evaluation of the tuvalu islands development program – economic research and policy division...

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ASIAN DEVELOPMENT BANK PCR:TUV 31538

PROGRAM COMPLETION REPORT

ON THE

ISLAND DEVELOPMENT PROGRAM (Loan 1693-TUV[SF])

IN

TUVALU

January 2003

CURRENCY EQUIVALENTS

Currency Unit – Australian dollar (A$)

At Appraisal At Program Completion (March 1999) (July 2001)

A$1.00 = $0.625 $0.508 US$1.00 = A$1.60 A$1.97

ABBREVIATIONS ADB – Asian Development Bank CFC – Community Fishing Center DBT – Development Bank of Tuvalu DCC – Development Coordinating Committee EEZ – exclusive economic zone EPOC – ESCAP Pacific Operations Centre ERPD – Economic Research and Policy Division Falekaupule – traditional decision-making body on the islands of Tuvalu FTF – Falekaupule Trust Fund FY – fiscal year IBD – interest bearing deposit IDP – island development program IDPI – island development program implementation IDRF – island development revolving fund IMO – International Maritime Organization IPS – investment policy statement kaupule – local government MHARD – Ministry of Home Affairs and Rural Development MIARUD – Ministry of Internal Affairs, Rural and Urban Development MIS – management information system MLGWY – Ministry of Local Government, Women, and Youth

(formerly MIARUD) NZAID – New Zealand Agency for International Development ODA – Overseas Development Assistance PDMC – Pacific developing member country PME – participatory monitoring evaluation PWD – Public Works Department SDE – special development expenditure SDR – special drawing rights SIP – summary island profile STCW95 – Standards of Training Certification and Watchkeeping 1995 TA – technical assistance TMS – Tuvalu Maritime School TMTI – Tuvalu Maritime Training Institute (formerly TMS) TNCW – Tuvalu National Council of Women TTF – Tuvalu Trust Fund TTFAC – Tuvalu Trust Fund Advisory Committee UNDP – United Nations Development Programme

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NOTES

(i) The fiscal year (FY) of the Government of Tuvalu ends on 31 December.

(ii) In this report, "$" refers to US dollars, unless specified as A$, which refers to Australian dollars.

CONTENTS

Page

BASIC DATA i

MAP iv

I. PROGRAM DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 3 C. Program Costs 5 D. Disbursements 5 E. Program Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 7 K. Performance of the Borrower and the Executing Agency 7 L. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Achievement of Outputs and Purpose 9 C. Preliminary Assessment of Sustainability 10 D. Environmental, Sociocultural, and Other Impacts 10

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 11 A. Overall Assessment 11 B. Lessons Learned 11 C. Recommendations 12

APPENDIXES 1. Chronology of Events 13 2. Status of Compliance with Loan Covenants 14 3. Island Development Program Policy Matrix in July 2002 18 4. Summary of Falekaupule Trust Fund 26

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number

Tuvalu 1693-TUV(SF) Island Development Program Tuvalu Ministry of Internal Affairs and Rural and Urban Development US$4,000,000 PCR:TUV 731

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Interim Completion

– Final Completion

3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

17 February 1999 26 February 1999 4 May 1999 6 May 1999 18 June 1999 13 July 1999 6 September 1999 4 December 1999 19 November 1999 30 November 2000 19 July 2001 1 1.0% 24 8 years

8. Disbursements a. Dates Initial Disbursement

22 November 1999

Final Disbursement

19 July 2001

Time Interval

1.6 years

Effective Date

19 November 1999

Original Closing Date

30 November 2000

Time Interval

1.0 year

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b.

Amount

Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance Island Development 3,971,692 none none 3,971,692 3,971,692 0 Program Total 3,971,692 3,971,692 3,971,692

C. Program Data

1. Program Cost Cost Appraisal Estimate Actual Foreign Exchange Cost 4,000,000 3,971,692 Local Currency Cost 0 0 Total 4,000,000 3,971,692

2. Financing Plan Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 0 0 ADB-Financed 4,000,000 3,971,692 Other External Financing 0 0 Total 4,000,000 3,971,692

ADB = Asian Development Bank.

3. Cost Breakdown by Program Component Component Appraisal Estimate Actual 1st tranche 2,800,000 2,800,000 2nd tranche 1,200,000 1,171,691 Total 4,000,000 3,971,692

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4. Program Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

28 February 2000 S S 31 March 2000 S S 30 April 2000 S S 31 May 2000 S S 30 June 2000 S S 31 July 2000 S S 30 September 2000 S S 31 October 2000 S S 30 November 2000 S S 31 December 2000 S S 31 January 2001 S S 28 February 2001 S S 31 March 2001 S S 30 April 2001 S S 31 May 2001 S PS PS = partly satisfactory, S = satisfactory. D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Fact-Finding 11-29 May 1998 5 19 d,d,c,e,h Appraisal 16-26 February 1999 2 11 d,c Inception 2-9 December 1999 1 8 d Review 6-13 March 2000 1 8 d Review 28 September-5

October 2000 1 8 d

Note: a Reference letters in table pertain to the following: a - engineer, b - financial analyst, c - counsel, d - economist, e -

procurement consultant or specialist, f - control officer, g - programs officer, h - others.

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iv MAP

I. PROGRAM DESCRIPTION

1. Tuvalu became a Pacific developing member country (PDMC) in 1993. One of the Pacific microstates, Tuvalu has a population of about 10,000 and a land area, over nine islands, of only 26 square kilometers (km2). Tuvalu is a former British colony, known as the Ellice Islands in the former Gilbert and Ellice Islands colony. Tuvalu separated from the colony in 1975, and became independent in 1978. At independence, Tuvalu’s development prospects were limited by inadequate infrastructure, limited land, restricted access to markets, and a harsh and hostile environment. Among its advantages though was a close-knit, homogenous, and predominantly Polynesian population, with a strong culture, relatively high level of education, and substantial marine resources. 2. The establishment of the Tuvalu Maritime School soon after independence has provided jobs for Tuvalu’s male population that is now a significant part of the economy. Fishing licenses from the exclusive economic zone (EEZ) have also provided substantial revenue to the Government of Tuvalu. The Tuvalu Trust Fund (TTF) was established in 1987 among the governments of the United Kingdom, New Zealand, Australia, and Tuvalu. Its wise management has allowed the government to fund a structural deficit in its recurrent budget. Prudent TTF fiscal policy has allowed Tuvalu to overcome some of its infrastructure deficiencies, and reach a relatively high index ranking of human development among the PDMCs. 3. Despite these positive developments, there has been a gradual trend toward centralization of resources and opportunities in the capital, Funafuti, with a corresponding increase in urban population. To redress this imbalance, the Government has undertaken a program of decentralization and local government reform. 4. In July 1999, the Asian Development Bank (ADB) approved its first loan to the Government of Tuvalu for the Island Development Program (IDP), Loan 1693-TUV(SF), for $4.0 million equivalent (special drawing rights, or SDR2,973,000). The main IDP objectives were to (i) support decentralization, (ii) give the island communities a significant level of development finance, (iii) improve the enabling environment for island development, and (iv) support the Government through technical assistance (TA) for capacity building for island development program implementation (IDPI). 5. The IDP TA was designed to be implemented over 36 months, from August 1999 to July 2002. The loan was to be released in two tranches of $2.8 million and $1.2 million. The loan became effective on 19 November 1999, and the first tranche was released on 22 November. Release of the second tranche was planned for mid-2000, but released in July 2001. Appendix 1 gives a chronology of IDP events.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. Tuvalu has been an ADB member since 1993, but the IDP was its first ADB loan. The time it took to identify a loan reflects the difficulties of identifying suitable projects for the PDMC microstates. The Pacific Strategy for the New Millennium1 highlights the use of trust funds as an important tool in the longer-term sustainability in the microstates. The Program focused on supporting populations on the outer islands, where incomes are far lower than in the capital,

