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Progress Report on Tranche Release

This consultant’s report does not necessarily reflect the views of ADB or the government concerned. [For PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed project’s design.]

Program Number: 45032 Grant Number: 0300 June 2014

Nauru: Public Financial Management Reform Program (Second Tranche)

This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 6 June 2014)

Currency Unit – Australian Dollar (A$)

A$1.00 = $0.9340 $1.00 = A$1.0706

ABBREVIATIONS ADB – Asian Development Bank CEDAW – Convention on the Elimination of All Forms of Discrimination

against Women CEO – chief executive officer NUC – Nauru Utilities Corporation RPC – Australian Regional Processing Centre for Asylum Seekers SOE – state-owned enterprise

NOTES

(i) In this report, “$” refers to US dollars unless otherwise stated. (ii) The fiscal year (FY) of the government ends on 30 June. “FY” before a

calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June 2008.

Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Regional Director A. Iffland, Pacific Liaison and Coordination Office, PARD Team leader M. Lucich, Senior Economics Officer, PARD Team members M. de Villa, Associate Project Analyst, PARD J. Ghimire, Counsel, Office of the General Counsel

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

I. INTRODUCTION 1

II. RECENT DEVELOPMENTS AND PROGRAM IMPLICATIONS 1

III. STATUS OF SECOND TRANCHE RELEASE CONDITIONS 2

A. Summary of Compliance with Policy Conditions 2 B. Progress on Second Tranche Release Conditions 2

IV. MAINTENANCE OF TRANCHE 1 CONDITIONS AND COVENANTS 6

V. CONCLUSION 7

VI. THE PRESIDENT’S DECISION 7

APPENDIXES

1. Status of Compliance with Second Tranche Release Conditions 2. Continued Compliance with First Tranche Conditions

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I. INTRODUCTION

1. On 9 August 2012, the Board of Directors of the Asian Development Bank (ADB) approved a grant of $4 million from ADB’s special funds resources to Nauru for the Public Financial Management Reform Program.1 These funds were to be disbursed in two tranches of $2 million each. The program has three outputs: (i) stronger public financial management, (ii) more rigorous corporate governance and economic performance of selected state-owned enterprises (SOEs), and (iii) a comprehensive legal and policy framework for equitable access to social services. The grant agreement was signed on 14 September 2012. The first tranche of $2 million was disbursed to the government on 28 September 2012 following satisfaction of the first tranche conditions and upon grant effectiveness on 27 September 2012. 2. This progress report details achievements supporting compliance with the conditions for release of the second and final tranche of $2 million.

II. RECENT DEVELOPMENTS AND PROGRAM IMPLICATIONS

3. In the 21 months since program approval, Nauru has experienced a number of political and economic shocks. Parliamentary elections were held in June 2013. These resulted in the former opposition faction gaining power. The Parliament elected Baron Waqa as President by a margin of 15 to 4. The new government remains committed to the National Sustainable Development Strategy 2005–20252 and the economic reforms under the program grant. 4. After closing in 2008, the Australian Regional Processing Centre for Asylum Seekers (RPC) reopened in September 2012. On 19 July 2013, a riot and fire broke out at the RPC, resulting in over $60 million in damage. The RPC facilities were subsequently rebuilt. The reopening of the RPC provides Nauru a major economic boost, but it is also placing stresses on services delivery and distorting the local labor market. The RPC provides substantial job creation in Nauru, employing 600 Nauruans as of 1 March 2014. There also has been job growth in other parts of the economy. Eigigu Holding Company, a large SOE, and Central Meridian, the largest local construction firm, report a recent quadrupling and tripling of staff, respectively. Nauru’s labor market is likely at, or approaching, full employment. If the RPC reaches capacity of 3,200 transferees, the Australian government estimates a demand for an additional 1,000 local staff. 5. Official estimates show that the economy grew by 4.9% in FY2013, and ADB forecasts growth of 10% for FY2014. The economic boost from the RPC is being partly offset by lower phosphate exports. After peaking at 519,000 tons in 2012, phosphate production has declined to around 400,000 tons per annum. 6. Nauru’s inflation turned positive in FY2013, as the consumer price index grew by 0.5%. This follows a number of years of deflation due to appreciation of the Australian dollar, which serves as Nauru’s currency. Prices for alcohol and tobacco rose by 47% from January 2013 to January 2014, but this was offset by decline in prices for food (50% of the consumer price index basket), clothing, housing, household operations, transport and communications, and miscellaneous items. Overall, consumer prices rose by 4.9% from January 2013 to January 2014.

