Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 120078-KI
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY GRANT
IN THE AMOUNT OF SDR 3.6 MILLION (US$5 MILLION EQUIVALENT) TO
THE REPUBLIC OF KIRIBATI
FOR THE
FOURTH ECONOMIC REFORM DEVELOPMENT POLICY OPERATION
October 26, 2017
Macroeconomic and Fiscal Management Global Practice
East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance of
their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization.
REPUBLIC OF KIRIBATI – GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of June 30, 2017)
Currency Unit
US$1.00 = A$1.30
SDR 1 = A$1.81
ABBREVIATIONS AND ACRONYMS
A$ Australian Dollar MFED Ministry of Finance and Economic
ADB Asian Development Bank Development
CEO Chief Executive Officer MFMRD Ministry of Fisheries and Marine
CPIA Country Policy and Institutional Assessment Resources Development
CPO Chief Procurement Officer PDO Program Development Objective
CPU Central Procurement Unit PEFA Public Expenditure and Financial
CSO Community Service Obligation Accountability
DBK Development Bank of Kiribati PFM Public Financial Management
DFAT Department of Foreign Affairs and Trade PFTAC Pacific Financial Technical Assistance
DPO Development Policy Operation Center
DSA Debt Sustainability Analysis PNA Parties to the Nauru Agreement
ERT Economic Reform Taskforce PUB Public Utilities Board
GDP Gross Domestic Product PV Present Value
GoK Government of Kiribati RERF Revenue Equalization Reserve Fund
GRS Grievance Redress Service RFP Request for Proposal
HIES Household Income and Expenditure Survey RPF Regional Partnership Framework
ICR Implementation Completion and Results SAIDI System Average Interruption Duration
ICT Information and Communication Technology Index
IDA International Development Association SAIFI System Average Interruption Frequency
IMF International Monetary Fund Index
KDP Kiribati Development Plan SOE State-Owned Enterprise
KOIL Kiribati Oil Limited SPC South Pacific Community
KPF Kiribati Provident Fund US$ United States Dollar
KPPRP Kiribati Public Procurement Reform Plan VAT Value Added Tax
LIC Low Income Country VDS Vessel Day Scheme
MFAT Ministry of Foreign Affairs and Trade WDI World Development Indicators
WEO World Economic Outlook
Vice President: Victoria Kwakwa
Country Director: Michel Kerf
Senior Practice Director: Carlos Felipe Jaramillo
Practice Manager: Ndiame Diop
Task Team Leader: Virginia Horscroft
ii
REPUBLIC OF KIRIBATI
FOURTH ECONOMIC REFORM DEVELOPMENT POLICY OPERATION
TABLE OF CONTENTS
SUMMARY OF PROPOSED GRANT AND PROGRAM iv
1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY DEVELOPMENTS) .................... 1
2. MACROECONOMIC POLICY FRAMEWORK ................................................................................. 3
2.1 RECENT ECONOMIC DEVELOPMENTS ...........................................................................................3
2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ..........................................................8
3. THE GOVERNMENT’S PROGRAM ............................................................................................. 11
4. THE PROPOSED OPERATION ................................................................................................... 11
4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ......................................... 11
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ................................................ 13
4.3 LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY ......................................... 25
4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS ..................................... 25
5.1 POVERTY AND SOCIAL IMPACT .................................................................................................. 26
5.2 ENVIRONMENTAL ASPECTS ........................................................................................................ 27
5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS ........................................................................ 28
5.4 MONITORING, EVALUATION AND ACCOUNTABILITY ................................................................. 30
6. SUMMARY OF RISKS AND MITIGATION ................................................................................... 30
ANNEX 1: POLICY AND RESULTS MATRIX..................................................................................... 33
ANNEX 2: LETTER OF DEVELOPMENT POLICY ............................................................................... 36
ANNEX 3: IMF ASSESSMENT LETTER ............................................................................................ 39
ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE.............................................. 42
LIST OF FIGURES
Figure 1: Evolution of expenditure and expenditure composition .........................................................7
Figure 2: Long-term RERF outlook ...........................................................................................................9
Figure 3: Debt sustainability analysis ................................................................................................... 10
Figure 4: RERF balance in nominal and real terms, 1984-2016 ............................................................ 13
Figure 5: Fishing license fee revenues, 1996-2016 (A$m) .................................................................... 19
LIST OF TABLES
Table 1: Key macroeconomic indicators ..................................................................................................3
Table 2: Key fiscal indicators ....................................................................................................................5
Table 3: DPO prior actions and analytical underpinnings .................................................................... 23
LIST OF BOXES
Box 1: Copra subsidy reform in Kiribati ...................................................................................................6
The Kiribati Fourth Economic Reform Development Policy Operation was prepared by an IDA team consisting of Virginia Horscroft
(Senior Economist and Task Team Leader, GGO14), Mark Brennan (Consultant, FABRP), Siosaia Faletau (Liaison Officer, EACNF),
Akka Rimon (Liaison Officer, EACNF), Andrew Blackman (Economist, GMF10), Ekaterina Gratcheva (Lead Financial Officer/Reserve
Advisory Mgmt, FABRP), Loren Atkins (Associate Counsel, LEGES), Duangrat Laohapakakul (Senior Counsel, LEGES), Chau-Ching
Shen (Senior Finance Officer, WFALN), Stephen Hartung (Financial Management Specialist, GGO20), Robert Gilfoyle (Senior
Financial Management Specialist, GGO20), Natasha Beschorner (Senior ICT Policy Specialist, GTI09), Kamleshwar Khelawan (Senior
Energy Specialist, GGE09), Artessa Saldivar-Sali (Senior Municipal Engineer, GSU08), Cary Anne Cadman (Senior Environmental
Specialist, GEN2A), Lasse Melgaard (Representative, EACFF), and Samantha Evans (Program Assistant, EACNF). Overall guidance
was provided by Ndiame Diop (Practice Manager, GMF10), Robert Utz (Program Leader, EACNF), and Michel Kerf (Country
Director, EACNF). Annette de Kleine (Senior Economist, GMF04) provided peer review comments.
iii
SUMMARY OF PROPOSED GRANT AND PROGRAM
REPUBLIC OF KIRIBATI
FOURTH ECONOMIC REFORM DEVELOPMENT POLICY OPERATION
Recipient Republic of Kiribati
Implementation Agency Ministry of Finance and Economic Development
Financing Data IDA Grant; IDA terms; amount of SDR 3.6 million (US$5 million equivalent)
Operation Type Programmatic (2 of 2); single-tranche Development Policy Operation
Pillars of the Operation The program development objective is to: (i) strengthen public financial
and Program management; and (ii) improve the environment for inclusive growth. These two
Development Objectives components correspond to the two pillars of the operation. The first pillar is
supported through strengthening the management of public assets and liabilities, and
improving public procurement. The second pillar is supported through improving
oversight of joint ventures in the fisheries industry, improving the quality and
expanding the coverage of essential public utilities, and facilitating competition and
universal service provision in the telecommunications industry.
Result Indicators Strengthening public financial management:
1. The return on the RERF portfolio is aligned with the relevant market benchmark
(baseline return 8.29 percent below the benchmark; target return 0.25 percent
below the benchmark or better).
2. The RERF is managed according to prevailing market standards with reduced costs
(baseline costs 0.2 percent of market value; target costs of no more than 0.1
percent of market value).
3. Public sector debt, including contingent liabilities, is monitored effectively
through a comprehensive and up-to-date public sector debt database (baseline
database covers only central government external debt; target database covers
public sector external and domestic debt, including contingent liabilities, and all
transactions are recorded within a three-month lag).
4. The Central Procurement Unit (CPU) is operational, as indicated by the delegation
of the relevant procurement powers to the Chief Procurement Officer (CPO)
(baseline of no CPU; target of the CPO holding delegated procurement powers).
Improving the environment for inclusive growth:
5. All fisheries joint ventures are reviewed annually based on the approved criteria
and, for those found not to offer value-for-money, remedial actions are agreed
(baseline two-thirds of joint ventures provided value-for-money; target all
remaining joint ventures provide value-for-money, or have associated remedial
actions agreed).
6. The telecommunications market in Tarawa is served by at least two mobile
service operators competing on access and price (baseline one operator, 12
percent mobile penetration rate, A$0.90 standard call cost; target at least two
operators, 50 percent penetration, A$0.75 standard call cost).
7. There is increased penetration of mobile telephones in the outer islands (baseline
12 percent penetration; target 20 percent penetration).
8. The financial and operational performance of the Public Utilities Board and the
quality of electricity services has improved, as measured by the billing collection
rate (baseline 85 percent; target at least 90 percent), total power losses from the
distribution network (baseline 18 percent; target no more than 15 percent), SAIFI
(baseline 7.9; target 6) and SAIDI (baseline 946; target 880).
9. There is an increase in the proportion of poor households (households consuming
less than 100kWh) in Tarawa benefiting from the new electricity tariff structure
(baseline 0 percent; target 70 percent).
Overall Risk Rating Substantial
Climate and Disaster Risks (i) Are there short and long term climate and disaster risks relevant to the operation
(as identified as part of the SORT environmental and social risk rating)? Yes : No
If yes, (ii) summarize briefly in the risk section.