1 ADB. 2000. A Pacific Strategy for the New Millennium. Manila.

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Funafuti, by providing greater financial resources so the islands can provide local services in education, health, and the private sector. The Falekaupule Trust Fund (FTF, or Fund) was a way to redress the imbalance of incomes and redirect financial resources to the less prosperous island communities. This reflects Tuvalu’s country strategy, and ADB’s goal of alleviating poverty. 7. In 1994, a new Government set out to review the Local Government Act. The aim was to distribute the benefits of development more evenly by strengthening the capacity of local governments. With assistance from the United Nations Development Programme (UNDP), a major program of consultation with the island communities began in 1995, which resulted in the passage of the Falekaupule Act in December 1997. Under the new Act, the falekaupules (councils of elders, the traditional assembly of each island) and kaupules (local governments) acquired more power and responsibility to manage local development. The Act also outlined a process to resolve disputes between the two bodies. 8. The islands needed more financial resources to undertake this expanded mandate. The TTF became a model for providing the needed additional resources. The result was an agreement between the Government and the falekaupules on the concept of the FTF. The FTF differed fundamentally from the TTF, however, in that the new Fund provided assistance for "development" (essentially capital formation, capacity building, and maintenance) on the islands, while the TTF was established to support the Government's recurrent budget. The FTF would cater to the islands’ development needs, while the Government would continue to support the recurrent needs of each kaupule through its recurrent grants. 9. The FTF comprises contributions from all island communities and the Government, and loan assistance from ADB. The FTF is invested overseas, and its real earnings are distributed to the island communities for small-scale community projects. The island communities raised revenue for the fund. Representatives of all island communities signed the FTF Deed on 31 July 1999. 10. ADB funded a preparatory TA in early 1998 “to establish a policy-based investment fund for Tuvalu.”2 This TA recommended, and provided guidelines for, the establishment of the FTF to support decentralization. The TA provided further technical input on the FTF’s structure and governance, which were based closely on the successful TTF model. Preparatory efforts included widespread consultations with island community leaders, women, and youth about how the fund should be set up and used. Ownership of the FTF is reflected in the contributions that the island communities and the Government made from their own resources to match the ADB loan. Table 1 summarizes the underlying structure of the policy matrix. 2 ADB. 1997. Technical Assistance to Tuvalu to Establish a Trust Fund. Manila.

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Table 1: Structure of the Policy Matrix

Policy Areas Strategy Actions I. Decentralization

and enhancement of regional autonomy

a. Improve local

governance of island communities

Public relations and training on the implications of the

Falekaupule Act Human resources development to support the Falekaupule

Act Initial implementation of legislation to give increased

autonomy to island communities Ongoing implementation of Falekaupule Act

b. Deliver sustainable

financial resources to support enhanced island autonomy

Prepare and update summary island profiles (SIPs) and island development plans

Enact legislation and execute trust deed to establish an investment fund for outer island development, the Falekaupule Trust Fund (FTF)

Bring into force and implement the FTF Act Government to provide adequate financial support for

island development to complement the resources generated by the FTF

II. Fostering an

enabling environment for regional development

a. Provide an enabling macropolicy environment

Government maintains expenditure growth in line with sustainable revenue

ADB TA 2628-TUV Strengthening Economic and Financial Management is implemented satisfactorily

Government to increase allocation of resources to the national budget for island development

b. Enhance the

delivery of key public services for regional development

Provide high quality and cost-effective interisland shipping services

Provide high quality and cost-effective power services

c. Promote business development

Overseas income enhancement through increased maritime employment

Contracting out of Government services Dept repayment to private sector entities to be settled on

time Strengthen the business development advisory services on

islands Reorganize microfinance institutions Mobilize banking services for business lending

Source: ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Tuvalu for the Island Development Program. Manila. (Appendix 2) B. Program Outputs

11. Three project outputs were taken from the program Framework outlined in the Report and Recommendation of the President (RRP): (i) strengthening island communities’ capacity and capability for decentralized public and development administration and regional autonomy, (ii) enhancing key public sector services for regional development, and (iii) implementing initiatives to promote business development.

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1. Strengthening Island Community Capacity and Capability

12. Output 1.1. Organizational structure of the Ministry of Internal Affairs (MIA) and local councils revised by December 1999: The implementation of the new Falekaupule Act in 1999 instituted the restructured local councils, now called kaupules. The kaupules now work closely with the Falekaupule to manage all island affairs. The Ministry of Home Affairs and Rural Development (MHARD) has assumed responsibility for women, youth, and community affairs― as well as local government―to complement the reforms in island communities and to ensure that these stakeholders’ views are included in the use of the FTF. The Economic and Social Commission for Asia and the Pacific (ESCAP) Pacific Operations Centre reviewed the Ministry structure after the initial restructuring. The Government is awaiting the final report of the review, intending to implement a new structure for the 2003 budget year. 13. Output 1.2. Primers and manuals on the Falekaupule Act published and distributed to island leaders and communities by March 2000: The Government published the Falekaupule Act primer in July 1999 that included the legislation and detailed explanation of the intent of each section of the legislation. The primer was circulated to all island communities, and widely distributed throughout the public service. By November 2001, the primer had been translated into Tuvaluan and circulated to all island communities. 14. Output 1.3. At least three workshops for each council of elders staff by March 2000: The Government conducted a number of workshops on implementation of the Falekaupule Act, including workshops on local government administration, local government financial administration, and community mobilization (including island development planning).

2. Enhanced Key Public Sector Services for Regional Development

15. Output 2.1. Reliable interisland transportation. The average visit frequency doubled from 1 per month in 1999 to 2 per month in 2003: The frequency of inter-island shipping has increased substantially since the Government acquired a new inter-island vessel. From the Program’s beginning in 1999 to 2001, the frequency of field trips to the outer islands increased by 26%. In early 2002, the Government acquired a new interisland vessel, provided by Japanese overseas development assistance (ODA). The new vessel has increased the number of visits to the islands for both passengers and freight, especially the transport of catch from the community fishing centers on each island. But the exact increase has not yet been determined. 16. Output 2.2. Reliable rural electrification in the outer islands: its share of households with electricity (30% in 1999, 40% in 2001, and 50% by 2003): As of December 2000, the Government had installed diesel-generating capacity on all islands of Tuvalu. The service is usually rationed to peak periods of demand, as determined by each island community, to ensure that islands have sufficient diesel fuel. This has limited the requirement of transport of diesel fuel, which had been seen as a constraint to the Program. Improved shipping services have largely overcome the fuel constraint. Provision of electricity has significantly improved the well being of the island communities.

