Countries and Regions

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p. 3 of 6 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 Appendixes

Country Strategy and Program Update 2005-2006: Vanuatu

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III. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

19. Vanuatu, with a human poverty index of 46.4, is the third poorest of the PDMCs. About 50% of its population lives below the $1 per day poverty line, and 23% of children under 5 suffer from malnutrition (Table A2.1). Vanuatu also scores poorly in social development with a human development index of 0.425. ADB has helped Vanuatu prepare a poverty reduction strategy, which comprises 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, and for technical vocational education and training (TVET). Most development efforts have been concentrated in the two principal urban centers, so the outer islands have limited access to basic services, including basic skills training for adults and school leavers. A proposed TA for rural productive skills development will help develop basics skills such as plumbing, masonry, carpentry, sewing, and agroprocessing, thereby improving the labor force, reducing unemployment, and increasing cash incomes. A proposed loan project for outer island infrastructure development (OIIDP), intended to help improve accessibility to markets and social services, has been further deferred. The Government and ADB signed a poverty partnership agreement on 12 September 2003 confirming the Government’s commitment to analyzing poverty, developing appropriate strategies to reduce it, and implementing these strategies through its policies and budgets.

B. Progress in the Country Strategy and Program Focus Areas

1. Good Governance and Economic Management

20. For the past 6 years, ADB’s program in Vanuatu has been formulated in harmony with the CRP policy matrix. ADB’s CRP project aimed to enhance and sustain private sector-led economic growth with its benefits distributed equitably. This 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. However, economic growth has not increased and this has threatened the improvement of social indicators.

21. Reforms remain unfinished in several areas, particularly with regard to economic development: (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 people without examination of impacts; (iv) inconsistent policy on the sale of government-owned assets; (v) a worsening fiscal situation arising from unbudgeted payouts, lack of control over the wage bill, and lax revenue collection; and (vi) consistent weaknesses in the public service, particularly in senior positions.

22. The 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 in the productive sectors, particularly agriculture and tourism. The Government is placing priority on providing support to these sectors. ADB has offered to help further develop the PAA, and a TA is currently being processed to help the government develop a framework for setting priorities of sector development plans, corporate plans, departmental budgets, and project proposals. 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 developing and marketing agricultural products, and other funding agency support is likely for the tourism sector.

2. Private Sector Development

23. The Government is ineffective in supplying the essential public goods for an effective and efficient private sector: secure property rights, a legal system that allows contracting with confidence, efficient and low-cost infrastructure, and regulations that are consistently enforced.

24. Neither the Government nor private companies provides low-cost infrastructure. Government provision regularly fails because of little incentive for efficiency, political interference, and the tendency to overstaff and neglect maintenance. Private services such as telecommunications and utilities are deficient because private suppliers have been granted nontransparent, poorly regulated, long-term monopolies. The result is costly, efficient services in Port Vila and Luganville and hardly any service in rural areas. In effect, the current system exacerbates rather than reduces geographic constraints such as isolation and size—inappropriate government intervention pushes up costs, reduces competition, and tends to crowd out the private sector. The CRP policy matrix and the Business Forum confirm a few key issues for Vanuatu’s business environment: (i) SOE reforms and privatization, which have been sluggish because of lukewarm political commitment, should be accelerated; (ii) private concessions should be reviewed and rectified; (iii) existing monopolies should be regulated to guarantee competitive market prices; and (iv) private participation in infrastructure projects should be promoted.

25. Vanuatu’s domestic financial sector provides only a minimal range of banking services. Access to credit is limited—especially for Ni-Vanuatu entrepreneurs—and interest rate spreads are high, reflecting high unit costs and risk premiums. The introduction of a secured transaction system that allows using movable property (chattels) as collateral is fundamental in developing an effective credit market. A well-functioning secured transactions system would generate economic and social gains for creditors and debtors, reducing transactions costs and improving access to credit. As diagnosed under the small-scale technical assistance (SSTA) for access to affordable credit,⁵ however, Vanuatu's laws do not allow for the inexpensive and predictable use of movable property as collateral. The framework for lending that meets the standards for creation, priority, publicity, and enforcement of security interests is not in place. While it is possible to use some forms of collateral, the process is costly, inefficient, and risky to lenders: the existing framework does not permit the effective use of collateral as security for loans. These shortcomings have significant adverse economic consequences for Vanuatu. They hinder the country in developing its comparative advantage in areas such as agriculture, fishing, and tourism, resulting in a loss of potentially high-value export opportunities. The current system inhibits the growth of businesses, prevents commercial opportunities from being fully exploited, and especially disadvantages people (primarily Ni-Vanuatu) who wish to operate their businesses as sole proprietors. The inability to purchase equipment on credit harms productivity and exacerbates the disadvantages of the wide geographic area that Vanuatu occupies. Accordingly, ADB has submitted for approval in 2004 a TA to assist the Government in establishing a well-functioning secured transactions framework.

3. Infrastructure

26. Inadequate transport infrastructure continues to be a major obstacle to economic growth, particularly in the outer islands. Despite numerous funding-agency-assisted initiatives, little progress has been made in addressing this problem. Despite the Government’s reluctance to borrow for the OIIDP, they have requested support for preparation of an urban sanitation and public health project and assistance in port corportization. The former would follow the outline of a master plan developed earlier with ADB assistance,⁶ focusing on expansion of potable water provisions, and appropriate sewage and solid waste management services for Port Vila and Luganville. Shipping is central to developing Vanuatu’s private sector, as well as to enhanced service delivery to the outer islands. Expanding shipping services is imperative, as is operating the two main ports more efficiently. Privatizing the management of port assets, as well as introducing competition and innovation to port operations, would accomplish this. The urgency in introducing reforms has been heightened by years of underfunding, physical and political indifference to asset management and utilization, and heightened security regulations introduced by the International Maritime Authority on 1 July 2004.

4. Social Development and Environment

27. Vanuatu has some of the lowest human development indicators among the PDMCs. Basic and secondary educations, which are inadequate in quantity and quality (Appendix 2, Table A2.4), are being supported by the governments of Australia and France, as well as the European Union. The World Bank has a sector project focused on basic education, and ADB has an advisory TA underway to help prepare a TVET policy framework. The health sector enjoys support from the governments of Australia, New Zealand, Japan, and the People’s Republic of China, as well as the World Health Organization and the United Nations Populations Fund (UNFPA).

28. 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 with inadequate water, sewerage, or waste management systems. Environmental legislation drafted with ADB assistance⁷ was approved in 2002, and technical assistance is scheduled in 2004 to mainstream environmental considerations in economic and development planning.

29. 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, and a proposed TA for rural productive skills development will all help improve services available to women. Gender targeting will be built into all these projects.

30. Vanuatu has a wide range of international and domestic nongovernment organizations, some deeply involved in development. The Chamber of Commerce and Industry has a series of programs to help develop natural resources, including forestry (2002), livestock (2003), and marine resources (2004). The chamber’s program will be supported through ADB’s involvement in private-sector development. The ongoing TVET TA will support the development of nongovernment organizations, including the National Training Council and informal rural training centers. Further support for TVET is envisaged.

C. Highlights in Coordination of External Funding and Partnership Arrangements

31. 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 based on the PAA held in Port Vila on 4 September 2003. The meeting revealed a need for greater assistance for the economy, including economic policy, strategic planning, agriculture, tourism, infrastructure, education, and private-sector development. 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 direct support. Present and proposed funding agency assistance is summarized in Appendix 2, Table A2.6.

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