Operation ID P161794
iv
IDA PROGRAM DOCUMENT FOR A PROPOSED
FOURTH ECONOMIC REFORM DEVELOPMENT POLICY OPERATION
TO THE REPUBLIC OF KIRIBATI
1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY DEVELOPMENTS)
1. The proposed Fourth Economic Reform Development Policy Operation aims to support the
Government of Kiribati (GoK) to strengthen public financial management and improve the
environment for inclusive growth. It is the second in a programmatic series of two development
policy operations, following on from an earlier programmatic series of two development policy
operations. The first operation in the current series provided grant financing of US$2 million
equivalent, with the proposed second operation to provide grant financing of US$5 million equivalent.
With the support of the GoK, the World Bank’s development policy engagement is taking place jointly
with other major development partners. The Asian Development Bank (ADB), Australian Department
of Foreign Affairs and Trade (DFAT) and New Zealand Ministry of Foreign Affairs and Trade (MFAT) are
each providing budget support against a joint policy matrix agreed between the GoK and this group
of development partners.
2. Kiribati is one of the smallest, most remote and most geographically dispersed countries in
the world, which creates significant economic growth and service delivery challenges. Kiribati
consists of 33 islands spread over 5 million square kilometers of ocean (an area far larger than India).
The population of about 114,000 people lives on 21 of the coral atolls and single volcanic island in the
island groups, with a total land area of less than 800 square kilometers. Kiribati is extremely remote
from its nearest markets – about 4,000 kilometers from both Australia and New Zealand. Kiribati’s
low-lying atolls rise little more than 1.8 meters above sea level on average and, as such, are at the
forefront of climate change. Kiribati is highly exposed to the effects of sea level rise, storm surge,
coastal erosion and saltwater intrusion.
3. With such extreme economic geography challenges, economic growth prospects are limited.
Private sector development opportunities are highly constrained by the lack of economies of scale
possible in such a small and fragmented domestic market that is extremely remote from large markets
abroad. Severe infrastructure deficits in the areas of utilities, transport and communications
compound these constraints. Economic activity is dominated by subsistence agriculture and fisheries
(dominated by government-subsidized copra production), the public sector (including a large number
of state-owned enterprises (SOEs)), and a service economy underpinned by the public sector in the
capital of South Tarawa (where approximately half the population live). Public expenditure was
equivalent to 112 percent of GDP in 2016, funded primarily by fisheries license fees (65 percent of
GDP) and grants from development partners (33 percent of GDP). The public sector directly accounts
for as much as 50 percent of GDP and some 80 percent of formal sector jobs (however, formal sector
employment accounts for only 20 percent of the labor force). Beyond subsistence agriculture and
fisheries, the private sector remains small, mostly consisting of small firms in the wholesale, retail,
and transport sectors. The most significant opportunities for private sector development exist in the
fisheries sector, with potential opportunities also in tourism. Open unemployment is estimated to
exceed 30 percent, and youth unemployment, 50 percent.
4. Kiribati’s economic geography also makes service delivery very costly. The small, dispersed
and fragmented population significantly raises the cost of service delivery, affecting the affordability,
scope and quality of infrastructure and services in the utilities, transport and communications sectors,
as well as of public services more broadly. Kiribati’s geography and exposure to natural hazards,
particularly drought and loss of groundwater, also raises public sector costs and makes some areas of
service delivery – like water and sanitation – very challenging. These factors have significant and
1
pervasive implications for living standards, and are likely to intensify with the effects of climate
change.
5. The program development objective is to: (i) strengthen public financial management; and
(ii) improve the environment for inclusive growth. The first pillar, on public financial management,
focuses on strengthening the management of public assets and liabilities, and improving public
procurement. Over time and in conjunction with other measures, these reform actions should
contribute to wider improvements in the maintenance of fiscal sustainability, the containment of fiscal
risks, and the quality of public spending. The second pillar, on the environment for inclusive growth,
focuses on improving oversight of joint ventures in the fisheries industry, improving the quality and
expanding the coverage of essential public utilities, and facilitating competition and universal service
provision in the telecommunications industry. These measures should each contribute to improving
the environment for inclusive growth – even if the overall magnitude of the improvement that is
possible is highly constrained by Kiribati’s fundamental economic geography characteristics.
6. The overall risk rating for the proposed operation is substantial. The main risks to achieving
the program development objectives are: (i) institutional capacity risks arising from the extremely thin
capacity of the public sector to implement the reform program and sustain it over time; (ii) political
and governance risks arising from the politically-sensitive nature of key aspects of the reform program;
(iii) macroeconomic risks arising from the inherently volatile economic and fiscal situation, with any
large shock likely to detract from the policy focus on the reform program; (iv) environment risks arising
from Kiribati’s vulnerability to natural disasters and the impacts of climate change; and (v) fiduciary
risk. Key risk mitigating measures include: (i) the relatively strong and established policy dialogue,
which focuses on reaching shared understandings, building common platforms, and taking a step-by-
step approach to reforms; (ii) the selection of a limited number of policy actions that are aligned with
government priorities and to which the government is firmly committed; (iii) dedicated technical
assistance supporting implementation of the policy actions; and (iv) regular missions to help maintain
the momentum of the reform program.
7. There is no recent data on poverty. The World Bank in conjunction with the Secretariat for
the Pacific Community (SPC) is supporting the GoK to undertake a Household Income and Expenditure
Survey (HIES) in 2017/18. This will be the first HIES since the one conducted in 2006, which indicated
that poverty was widespread. It showed food poverty (based on national poverty lines) to be low in
Kiribati, at about 5 percent of the population, but basic needs poverty 1 (again based on national
poverty lines) to be relatively widespread, at about 22 percent. Basic needs poverty was concentrated
in South Tarawa, where the rate was about 24 percent. Poverty rates varied significantly by island
group, depending on available economic opportunities, the extent of isolation, and the age structure
of the population. For instance, about 16 percent of the population of the Southern Gilbert Islands
were found to be below the food poverty line, reflecting isolation, limited agricultural potential, and
vulnerability to drought. These islands had the highest proportion of elderly people in the country,
thus a low proportion of working age adults and a high dependency ratio. In contrast, poverty rates
were very low in the Line Islands, reflecting a younger migrant population and more abundant natural
resources. Female-headed households and households headed by the elderly were over-represented
in the poorest quintiles, and children were also more likely to experience poverty. A large proportion
of the population was found to be vulnerable to falling into poverty. If the basic needs poverty line
were 20 percent higher, the poverty rate would have been 34 percent. With a Gini coefficient of 0.39,
the degree of inequality in Kiribati was found to be similar to that in other Pacific Islands.
1The ‘cost of basic needs’ approach defines the minimum resources needed for long-term physical well-being,
usually in terms of consumption. The poverty line is the amount of spending required to obtain those
resources – defined by a list of food and non-food (clothing, shelter and services) ‘basic needs’.
2
8. Though the lack of panel data on poverty prevents the study of its dynamics, indications of
changes in wellbeing can be gleaned from other measures of deprivation. Between 2010 and 2015,
census data indicate that the proportion of households with access to piped or rain water increased
from 38 to 58 percent, and the proportion with access to a flush toilet or pit latrine increased slightly
from 57 to 62 percent. Over the same period, maternal mortality is estimated to have declined to 90
per 100,000 live births, and under-5 mortality to have declined to 56 per 1,000 live births, rates that
are still high by regional standards. Access to electricity for lighting increased significantly between
the censuses, mainly due to donor-funded solar programs. According to WDI, net primary school
enrolment is relatively high, at 95 percent, but no historical data is available to identify trends. While
there is no data to indicate trends in income distribution over the period since the HIES, real GDP per
capita declined by just over 10 percent between 2006 and 2011, before rising again to return to its
2006 level by 2016 – making it possible that poverty has not declined much, if at all, since 2006.
2. MACROECONOMIC POLICY FRAMEWORK
2.1 RECENT ECONOMIC DEVELOPMENTS
9. Recent economic performance has been relatively strong. Though growth continues to be
volatile, Kiribati had its sixth consecutive year of growth in 2016. After reaching 10.3 percent in 2015
on the back of strong wholesale and retail trade, and construction activity, real GDP growth slowed to
an estimated 1.1 percent in 2016, reflecting the winding down of major donor-financed infrastructure
projects and normalization of fisheries revenues after the record level in 2015. Growth is expected to
pick up to 3.1 percent in 2017, again driven by construction and wholesale and retail trade.