1 ADB. 2012. Report and Recommendation of the President on the Proposed Asian Development Fund Grant to

Nauru for the Public Financial Management Reform Program. Manila. 2 Republic of Nauru. 2009. National Sustainable Development Strategy 2005–2025 (as revised 2009). Nauru.

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7. Government expenditure has grown considerably in recent years, rising from A$57.9 million in FY2013 to a planned A$96 million in FY2014. This has been made possible by large increases in RPC-related revenues and, to a lesser extent, strong growth in fisheries license revenues. It appears likely that in FY2014, revenues (A$93.9 million) will be slightly below forecast (A$99 million). Due to government spending being slower than anticipated, however, a surplus of A$10 million is expected. Capacity constraints limit the extent of effective fiscal expansion. 8. A key risk is that the ongoing revenue gains are supporting a level of recurrent expenditure which may be unaffordable when RPC revenues slow. Continued spending increases will also contribute to emerging inflationary pressures in Nauru. ADB has recommended that the government direct the additional revenues to a proposed new trust fund currently under discussion with development partners. Paying off debt and spending on much-needed infrastructure improvements to the port and the technical and vocational education and training learning village would also reduce the growth in recurrent expenditure. 9. The political changes and the impact of the RPC’s reopening have proven to be major challenges to program implementation. As a result of political developments, there have been substantial changes in government counterparts. The secretaries of the ministries of finance, health, commerce, home affairs, and justice, as well as two deputy secretaries of finance and all parliamentary counsel resigned or were dismissed. Consultation by development partners has been delayed by a lack of counterparts and the almost complete unavailability of accommodation on the island. Despite these challenges, the government has demonstrated a commitment to program implementation that has seen the program conditions satisfied prior to the original program closing date of September 2014.

III. STATUS OF SECOND TRANCHE RELEASE CONDITIONS

A. Summary of Compliance with Policy Conditions

10. The second tranche has seven conditions in three output areas: (i) stronger public financial management, (ii) more rigorous corporate governance and economic performance of selected SOEs, and (iii) a comprehensive legal and policy framework for equitable access to social services. The government has provided compliance documentation for all seven second tranche release conditions (Appendix 1). The documentation provided shows that the government has complied with all seven second tranche release conditions.

B. Progress on Second Tranche Release Conditions

1. Output 1: Stronger Public Financial Management

11. The program aims to rectify weaknesses specified in the 2011 Public Expenditure and Financial Accountability assessment for Nauru.3 Policy actions under output 1 are in accordance with the government’s public financial management action plan and include (i) revenue management, (ii) budget and planning processes, and (iii) overall financial and official development assistance management. 12. Policy condition 1.1.1, Adoption of a taxation policy framework that broadens Nauru’s tax base, was complied with.

3 ADB. 2011. Nauru: Public Financial Management Performance Report. Consultant’s report. Manila (TA 6507-

REG).

