fbpx 48478-001: Fiscal Sustainability Reform Program | Asian Development Bank

Nauru: Fiscal Sustainability Reform Program

Sovereign (Public) Project | 48478-001 Status: Closed

The proposed program amount is $3.8 million, comprising $2 million from ADB's special funds resources and $1.8 million in direct cofinancing from the Government of Australia. The program amount is, together with parallel cofinancing by the governments of Nauru ($14.6 million) and Taipei,China ($2.5 million equivalent), commensurate with development financing needs and is included in the government's medium-term budget estimates. The entire program amount will be used as seed financing for the new Intergeneration Trust Fund (NTF).

Project Details

Project Officer
Everett, Hayden B. Pacific Department Request for information
Country
  • Nauru
Modality
  • Grant
Sector
  • Public sector management
 
Project Name Fiscal Sustainability Reform Program
Project Number 48478-001
Country Nauru
Project Status Closed
Project Type / Modality of Assistance Grant
Source of Funding / Amount
Grant 0473-NAU: Fiscal Sustainability Reform Program
concessional ordinary capital resources lending / Asian Development Fund US$ 2.00 million
Grant 0474-NAU: Fiscal Sustainability Reform Program
Government of Australia US$ 1.89 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Knowledge solutions
Partnerships
Private sector development
Sector / Subsector

Public sector management / Public administration

Gender Equity and Mainstreaming No gender elements
Description The proposed program amount is $3.8 million, comprising $2 million from ADB's special funds resources and $1.8 million in direct cofinancing from the Government of Australia. The program amount is, together with parallel cofinancing by the governments of Nauru ($14.6 million) and Taipei,China ($2.5 million equivalent), commensurate with development financing needs and is included in the government's medium-term budget estimates. The entire program amount will be used as seed financing for the new Intergeneration Trust Fund (NTF).
Project Rationale and Linkage to Country/Regional Strategy

1. The proposed Fiscal Sustainability Reform Program is the latest in a series of program grants and technical assistance (TA) operations of the Asian Development Bank (ADB) and other development partners designed to support the Government of Nauru's efforts to achieve fiscal sustainability. The main feature of the program is the establishment of the Nauru Intergenerational Trust Fund (NTF). This will be complemented by reforms to improve public financial management (PFM) and efficient delivery of power and water services.



2. Development context. Nauru is very small and geographically remote. It has a total land area of 21 square kilometers and a population of approximately 10,000. Small size, remoteness, and limited resources mean the scope for private sector development is significantly constrained. This in turn places limits on the country's ability to finance basic government operations and service delivery while the public sector itself also faces diseconomies of scale and a thin domestic pool of skilled labor.



3. Overview of the economy. The public sector dominates the economy. The civil service and state owned enterprises (SOEs), particularly the Nauru Utilities Corporation (NUC), accounted for 82% of total employment in 2010. The state budget is reliant on a limited set of volatile revenue sources including fishing license fees, phosphate mining, customs duties, and, more recently, revenues associated with the reopened Australian Regional Processing Centre (RPC) for asylum seekers. The Australian dollar is used as legal tender. This supports price stability but removes monetary policy as a tool for economic management.



4. Recent economic and fiscal performance. Nauru experienced a resurgence in economic growth following the reopening of the RPC in 2012. This, together with windfall fishing license revenue and high levels of development assistance, led to average growth of about 8% between FY2012 and FY2014, and a 288% increase in domestic revenues in FY2015 compared with FY2012. ADB's estimates for growth in FY2015 and FY2016 are 6.8% and 5.4%, respectively, as the effects of the above positive shocks tapers off. The FY2016 national budget targets a surplus of $100,604 (or 0.1% of GDP) predicated on expenditure restraint as revenue stabilizes around current levels. Public debt has fallen significantly in recent years and, together with arrears and liabilities, is around $19.4 million (or 31.8% of GDP) . Nonetheless Nauru faces large downside risks which could undo much of this progress, with significant uncertainty existing around the future of the RPC and the sustainability of fisheries revenue.



5. Government reform efforts. A _stable, trustworthy, fiscally responsible government_ is the central long-term goal of Nauru's National Sustainable Development Strategy (NSDS), 2005 2025. Under this strategy, the government has delivered fiscal surpluses, reduced government debt, introduced finance sector reforms, started to restructure poorly performing SOEs, and implemented vital PFM reforms. The government acknowledges the importance of continuing these reforms, particularly those related to improving PFM quality and utilities service delivery. Furthermore, establishment of a Nauru Intergenerational Trust Fund (NTF) will be a critical next step in accelerating these efforts.



6. PFM reform. In 2011, the government adopted a PFM Action Plan, based on its 2010 Public Expenditure and Financial Accountability (PEFA) assessment, to guide its reform efforts. Steady progress is being made. For example: (i) an automated financial management information system, Technology One, has been installed; (ii) the public procurement law has been revised and major procurement operations have been outsourced; and (iii) expenditure is now more closely linked to the NSDS through Annual Operating Plans. However, many challenges remain that could potentially undermine the fiscal position. For example, effective expenditure controls need to be implemented, the efficiency and fairness of the revenue system needs to be improved, as does the allocation of public resources through the budget process.



