Marshall Islands: Public Sector Program - Subprogram 2

Sovereign Project | 43321-023

Summary

The program, supported by a policy-based loan, is to improve the long-term fiscal sustainability of the RMI government. In 2010, the Asian Development Bank (ADB) approved (i) a program cluster for the public sector program, and (ii) financing from the Asian Development Fund (ADF) of $9.5 million (special drawing rights of 6,413,000) for subprogram 1 of the public sector program. The public sector program supports the implementation of the government's reform initiatives and initiates the adjustments required to achieve long-term fiscal sustainability. Under subprogram 1, policy actions were designed and the implementation of immediate reform priorities began. Subprogram 2 will complete the implementation of the policy actions.

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Project Name Public Sector Program - Subprogram 2
Project Number 43321-023
Country Marshall Islands
Project Status Closed
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan 2950-RMI: Public Sector Program - Subprogram 2
Asian Development Fund US$ 5.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector Public sector management - Economic affairs management - Public administration - Public expenditure and fiscal management
Gender Equity and Mainstreaming No gender elements
Description The program, supported by a policy-based loan, is to improve the long-term fiscal sustainability of the RMI government. In 2010, the Asian Development Bank (ADB) approved (i) a program cluster for the public sector program, and (ii) financing from the Asian Development Fund (ADF) of $9.5 million (special drawing rights of 6,413,000) for subprogram 1 of the public sector program. The public sector program supports the implementation of the government's reform initiatives and initiates the adjustments required to achieve long-term fiscal sustainability. Under subprogram 1, policy actions were designed and the implementation of immediate reform priorities began. Subprogram 2 will complete the implementation of the policy actions.
Project Rationale and Linkage to Country/Regional Strategy

RMI consists of 29 low lying atolls and 5 single islands that cover 181 square kilometers of land area spread across nearly 2 million square miles of the western Pacific Ocean. The country gained independence in 1979, having been administered by the United States (US) as part of the Trust Territory of the Pacific Islands since 1947. The 2011 Census recorded a total population of 53,158 persons, with approximately 74% of the population living on Majuro and Ebeye. RMI has been identified as a fragile situation by ADB since 2008 with a number of constraints that underlie weak performance and fragility, including weak public sector institutions, limited government capacity, and underdeveloped governance systems.

The RMI economy relies heavily on government expenditure and, in turn, on foreign grants that fund more than two-thirds of government expenditure. Most foreign grants are provided by the US, mainly under the amended Compact of Free Association. Increased foreign grants helped the economy grow at an average annual rate of 3.1% from fiscal year (FY) 2000 to FY2007. However, in FY2008 and FY2009, the economy contracted by 1.9% and 1.3% respectively, as high world food and fuel prices raised inflation to 14.7%, prompting the declaration of a state of national economic emergency. The economy grew by 5.2% in FY2010, driven by an expansion of fishery output and exports, and moderating fuel prices. Similarly, growth in FY2011 was 5.0%, driven by higher fish catches, large inflows from the Kwajalein land use agreement, and the Federal Aviation Administration-funded airport extension project

Growth over the medium-term in the RMI is expected to stay low at around 1.5% and revenues are projected to decline (table 2). Within this low-growth scenario, the RMI needs to adjust to the annual decline in US Compact grants, which will be phased out in FY2023. Of a $130 million annual budget in FY2011, about $95 million was funded by bilateral donors, with approximately two-thirds of this representing Compact grants. The governments of RMI and US are investing in a Compact trust fund that is intended to generate a revenue stream to replace Compact grants in FY2024. Contributions from the RMI government have, however, fallen short because excessive recurrent expenditure and poor revenue performance have prevented the generation of the required fiscal surpluses. Under current policies, there will be insufficient government assets in the Compact trust fund in 2023 to replace the expiring Compact grants.

Fiscal and structural reforms are therefore urgently needed to achieve fiscal sustainability and generate sustainable medium-term economic growth. Structural reforms will stimulate private sector economic activity, generate domestic employment and incomes, and broaden the local tax base, while tax reforms will boost domestic revenue collection and offset the imminent reduction in grants. Implementing state-owned enterprise (SOE) reforms and reducing public expenditures will contribute to improving the fiscal balance.

In 2009, recognizing the need for reform, the RMI government began several initiatives to advance public sector reform and promote macroeconomic stability and sustainable growth. These included the preparation of a comprehensive recovery plan for the Marshalls Energy Company (MEC) and the formation of the Comprehensive Adjustment Program (CAP) Advisory Group and the Tax and Revenue Reform and Modernization Commission (TRAM) to prepare fiscal reform plans. These initiatives formed the basis of the government's strategy to mitigate the impact of the global financial crisis and subsequently led to the design of ADB's support for the public sector program.

The program is aligned with the RMI Country Operations Business Plan (COBP), 2012-2014 and ADB's Pacific Approach, 2010-2014. The program also applies lessons from earlier ADB policy programs in the RMI and elsewhere in the Pacific, as well as ADB's approach to engaging with weakly performing countries, notably by (i) adopting a country-led set of policy actions developed in an open, participatory manner and at a pace in keeping with country practices, and (ii) initiating long-term policy dialogue and providing targeted technical assistance (TA) support.

Implementation of subprogram 1 has had a successful outcome for RMI. Under this subprogram, the majority of loan funds were on-lent from the government to MEC. The funds were used to repay a high interest loan held by MEC with a commercial bank. Using the cash-flow savings from repaying this loan, MEC was able to undertake a refurbishment of a generator. The refurbished generator has a significantly higher megawatt output than previously which has resulted in a reduction in fuel usage of approximately 14%.

Impact The public sector provides more efficient and effective services to the population.
Project Outcome
Description of Outcome The government achieves fiscal sustainability.
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

1. Government's fiscal discipline improves over the medium term.

2. Cabinet enforces restraint on recurrent expenditure.

3. Ministry of Finance increases tax revenue.

4. Selected state-owned enterprises improve their performance.

5. Cabinet ensures effective stakeholder participation in public sector reforms.

Status of Implementation Progress (Outputs, Activities, and Issues)
Geographical Location
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation
Responsible ADB Officer Maria Melei
Responsible ADB Department Pacific Department
Responsible ADB Division Urban, Social Development & Public Management Division, PARD
Executing Agencies
Ministry of FinanceOIDAFIN@NTAMAR.COMP.O. Box D, Majuro
MH 96960
Republic of the Marshall Islands
Timetable
Concept Clearance 05 Jun 2012
Fact Finding 04 Jun 2012 to 15 Jun 2012
MRM 21 Aug 2012
Approval 26 Nov 2012
Last Review Mission -
Last PDS Update 18 Jun 2012

Loan 2950-RMI

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
26 Nov 2012 13 Dec 2012 21 Jan 2013 31 Dec 2013 - 31 Mar 2014
Financing Plan Loan Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 5.00 Cumulative Contract Awards
ADB 5.00 26 Nov 2012 4.89 0.00 100%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 0.00 26 Nov 2012 4.89 0.00 100%

Safeguard Documents

See also: Safeguards

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Evaluation Documents

See also: Independent Evaluation

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