Tuvalu: Strengthened Public Financial Management Program

Sovereign Project | 45395-001

Summary

The focus of ADB's program the Strengthened Public Financial Management Program (SPFMP) is consistent with the objectives of Tuvalu's National Strategy for Sustainable Development 2005-2015, known as Te Kakeega II, and ADB's Pacific Approach 2010-2014, which aims to achieve sound macroeconomic and fiscal management, and strengthened and improved public enterprise management. The program will assist the government to address key issues affecting fiscal sustainability, specifically, weak budget credibility and poorly performing public enterprises. The SPFMP will continue ADB's support for strengthening public sector management and the environment for private sector development in Tuvalu areas of historical ADB involvement. Other development partners will focus their respective budget support programs on reforms in the health and education sectors. Appendix 1 provides basic program information.

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Project Name Strengthened Public Financial Management Program
Project Number 45395-001
Country Tuvalu
Project Status Closed
Project Type / Modality of Assistance Grant
Source of Funding / Amount
Grant 0318-TUV: Strengthened Public Financial Management Program
Asian Development Fund US$ 2.35 million
Strategic Agendas Inclusive economic growth
Drivers of Change
Sector / Subsector Public sector management - Public expenditure and fiscal management
Gender Equity and Mainstreaming No gender elements
Description

The focus of ADB's program the Strengthened Public Financial Management Program (SPFMP) is consistent with the objectives of Tuvalu's National Strategy for Sustainable Development 2005-2015, known as Te Kakeega II, and ADB's Pacific Approach 2010-2014, which aims to achieve sound macroeconomic and fiscal management, and strengthened and improved public enterprise management. The program will assist the government to address key issues affecting fiscal sustainability, specifically, weak budget credibility and poorly performing public enterprises. The SPFMP will continue ADB's support for strengthening public sector management and the environment for private sector development in Tuvalu areas of historical ADB involvement. Other development partners will focus their respective budget support programs on reforms in the health and education sectors. Appendix 1 provides basic program information.

The SPFMP will be supported by ADB technical assistance (TA) (funding of US$300,000), which is expected to be approved in June 2012. Advisors from the Pacific Economic Management (PEM) , and Private Sector Development Initiative (PSDI) regional TA projects, as well as from the IMF's Pacific Financial Technical Assistance Center (PFTAC) will also help the government to accomplish the policy actions contained in the program (and highlighted in Table 2, below).

The SPFMP builds on lessons and outcomes of the Improved Financial Management Program (IFMP), which was ADB's first budget support operation in Tuvalu (albeit a programmatic budget support operation with multiple tranches). This program was aimed at strengthening the governance framework for Tuvalu's public enterprises, improving the government's capacity for oversight, strengthening capacity to manage debt, and reducing the government's debt to the National Bank of Tuvalu (NBT). The IFMP was instrumental in helping the government to implement several substantive reform actions including:

-improved debt management capability via the approval of a debt risk management and mitigation policy and strategy;

-strengthened oversight of public enterprises via approval of a public enterprise governance reform strategic policy and the enactment of the Public Enterprise (Performance and Accountability) Act 2009; and

-strengthened management capacity in public enterprises via approval of an asset/liability management (liquidity) policy and a loan grading policy for NBT that allows timely collection of past due loans and advances of credit, and measuring, monitoring and maintaining adequate liquidity. The Banking Commission Act 2011, which provided the legal framework for the licensing and on-going supervision and regulation of banking institutions in Tuvalu based on the Basel core principles for effective banking supervision, was also approved by Parliament in 2011.

Project Rationale and Linkage to Country/Regional Strategy

Tuvalu is a Pacific micro-state small, geographically remote, with limited resource endowments. With a total population of only 11,000, the economy is dominated by the public sector and few opportunities exist for private sector development. The economy is extremely vulnerable to external shocks due to its heavy reliance on income earned from external sources, including from the Tuvalu Trust Fund (TTF), fish licensing fees, the '.tv' internet domain, workers remittances, and grants; all of which are largely outside the government's control. Consequently, future revenue streams are difficult to accurately predict and are often volatile. Expenditure has outpaced revenue in recent years largely due to overspending on the Tuvalu medical treatment and scholarship schemes leading to widening budget deficits. For example, the deficits for 2010 and 2011 are estimated at 38.0% and 22.0% of GDP respectively, compared to 3.2% of GDP in 2009 and 1.5% in 2008.