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13. On 21 December 2012, a ministerial statement announced the beginning of preparations of a government white paper on revenue policy development. This white paper would examine options for business taxes on private businesses and SOEs. The government sought external assistance from the Pacific Financial Technical Assistance Centre, which fielded a mission to Nauru in October 2013. Following consultations with government, civil society, and the private sector, the Centre produced a report outlining a proposed taxation framework and a second report outlining the proposed revenue administration framework. 14. The tax framework proposes a standard business tax based on taxable profits for larger private enterprises and SOEs. A simple, lump-sum presumptive tax (such as a license fee) will apply for small business. Further development of the Nauru Revenue Office, established under tranche 1, will be critical to implementing the reforms. On 18 February 2014, the Cabinet approved the tax reform concepts outlined in the report of the Pacific Financial Technical Assistance Centre, as well as the indicative organizational structure for the Nauru Customs and Revenue Office outlined in the second report. 15. Policy condition 1.1.2, Implementation of the new procurement policy and guidelines by contracting a procurement agency, was complied with. 16. In March 2012, the Government of Nauru began a series of measures designed to improve the quality of public procurement in Nauru and to reduce procurement costs. This reform has three elements: (i) introduction of a legal regulatory framework for public procurement, (ii) development of a Government of Nauru Public Procurement Manual, and (iii) appointment of an international procurement agent to assist in implementing public procurement in Nauru. A procurement agent will handle procurement for items exceeding A$5,000 in value. 17. The legal framework provides the legislative basis for the government’s program of procurement reform. It comprises the Public Finance (Control & Management) (Amendment) Act 2012, which was enacted unanimously by Parliament on 6 November 2012, and the Public Finance (Control & Management) Regulations 2013 of 24 January. A third part of the legislative framework is the Public Procurement Manual that was approved by the Cabinet on 29 June 2013. 18. Following an international tender process, the government signed a contract in May 2013 appointing the joint venture of Charles Kendall & Partners Ltd. from the United Kingdom and Project Procure Pty. Ltd. from Australia as the international procurement agent. The procurement agent’s resident manager arrived in Nauru on 1 July 2013 and has started handling procurement for the government, including large shipments of petroleum. 19. Policy condition 1.1.3, Agreement reached on debt settlement for Bank of Nauru liquidation, was complied with. 20. In 2011, Nauru engaged Deloitte Insolvency Partner, Neil Cussen, funded by Australian Agency for International Development, to commence Bank of Nauru’s liquidation. The liquidator presented its final report in August 2013, which was approved by Cabinet in the same month. The liquidator proposed a debt settlement which would see 80% of the 3,500 mainly small deposit holders paid out over the next 3–5 years. The principal source of the payments is the recovery of a $14 million dollar loan from the SOE, Republic of Nauru Phosphate Corporation. This would bring the liquidator’s role to completion by the end of 2014, with the government taking over the final payout. The first payment to deposit holders was made in February 2014.

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21. Final resolution of the Bank of Nauru liquidation would bring a number of benefits to the country. Guarantees to those deposit holders constitute the bulk of the government’s internal debt. Resolution of the liquidation will also facilitate reintroduction of banking services to the island. In 2013, ADB supported the government through regional technical assistance in preparing an information memorandum inviting financial institutions to establish operations on the island. 4 Three banks expressed interest in response to the memorandum, and the government selected a regional Australian bank, Bendigo and Adelaide Bank, as its preferred option.

2. Output 2: More Rigorous Corporate Governance and Economic Performance of Selected SOEs

22. The program supports the government’s effort to improve the corporate governance and performance of two key SOEs: Nauru Utilities Corporation (NUC) and the Republic of Nauru Phosphate Corporation. The program supports the corporatization and commercialization of NUC to improve its corporate governance and economic performance. The program also addresses the fact that women have generally been underrepresented on the boards of SOEs providing essential services and generating much of the country’s income. 23. Policy condition 2.1.1, Performance-based management system for Nauru Utilities Corporation, was complied with. 24. With assistance from the Government of Australia and ADB technical assistance,5 a new chief executive officer (CEO) was appointed in June 2012 for NUC on a performance-based contract. This contract included key performance indicators and targets requiring development of (i) a business plan and a management reporting system within the 4-month probationary period, and (ii) a performance management system for other utilities staff and a training plan within 9 months. The contract provided for a review within 9 months of commencement to allow agreement on performance goals for the remainder of FY2013. These agreed key performance indicators and targets form the basis for annual reviews to determine the CEO’s performance bonus. The first performance review under this contract was conducted in March 2013. 25. The current CEO’s performance-based contract is based on process indicators, as data was not available for a comprehensive set of service quality indicators. The Pacific Region Infrastructure Facility has subsequently completed a power and water benchmarking exercise for NUC, and these benchmarks should be incorporated in future terms of reference and performance indicators for NUC management.6 26. Policy condition 2.4.1, Cabinet approves appointment of at least 1 woman to at least 3 boards of state-owned enterprises, was complied with. 27. Following the elections on 6 June 2013, the government made new appointments to all the SOE boards. There are now women on the boards of Eigigu Holdings, Our Airline, Nauru Rehabilitation Corporation, Nauru Phosphate Royalties Trust, and Republic of Nauru Phosphate Corporation, as well as on the advisory committee of NUC. These entities constitute the majority of SOEs in Nauru, especially inasmuch as Eigigu Holdings acts as a holding company for a