Table 1: Key macroeconomic indicators
2014 2015 2016 2017 est 2018 proj 2019 proj 2020 proj
Real Economy Annual percentage change, unless otherwise indicated
Real GDP growth 0.4 10.3 1.1 3.1 2.3 2.4 2.3
Consumer prices (period average) 2.1 0.6 1.9 2.2 2.5 2.5 2.5
Fiscal Accounts Percent of GDP, unless otherwise indicated
Revenues and grants 143.4 155.8 116.4 136.0 126.1 122.2 121.3
Revenues 89.9 110.4 83.7 79.1 69.2 68.3 67.4
of which Fishing revenues 72.3 92.0 65.1 58.6 48.9 48.1 47.4
Grants (excluding budget support grants) 53.6 45.4 32.7 56.9 56.9 53.9 53.9
Expenditures 118.8 113.2 112.3 145.1 133.4 133.0 131.4
of which GoK capital investment in outer islands 11.3
Overall balance (excluding budget support grants) 24.6 42.6 4.1 -9.2 -7.3 -10.9 -10.1
Overall balance (including budget support grants) 29.9 44.7 6.1 -1.9 -2.5 -2.8 -5.7
PPG debt (end of period) 17.9 23.8 22.8 24.4 26.3 30.8 34.4
RERF Current AUD millions, unless otherwise indicated
Closing balance 679 756 868 923 949 976 1004
Balance of payments Percent of GDP, unless otherwise indicated
Current account balance 25.1 46.7 19.4 14.0 4.3 2.3 1.2
Exports 6.2 5.2 5.7 4.5 4.4 4.4 4.4
Imports 65.2 59.0 58.8 59.2 60.3 61.3 60.8
External debt 8.8 19.8 22.8 24.4 26.3 30.8 34.4
External debt service 4.7 0.3 0.4 0.6 0.3 0.9 1.5
Exchange rate (A$/US$, period average) 1.1 1.3 1.3 .. .. .. ..
Memorandum items:
Nominal GDP (US$ millions) 178.2 181.7 194.3 202.5 211.6 219.5 227.7
Source: IMF and World Bank staff estimates.
3
10. The current account has remained in surplus despite large trade deficits. In recent years,
Kiribati’s large structural deficits on merchandise trade and services have been offset by very strong
receipts of fishing license fees, as well as aid flows, investment income on the sovereign wealth fund
– the Revenue Equalization Reserve Fund (RERF) 2 – and remittances from seafarers. The merchandise
trade deficit was an estimated 53 percent of GDP in 2016, driven by capital imports relating to donor-
financed infrastructure projects. But the strength of fishing license fee revenue is estimated to have
kept the current account in surplus.
11. Inflation is moderately low, at around 2 percent, and private sector credit is expanding
modestly. The moderately low inflation is in line with trading partner inflation and international food
and fuel prices, and reflects the relative stability of the Australian dollar – which Kiribati uses as its
currency. The IMF regards Kiribati’s use of the Australian dollar as providing a strong nominal anchor
given its close trade links with Australia. The modest expansion in private sector credit has been driven
by public financial institutions. The financial sector essentially consists of one commercial bank and
two public financial institutions (the Development Bank of Kiribati (DBK), and the Kiribati Provident
Fund (KPF)). The commercial bank primarily serves the public sector and larger private sector
customers, with the public institutions financing most personal and small business loans, thus having
a critical role in supporting access to finance. Ensuring long-term sustainability requires strengthened
risk monitoring, improved financial supervision, and decisive efforts to address long-standing
weaknesses in their balance sheets. Importantly, concrete steps have now been taken to address the
persistent funding gap of KPF and to link the crediting rate more closely with the actual returns of the
fund.3
12. The fiscal position has improved markedly in recent years, due primarily to high fishing
license fee revenue. The fiscal outcome in Kiribati is dominated by fishing license fee revenue, which
was low and volatile in the years to 2012, but which has been significantly higher (though still volatile)
in the years from 2013. After peaking at A$207 million in 2015 (92 percent of GDP), fisheries revenue
fell in 2016 but was still high by historical standards, at A$159 million (65 percent of GDP). The
implementation of the Vessel Day Scheme (VDS) (see later), favorable – though still variable – weather
conditions, and the appreciation of the US dollar against the Australian dollar in 2015, all contributed
to the increase. Efforts to increase domestic tax revenue have also borne fruit. The GoK successfully
introduced a VAT in mid-2014 to replace distortive tariffs and trade taxes, and has managed to
maintain the VAT despite its politicization during the election in 2015. (A number of items considered
essential to livelihoods on the outer-islands were exempted from the VAT at its introduction, and the
GoK added essential public services to the list of exemptions in 2015 to address the perceived and
actual regressive impact of the tax, but maintained the VAT nonetheless). Tax revenue is estimated to
have risen in 2017, partly as a result of improved revenue administration and efforts to collect arrears.
Scope for further improvement is now thought to be quite limited.
13. With strong revenue receipts and pressing expenditure needs, public expenditure has also
risen in recent years. On the current side, spending increases have been driven by a hike in the copra
subsidy in the 2016 budget, as well as increases in health and education spending. Though the increase
in the copra subsidy has had a very significant fiscal impact and – anecdotally at least – some distortive
effects on household production decisions, it is extremely important from a social and political
perspective and very unlikely to be unwound in the near future (see Box 1). The recent increases in
health and education spending, while significant in themselves, are still merely offsetting the
significant declines in real per capita spending in these sectors after 2008 – with real per capita health
spending now nearly restored to 2008 levels, but real per capita education spending still well below
2 The RERF was established in the 1950s to invest royalties from the now-depleted phosphate reserves. Its
current estimated value is about A$915 million (about 350 percent of GDP).
3 The regional withdrawal of correspondent banking relations has so far had limited impact in Kiribati.
4
its level in the 2000s. Despite the recent increases in subsidies and public sector wages (mainly
through health and education sector spending), Kiribati’s recurrent expenditure composition is not
too dissimilar to other low income countries (LICs) and other small states (Figures 1a and 1b). On the
capital side, spending increases have been driven by large infrastructure projects financed by donors,
including road, airport, and water and sanitation rehabilitation projects, as well as, in 2017, the
government’s commitment of A$30 million for outer island infrastructure investments (Figure 1c). Of
the 30 percentage point of GDP increase in capital spending occurring this year, only 11 percent is due
to the government’s outer island infrastructure commitment: the remainder is due to donor spending,
which tends to be quite volatile, in line with project implementation cycles. While the higher levels of
public spending in 2017 obviously entail a trade-off, of lower potential public spending in future years,
they contribute to growth (mainly directly) and have very little prospect of crowding out private sector
activity (indeed, given the structural constraints on the private sector in Kiribati, public spending is
more likely to crowd in private sector activity). The relatively high levels of public (including donor)
spending also pose little risk to inflation in Kiribati, because of the very limited multiplier effect –
particularly from capital spending – due to the high import content of public spending.
Table 2: Key fiscal indicators
2014 2015 2016 2017 est 2018 proj 2019 proj 2020 proj
Percent of GDP
Total Revenues and Grants 143.4 155.8 116.4 136.0 126.1 122.2 121.3
Tax revenues 14.4 15.5 15.7 17.3 17.3 17.2 17.2
Direct taxes 5.8 6.4 7.0 7.7 7.7 7.6 7.7
VAT and excises 8.6 9.1 8.7 9.6 9.7 9.6 9.5
Non-tax revenues 75.5 94.9 68.0 61.8 51.9 51.1 50.2
Fishing revenues 72.3 92.0 65.1 58.6 48.9 48.1 47.4
Other non-tax revenues 3.2 2.9 2.9 3.2 3.0 3.0 2.8
Grants (excluding budget support grants) 53.6 45.4 32.7 56.9 56.9 53.9 53.9
Expenditures 118.8 113.2 112.3 145.1 133.4 133.0 131.4
Current expenditures 60.9 60.3 71.4 74.0 73.5 73.2 71.6
Wages and salaries 27.2 24.4 23.3 25.3 25.3 25.3 25.2
Subsidies, grants, other commitments 13.3 10.7 17.7 20.8 22.5 22.3 22.2
of which copra subsidies 2.7 3.3 9.0 8.7 8.3 8.0 7.7
Other current expenditure 20.4 25.2 30.4 27.9 25.7 25.6 24.2
Development expenditures 57.9 52.9 40.9 71.1 59.8 59.8 59.8
of which GoK capital investment in outer islands 11.3
Overall balance (excluding budget support grants) 24.6 42.6 4.1 -9.2 -7.3 -10.9 -10.1
Overall balance (including budget support grants) 29.9 44.7 6.1 -1.9 -2.5 -2.8 -5.7
Financing -24.6 -42.6 -4.1 9.2 7.3 10.9 10.1
Domestic financing -34.2 -52.2 -14.3 -1.1 -0.5 -3.3 -0.3
RERF 4.2 -22.3 -12.3 0.0 0.0 0.0 0.0
Custodian account 0.0 -31.3 12.3 -12.0 0.0 0.0 0.0
Cash account -42.5 1.4 -14.3 10.9 -0.5 -3.3 -0.3
Project loans (net) 4.3 7.5 8.2 3.0 3.0 6.0 6.0
Budget support grants 5.3 2.1 2.0 7.3 4.8 8.1 4.4
Source: IMF and World Bank staff estimates.
5
Box 1: Copra subsidy reform in Kiribati
The copra subsidy, which began in the mid-1990s, has multiple objectives. It is an agricultural subsidy to
maintain copra production (a key export), a cash transfer to ensure a supply of cash in outer islands to maintain
a monetized economy, an unemployment benefit to provide cash incomes to those who would otherwise be
unemployed, a form of conditional cash transfer to encourage people to remain on the outer islands in order
to slow urban migration, and one of the key transfer mechanisms that the government uses to redistribute its
rising resource wealth (fishing license fee revenue) to the population of the outer islands.