3. Implemented Business Development Promotion Initiatives

17. Output 3.1. Tuvalu Maritime School (TMS) graduates: 65 in 1999, 75 in 2001, and 100 by year 2003: TMS became the Tuvalu Maritime Training Institute (TMTI), with the school’s corporatization in 2000. Progress toward the targeted output of graduates has been slightly

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lower than expected. TMS graduates numbered 72 in 2001, up from 62 graduates in 2000 and 48 in 1999. Projections for 2003 have not yet been received, but TMTI hopes to increase its numbers to the target level. 18. Output 3.2. Community fishing centers in operation: from one center in 1998, to four in 1999, and eight in 2000: All community fishing centers had been opened and were operating by 2000, with the Government providing working capital. 19. Output 3.3. Share of microfinance to the outer islands: 5% in 1998, 10% in 2001, and 30% by 2003: The Tuvalu National Council of Women (TNCW) has extended its microcredit revolving fund to the outer islands with assistance from the New Zealand Agency for International Development (NZAID). The Development Bank of Tuvalu (DBT) has begun lending to the outer islands with high levels of utilization and good repayment rates. The kaupules on each island operate island development revolving funds (IDRFs) that provide small loans. Exact percentages are not available for the outer islands. C. Program Costs

20. Program costs are discussed in the Disbursement section. D. Disbursements

21. The loan was to be disbursed to the Government of Tuvalu in two tranches: $2.8 million and $1.2 million (Tables 2 and 3). The counterpart funds were to be deposited into the FTF. The Government would match these funds dollar-for-dollar.

Table 2: Tranching of the Island Development Program (IDP) Loan

Component As Planned Loan ($million)

Percentage Share (%)

First Tranche

2.8

70%

Second Tranche 1.2 30% Total 4.0 100.0

Source: Office of Pacific Operations, Asian Development Bank. 22. The first tranche of $2.8 million was released to the Borrower on 19 November 1999. The second tranche was released on 19 July 2001. ADB expected full disbursement of the loan by 30 November 2000, but the Government requested—and ADB approved—an extension of the loan closing date until 30 June 2001, because the Government needed additional time to establish the shipping corporation and improve the frequency of shipping services to the outer islands. The initial disbursement time frame was realistic, but confusion about the most appropriate form of corporatization for the shipping service caused delays.

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Table 3: Use of the Proceeds of the IDP Loan by December 2000

Component

As Planned Loan

($million)

Percentage Share

(%)

Released (US$)

Received (A$)

Date Released

First Tranche

2.8

70%

2,800,000.00

4,265,512.38

19 November 1999

Second Tranche 1.2 30% 1,171,691.84

2,229,827.71 19 July 2001

Total 4.0 100.0 3,971,691.84 6,495,340.09 Source: Controller’s Department, Asian Development Bank. E. Program Schedule

23. The Program schedule was on track except for the loan extension mentioned in paragraph 22. F. Implementation Arrangements

24. The name of the Executing Agency changed twice over the life of the loan. At the beginning, its name was the Ministry of Internal Affairs, Rural and Urban Development (MIARUD). It then changed to the Ministry of Local Government, Women and Youth (MLGWY). The name then changed to the Ministry of Home Affairs and Rural Development (MHARD). 25. Implementation of the IDP was impeded by the lack of staff, since key Ministry staff were overseas on long-term training for most of the Program period. Also, the Ministry lacked prestige, which made it difficult to attract and keep high-caliber staff. Nevertheless, the Program made significant progress. The recent return of graduates from overseas study has bolstered the Ministry. 26. During the implementation of the IDP, the Ministry assumed responsibilities for the Community Affairs Office, the Department of Women, and the Department of Youth. This development improved IDP’s ability to reach out to such groups, and spread its impact throughout the community. G. Conditions and Covenants

27. The Borrower has complied with all 20 of the covenants listed in the Program matrix (Appendixes 2 and 3). All covenants appeared appropriate, and within the Borrower’s capability to fulfill. 28. The tranche conditions were all complied with, although there were delays in meeting second tranche conditions related to shipping services. The delays were because the Government adopted a new method of corporatization that staff were initially unfamiliar with. 29. The first and second tranche conditions were addressed to the Program objectives, which were admirable and worthwhile goals. But those objectives were too broad. Some conditions were seen as not directly improving lives in the outer islands. The second tranche conditions, for example, included the need for the central government to introduce an output budget, amend government procedures for accounting and payment, and balance the budget.

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Other conditions regarding the corporatization of shipping services and the TMS were also worthwhile, but were largely beyond the control of the executing and implementing agencies. If implemented well, these objectives should benefit the island communities significantly. But the success of public corporations in Tuvalu has been limited, largely because of weak institutional capacity. H. Related Technical Assistance

30. The attached IDPI TA 3221-TUV supported the loan and the establishment of initial structures and processes for the IDP, specifically the FTF (Appendix 4). The TA was also important in the strengthening of institutional structures supporting the FTF and island development. Broad educational campaigns at the grassroots level were crucial to widespread understanding of the nature, purpose, and use of the FTF. Baseline data, to help measure the Program’s overall impact, were also obtained in 2001 through a participatory monitoring and evaluation (PME) survey. A follow-up survey, with strong emphasis on poverty, is planned for 2003. The TA will continue until June 2003. 31. The current assessment of the TA’s performance is satisfactory. No significant changes have been made to it. In 2002, the Government requested a contract variation to help conduct workshops to increase understanding of the FTF and resolve issues regarding fairness of its distributions. These issues seem to have been addressed satisfactorily, but it was agreed that the issue would be reviewed again in 2005. 32. A TA Completion Report will be prepared when the TA ends in mid-2003. I. Consultant Recruitment and Procurement

33. There were no significant disagreements between the Borrower and ADB, and no major problems in the selection and fielding of consultants. J. Performance of Consultants, Contractors, and Suppliers

34. The consultants performed as specified in their terms of reference. The attached IDP TA will continue until June 2003. Systems have been put in place to stabilize the FTF, but there are concerns about its long-term sustainability without an ongoing TA. These concerns stem from experience with the TTF. Success of the TTF was often attributed to external technical assistance over its 15-year span, especially the role of the TTF Advisory Committee (TTFAC). This assistance was from the governments of New Zealand, Australia, and the United Kingdom. Because of this experience, it is thought that continued support should be provided to the FTF, to assure its long-term success. It is hoped that NZAID will provide future technical assistance through its bilateral program. NZAID has indicated that it will contribute more funds to the FTF from its bilateral ODA program with Tuvalu. K. Performance of the Borrower and the Executing Agency

35. The Borrower had limited institutional capacity at the national and local levels. Capacity was limited in MHARD because many staff were overseas on long-term training, and the Ministry has historically had difficulty retaining qualified staff. This has limited the ability to provide extensive training. The return of trained staff in 2002 bolstered the Ministry and improved capacity substantially.

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36. Capacity at the local government level has been improved substantially by the national Government’s financial support for increased staffing. The local governments now have staff who are capable of competently managing island affairs. Workshops funded by UNDP and supported by the ADB TA have helped develop capacity in financial management and general administration. Despite this, capacity is still lacking on the islands as new systems are introduced. Logistical problems make the training of outer island staff complicated and expensive. Thus, there is some misunderstanding of the roles of local governments as the new system is implemented. The Ministry is addressing this problem through information campaigns. 37. The capacities to implement and increase understanding of the management of FTF proceeds have been increased significantly by recent workshops, conducted by the Ministry with TA assistance, in the capital and on all of the islands. 38. Overall, the performance of the Borrower and the Executing Agency has been highly satisfactory. L. Performance of the Asian Development Bank

39. Disbursements have been timely and responses to requests for funding satisfactory. ADB’s performance throughout the Program has been satisfactory. ADB and the Government always had a cordial and constructive relationship.