4 ADB. 2008. Regional Technical Assistance for Pacific Private Sector Development Initiative Phase 2. Manila.

5 ADB. 2011. Regulatory and Governance Reform for Improving Water and Electricity Supply in Nauru. Manila.

6 ADB. 2013. Regional Technical Assistance for Establishment of the Pacific Region Infrastructure Facility

Coordination Office. Manila.

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number of smaller SOEs (e.g., the Menen Hotel and the newly reopened Eigigu Supermarket). Two women are on the boards of Eigigu Holdings and Nauru Phosphate Royalties Trust.

3. Output 3: Enhanced Legal and Policy Framework for Equitable Social Service Delivery

28. Under tranche 1, Nauru ratified the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) in June 2011. For tranche 2, the government has prepared a legal review for CEDAW compliance. A national women’s policy and CEDAW implementation plan of action have also been prepared for tranche 2 by the Ministry of Home Affairs. 29. Policy condition 3.4.1, Legal framework review for CEDAW compliance completed, was complied with. 30. Prior to its disbandment in July 2013, the Nauru Office of Parliamentary Counsel prepared a Legislative Review on Compliance with CEDAW. In 2007, the United Nations Development Fund for Women and the United Nations Development Program published Translating CEDAW into Law.7 This reported on a study assessing the degree to which the laws of nine Pacific countries (Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tuvalu, and Vanuatu) comply with CEDAW. Each of these countries is a party to CEDAW. The study used a system of indicators to evaluate the degree of compliance. The 113 indicators were based on the text of each of the articles of CEDAW, as well as other sources. The indicators are a useful means of measuring progress and identifying areas of legislation that require attention for compliance with CEDAW. The Nauru legislative review uses the first 33 indicators, based on Articles 1 and 2 of the Convention, and analyzes how Nauru fares against these indicators. It then uses selected other indicators for some of the remaining Articles. 31. The review found that Nauru has a number of laws that discriminate against women, most notably: Adoption of Children Act 1965; Births, Deaths and Marriages Act 1957; and Criminal Code 1899. Further, while the Constitution of Nauru does not discriminate against women, the protection against discrimination that is ostensibly offered by Article 3 is ineffective and a more robust antidiscrimination provision would be required for full compliance with CEDAW. This might be achieved through antidiscrimination legislation and not necessarily require a constitutional amendment. 32. Work is underway to replace the Queensland Criminal Code of 1899, currently used by Nauru, with a new Nauru Criminal Code (likely to be called the “Crimes Act”). The Australian Attorney General’s Department (Pacific Section) has assisted the Nauru government in drafting a new Code for Nauru, in three separate parts. The first part, concerning offenses against the person, is most relevant in terms of CEDAW compliance. All of the existing gender distinctions and discriminatory provisions will be removed in the new Code. Adoption of the new Code would be a significant step toward bringing Nauru into compliance with its CEDAW obligations. 33. Policy condition 3.4.2, Nauru to adopt National Implementation Plan for United Nations CEDAW, was complied with.

7 V. Jivan and C. Forster. 2007. Translating CEDAW into Law: CEDAW Legislative Compliance in Nine Pacific Island

Countries. UNDP Pacific Centre and UN Women Multi-country Office, Suva.