Consistent with the recommendations of technical assistance from the World Bank, the GoK has pursued the
merger of the two copra SOEs to reduce the costs of handling the copra subsidy, a reform supported by the
previous DPO series. The existence of two SOEs in the sector was identified as the cause of substantial
duplication of functions, higher handling costs, and weakened accountability for effective copra purchasing,
processing, and exporting. It was expected that reduced leakages and efficiency savings from merging the two
copra SOEs would reduce the government spending on the copra subsidy. While efficiency savings may have
been achieved, the overall objective of reducing expenditure on the copra subsidy scheme has not been
achieved, due to significant increases in the amount of the copra subsidy itself. Having fallen from A$7.7 million
in 2013 to A$5.3 million in 2014, public expenditure on copra subsidies rose to A$7.9 million in 2015 (when the
copra subsidy was increased from A$0.80 to A$1 per kilogram), before increasing sharply to A$22.8 million in
2016 (when the copra subsidy was increased from A$1 to A$2 per kilogram during the first half of the year).
The new government that came to power early in 2016 has a strong mandate to raise the living standard of
the population of the outer islands. It is considering government support to outer islands as a whole, including
various government initiatives that aim to help create jobs and diversify income opportunities in outer islands,
inequities in public spending against the population of the outer islands (for instance, public spending on health
and education, infrastructure, and public utilities), the extent of connective infrastructure and services (both
transport and communications), and the disadvantages facing people from the outer islands in finding work in
the public sector, receiving overseas scholarships, and getting on overseas seasonal workers schemes.
The World Bank has previously invested in building a knowledge base to support the policy dialogue with the
GoK in this important area. At the time of the first DPO series, the Bank undertook preliminary work on
potential alternatives to the copra subsidy that could replace its role as a social protection scheme – looking at
possibilities of cash for work, recalibrating the eligibility criteria for the existing social protection scheme for
the elderly, increasing post-secondary scholarships, and providing transport grants to seafarers from the outer
islands boarding foreign vessels. Preliminary indications were that these would be particularly advantageous as
alternatives to the copra subsidy scheme. The trade-offs involved with the expenditure on the copra subsidy
have risen very substantially since then, however, raising the importance of reassessing options to improve the
poverty targeting of the scheme. To strengthen the evidence required for further advice in this area, the Bank
is supporting the new HIES in Kiribati. The Bank will also contribute to planned analytical work on the copra
sector to be led by MFAT, and may update the earlier public expenditure analysis the Bank supported.
Sources: AusAID (2012) Kiribati Country Case Study, World Bank (2013) Policy Brief: Some Thoughts on Social Schemes for
Protection and Promotion in Kiribati.
14. Because of Kiribati’s high degree of dependence on a volatile source of revenue and its
broader vulnerability to external shocks, it is important for Kiribati to maintain as much flexibility
on public expenditure as possible (at least until the ‘new normal’ for fisheries revenues is clearer),
as well as larger fiscal buffers. Growth in Kiribati has been much more volatile than other LICs, and
even compared with other small states (Figure 1d). Although about two-thirds of current spending is
in the difficult-to-reduce categories of wages, salaries, pensions, interest payments, and subsidies, this
proportion is lower than the averages for LICs and small states. In addition, Kiribati has been
attempting to contain the growth of expenditure by adopting conservative fisheries revenue forecasts
in the annual budget, roughly in line with IMF recommendations. This has been a useful measure while
the ‘new normal’ range of fisheries license fee revenue has been unclear. The IMF now recommends
assuming A$130 million in real terms, going forward, which will provide Kiribati with a realistic anchor
for the budget envelope, to frame expenditure priorities within.
6
Figure 1: Evolution of expenditure and expenditure composition
a. Composition of current spending b. Cross-country comparison – current spending
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2014 2015 2016 est 2017 proj Kiribati LIC MIC SS
Wages & salaries Subsidies & transfers Wages, salaries & pensions Subsidies & transfers
Debt service* Other current expenditure Debt service* Other current expenditure
Note: *Debt service for Kiribati includes principal and interest payments (separate estimates are not available).
c. Evolution of aggregate spending d. Cross-country comparison – growth volatility
140 140 1
Average Coefficient of Variation
120 120 1
Capital to Operating Ratio
1
100 100
1
Percent of GDP
80 80 1
60 60 0
0
40 40
0
20 20 0
0 0 0
2010 2011 2012 2013 2014 2015 2016 2017 Kiribati Small states Middle Low income
est proj income
Operating expenditure Capital expenditure 20-year Average 10-year Average
Capital/ Operating (RHS)
Source: WDI, WEO and World Bank staff estimates.
15. In recent years, the higher levels of fishing revenue have allowed the government to make
transfers into the RERF as well as accumulating large fiscal buffers. The GoK has reinvested all RERF
earnings, instead of withdrawing them to finance public expenditure. The RERF is Kiribati’s main
mechanism to serve as a buffer against current shocks and to provide for inter-generational equity.
Once fishing revenues began to increase, and Kiribati’s fiscal deficits turned to surpluses, the GoK did
not immediately begin to make transfers into the RERF to replenish the significant drawdowns that
had taken place over the previous decade. Given pressing expenditure needs, the GoK first began to
increase public expenditure, but as fishing revenues grew further, the GoK accumulated significant
cash reserves. In 2015, the GoK transferred A$50 million to the RERF. In 2016, the GoK transferred a
further A$70 million to the RERF, leaving cash reserves of around 3-4 months of current expenditure
(roughly in line with IMF recommendations). Continued strong fishing revenues mean the GoK has
again accumulated significant cash reserves, which now stand at about A$110 million relative to the
recommended buffer of about A$45 million. Rather than transferring the excess cash reserves into
the RERF as in the previous two years, the GoK has made the decision to retain these as a source of
funds to finance infrastructure projects in the outer islands – a key priority for the current government
as part of its agenda for promoting growth and service delivery across the whole of the country. This
approach avoids the costs and risks of debt financing. Over the next year or so, it will be important for
the GoK to expand its capacity to evaluate, prioritize and sequence alternative project proposals in
7
line with implementation capacity. The World Bank’s investment pipeline includes a commitment to
outer island infrastructure projects, so the dialogue around these will provide an opportunity for Bank
staff to share expertise on project assessment, prioritization and planning.
16. Longer term, there is a need to determine an appropriate strategy for drawdowns from and
transfers into the RERF, in line with the GoK’s objectives for the RERF (which include striking a
balance between benefits to current and future generations). This is likely to involve estimating, on
a periodic basis, ‘normal’ fishing revenues, and formulating an approach to transferring a share of
excess or windfall fishing revenues to cash reserves or – if that buffer is already adequate – to the
RERF. It will also involve estimating a sustainable approach to drawdowns from the RERF. With these
parameters established, fiscal discipline sufficient to maintain expenditure within what is affordable
on a medium-term basis – based on an estimate of ‘normal’ fishing revenues – will be needed, to
ensure that the RERF grows in line with the GoK’s objectives for it. If fishing revenues fall short of the
‘normal’ level, they could be supplemented from the cash buffer, to maintain budgeted expenditure.
2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
17. The medium-term macroeconomic outlook is broadly favorable. Growth is expected to be
maintained at 2-2.5 percent over the medium term, higher than the historical average, from planned
infrastructure investments by development partners and the GoK, and the expected ‘new normal’
level of fishing revenues. Inflation should remain contained on continued softness in international
food and commodity prices, unless there is a significant further weakening of the Australian dollar
against the US dollar. Although the size of the current account surplus is forecast to decline on lower
fisheries revenues, the current account is expected to remain in surplus over the medium term,
supported by still substantial fishing license fee revenue, aid flows, investment returns on the RERF,
and remittances. Though they had earlier been on a declining trend, remittances have been picking
up in the last three years, both with the global recovery in shipping activities and as employment
opportunities for I-Kiribati overseas increases with the creation of additional temporary labor schemes
– a trend projected to continue in the future.
18. The fiscal outturn largely depends on fishing license fee revenues, grants from development
partners, and the ability of the GoK to contain expenditure within what can be afforded with the
‘new normal’ fishing revenues. Beyond the sense in which the VDS has led to a structural increase in
fishing license fee revenues, their level in any given year is difficult to predict until weather patterns
can be estimated with some degree of confidence. The fiscal projections rely on the IMF’s reasonably
conservative recommended approach, explaining the 10 percentage point of GDP drop in fisheries
revenues between 2017 and 2018-2020. This is roughly offset by the A$30 million allocation for outer
island infrastructure investment in 2017, which is not repeated in 2018-2020. The estimated deficit
for 2017 is 1.9 percent of GDP, down from 9.2 percent as a result of the budget support provided by
development partners (World Bank: US$5 million under the proposed operation, plus US$2 million
from the previous operation withdrawn earlier this calendar year; ADB: US$5 million; MFAT: A$2.5
million; and DFAT: $A0.5 million). Relatively modest deficits are then projected for the period 2018-
2020 (with the larger deficit in 2020 due to the lower budget support projections that year). The key
risk to these fiscal projections is on the expenditure side. It is critical for the GoK to contain the growth
of current spending and to avoid any further increases in the copra subsidy (allowing its current
nominal costs to decline in real terms over time). The economic policy dialogue between the GoK and
development partners offers one important avenue to address any fiscal challenges that may emerge
over time, in line with the GoK’s commitments to sustainable fiscal management and – in particular –
the sustainable management of the RERF.