III. EVALUATION OF PERFORMANCE

A. Relevance

40. The IDP sought to improve the quantity and quality of resources available to help the island communities control their own development. The Program also sought to make a broad impact on the economy and to be instrumental in supporting private sector growth. The strategy was to promote economic growth and alleviate poverty by development of the outer islands, home to Tuvalu’s poorest and most vulnerable. 41. The establishment of the FTF and its initial distributions provided development capital for the island communities in line with FTF goals.3 This has allowed islands to implement their own community projects. Community education programs were conducted to increase understanding of the FTF, and training was conducted to help the outer island citizens manage their funds more effectively. Most of these funds were provided as the result of a recommendation made at the midterm review. Appendix 3 summarizes the FTF, its objectives, investments, and use. 42. The islands’ cash economies have expanded through the establishment of community fishing centers (CFCs) and upgrading of TMTI’s training capabilities, which resulted in more seafarers bringing cash back into the island economy. Internal DBT problems initially hampered the availability of credit for island communities, but credit has now increased. These actions are consistent with ADB’s poverty alleviation strategy, and Tuvalu’s country strategy, by providing greater economic opportunities for those living on the outer islands.

3 Recent instability of financial markets could result in lack of drawdowns from the FTF in the immediate future. The

long-term viability of the Fund, however, should not be affected.

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43. Overall, the design addressed the major IDP components. Although training and public relations were not adequately addressed in the original design, revisions arising from the midterm review allowed the use of TA resources for those activities. B. Achievement of Outputs and Purpose

44. The Program’s purpose was to increase economic development in the outer islands through three outputs:

(i) strengthening the capacity and capability of island communities, (ii) enhancing key public sector services for regional development, and (iii) implementing initiatives to promote business development.

45. All Program objectives were achieved to some extent (Section IIB). Implementation of the new Falekaupule Act and the FTF were the most tangible improvements, although the recent turbulence in financial markets probably means that it will be a few years before the full impact of FTF is felt. This also happened with the establishment of the Tuvalu Trust Fund in 1987. The additional training to handle these new responsibilities, and the increased wages, have attracted more skilled people to work in the island communities. 46. Key public sector services have also expanded. All island communities now have access to reticulated electricity. Shipping services for the island communities have clearly improved, especially with the arrival of a new interisland vessel. 47. Business development has also improved substantially. The establishment of community fishing centers in each island community now provides cash income for local fishermen and their families. Also, the increased number of TMTI graduates and planned improvements in TMTI facilities continue to generate substantial cash income for the availability of credit for the island communities. Access to microcredit is increasing; a number of islands are using FTF proceeds to expand the capital of their grassroots IDRFs. The IDRFs provide small loans for activities like agriculture, fishing, food preparation, and paying school fees. Serious internal troubles during the Program caused DBT to suspend lending for more than 2 years, but lending has begun again. DBT gives preference to fishing and agriculture activities on the outer islands, with minimum loans of $500. The interest rate for fisheries and agriculture are 8% annually; rates for all other loans are 10% (the rate is 13% at commercial banks). The repayment rates have been punctual. The TNCW is expanding its microcredit scheme to the outer islands, based on the success of the model piloted in Funafuti. The Island Women’s Organizations on each island have recently begun lending, only for projects that generate income. The maximum loan is $300, with a 5% interest rate. NZAID has provided A$5,000 as startup capital for each island. 48. The overall goal of economic development in the outer islands has been reached, to the extent that it can be observed over such a short period. The PME survey, conducted in 2001 with funds from the IDP TA, showed optimism about future prospects and economic development in island communities. Many people specifically expressed optimism that access to increased financial resources through the FTF would improve life on the islands. A follow-up survey in 2003 will monitor improvements and progress in economic and social well-being, with increased focus on poverty. Followup surveys are planned every 2 years to monitor IDP progress and other Government island development efforts.

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C. Preliminary Assessment of Sustainability

49. The sustainability of the Program will depend on several actions, including the provision of additional TA to help with FTF management. As mentioned before, New Zealand’s ODA program is expected to contribute more capital to the FTF, complemented with additional TA. In resolving the issue of distribution from the FTF, the Island Leaders Conference agreed to review the FTF Deed and the distribution formula in 2005. 50. There is also hope for recovery of the financial markets from their depressed state, which will begin to generate proceeds for FTF disbursements. This will mean long-term sustainability of the FTF, especially once a buffer account is established and reaches an agreed level. The buffer account, built up from FTF returns, will provide distributions in years when FTF proceeds are inadequate. 51. The Government will also need to continue financial support of the kaupules by maintaining, or preferably, expanding the recurrent grants system. Some within the Government feel, despite widespread education, that the FTF’s establishment will somehow allow the Government to withdraw recurrent kaupule support. This is despite the fact that a specific condition of FTF’s establishment was that proceeds would be used only for development, and that the Government would maintain its recurrent support. 52. Despite initial concerns, the electrification program through the Tuvalu Electricity Corporation has worked reasonably well, although long-term maintenance capacity will likely become a problem. The Government currently subsidizes the service, but the subsidy lacks transparency so its annual size is not clear. A shipping corporation has been established, but its institutional structure needs strengthening to make it sustainable. The shipping corporation still depends heavily on the Government for maintenance of its operations, but this is generally considered an essential public service. ADB is programming assistance to review and assess the viability of the public and other corporations in 2003. 53. The CFCs, which opened through the Fisheries Department on each island in 2000, provide an important source of local income. Catch is sold locally, or exported to the capital, Funafuti. The fishermen are paid a standard rate based on weight and fish species. The Government provides a small subsidy, but sales cover most CFC operational costs. 54. The Government had provided considerable subsidies to the outer islands in past years when revenue sources were strong. The TTF provided no assistance for the 2002 budget, and may not assist for the next 3 years, as the capital rebuilds after the recent financial market volatility. But the Consolidated Investment Fund (CIF), a reserve account controlled by the Government, will compensate by providing an equivalent amount, on a declining basis, over the period. Despite lower revenues, the Government plans to maintain these subsidies to improve island life and thus, minimize the rural-urban drift. But pressures on the Government to reexamine the value of these subsidies will increase if revenues are lower than expected, because the most important revenue sources are generated externally, and are beyond Government control. D. Environmental, Sociocultural, and Other Impacts

55. The Program had no significant environmental impacts, but it generated considerable sociocultural impacts owing to the island communities’ participation in the Program. Island communities were originally asked to contribute to the FTF to promote ownership. Instead, the

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contributions became a source of division because the distribution formula, including the distribution of capital, was perceived to favor the larger islands, and thus, was perceived to be influenced by politics. The situation initially caused hardships, because the islanders were asked to contribute and raise funds from meager resources. Competition among islands to raise funds worsened the burden on families. Placing a cap on island contributions largely resolved this issue. The initiative to revise the distribution formula was accomplished through workshops and the June 2002 Island Leaders Conference, funded by the IDPI TA.4 But this issue still has potential to cause future problems. 56. Individual FTF-funded projects have benefited the island communities in general. Appendix 4 summarizes some FTF projects. Most FTF projects will provide new services and facilities such as water cisterns, waste disposal, preschool classrooms and sanitary facilities. These projects, and the increased financial resources for the islands, have increased optimism for development in island communities.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

57. The logical framework related closely to IDP’s objective of economic development of the outer islands. But some tranche conditions did not relate closely to the overall objectives, including implementation of output budgeting and corporatization of the TMS and shipping services. The Program’s main focus was to establish the FTF, and to develop the capacity of island communities to govern themselves. Therefore, the tranche conditions could have been linked more closely to island development. 58. The IDP was implemented as intended. Its main objectives were achieved. All tranche conditions were fulfilled on time. The Program is considered successful. B. Lessons Learned