7. Utilities reform. The supply of electricity and water is provided by NUC. Poor asset management and antiquated infrastructure has led to frequent power outages, a situation that has been exacerbated by the large increase in electricity demand since the resumption of the RPC. In addition, subsidies provided to NUC in the form of fuel for power generation has been a significant drain on the annual budget. Although this arrangement has ended, it was replaced with a provision of up to $5.5 million as a direct subsidy to NUC. Planned power sector tariff reform should reduce the fiscal burden of these subsidies.



8. Ensuring future service delivery. The government has been trying to set up the NTF since 2009 when a prospectus was forwarded to potential donors. Parliament passed the Nauru Trust Fund Act 2012 to authorize its establishment. The NTF will help ensure that donor funds and windfall revenues are better managed and provide a future source of stable budget financing. The government has demonstrated its commitment by setting aside $14.6 million during FY2015 FY2016 as its contribution to the NTF. ADB's experience with trust funds in the region show that they help _sterilize_ a portion of these funds to avoid the resource curse that could result in spending and inflationary spirals that are nonproductive and non-wealth-producing, and avoid capacity and other constraints such as strains on infrastructure, some of which are now emerging in Nauru. Furthermore, trust funds should be established (i) when there are unanticipated excess resources available for which there are no immediate or urgent uses; (ii) when a critical long-term resource shortage is forecast and there are no foreseeable cheaper or more efficient means of financing available; and (iii) as a hedge against economic volatility. The NTF meets these criteria.



9. Program modality. ADB proposes a stand-alone policy-based operation that will require that all policy actions are accomplished in advance of grant effectiveness. The program fully supports implementation of key policies agreed with the government and is supported by all major development partners including the Government of Australia. The program is being developed in the context of a programmatic policy discussion with key partners and is based on the NSDS. Lessons from ADB's experience in Nauru and in the Pacific include (i) limiting reform to a small number of major actions; (ii) using a single tranche within a programmatic, multiyear, framework for policy dialogue and TA; and (iii) combining TA with policy-based operations to undertake complex, politically sensitive reforms.


Impact

The project is aligned with Nauru's National Sustainable Development Strategy, 2005 2025 objectives:

1. A stable, trustworthy, fiscally responsible government.

2. Provision of enhanced social, infrastructure, and utilities services.

3. Development of an economy based on multiple sources of revenue.

Project Outcome
Description of Outcome The Government of Nauru improves its fiscal sustainability
Progress Toward Outcome Program grant was disbursed in August 2016 following achievement of all policy conditions.
Implementation Progress
Description of Project Outputs

3. Improved funding mechanism for future service delivery

2. Efficient service delivery by the National Utility Corporation (NUC)

1. Improved public financial management

Status of Implementation Progress (Outputs, Activities, and Issues) Program grant was disbursed in August 2016 following achievement of all policy conditions.
Geographical Location Nation-wide
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects no major impact
Involuntary Resettlement no major impact
Indigenous Peoples no major impact/no accessment
Stakeholder Communication, Participation, and Consultation
During Project Design The Nauru Government, Nauru Utilites Corporation (NUC), and co-financing partners (Government of Australia and Government of Taipei,China) were consulted.
During Project Implementation The Nauru Government, Nauru Utilites Corporation (NUC), and co-financing partners (Government of Australia and Government of Taipei,China) will be consulted.
Responsible ADB Officer Everett, Hayden B.
Responsible ADB Department Pacific Department
Responsible ADB Division Pacific Liaison and Coordination Office in Sydney, Australia
Executing Agencies
Ministry of Finance
Government Building
Nauru
Timetable
Concept Clearance 02 Oct 2015
Fact Finding 26 Oct 2015 to 30 Oct 2015
MRM 08 Jan 2016
Approval 28 Apr 2016
Last Review Mission -
Last PDS Update 04 Oct 2016

Grant 0473-NAU

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
21 Mar 2016 01 May 2016 08 Jun 2016 30 Jun 2016 30 Sep 2016 01 Dec 2016
Financing Plan Grant Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 2.00 Cumulative Contract Awards
ADB 2.00 21 Mar 2016 2.00 0.00 100%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 0.00 21 Mar 2016 2.00 0.00 100%

Grant 0474-NAU

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
28 Apr 2016 01 May 2016 08 Jun 2016 30 Jun 2016 30 Sep 2016 01 Dec 2016
Financing Plan Grant Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 1.89 Cumulative Contract Awards
ADB 0.00 28 Apr 2016 0.00 1.83 97%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 1.89 28 Apr 2016 0.00 1.83 97%

Project Data Sheets (PDS) contain summary information on the project or program. Because the PDS is a work in progress, some information may not be included in its initial version but will be added as it becomes available. Information about proposed projects is tentative and indicative.

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Safeguard Documents See also: Safeguards

Safeguard documents provided at the time of project/facility approval may also be found in the list of linked documents provided with the Report and Recommendation of the President.

None currently available.

Evaluation Documents See also: Independent Evaluation

Title Document Type Document Date
Nauru: Fiscal Sustainability Reform Program Validations of Project Completion Reports Oct 2018

Related Publications

None currently available.


The Public Communications Policy (PCP) establishes the disclosure requirements for documents and information ADB produces or requires to be produced in its operations to facilitate stakeholder participation in ADB's decision-making. For more information, refer to the Safeguard Policy Statement, Operations Manual F1, and Operations Manual L3.

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Tenders

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Contracts Awarded

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Procurement Plan

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