19. The long-term outlook for the RERF is positive. Figure 2a shows the projected trajectory of
the real value of the RERF, based on the GoK’s current investment strategy and using reasonably
8
conservative forecasts of market returns. The projections assume the reinvestment of returns and a
drawdown of 1 percent per year of the total value of the fund to finance public investment priorities
after 2020, once the GoK has achieved its nominal target for the fund. These assumptions align with
the dominant thread in the Bank’s dialogue with the GoK, though the decision on a possible drawdown
rule has not yet been taken. Although it is expected that the GoK will also determine a framework to
transfer excess or windfall fisheries revenues into the RERF when these arise, no such transfers are
assumed in the forecasts shown except A$10 million per year in the years to 2020, to provide near
certainty for the achievement of the nominal target. The positive outlook, given current management
of the RERF and the structural shift in fisheries revenues that enables RERF returns to be reinvested
(rather than the RERF being required to finance the recurrent budget), stands in stark contrast to the
performance in the 2000s (see Figure 4). Figure 2b shows the outlook in real per capita terms. The
upward trend pre-2020 becomes a downward trend when the GoK begins the 1 percent drawdowns
to finance public investment, but as population growth slows, the real per capita value of the RERF
begins to rise again – increasingly sharply with the slowing population growth rate. It is important to
recognize that no assumption is being made here as to what the trajectory of the real per capita value
of the RERF should be: the weight to be placed on the welfare and needs of the current generation
relative to future generations is a valuation for the GoK to make, and the current government is
demonstrating its ownership of this process as it works to clarify the objectives of the RERF. (Note that
the projected trajectories shown in Figure 2 are subject to wide margins of error – they are based on
a forecast market return, whereas in practice market returns may be subject to considerable variability
potentially leading to very different outcomes from those shown here.)
Figure 2: Long-term RERF outlook
a. Real value (2017 AUD millions) b. Real per capita value (2017 AUD)
1 9
1 8
1
8
1
8
1
8
1
8
1
900 7
800 7
2019
2025
2047
2019
2025
2017
2021
2023
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2017
2021
2023
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
Source: World Bank staff estimates and UN Population Fund.
20. Kiribati is assessed as being at high risk of debt distress, according to the latest IMF/World
Bank Debt Sustainability Analysis (DSA), from August 2016. This assessment reflects Kiribati’s limited
capacity to service debt, given its historically low average growth rate and narrow export base. Even
moderate borrowing could result in an unsustainable debt trajectory under the baseline scenario,
where fishing license fee revenue is assumed to remain above the historical average, there is
moderate expenditure growth, fiscal deficits remain small, and there is continued availability of highly-
concessional loans and grants to finance development expenditure. Containing this risk requires
Kiribati to avoid any non-concessional borrowing, secure grants rather than concessional loans to
finance its main development needs, maintain fiscal discipline, maintain adequate buffers against
shocks, and continue to implement key reforms to support greater public sector efficiency and – to
the extent possible – greater private sector development, to support Kiribati’s growth prospects. The
next DSA, scheduled for late 2017, is expected to bring risks from natural disasters and climate change
9
effects into the baseline scenario.
21. Kiribati’s macroeconomic policy framework is adequate for the purposes of the proposed
operation. In recent years, Kiribati has substantially improved the management of the RERF, a critical
anchor for economic and fiscal stability. It has also avoided borrowing on non-concessional terms, in
accordance with its debt policy. In the face of very significant increases in revenues from fisheries
license fees, the GoK has contained the growth of public expenditure to a reasonable extent. As a
result of the reasonable containment of expenditure in the face of sharply increased revenues, Kiribati
has accumulated significant cash reserves over this period. Part of the accumulated cash reserves is
now available as a buffer against shocks; another part – equivalent to about 50 percent of GDP – has
been transferred into the RERF; and the final part is available to the GoK to finance planned outer
island infrastructure projects. Kiribati is in the process of determining an appropriate strategy for
drawdowns from and transfers into the RERF, in line with the objectives for the RERF that is
formulating. It remains important for Kiribati to carefully target spending to its most pressing
expenditure needs – of which there are undoubtedly many, given generally declining real per capita
expenditure trends over the last decade and the substantial infrastructure gaps the country faces.
Updated public expenditure analysis would be helpful in this regard, and the Bank should be able to
assist with it as part of its macro-fiscal dialogue with the GoK.
Figure 3: Debt sustainability analysis
a. Public debt (PV of debt-to-GDP ratio) b. External debt (PV of debt-to-GDP ratio)
200 120
100 100
0
80
-100
60
-200
40
-300
-400 20
-500 0
2016 2019 2022 2025 2028 2031 2034 2016 2021 2026 2031 2036
Note: 1/ In Figure 3a, a Combination shock, in Figure 3b, a Terms shock. Source: IMF/WB DSA.
22. Risks to the macroeconomic outlook are substantial, and tilted to the downside. Revenue
from fishing license fees is inherently volatile, and could decline significantly as a result of unfavorable
weather conditions. But as mentioned above, the key fiscal risk is on the expenditure side. The
economic policy dialogue between the GoK and development partners offers an important means of
mitigating this risk, through dialogue on the necessity of containing the growth of current spending
and avoiding any further increases in the copra subsidy (a dialogue that will be supported by planned
analytical work). Negative dynamics in global financial markets would have an adverse impact on
returns to the RERF. The greater emphasis that the current government places on striking a balance
between benefits from the RERF for the current and future generations, while by no means undue,
also poses a risk to the long term macroeconomic outlook, if a balance is not similarly struck between
a drawdown rule and a savings or transfers rule. This risk is mitigated by the Bank’s specific
engagement with the GoK on the RERF. Delays in the implementation of major investment projects
would negatively affect growth, as would further natural disasters. Remittances from migrant workers
could be negatively affected by a sharper-then-expected slowdown in China spilling over into declining
global shipping activities, and lower-than-expected growth in New Zealand and Australia (where I-
10
Kiribati have emerging temporary labor opportunities). Higher-than-expected prices for imported
food and fuel would have a significant impact on inflation, growth and poverty.
3. THE GOVERNMENT’S PROGRAM
23. The Kiribati Development Plan 2016–19 (KDP) identifies key priority areas for the medium
term, with the overarching vision, “Towards a better educated, healthier, more prosperous nation
with a higher quality of life.” The KDP focuses on six priority areas: (i) human resource development;
(ii) economic growth and poverty reduction; (iii) health; (iv) environment; (v) governance; and (vi)
infrastructure. With respect to economic growth and poverty reduction, the strategies include:
enhancing management of the RERF; ensuring effective public financial administration and debt
management; placing SOEs on a more commercial footing; providing for the sustainable development
of the fishing industry and maximizing economic returns from marine resources; and ensuring that
that the most vulnerable groups in the population are cared for. With respect to the RERF and in
keeping with the current government’s electoral platform, the government is committed to ensuring
that the RERF reaches A$1 billion by 2020. With respect to governance, the strategies include: timely
audits of government ministries and SOEs; greater transparency and accountability in public service
delivery; and the implementation of specific policies with respect to women, youth, children, people
with disabilities, and gender-based violence. With respect to infrastructure, the strategies include:
improving telecommunications connectivity for the outer islands, and reforming the Public Utilities
Board to achieve operationally and financially sustainable electricity, water and sanitation services.
The priorities in the KDP have been reinforced in the consultation version of the new Kiribati Vision
20 (“KV20”) statement, which emphasizes the importance of fisheries and tourism development for
economic growth, and the investment in infrastructure needed to realize this potential.
24. Key aspects of the KDP priority area of economic growth and poverty reduction are reflected
in the strategic plan of the Ministry of Finance and Economic Development (MFED) for 2016-19.
These include improving the sustainability of government finances, and in particular improving the
management of the RERF through regular performance reviews of the asset managers, and better
monitoring of public debt using improved data and regular reporting. These also include improving
the efficiency of SOEs, and in particular continuing work to restructure underperforming SOEs and
commercialize SOEs with the potential for private sector participation.
25. With respect to the critical fisheries sector, the National Fisheries Policy 2013–2025 outlines
a series of policy and institutional reforms designed to improve the returns Kiribati obtains from the
exploitation of its fisheries. The reform priorities include: (i) strengthening compliance with regional
conservation and management measures, including the VDS, through the review and updating of
access agreements, license conditions, and other regulations; (ii) updating the Fisheries Act and other
relevant acts as required to clarify and strengthen coastal and oceanic fisheries management; and (iii)
building the capacity of the Ministry of Fisheries and Marine Resources Development (MFMRD) to
better execute its responsibilities (including licensing, implementation of international treaties,
monitoring and compliance, and reporting). The GoK is also working to facilitate the growth of the
transshipment industry, to generate greater domestic economic activity from oceanic fisheries.