59. A number of important lessons were learned over the life of ISP. 60. Translation of crucial documents is essential when dealing with island communities. Budgets should be provided for translation, through loans or TA. Allowances should be made for delays associated with translation. The language problem can partly explain the disputes about distribution. The FTF Deed was written in English, without translation. This issue was resolved at the Island Leaders Conference, but it was agreed that it should be reviewed in 2005 after another 3 years of operation. 61. Falekaupule Trust Fund. Some in Government feel that the success of the Tuvalu Trust Fund was influenced by the TA that supported its corporate governance. This TA includes funding of the TTFAC and the Board members, including representatives of the governments of Australia, New Zealand, and the United Kingdom. The logical extension of this view is that TA and advice from external parties are essential to the long-term success of the FTF. Capacity constraints are significant in the microstates, so this has implications for ADB’s Pacific strategy to encourage the use of trust funds as a tool for development assistance. Long-term advice is needed to strengthen governance and maximize the likelihood of success in the use of trust funds. 4 ADB. 1999. Technical Assistance to Tuvalu for Island Development Program Implementation. Manila.

12

62. Counterpart Staff. The need for counterpart staff has often been identified as crucial for the success of projects. IDP was handicapped by a lack of staff in MHARD, the Executing Agency, because many staff were overseas for long-term training. Often, adequate transfer of skills was not possible because of the difficulty in identifying counterparts, and competing demands for their time. Complicating this problem was the Ministry’s ability to retain staff because of a perceived lack of prestige. These issues should be considered before initiating future projects, or stronger constraints should be placed on the Executing Agencies to ensure the availability of adequate counterpart staff. But it is recognized that every project will have factors beyond the control of its designers. 63. Tranche Conditions. Tranche conditions for fund release could be more tightly focused to address Program objectives. Conditions such as improving Government payment procedures, introduction of output budgeting, and corporatizing the maritime training school are not directly relevant to the loan’s objectives. Fewer and more verifiable conditions that are directly related to the loan’s objectives would bring more long-term benefits to the island communities. An example of such a condition is a requirement that the Government maintains its financial support to the local governments after introduction of the FTF. C. Recommendations

1. Program-Related Recommendations

64. ADB should consider providing TA to help the Government in reviewing the FTF Deed in its country strategy and program update for 2004–2006, and to follow up outcomes of the Island Leaders Conference. A program performance audit report (PPAR) is recommended for mid-2003.

2. General Recommendations

65. The TTF experience emphasizes that long-term sustainability of trust funds as a mechanism for development assistance should be considered, given the obvious capacity constraints in the Pacific microstates. Long-term technical assistance is critical to the success of trust funds. Donors are aware of this, and are likely to provide such assistance. 66. When the Executing Agency assigns counterpart staff, it should consider their capacity constraints, to ensure that counterparts can work full time to transfer skills effectively. 67. Tranche conditions should be fewer. The conditions should relate directly to the loan, and be objectively verifiable and measurable. The objectives should also be strictly enforced to ensure real changes that will achieve the Program’s objectives. Allowance could be made for changes that are beyond the Government’s control.

Appendix 1 13

CHRONOLOGY OF EVENTS Date Event 25 March 1998

TA 2849-TUV presents report on the establishment of a policy-based investment

fund for Tuvalu Loan Fact-Finding Mission Circulated draft RRP for interdepartmental comments Follow-up Fact-Finding Mission Circulated draft RRP for Management Review Meeting Management Review Meeting Loan Appraisal Mission Circulated draft RRP for LTACC Meeting LTACC Meeting

June 1999 Received Government’s development policy letter dated 4 June 1999 Government advised of start of formal loan negotiations Fax requesting Government confirmation of completion of loan negotiations Loan negotiations completed, RRP drafted, Loan Agreement negotiated, and

Policy Matrix transmitted to the Government President approved circulation of Board documents

13 July 1999 ADB approval 6 September 1999 Loan signing

Legal opinion from the Office of the Attorney General 19 November 1999 Loan effectivity

Received authorized signatories for loan withdrawals Received first tranche withdrawal application

22 November 1999 Release of first tranche Joint Program Review Mission Program Review Mission Draft progress report for release of the second tranche circulated for

interdepartmental comments President approved the progress report and second tranche release Request for Loan Extension OPO approved the extension of the loan closing to 30 June 2001 Government advised of loan closing extension Program Review Mission

13 June 2001 Second tranche (balance) progress report circulated for interdepartmental comments

26 June 2001 President approved circulation of the progress report to the Board for information 27 June 2001 Full second tranche progress report circulated to the Board for information 19 July 2001 Release of second tranche

Program closing (final disbursement) November 2001 Program Completion Review ADB = Asian Development Bank, LTACC = Loan and Technical Assistance Coordination Committee, OPO = Office of Pacific Operations (now Pacific Department), RRP = Report and Recommendation of the President, TA = technical assistance, TUV = Tuvalu.

Appendix 2 14

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Status of Compliance 1. The Borrower shall cause the Program to be carried out with due diligence and efficiency; and in conformity with sound administrative, financial, engineering, environmental, and economic practices. 2. In carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 of this Loan Agreement. 3. The Borrower shall make available, promptly and as needed, the funds, facilities, services, and other resources that are required, in addition to proceeds of the loan, to carry out the Program. 4. The Borrower shall ensure that the activities of its departments and agencies for carrying out the Program are conducted and coordinated in accordance with sound administrative policies and procedures. 5. The Borrower shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed from loan proceeds, and to record the Program’s progress. 6. The Borrower shall enable ADB to inspect any relevant records and documents referred to in paragraph (a) of this section. 7. The Borrower shall furnish, or cause to be furnished, to ADB all such reports and information that ADB reasonably requests concerning (i) the loan, expenditure of its proceeds, and maintenance of its services; (ii) goods financed from proceeds of the loan; (iii) the counterpart funds and their use; (iv) Program implementation, including meeting targets and implementing actions set out in the Policy Letter; (v) financial and economic conditions in the territory of the Borrower and the international balance-of-payments position of the Borrower; and (vi) other matters related to the loan.

Sec. 4.01 (a) Sec. 4.01 (b) Sec. 4.02 Sec. 4.03 Sec. 4.04 (a) Section 4.04 (b) Sec. 4.05 (a)

Complied. Complied. See Covenants 14-20. Complied. Complied. Complied. Complied. Complied.

Appendix 2 15

Covenant

Reference in Loan

Agreement

Status of Compliance 8. The Borrower shall furnish, or cause to be furnished, to ADB quarterly reports on how the Program was carried out, and on accomplishment of targets and implementation of actions established in the Policy Letter. Such reports will be submitted in such form and detail, and within the time periods that ADB reasonably requests, and shall indicate, among other things, progress made and problems encountered during the quarter reviewed, steps taken or proposed for remedy, and proposed activities and expected progress for the next quarter. 9. The Borrower shall prepare and furnish to ADB a report, in such form and detail as ADB requests, on the execution and initial operation of the Program, including its cost, the Borrower’s performance of its obligations under the Loan Agreement, and the accomplishment of the purposes of the loan. 10. The mutual intention of the Borrower and ADB is that no other external debt owed a creditor other than ADB shall have priority over the loan through a lien on the Borrower’s assets. The Borrower agrees that (i) unless ADB agrees otherwise, any lien established on any of the Borrower’s assets as security for an external debt will ipso facto equally and ratably secure the payment of the principal of, and service charge and any other charge on, the ADB loan; and (ii) the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect. 11. The provisions of paragraph (a) of this section shall not apply to (i) any lien created on property, at the time of purchase, solely as security for payment of its purchase price; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt that matures no longer than 1 year after its date. 12. The term “assets of the Borrower” as used in paragraph (a) of this section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of such political subdivision, including the National Bank of

Sec. 4.05(b) Sec. 4.05 (c) Sec. 4.06 (a) Sec. 4.06 (b) Sec. 4.06 (c)

Complied. Complied. Complied. Complied. Complied.