Returns from the TTF, which have in the past provided some financial certainty, have fallen below their targeted value in recent years. As a result, there have been no distributions from the TTF to the Consolidated Investment Fund (CIF) to finance the budget since 2008. The CIF was established to provide stability to the annual budget, and receives transfers from the TTF when the fund's market value exceeds its targeted value (which is linked to the Australian consumer price index). While there have been some injections into the CIF from donors, its value has declined to around $2.1 million and according to the Tuvalu Trust Fund Advisory Committee (TTFAC), the Fund, if not carefully managed, could be exhausted by the end of 2012. On current trends, and given the ongoing uncertainty in global financial markets, distributions are unlikely to begin again until 2014.

Given the extent of the government's fiscal challenges, it is crucial that budget management is of a sufficiently high quality to ensure limited public funds are effectively spent. However, weaknesses in budget credibility and strategic allocation of resources continue to undermine the fiscal position. This is evidenced by the findings of the 2010 assessment of Tuvalu's public financial management systems based on the World Bank's public expenditure and financial accountability (PEFA) methodology. Poor budget management is further compounded by weakly performing public enterprises that are a drag on economic growth only two of Tuvalu's eleven public enterprises, the National Bank of Tuvalu and Tuvalu Electricity Corporation, are financially profitable (the latter following technical assistance provided by ADB in 2010). An assessment of the public enterprise sector undertaken by the International Monetary Fund in 2010 as part of its biennial Article IV consultations concluded that the total debt of the sector, excluding the two banks, had risen from 19% of GDP in 2004 to 42% in 2007. This poses considerable fiscal risks as the debt is partly guaranteed by the government.

Impact Fiscal sustainability is achieved
Project Outcome
Description of Outcome Improved fiscal management capacity
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

1. Improved fiscal management policy

2. Improved fiscal management capability

3. Improved public enterprise rationalization

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

Implementation of actions achieved under the IFMP has either been completed, or is close to completion. The two actions that remain outstanding are the operationalization of Tuvalu's Debt Risk and Mitigation Policy, and the appointment of a Banking Commissioner under the 2011 Banking Commission Act. Work on the former is on-track for completion by late 2012 with AusAID TA. The appointment of a Banking Commissioner has been delayed due to the tight fiscal situation faced by the government but is expected to be addressed in the 2013 budget via a levy on NBT, the Development Bank of Tuvalu and Tuvalu Provident Fund, which will be announced in late November 2012.

Lessons from the IFMP include: the need to build stronger political consensus to undertake reforms through support for a government-led dialogue on budget support and concerted outreach to Cabinet, Parliamentarians, and the community; to improve development partner coordination through joint dialogue and joint missions, as well as improved coordination of technical assistance; and to adopt a medium term perspective to restoring fiscal sustainability in recognition of the size of the challenges that micro-states like Tuvalu face.

During Project Implementation The Ministry of Finance and Economic Development (MFED) will be the executing agency (EA) and will oversee and coordinate the timely implementation of agreed policy, legal, and regulatory actions. The implementing agencies will be MFED, the Office of the Prime Minister, and the Ministry of Foreign Affairs (which oversees the Vaiaku Lagi Hotel). Resources from new and ongoing TA will support the government to fulfill program conditionalities. MFED will also be responsible for program administration, disbursements, and maintenance of all program records. ADB and other development partners through the joint policy matrix process, will work with the government to set up a high-level coordination and monitoring mechanism to monitor progress, oversee the implementation of the program, and guide and direct the activities of the EA.
Business Opportunities
Consulting Services Ministry of Finance and Economic Development
Procurement Ministry of Finance and Economic Development
Responsible ADB Officer Laisiasa Tora
Responsible ADB Department Pacific Department
Responsible ADB Division Pacific Subregional Office in Suva, Fiji
Executing Agencies
Ministry of Finance and Economic PlanningPrivate Bag
Funafuti
Tuvalu
Timetable
Concept Clearance 16 May 2012
Fact Finding 29 May 2012 to 07 Jun 2012
MRM 10 Jul 2012
Approval 22 Nov 2012
Last Review Mission -
Last PDS Update 10 Jan 2013

Grant 0318-TUV

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
22 Nov 2012 17 Dec 2012 11 Feb 2013 31 Dec 2013 - 24 Jan 2014
Financing Plan Grant Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 2.35 Cumulative Contract Awards
ADB 2.35 22 Nov 2012 2.35 0.00 100%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 0.00 22 Nov 2012 2.35 0.00 100%

Safeguard Documents

See also: Safeguards

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Evaluation Documents

See also: Independent Evaluation

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