4. THE PROPOSED OPERATION
4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION
26. The two pillars of the proposed operation are aligned with the second, fifth and sixth focus
areas of KDP, on economic growth and poverty reduction, governance, and infrastructure. The first
11
pillar, on strengthening public financial management (PFM), is closely aligned with the GoK’s strategies
on the RERF, PFM, debt management, SOE management, and transparency. Over time and in
conjunction with other measures, this pillar should contribute to improvements in the maintenance
of fiscal sustainability, the containment of fiscal risks, and the quality of public spending. This should
help ensure that the government can maintain public services and public investment in human and
physical capital, which are of disproportionate importance to the poor. The second pillar, on improving
the environment for inclusive growth, is closely aligned with the GoK’s strategies on returns from
fisheries assets, telecommunications connectivity, and electricity, water and sanitation services. By
improving the returns from fisheries assets, this pillar should benefit the poor (through the public
services fisheries revenue funds) and promote shared prosperity (through the economic activity in the
fisheries sector). By improving access to and the quality of telecommunications and utility services,
this pillar should also benefit the poor (through access to these services) and promote shared
prosperity (through the improvement in the business environment).
27. The second pillar of the proposed operation, which corresponds to the second component
of the PDO, has been revised since the first operation. In the first operation, this pillar was, “Creating
an environment for inclusive and private sector led growth.” The team believes that this objective is
broader than what could feasibly be achieved in Kiribati at the current juncture, through this DPO
series. In particular, achieving the ambition of private sector led growth in Kiribati seems improbable
in the near term, given that the main driver of growth in Kiribati is the public sector, funded by fisheries
license fees and aid. That is, the bulk of the economic activity generated from Kiribati’s fisheries assets
is indirect through the public sector – in the form of the public sector employment, procurement and
service delivery financed by the license fees – rather than direct through the private sector. While
there are certainly opportunities for greater private sector development, and these need to be
facilitated, private sector led growth appears improbable in the near term. Several of the reforms
under the second pillar will improve the business environment, and will also improve the quality of
life of the poorest in Kiribati, so a focus on improving the environment for ‘inclusive growth’ seems an
appropriate reformulation of the pillar.
28. The design of the proposed operation reflects the lessons learned in the implementation of
the previous DPO series in Kiribati. These include:
x Budget support to small states with thin capacity can provide benefits far beyond the financial
resources transferred – in Kiribati, the policy dialogue afforded by DPOs is more significant
than the specific actions in the policy matrix, with the current dialogue on RERF and debt
issues in particular more than offsetting any weaknesses in the policy matrix.
x Project-level engagements can assist in identifying key priorities to be supported through
policy-based operations – evident with the telecommunications and utility sector reforms.
x Task teams must consider results indicators at the same time as they are working on policy
actions – several revisions to the results indicators are proposed, in an effort to ensure they
will fairly reflect the achievements of the series.
x The flexibility built into the Bank’s approach to programmatic series of DPOs is vital in fragile
states and very thin capacity environments – several revisions to the indicative triggers are
proposed, reflecting changing policy emphasis and/or capacity constraints that have affected
the timeframes and ambition of the steps in the reform process.
x Tackling more contentious policy areas – particularly in fragile states – involves taking greater
risks, which the Bank should support – this DPO series continues to work on RERF, fisheries
and SOE management, significant yet contentious areas whose risks are acknowledged.
12
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS
Pillar 1: Strengthening public financial management
Prior Action 1: (i) The Recipient, through its Ministry of Finance and Economic Development, has
completed a review of RERF custodial arrangements to ensure that the services of the provider
remain competitive with current market practice and benchmarks; (ii) the Recipient, through its
Cabinet, has endorsed the recommendations of the review; and (iii) the Recipient has issued a
request for proposal for custodial services.
29. The RERF is Kiribati’s main mechanism to serve as a buffer against current shocks and to
provide for inter-generational equity. In the first decade of the 2000s, the real value of the RERF
declined significantly as a result of both unsustainable fiscal management and poor RERF management
(Figure 4). On the fiscal management side, a combination of low and volatile fisheries revenues and
relatively high public expenditure needs resulted in large fiscal deficits and frequent drawdowns from
the RERF. On the RERF management side, a review conducted in 2011 with technical assistance from
the IMF identified a number of weaknesses, including the misalignment of the asset allocation with
the RERF’s long-run investment objectives. The review recommended closer oversight of the asset
managers, shifting to a passive investment strategy, setting more realistic investment targets, and
renegotiating the contract with the custodian. In 2013, with technical assistance from World Bank
Treasury, the government began implementing those recommendations, beginning with a review of
the performance of the incumbent asset managers, which found they had taken inappropriate risks
while achieving returns that were persistently below market benchmarks over an extended period
and charging management fees that were well above competitors, for no additional services.4
Figure 4: RERF balance in nominal and real terms, 1984-2016
1
800
600
400
200
0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Market Value (A$m) Real Value (1984 A$m)
Source: World Bank staff estimates
30. Strengthening the management of the RERF is an overriding policy priority for Kiribati, as an
anchor for the country’s economic and fiscal sustainability. Supported by the ongoing engagement
from World Bank Treasury, the GoK has taken key decisions to improve the management of RERF.
These have included issuing a request for proposal (RFP) to identify best-fit asset managers for the
RERF, selecting two new asset managers through a competitive and transparent process, and
implementing the transfer of RERF assets to the new asset managers. The reforms have also included
executing the approved strategic restructuring of the RERF portfolio to better align with the RERF’s
4The inappropriate risks had included – among other things – exposure to multiple Icelandic banks, which led
to irrecoverable losses in the aftermath of the Global Financial Crisis.
13
long term objectives. 5 These reforms have been supported by successive DPOs and represent one of
their most significant achievements. In recent years, increased fishing revenue in conjunction with
relatively prudent fiscal management has also allowed the GoK to make transfers into the RERF (A$50
million in 2015 and A$70 million in 2016).
31. The current government has continued to implement the recommendations of the earlier
IMF- and Treasury-supported reviews. This has included completing a review of RERF custodial
arrangements, to ensure the services Kiribati receives measure up to current market practice and
benchmarks. The review identified a pressing need to renegotiate the contract for custodial services
to strengthen the oversight role of the custodian on behalf of the GoK with respect to the asset
managers. The review also found the fees charged to the GoK by the incumbent custodian to be the
highest among all clients in the World Bank Treasury Reserves Advisory and Management Program
(RAMP) (about three times the client average), with the incumbent unable to meet the market
practice reporting requirements for the revised investment strategy, and experiencing significant staff
turnover with a rotation of four relationship managers in the previous 18 months. In response to the
review, Cabinet endorsed its recommendations, including the need to assess the custody services
market to identify suitable parties with demonstrated capability to meet the future needs of the RERF,
and select a suitably qualified institution to undertake the custody role. The custody RFP was issued
in the first half of 2017, with the response process currently underway. In this process, the GoK has
demonstrated a continued commitment to a transparent process that ensures a sufficient test of the
custody services market. The involvement of World Bank Treasury has added significant value. The
initial response to the RFP was limited, with few of the targeted global custodians sufficiently
knowledgeable about the specifics of the RERF to be willing and able to bid – particularly because of
de-risking considerations associated with anti-money laundering frameworks. In a resource-intensive
but critical process, Treasury worked with multiple global custodians to educate them on the specifics
of the RERF, using Treasury’s expertise and convening power to get a genuine competition among
suitable custodians for the benefit of Kiribati. The RFP process is expected to be completed and the
selected party appointed by the fourth quarter of 2017.
32. The review of RERF custodial arrangements and issuance of the custody RFP is proposed to
replace the original trigger specified for this reform area. The original trigger was the development
and submission to Cabinet of reform options to regularize transfers to and withdrawals from the RERF.
This trigger has not proven achievable. On the change of government in 2016, the new government
supported the continued implementation of the recommendations of the earlier IMF- and Treasury-
supported reviews, and thus continued to implement reforms to the management of the RERF. But
the new government also decided to grapple with the overall direction and purpose of the RERF. After
a period of due consideration, the GoK is now moving ahead to clarify the objectives of the RERF. Short
term, the GoK will pursue a highly visible nominal target of reaching a balance of A$1 billion by 2020;
after that, on the investment side, the GoK is likely to pursue a higher, long-term growth strategy for
the real value of the RERF, and at the same time adopt some form of provisions to balance the benefits
of the RERF accruing to both current and future generations (possibly including a drawdown rule for
withdrawals to finance investments for the current generation and a savings rule for transferring
windfall gains into the RERF for future generations). Over this period, the Bank has adapted and built
an effective working relationship with the new government in support of its objectives for the RERF.
At the same time, the government’s support for the objective of strengthening the management of
the RERF has remained strong, and the Bank’s Treasury has supported the government to review RERF
custodial arrangements, assess the custody market, issue a RFP for custodial services, and manage the
RFP process. This process, involving competition for the provision of custodial services among targeted
5While the high management fees were only a small aspect of the rationale for changing asset managers,
Treasury estimates that the change in asset managers and restructuring of the portfolio will save the
government upwards of A$1 million per year in RERF management costs.