Appendix 2 16

Covenant

Reference in Loan

Agreement

Status of Compliance Tuvalu and any other institution performing the functions of the Borrower’s central bank. 13. The Borrower shall, within limits of the laws in its territories, make the foregoing undertaking effective for liens on the assets of its political subdivisions and their agencies. If the Borrower is unable within the limits of the law to make this undertaking effective, the Borrower shall give to ADB an equivalent lien that is satisfactory to ADB. 14. Before the effective date, the Borrower shall establish, in a manner satisfactory to ADB, a special account at the National Bank of Tuvalu for the specific purpose of depositing and using the counterpart funds. 15. The Borrower, whenever withdrawing proceeds from the loan account, shall promptly deposit into the special account the Australian dollar equivalent. 16. Unless ADB agrees otherwise, counterpart funds shall be used to meet expenditures incurred, pursuant to the provisions of paragraph 2, below. 17. Separate accounts and records in respect to the special account shall be maintained in accordance with sound accounting principles and shall be audited annually by independent auditors acceptable to ADB. Certified copies of such audited accounts and records shall be furnished to ADB promptly after preparation, but in any event not later than 6 months after the close of the fiscal year to which they relate, or not later than 6 months after the closing date of the loan account. 18. The Borrowers shall ensure that the counterpart funds are used solely to meet its obligations as a settlor of the Falekaupule Trust Fund. 19. Without limiting the generality of Section 4.05 of this Loan Agreement, the Borrower shall make available to ADB the following documents immediately after they have been laid before Parliament: (i) the annual report of the Trust; (ii) the annual accounts of the Trust; (iii) the auditor’s

Sec. 4.06 (d) Schedule 5, para. 1 (a) Schedule 5, para. 1 (b) Schedule 5, para. 1 (c) Schedule 5, para. 1 (d) Schedule 5, para. 2 Schedule 5, para. 3

Complied. Complied. Complied. Complied. Complied. Complied. Complied.

Appendix 2 17

Covenant

Reference in Loan

Agreement

Status of Compliance report of the Trust; and (iv) the annual report of the Trust Secretariat. 20. The Borrower shall ensure that no amendments are made to the Trust deed or its status, or to the legislation making financial provision concerning the Falekaupule Trust Fund without ADB’s prior knowledge and consent.

Schedule 5, para. 4

Complied.

18

ISLAND DEVELOPMENT PROGRAM POLICY MATRIX IN JULY 2002

Policy Area Strategy Measures to be Taken

Measurable Indicators/Targets

/Target Date Status as of July 2002

1. Decentralization and

enhancement of regional autonomy

a. Improve local

governance of island communities

Public relations and training on implications of the Falekaupule Act

• Primer and manuals on the

Falekaupule Act are published and in the hands of island leaders and the community

First tranche condition

Completed.

• Implementation task force tours to outer islands, and meetings in Funafuti


Completed.

• At least four workshops for community leaders on by-law formulation and administration of Falekaupule Act provisions

May 1999 Completed.

Human resourcesdevelopment in support of the Falekaupule Act

• At least eight workshops to train trainers of government officials in the implementation of the Falekaupule Act

December 1999 Partially completed. One workshop on effective legislation not yet held.

• Outer island extension officers meet 70% of expected performance outputs

March 2000 Ongoing.

• At least one workshop, and distribution of Falekaupule Act primer and manuals to the national public service


Completed.

• Revised organizational structure and terms of reference for staff of the Ministry of Rural Affairs, Rural and Urban


Completed. The ESCAP Pacific Operations Centre is preparing a new corporate plan and structure. There was a

18 Appendix 3



Target Date Status as of July 2002

Development (MIARUD)

delay in receiving the new report.

• MIARUD staff resources are increased by filling 80% of staff vacancies


Completed in 1999. Staffing levels have subsequently suffered because of the departure of staff for further studies.

• At least 60% of island council posts filled in each island

December 1999 Completed.

• Publication and distribution of instruction manuals for island council staff

December 1999 Completed. English copies distributed. Awaiting translation.

• At least three workshops for each island council staff on development planning, management, and budgeting

March 2000 Partially completed. Workshops on general administration and financial management completed.

Initial implementation of legislation that gives increased autonomy to island communities

• Falekaupule Act brought into force


Completed.

• Island councils members are elected on each island in accordance with provisions of Falekaupule Act


Completed.

Ongoing implementationof Falekaupule Act

• All relevant by-laws relating to local government are reviewed, and revised where necessary

March 2000 Completed.

Appendix 3 19

18




• Falekaupule Act is fully

implemented, including delegation to councils of elders of responsibility for making by-laws, with subsequent validation by the attorney general

Second tranche condition

Completed.

• Island councils are operating on each island


Completed.

b. Deliver sustainable financial resources to support enhanced island autonomy

Prepare and update summary island profiles (SIPs) and island development plans

• SIPs are completed for each island


Completed. Update awaiting census data. A followup PME survey will be used in new SIPs to be prepared in 2003.

• Island development plans are completed for each island, and reflected in the national development strategy

March 2000 Partially completed. Islands are working to update their draft island development programs.

• Project profiles are submitted to each falekaupule


Completed.

Enact legislation and execute trust deed to establish an investment fund for outer island development, the Falekaupule Trust Fund (FTF)

• Enactment of legislation to authorize and fund establishment of FTF

• Execution of trust deed

First tranche condition First tranche condition

Completed. Completed.

Implement the FTF Act • Island communities have pledged their initial contributions to the FTF


Completed.

20 Appendix 3

18




• Provisions for Government

contribution to FTF are in the 1999 budget


Completed.

• Identification of nominees for the FTF secretariat and board of trustees


Completed.

• Government makes second contribution to FTF according to agreed formula


Completed. The Government has released $2.1 million matching funds for the ADB second tranche. An additional amount of about $150,000 has been allocated in the 2002 budget to match the remainder of the second tranche, allowing for foregone interest.

Government to provide adequate financial support for island development to complement resources generated by the FTF

• Councils of elders revenue increases by, at least, the average expected FTF disbursement

• 1999 and 2000 transfers to

budgets of councils of elders at least match 1998 transfers to local government

Second tranche condition Ongoing

Completed. Completed.

• Government to provide interim grants for development spending by the councils of elders in the 1999 budget


Completed.

Appendix 3 21

18




II. Fostering an enabling

environment for regional development

a. Provide an

enabling macropolicy environment

Government maintains expenditure growth in line with sustainable revenue

• The 1999 recurrent revenues

(including average Tuvalu Trust Fund [TTF] earnings) match or exceed recurrent expenditures.


Completed.

• The 2000 recurrent revenues (including average TTF earnings) match or exceed recurrent expenditures.


Completed.

TA 2628-TUV:Strengthening Economic and Financial Management is implemented satisfactorily

• The 1999 budget uses an outputs format, with full allocation of costs up to 25% of outputs, and key performance indicators for benchmarking results.


