although Agence Française de Développement is likely to provide support for airport development, and the Government of Japan for road and bridge development, there remains a substantial funding gap in the sector. 4. Social Development and Environment 26. Among the PDMCs, Vanuatu has some of the lowest human development indicators. Basic and secondary education, which are inadequate in quantity and quality (Appendix 2, Table A2.4), are being supported by the Governments of Australia and France, and the European Union. The World Bank has been considering a sector project focused on basic education, and ADB has under way an advisory TA to help prepare a TVET sector policy framework. The health sector enjoys support from the Governments of Australia, New Zealand, Japan and the Peoples' Republic of China, as well as the United Nations Development Programme. Proposed ADB projects will be screened for impacts on indigenous peoples. 27. Pressures on land, water, and the marine environment-reef depletion, soil erosion, water contamination due to poor waste disposal, watershed damage, and substantial climate variation-have become visible only in recent years (Appendix 2, Table A2.5). Continuing urban migration has given rise to slum communities without adequate water, sewerage, and waste management systems. Environment legislation drafted with ADB assistance5 was approved in 2002. ADB continues dialogue with the Government about the need to corporatize water services in Luganville, and has expressed interest in providing additional support for the sector if so requested. 28. Although women are responsible for harvesting and marketing most crops, as well as managing their households, they are disadvantaged socially, economically and politically. Rural women are especially disadvantaged, and women's groups are demanding more participation in various activities. ADB has helped build the capacity of the Vanuatu National Council of Women. The TVET TA, the microfinance pilot project, a proposed TA for rural productive skills development and the proposed OIIDP will all help improve services available to women. Gender targeting will be built into all these projects. 29. Vanuatu has a wide range of international and domestic nongovernment organizations, some deeply involved in development. The Chamber of Commerce and Industry has under way a series of programs to help develop the primary sector, including forestry (2002), livestock (2003), and marine resources (2004). The Chamber's program will be supported by ADB's involvement in the private sector development area. The ongoing TVET TA will support the development of nongovernment organizations, including the National Training Council and informal rural training centers. C. Highlights in Coordination of External Funding and Partnership Arrangements30. The first consultative group meeting for Vanuatu, held in Nouméa in July 1997, resulted in funding agency commitments to the CRP. The Government followed this with a development partners meeting on 4 September 2003, in Port Vila, based on the PAA. The meeting revealed a need for greater assistance for the economic sectors, including in economic policy, strategic planning, agriculture, tourism, infrastructure, education and private sector development. In some cases, such as in agriculture, tourism, and education, ADB is encouraging other funding agencies to close the gap, while in others, such as strategic planning, skills development, infrastructure, and private sector development, ADB will provide support directly. Present and proposed funding agency assistance is summarized in Appendix 2, Table A2.6. ____________________
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