14
global custodians, should lead to a custodial arrangement that offers Kiribati an appropriate degree
of oversight of the asset managers, fulfilment of market practice reporting requirements to Kiribati,
and competitive fees. Particularly with respect to strengthened custodial oversight of the asset
managers, the custody RFP process is a necessary step towards the sustainable management of the
RERF, so represents a solid reform action to replace the original trigger in this reform area.
33. The expected result in this reform area is that the financial and operational performance of
the RERF will be close to market benchmarks. This implies two things, first that RERF portfolio
performance is aligned with market benchmarks (with the suggested results indicator of portfolio
performance that is better than 0.25 percent below the benchmark). This indicator was not included
in the original results matrix, but it is important since it captures the combined effect of the RERF
reforms supported in the second operation of the first series and the first operation of the current
series, which were closely related. This is the reason that it is appropriate for the baseline for this
indicator to be drawn from 2014, just prior to the second operation in the first series when this
sequence of reforms commenced.6 Second, the restructuring of the RERF portfolio and issuance of the
custody RFP is expected to result in a reduction in the average costs of managing the RERF (with a
target for management costs of 0.1 percent of market value, compared to the baseline of around 0.2
percent in 2015). With the change in prior action for the second operation, it is not appropriate at this
juncture to include the other results indicator from the original matrix, of cash balances held outside
the RERF of no more than 50 percent of current expenditure, since this was associated with the
original trigger of regularizing transfers to and withdrawals from the RERF.
34. The GoK is now focusing on finalizing its objectives for the RERF and developing a strategy
for their achievement that will have implications for transfers to and withdrawals from the RERF,
reforms which the Bank could support in the future. As stated, in the short term the GoK will pursue
its A$1 billion by 2020 target and likely from there pursue a higher, long-term growth strategy for the
real value of the RERF, and adopt provisions to balance the benefits of the RERF to current and future
generations (such as a drawdown rule for withdrawals to support current public investment priorities
and a savings rule for transferring windfall gains into the RERF). The Bank’s Treasury team has been
working closely with the Minister for Finance and Economic Development and the RERF Investment
Committee to clarify the objectives and model alternative scenarios for how they could be achieved.
The new objectives are expected to be presented to Cabinet for consideration by the end of 2017,
with work to finalize the strategy continuing into the first half of 2018.
Prior Action 2: The Recipient has improved monitoring of contingent liabilities, through: (i)
quantifying the Recipient’s guarantees; (ii) accepting the financial statements of the five largest
state-owned enterprises for the Recipient’s financial year commencing January 1, 2016; and (iii)
submitting the financial statement of the Kiribati Provident Fund for the Recipient’s financial year
commencing January 1, 2016 to the external auditor.
35. In recent years, the GoK has taken important measures to improve fiscal management in
the area of debt policy, reforms which have been supported by successive DPOs. Kiribati has adopted
a debt policy establishing criteria for concessional and non-concessional public borrowing and formal
procedures for contracting new debt, consistent with sustainable macroeconomic management. It has
also improved the management of public debt by establishing a comprehensive database of public
debt, including the debt of SOEs and joint ventures. These reforms have gone hand in hand with
reforms to SOEs themselves, which represent a significant share of economic activity in Kiribati and
which have, in the past, imposed significant fiscal burdens on the GoK through requirements for direct
and often ad hoc subsidies. The adoption and implementation of new legislative provisions for SOEs
6It is also not possible to calculate a baseline from between the two series, because that is when the
restructuring of the RERF portfolio was being executed and the assets held in transitional accounts.
15
(also supported by successive DPOs) has helped to underpin improvements in their corporate
governance and financial reporting. These reforms have, in turn, reduced the fiscal burden SOEs have
imposed on the GoK, with ad hoc subsidies replaced by community service obligations, the costs of
which have been well contained since.
36. The next step in Kiribati’s debt policy and management reform process is to strengthen the
monitoring of contingent liabilities. This includes quantifying sovereign guarantees and expanding
the debt database to include them and other contingent liabilities. It also includes timely monitoring
of the financial situation of large SOEs – where the major potential contingent liabilities lie. A final part
of this reform area is strengthening the GoK’s financial oversight of KPF, through the timely submission
of its financial statements for external audit, in order to better position the GoK to evaluate the extent
of this contingent liability. KPF manages assets equal to about 60 percent of GDP, and has faced large
balance sheet deficits in recent years due in part to the impact of the Global Financial Crisis and in
part to high rates paid to members. In the absence of a central bank, KPF is not subject to financial
supervision. Timely external audits are a necessary step if the GoK is to be able to assess and monitor
this contingent liability. These three components are reflected in the prior action for this operation.
37. In the original formulation of this trigger, the second component on the financial statements
of SOEs was specified as bringing the external audits of their financial statements up to date, but it
is proposed that this be revised. The SOE legislation sets a timeframe for the completion of financial
statements rather than the completion of the external audits of these financial statements, and that
is the indicator that the SOE unit in MFED monitors. At the current juncture, it is also the timely
submission of financial statements to the external auditor where the weakness lies, rather than the
promptness of the audits then conducted. Thus, it is proposed that the prior action should focus on
bringing the financial statements of SOEs up to date, rather bringing their external audits up to date.
The ICR for the first programmatic series argued that prior actions concerning the implementation of
SOE legislation should have focused only on the largest SOEs, because that is where the key fiscal risks
lie and, in the face of extremely scarce capacity, it does not make sense to stretch that capacity to
cover all SOEs equally, however insignificant some of them are. Thus, it is also proposed that the prior
action focus only on the major SOEs. Air Kiribati Limited, the Development Bank of Kiribati, Kiribati
Ports Authority, Kiribati Oil Limited (KOIL) and the Public Utilities Board (PUB) together account for
about 80 percent of the total assets and liabilities of the SOE portfolio. As such, there is something of
a natural gap in the portfolio between these major SOEs and all the others. The exception to this is
KOIL, whose assets and liabilities are small, but whose financial status is closely interconnected with
that of the PUB, so warrants inclusion for that reason.
38. As revised, the second component of this prior action is very similar to a prior action in the
second operation of the first DPOs series (though since then, the telecommunications SOE has been
privatized and KOIL added to the list of the ‘big five’). At the time of the previous similar prior action,
new SOE legislation had just been approved and the GoK was beginning to implement it. Its
implementation did not have the chance to bed down before the change in government, and across
that transition SOE reforms lost considerable momentum. The timely preparation of financial
statements slipped during that transition, yet is critical to the monitoring of fiscal risks. This prior
action is playing an important role in helping the GoK regain that momentum, by concentrating
attention on the importance of keeping the financial statements of the largest SOEs up to date. Over
the last year, the GoK has developed a new approach to monitoring budget support actions, that
accommodates recurring items as well as new reforms. Once achieved, this action will shift to the set
of recurring items, which should help to reduce the risks of further slippage in this area in the future.
39. The expected result in this reform area is that public debt is managed based on a
comprehensive and up-to-date public sector debt database that includes contingent liabilities, with
all debt-related transactions recorded within a three-month lag. This contrasts with the situation
16
prior to the commencement of this series, where the debt database covered only the external debt of
the central government.
Prior Action 3: The Recipient: (i) through its Cabinet, has approved the Kiribati Public Procurement
Reform Plan; and (ii) has made the Kiribati Public Procurement Reform Plan publicly available.
40. Procurement has been recognized as an area of significant weakness in public financial
management in Kiribati for some time, and the GoK has now committed to a reform it. The key
problem is that the procurement process lacks the regulatory framework and mechanisms to support
efficiency, fairness and transparency. An inefficient process is especially problematic in a context like
Kiribati, where administrative capacity is so scarce. The existing legislation does not establish a
preference for open competition, and there are currently no procurement regulations, no standard
bidding and contract documents (instead, a variety of different models are in use in different
agencies), and no working-level procurement manual. Aside from reducing the prospects for best
value in procurement, this situation makes each procurement unduly complicated thus preventing
scarce administrative capacity from being directed to its most effective use. Opportunities for synergy
and best value are further lost through decentralized procurement functions in line ministries and
SOEs, most of which have very small volumes of procurement and no dedicated procurement officers.
In the absence of established annual procurement planning, procurement tends to be transactional
(buying quickly using the same process and suppliers as before) rather than strategic. The Public
Expenditure and Financial Accountability (PEFA) assessment conducted in 2010 (the latest available),
rated Kiribati’s competition, value for money and controls in procurement at D+.
41. With technical assistance from the ADB, the GoK recently completed a procurement review
and formulated a reform program which has now been endorsed by Cabinet. The reform program
takes a fit-for-purpose approach to procurement reforms, taking into account the scarce public sector
capacity in Kiribati and the experiences Fiji, Tonga and Tuvalu have had to date with the solutions they
have adopted in somewhat similar circumstances. The reform plan includes establishing a Central
Procurement Unit (CPU), to centralize common activities and build professional capacity, centralize
procurement over a certain threshold, and manage consolidated purchases of commonly procured
items that are currently being procured in a fragmented manner by numerous separate entities.