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34. While the legal framework review is complete, progress on developing and approving the national implementation plan for CEDAW was slower than anticipated. Promised support from the Secretariat of the Pacific Community was mobilized more slowly than expected, and the initial gender stocktaking mission was delayed from the first quarter of 2013 to the first quarter of 2014. ADB responded by mobilizing resources under the Private Sector Development Initiative to assist the Department of Women’s Affairs in preparing the CEDAW implementation plan.8 The plan, for implementation over the next 5 years, was adopted by the Ministry of Home Affairs as part of the consideration of the national women’s policy. 35. Policy condition 3.4.3, Preparation and adoption of Nauru National Women’s Policy, as prepared by the Ministry of Home Affairs, was complied with. 36. Nauru previously had no national women’s policy embracing all such areas as health, education, livelihoods, political representation, and justice. Progress in developing the policy was slow, as assistance that was to have been provided by the Secretariat of the Pacific Community was not forthcoming. To maintain momentum on this issue, the Government of Nauru requested ADB’s assistance in preparing the national women’s policy. 37. A gender policy expert was mobilized under ADB regional technical assistance to provide advice and guidance to the Ministry of Home Affairs in developing a national women’s policy and to assist the Ministry in drafting the policy.9 The assignment included (i) research to assess the current situations of women and men in such various areas of life in Nauru as education, health, economic activities, and political representation; (ii) conduct consultations with government ministries, business, civil society, and community groups to qualitatively assess gender situations; (iii) assist the ministry in determining priority areas and policy priorities to enhance gender equity in the national women’s policy; and (iv) support the Ministry to develop a national women’s policy and obtain approval by the Cabinet.

38. A consultative workshop, attended by development partners, civil society, the private sector, and government representatives, was held in October 2013. Based on the results of the workshop, a discussion paper prepared earlier, and a subsequent workshop held in March 2014, the final policy was completed and approved by Cabinet in early April 2014. The National Women’s Policy was based on the Nauru Women’s National Plan of Action 1998–2004, subsequently revised 2005–2015 and is consistent with the National Sustainable Development Strategy 2005–2025, revised 2009.

IV. MAINTENANCE OF TRANCHE 1 CONDITIONS AND COVENANTS

39. The first tranche release conditions comprised five policy actions together covering all areas of the program. Policy action 3.1 (Education Act that requires compulsory primary and secondary education up to the age of 18 passed) was maintained and all legislation remains in force. Similarly, policy action 2.1 (Legislation for corporatization and legal separation of Nauru Utilities Authority passed) was maintained and all legislation remains in force. The remaining three policy actions in tranche 1 are built upon and reinforced by related policy actions in tranche 2. In these cases, achievement of tranche 2 actions demonstrates maintenance of tranche 1 policy actions (see Appendix 2). The seven non-tranche release conditions are also maintained.

8

Gender consultant to Pacific Private Sector Development Initiative provided support under the Gender Mainstreaming component of the TA (ADB .2013. Pacific Private Sector Development Initiative, Phase III. Manila)

9 ADB. 2010. Promoting Evidence-Based Policy Making for Gender Equity in the Pacific. Manila.

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V. CONCLUSION

40. It has been a challenge for Nauru to put in place the policy conditions required for release of the second tranche. The reopening of the RPC, the June 2013 election and subsequent changes in government personnel, as well as the riots in July 2013 all presented challenges to program continuity. Some of the conditions—such as the development of a national women’s policy or the adoption of a National Implementation Plan for United Nations CEDAW—proved particularly challenging. Nonetheless, the government has demonstrated its commitment to the program by implementing the policy actions set out in the program.

VI. THE PRESIDENT’S DECISION

41. In view of the progress made in the implementation of the Public Financial Management Reform Program, as evidenced by the compliance with seven second tranche release conditions, the President is satisfied with the overall implementation of the Public Financial Management Reform Program, and that the necessary conditions for the release of the second tranche of the Public Financial Management Reform Program have now been fulfilled. In accordance with the established procedure, the President will authorize the release of the second tranche in the amount of $2,000,000. The authorization shall be effective not less than 10 working days after the date of circulation of this progress report to ADB’s Board of Directors.