Completed.

• The 2000 budget uses an outputs format, with full allocation of costs up to 50% of outputs, and key performance indicators. A systematic monitoring system is operational.


Completed.

b. Enhance the delivery of key public sector services for regional development

Government to increase resource allocation to the national budget for island development

• Annual public sector investment plan is prepared and updated

December 1999 Completed. Included within annual budget.

Provide good quality and cost-effective services for interisland shipping

• Frequency of voyages increases to an average of one sailing every 2 weeks

December 1999 Partially completed.

• Number of visits to the outer islands increases by an average of 25%


Completed.

22 Appendix 3

18




• Shipping Corporation is

established.


Completed.

• Annual subsidy to shipping operations reduced by 20%

December 1999 To be verified. Difficult to assess because the shipping operations are part of Government budget. Will be verified as part of corporatization process.

• Rural electrification program is formulated


Completed. Electrification of all islands now completed.

• Electricity supply increases by 30% on the outer islands

December 1999 Completed.

• Subsidy per kWh is reduced by 50%

December 1999 To be verified. Lack of financial statements and other information for the Tuvalu Electricity Corporation (TEC) makes this difficult to assess.

• Electricity reliability is increased by 15%, and consumer costs are reduced by 20% per kWh in outer islands

December 1999 To be verified. Lack of financial statements and other information for the TEC makes this difficult to assess.

c. Promote business development

Overseas income enhancement through increased maritime employment

• Tuvalu progressively meets International Maritime Organization (IMO) STCW95 training standards and conventions


Completed. Tuvalu admitted to the IMO STCW95 White List in December 2000.

Appendix 3 23

18




• Legislation for

corporatization of Tuvalu Maritime School finalized


Completed.

• Tuvalu Maritime Training Institute is established pursuant to statute


Completed.

• Complete retraining program for all current seafarers that require skills upgrading for continued employment on foreign ships

December 2000 Yet to be identified.

• Community Fishing Centers are operating on at least four islands


Completed.

• Community Fishing Centers are operating on the eight main islands


Completed.

Contracting out of Government services to continue

• Contracting out of public works is expanded to plumbing water, mechanics, and carpentry

May 2000 To be verified.

Debt repayment to private sector entities will be settled on time

• Code of accounting procedures and payment criteria are approved and in force


Completed.

• All domestic outstanding financial obligations incurred by the Government before the code became effective are progressively settled.

December 2000 Ongoing. Most obligations have been settled. Outstanding telephone bill with Government still unresolved as of June 2002.

24 Appendix 3

18




Strengthen advisory services for business development on outer islands

• At least 25% of annual

resources of the Business Advisory Unit are employed on the outer islands

December 1999

Yet to be determined.

Reorganize microfinanceinstitutions

• Reviews and their action plans have been completed for the following microfinance institutions: Development Bank of Tuvalu, National Bank of Tuvalu, and Island Development Revolving Fund)

December 1999 Underway.

• Microfinance is delivered to the outer islands in accordance with action plan

May 2000 Underway. The credit scheme of the Tuvalu National Trust for Women is being extended to the outer islands.

• Business lending facility in the outer islands is enhanced

December 1999 To be verified.

Appendix 3 25

26 Appendix 4

SUMMARY OF FALEKAUPULE TRUST FUND A. Background 1. The Deed establishing the Falekaupule Trust Fund (FTF) was signed in Funafuti, Tuvalu on 31 July 1999 at the Tausoa Lima Falekaupule by the late Hon. Ionatana Ionatana, then Prime Minister of Tuvalu, and representatives of each of the eight falekaupules. The FTF is governed by the provisions established in the Falekaupule Trust Fund Deed. The legislative framework for the FTF is outlined in the Falekaupule Act of 1999. 2. The Falekaupule Trust Fund Deed specifies the FTF purposes:

“The Falekaupule Trust Fund for the island communities of Tuvalu for the charitable purposes of:

(i) Assisting the acquisition and development of skills and self-reliance in the island communities through local training;

(ii) Enabling the communities to acquire, maintain and improve their assets and resources to further education and self-reliance;

(iii) Funding community projects that improve the living conditions of the communities; and

(iv) Increasing the ability to generate revenue within the communities, for their own good.”

3. The President of the Trust is the minister designated as responsible for island development. The falekaupules are Fund trustees. Each falekaupule appoints a representative, and possibly, an alternate representative, to attend meetings of the FTF Board of Trustees. B. Investment Objectives 4. The Fund’s investment objective is to maximize returns on medium-term investments, subject to constraints aimed at containing fluctuations in returns over shorter periods. Outperformance over shorter periods will be sought relative to the notional return on a benchmark portfolio designed to reflect the risk profile by which the assets were invested at the time. 5. The trustees have appointed three professional fund managers to manage the Trust assets in line with the FTF investment strategy. The trustees have appointed an investment adviser, Mercer Investment Consulting, to review the investment performance of the fund managers and report to the Trustees as requested. Following the end of the financial year,1 the FTF secretariat determines an amount available for distribution. The distribution amount shall not be greater than the redemption value of the FTF at the end of the financial year, minus the real value of the Trust Fund calculated against Tuvalu consumer price index. The value is adjusted for any contributions made to the Trust.

1 Originally 31 March, but recently changed to 30 September to better coincide with the financial year of

the kaupules (local government).

Appendix 4 27

6. Exposure to asset classes will be monitored, taking into account the underlying exposures in any pooled investment vehicles. The Trust Fund’s sector exposures will be maintained within the following ranges of strategic asset allocation:

Table A4.1: Asset Allocation of Falekaupule Trust Fund

Proposed Asset Class Benchmark

(%) Ranges

(%) Australian shares Overseas shares Total Shares

33 22 55

20 – 45 10 – 30 30 – 75

Direct property Listed property Total Property

2 8

10

0 – 5 0 – 15 0 – 15

Total Growth Assets 65 40 – 80 Australian fixed interest Australian indexed bonds Overseas fixed interest (hedged) Cash

20 0 5

10

10 – 30 0 – 5 0 – 15 5 – 30

Total Defensive Assets 35 20 – 60 Source: Government of Tuvalu. The appropriateness of this benchmark portfolio will be formally assessed at least once yearly, and constantly reviewed to reflect any fundamental changes in the investment environment, in the FTF’s investment constraints, and in the FTF’s investment policy. C. Investment Performance Monitoring 7. The principal goals of performance monitoring are to:

(i) assess the extent to which the Trust Fund's investment objectives are being achieved;

(ii) compare the performance of the Trust Fund's appointed managers against performance of other professional managers and market indices;

(iii) ascertain any weakness in the manager; and (iv) allow the Board to continually assess the manager’s ability to meet the Trust

Fund's objectives. Professional consulting advice will be sought from time to time on the performance and continued suitability of externally appointed fund managers, the adequacy of Trust Fund returns, and the continuing suitability of the investment policy.

28 Appendix 4

D. Investment Performance 8. The FTF investment consultant, Mercer Investment Consultant, recommended investments to coincide with the investment strategy and balance investment styles (Table A4.2).2 The FTF was invested on 4 February 2000 in three pooled funds in Australia.

TableA4. 2: Investment of the FTF as at 4 February 2002

Manager Fund Amount ($) Trust Fund (excluding Reserve Account)

(%) Credit Suisse Capital Growth Salomon Smith Barney Diversified Westpac Manager Cash No 2

5,401,285.98 5,401,285.98

450,041.58

48 48 4

Total 11,252,613.54 100 Source: Government of Tuvalu. 9. Table A4.3 shows investment returns for the period ending 30 June 2002.