8 Appendix 1

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Ap

pe

ndix

4

STATUS OF COMPLIANCE WITH SECOND TRANCHE RELEASE CONDITIONS

Status Policy Actions for 2nd Tranche Means of Verification and/or

Supporting Documents

Completed 1.1.1 Adoption of a taxation policy framework that broadens Nauru’s tax base

Taxation Policy Framework Report

Cabinet endorsement of Taxation Policy Framework Report

Completed

1.1.2 Implementation of the new procurement policy and guidelines by contracting a procurement agency

Confirmation letter from Permanent Secretary of Finance

Copy of circular or press release announcing appointment of procurement agent

Completed 1.1.3 Agreement reached on debt settlement for Bank of Nauru liquidation


Report from the liquidator (Deloitte)

Completed 2.1.1 Performance-based management system for Nauru Utilities Corporation


Copy of performance-based contract for chief executive officer

Completed 2.4.1 Cabinet approves appointment of at least 1 woman to at least 3 boards of state-owned enterprises

Letter from Permanent Secretary of Finance

Copy of Gazette notice or press release announcing women’s appointments to boards

Completed 3.4.1 Legal framework review for CEDAW compliance completed

Copy of the completed review report

Completed 3.4.2 Nauru to adopt National Implementation Plan for United Nations CEDAW

National Implementation Plan for CEDAW

Email or letter from Ministry of Home Affairs confirming adoption of National Implementation Plan for United Nations CEDAW

Completed 3.4.3 Preparation and adoption of Nauru National Women’s Policy, as prepared by the Ministry of Home Affairs

Nauru National Women’s Policy

Cabinet decision

CEDAW = Convention on the Elimination of All Forms of Discrimination against Women. Sources: Asian Development Bank and Nauru Government.

Appendix 2 9


Ap

pe

ndix

4

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CONTINUED COMPLIANCE WITH FIRST TRANCHE RELEASE CONDITIONS

Policy Actions for 1st Tranche Status

Commencement of the financial management information system’s operation

Financial management information system remains in use as confirmed by Program Monitoring and Advisory Group

1 Report

Establishment of a revenue office with dedicated Deputy Secretary (tranche condition)

Achievement of tranche 2 condition demonstrates maintenance of tranche 1 condition (paragraphs 15–16)

Adoption of the Nauru Economic Infrastructure Strategy and Investment Plan

Pacific Regional Infrastructure Fund review confirms Nauru Economic Infrastructure Strategy and Investment Plan to be in place

Adoption of procurement policy, outsourcing all government and state-owned enterprise procurement (except bulk fuel procurement) >$A5,000 (tranche condition)


Review and adoption of the Nauru Government Debt Management Strategy

Debt management strategy was reviewed and updated by Pacific Financial Technical Assistance Centre in 2014

Publication of historical national account and balance of payment statistics for 2004–2009

Statistics available on website of the Secretariat of the Pacific Community https://www.spc.int/prism/country/nr/stats/

Legislation for corporatization and legal separation of National Utilities Authority passed (tranche condition)

Legislation remains in force

New corporate structure for Republic of Nauru Phosphate Corporation adopted and new chief executive officer selected under a performance-based contract

Chief executive officer in place with performance targets in contract

Education Act that requires compulsory primary and secondary education up to the age of 18 passed (tranche condition)

Legislation remains in force

Adoption of new education strategic plan with numerical targets for enrollments, completion rates, numeracy, and teacher quality (gender disaggregated)

Plan remains in use as confirmed by Program Monitoring and Advisory Group Report

Adoption of new health strategic plan with numerical targets for infant and maternal mortality rates, chlamydia and trachoma infection rates, diabetes population screening rate, and health expenditure in Nauru Government

Plan remains in use as confirmed by Program Monitoring and Advisory Group Report

Ratification of the United Nations Convention on the Elimination of All Forms of Discrimination against Women (tranche condition)


Source: Asian Development Bank.

1 The Program Monitoring and Advisory Group (PMAG) is an independent review established by the Australian

Department of Foreign Affairs and Trade to monitor and advise on Australia’s aid program in Nauru. ADB participates in the PMAG process together with DFAT and the Pacific Financial Technical Assistance Centre.