Table A4.3: Investment Returns of the FTF (as at 30 June 2002)

Fund/Benchmark Return (%) 3 Months

Return (%)

1 year

Return (% pa)

2 years

Return (% p.a.)

Since Inception

FTF a -4.0 -4.4 0.4 2.6 Fund Benchmark b c -3.9 -4.4 0.2 2.3 Tuvalu CPI -0.5 3.5 1.5 3.1

Australian CPI 0.7 2.8 4.4 4.2

a After fees. b As set out in the FTF Investment Policy Statement. c The relevant market return for each sector is weighted by that sector’s allocation of the benchmark, and adjusted for fees of 0.7% yearly. Source: Government of Tuvalu.

10. By 30 June 2002, the Fund had grown to just more than $16 million, from a combination of additional contributions to the FTF from the second tranche ($2.2 million), Government matching contributions ($2.1 million), and island contributions ($0.7 million).

2 Mercer Investment Consulting was also investment consultant for the Tuvalu Trust Fund (TTF) at this

time. The TTF investment consultant has recently changed through a tender process.

Appendix 4 29

Table A4.4: Value of the FTF as at 30 June 2002

Manager/ Fund 30 June 2002 Targeta Manager Mix

$ (%) (%) CS b 7,289,485.72 45.4 48.0 Citigroup c 8,059,546.10 50.2 48.0 WPC d 711,375.62 4.4 4.0 Total 16,060,407.44 100.0 100.0

a The target manager mix as recommended by Mercer and adopted at the December 1999 Board meeting.

b CS = Credit Suisse Capital Growth Fund. c Citigroup = Citigroup Diversified Trust, formerly Salomon Smith Barney d WBC = Westpac Managed Cash No 2 Fund Source: Government of Tuvalu.

Table A4.3 shows that the FTF has performed poorly in the past 12 months, given the volatility of international financial markets. The FTF lost further value with the deterioration of financial markets until 30 September 2002. But given its asset allocation, it is hoped that FTF will recover much of the lost value when financial markets rebound. (The Tuvalu Trust Fund had a similar problem upon investment in mid-1987―just before the October 1987 stock market crash.) But over 15 years, the TTF returns from the Fund have exceeded expected real returns of 5% per annum by 2%. E. Distributions 11. The Government provided a grant of $500,000 in 1999, and another $500,000 in 2000, in the absence of distribution from the FTF, which had only recently been invested. Those grants were split evenly among the island communities; each island received $125,000 over 2 years. 12. At its June 2001 meeting, the Board calculated that, as of 31 March 2001, the FTF had $813,579 available for distribution to the outer islands. The Board decided to distribute $613,579 to the island communities according to the distribution formula, leaving $25,000 for each island in a buffer account. Each falekaupule has an equal share in the resulting buffer account of $200,000. The FTF secretariat distributed $613,579 among the islands (“Distribution minus $25,000” in Table A4.5).

Table A4.5: Distribution Among the Falekaupule Falekaupule Share

(%)Distribution Total

($)Distribution minus $25,000

(set aside in buffer account)Nanumea 9.96 81,057 56,056.52 Nanumaga 9.03 73,461 48,461.27 Niutao 15.05 122,438 97,437.69 Nui 7.56 61,494 36,494.01 Vaitupu 18.81 153,030 128,030.34 Nukufetau 12.47 101,440 76,439.76 Funafuti 19.57 159,185 134,185.09 Nukulaelae 7.56 61,474 36,473.83 Total 100.00 813,579 613,578.51

Source: Government of Tuvalu.

30 Appendix 4

13. A reserve account was established with Westpac Cash Management with an initial deposit of $200,000 that earns a competitive cash rate. Because the FTF’s performance was poor in 2002, the reserve fund was distributed to help island communities fund their community projects. F. Distribution Formula 14. Calculation of the distribution among the islands was based on contributions from each island, and a Government incentive contribution that matched initial contributions. Through this formula, funds were distributed according to the ability of islands to raise capital, rather than according to development needs. There was a perception among residents of the smaller islands that the distribution had been unfairly politicized to benefit the larger, more powerful islands. If left unchanged, the larger islands would eventually dominate the fund, resulting in competition among islands to raise capital rather than to develop community assets. The concern was so widespread that a commission of inquiry was held to determine and lay out the facts about the initial raising of funds. 15. The initial distribution was by the original formula. Then the trustees agreed to try to resolve its controversial issues. A change in the formula required a change of the FTF Deed of Establishment, which requires unanimous agreement of the islands. After a series of island workshops and consultations, followed by an island leaders conference in June 2002, the islands agreed to changes to the FTF Deed. The formula remains the same, but the islands agreed to cap contributions to even out FTF distributions. This will benefit the small islands. Also, the Government agreed to match all islands’ contributions to a ceiling of $260,000―the highest initial contribution received from an island on inception of the Fund. The formula will be reviewed again in 2005. G. Use of the Funds 16. Each of Tuvalu’s eight islands has its own kaupule (Local Government) that appropriates the FTF proceeds as development revenues. Almost all of the money has gone to worthwhile projects that benefit the community. But some projects might not be considered to benefit the community as a whole, as required by the FTF Deed. There has also been some reluctance of islands to spend all the FTF resources, because the distribution formula, before the recent changes to the FTF Deed, encouraged the reinvestment of funds in the FTF. Also, there is still reluctance to spend the FTF resources that are not considered urgent. Instead, donor funding is sought. The FTF Board should increase its monitoring to ensure that the money is being used wisely. Table A4.6 lists a few projects that were funded from the FTF.

Appendix 4 31

Table A4.6: Examples of Projects Funded by the FTF Proceeds

Project Cost ($) Island Conservation area Eco-tourism boat 10,700 Funafuti Funafuti Market Renovation 10,000 Funafuti Matagi Gali Bar upgrading 20,828 Funafuti Water Cisterns 40,000 Nukufetau Electric water pump 2,500 Nukufetau Classroom Improvement 5,000 Nukufetau Contribution to IDRF 4,000 Nukulaelae Flush Toilets for Dwelling Houses 20,000 Nukulaelae Garbage Bins 10,000 Nukulaelae Chapel Maintenance 40,000 Nanumaga Patient and Maternity Wards 25,000 Nanumaga Multipurpose Court Improvement 10,000 Nanumaga Pastor’s House 30,000 Niutao Bathing Ponds Upgrading 5,520 Niutao Road Maintenance 29,000 Niutao Chicken Pens 10,000 Vaitupu Seawall Maintenance 5,000 Vaitupu Pig Pens 10,000 Vaitupu

3 44,000 Nanumea Hospital wards renovation 5,000 Nanumea Fencing of Kaupule 3,000 Nanumea Community pig pens 41,337 Nui Chainsaws 4,559 Nui

Civil servant houses

17. The FTF Board is developing a “negative list” of expenditures that cannot be made with Fund proceeds because they do not reflect the FTF objectives. This will restrict spending on consumption, secular activities, and any activities not in line with the purposes specified in the FTF Deed. The restrictions will help ensure that the benefits of the Fund are open to all in the community.

3 Kaupules are required to provide housing for civil servants of the central government, such as teachers,

nurses, and policemen, who are posted to the outer islands.

evaluation of the tuvalu islands development program – economic research and policy division...

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