Regulations, standard bidding and contract documents, templates and a procurement manual will be
prepared, within the framework of revised legislation. The position of Chief Procurement Officer (CPO)
will also be moved to be within MFED – currently, the Secretary for Cabinet is the CPO, which the GoK
has agreed is an unnecessarily high level for this role to sit at. The reform plan has been carefully
sequenced, such that changes in roles and powers will occur once the relevant entities have built up
the necessary capacity to use them – to avoid disrupting procurement processes in the interim.
42. Cabinet approval and publication of the Kiribati Public Procurement Reform Program
(KPPRP) is proposed as a new prior action for this operation. While it is unusual for the approval of
a reform plan to be a prior action in the final operation in a programmatic series, in Kiribati (as in
several Pacific Islands) the Bank’s experience is that budget support engagements are best seen as
one-plus-one arrangements: each operation specifies triggers for the subsequent operation, whatever
that operation’s position in a series. Cabinet’s approval of the reform plan is a signal of its commitment
to it, and its implementation will be supported by technical assistance from the ADB, adding to the
level of confidence that the GoK will be able to follow-through on this commitment. The GoK is now
beginning to implement the first phase of the KPPRP, which will include the institutional reforms
establishing and providing a budget for the CPU, the appointment of the CPO, and the delegation of
the relevant powers from the Secretary for Cabinet to the CPO (an interim arrangement, before the
wider legislative changes are made, that would include reassigning these powers). With support from
MFAT, the GoK is also embarking on an analysis of its asset management and maintenance needs and
systems, which is a very challenging area in Kiribati and which is complementary to procurement
17
systems. This is expected to lead to a series of asset management reforms. It is important to note the
significance of the timing of Cabinet’s commitment to procurement reform and the commencement
of its work on asset maintenance: with the GoK planning a significant new program of capital works in
the outer islands, there is a premium on moving towards efficient, fair and transparent procurement
and effective asset management and maintenance. Cabinet’s approval of the KPPRP is a valuable to
support as a signal of its commitment to the procurement reforms, whose implementation – alongside
asset management reforms – the Bank could support in the future.
43. Given that Cabinet approval of the KPPRP is a prior step to the actual implementation of
procurement reforms, its inclusion as a prior action in the last operation in a DPO series does make
it challenging to identify an appropriate results indicator. In essence, the expected result from this
high-level endorsement of the KPPRP is that it underpins the momentum for the KPPRP to be
implemented in a timely manner. A key signal that the KPPRP is being implemented in a timely manner
would be the establishment of an operational CPU. Once the CPU is able to operate, it will be possible
for the Secretary to Cabinet to delegate procurement powers to the CPO. That delegation could thus
therefore serve as an indicator that Cabinet’s approval of the KPPRP has been effective in spurring the
timely implementation of the KPPRP.
Pillar 2: Improving the environment for inclusive growth.
Prior Action 4: The Recipient, through its Cabinet, has: (i) approved a fisheries joint ventures policy
outlining the criteria for evaluating existing and new fisheries joint ventures; and (ii) approved a
plan to annually review the performance of fisheries joint ventures against this policy.
44. Fisheries are one of Kiribati’s most important assets, and – particularly through the public
sector activity that fisheries license revenue supports – are the main driver of the economy. They
also provide direct economic benefits, in the form of jobs in fishing, processing and transshipment
operations. Increasing the returns from fisheries – whether revenue to fund public sector activity or
direct economic benefits – is critical to inclusive growth in Kiribati. Historically, fisheries revenues were
low and volatile, but a turning point came with the implementation of the Vessel Day Scheme (VDS)
in 2012 (Figure 5). The VDS was the result of an accord reached by the Parties to the Nauru Agreement
(PNA) to establish limits on the number of fishing days they would sell to purse seine vessels.
Effectively, this supply constraint enables PNA members to retain a greater proportion of the tuna
catch value in license fees. Kiribati’s progress in negotiating access arrangements consistent with the
VDS and within the overall catch limits was slow, however, as a result of lack of whole-of-government
commitment to the VDS and, in particular, lack of coordination between MFED and MFMRD. In the
previous DPO series, the Bank supported the GoK to reform the management of fisheries resources
and fisheries revenue. This included adoption of a National Fisheries Policy, which incorporated a
commitment to comply with the VDS, and the production of a joint annual report on fisheries revenue
by MFED and MFMRD. Previously, MFMRD did not share disaggregated data on the sources of
fisheries revenue with MFED, so the information sharing and cooperation inherent in producing this
report – which has been produced on an annual basis since – was a critical step forward for
transparency and macroeconomic management. Alongside the RERF reforms, fisheries reforms
represented one of the most significant achievements of the previous DPO series.
45. Increasing the returns that Kiribati obtains from its fisheries assets is an overriding priority
for the GoK. Having made considerable progress in the area of fisheries revenue management under
the previous DPO series, this series has focused on the reform of fisheries joint ventures. To increase
domestic value-added from fisheries assets and provide employment opportunities for I-Kiribati
workers, the government has forged a number of joint ventures with overseas partners. The GoK has
provided concessions and incentives to attract potential investors, to offset the high costs of business
operations in Kiribati and the paucity of essential infrastructure. While some of these joint ventures –
18
like Kiribati Fish Limited – have resulted in operational processing plants that provide domestic jobs
and produce export-grade products – the benefits of others have been less clear. The details of the
joint venture agreements – including the concessions provided – were not readily shared by MFMRD
to facilitate an assessment of their costs and benefits for Kiribati. The previous operation supported
the GoK’s review of its six existing joint ventures, to examine their financial performance, contribution
to the economy (including government revenue and domestic employment), and compliance with
regional agreements, to ensure the joint ventures were not being formed merely to take advantage
of the local vessel status and thus subvert fishing effort limits imposed on international vessels.
Cabinet considered the findings and recommendations of the review, endorsing the recommendation
to dissolve one joint venture and substantially restructure another.7
Figure 5: Fishing license fee revenues, 1996-2016 (A$m)
220
200
180
160
140
120
100
80
60
40
20
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: MFED and MFMRD.
46. The prior action for this operation is that the government institutionalize the formal review
process by adopting a fisheries joint ventures policy, which has been completed. Cabinet considered
and endorsed a set of criteria against which all existing and proposed joint ventures will be assessed,
and agreed that the assessment should take place on an annual basis. The criteria include: the impact
of the joint venture on government revenue and revenue-expenditure; its contribution to domestic
employment; its potential for future expansion; its impact on the sustainability of local fisheries and
fishing operations; its financial viability, risk exposure and risk mitigation; its compatibility with sub-
regional, regional and international fisheries instruments; and the degree of cooperation of joint
venture partners with agreements, policies, management and operations. The adoption of this policy,
including annual evaluation of all joint ventures against the specified criteria, signals the GoK’s
commitment to actively ensure that Kiribati derives an appropriate level of benefits from its fisheries
assets.
47. There are a number of other aspects of the GoK’s strategy for increasing the returns Kiribati
accrues from its fisheries, which could be supported in the future. One possible area is
transshipment, which appears to have the potential to generate substantial domestic economic
activity, through backward linkages to private sector supply firms.
48. For the current series, the expected outcome of this area of reforms is that – through the
annual review process – Kiribati obtains value-for-money from its fisheries joint ventures. The value-
for-money assessment will be made annually, based on the criteria approved by Cabinet. The target
will be that all joint ventures are assessed as providing value-for-money for Kiribati (or for those that
7Whereas in the first DPO series the fisheries reforms focused on the management of fisheries revenues, in
the current DPO series the reforms focus on the broader returns (including the contribution to the economy
and domestic employment) Kiribati obtains from its fisheries assets. It thus seems more appropriate to include
this reform area under the second pillar (on the environment for inclusive growth) than under the first pillar
(on public financial management), which explains the proposed new location of this reform area.
19
are not, associated remedial actions have been agreed). The baseline, based on the findings of the
initial review, is that two-thirds of joint ventures provided value-for-money.
Prior Action 5: The Recipient, through its Cabinet, has approved ownership and management plans
for telecommunications assets in the outer islands, in order to facilitate the roll out of
telecommunications services to outer islands that do not currently have access to them.
49. Achieving universal access to reliable and affordable telecommunications services is
important to facilitate inclusive growth across the country, including through strengthening disaster
risk management. Telecommunications connectivity is critical to the quality of life of I-Kiribati, to the
business enabling environment in Kiribati, and to Kiribati’s capacity to mitigate the impact of natural
disasters through effective early warning systems and effective disaster responsive efforts. In recent
years, Kiribati has made substantial reforms to the telecommunications sector, supported by technical
assistance from the World Bank. In 2013, the GoK enacted new telecommunications legislation,
providing for the liberalization of the telecommunications sector, including the commercialization of
the incumbent SOE and the introduction of competition. In 2014, the GoK tendered for the sale of the
assets of the incumbent SOE. These reforms were supported by the operations in the first DPO series.
The new privately-owned telecommunications provider moved quickly to improve the quality of
services on offer and expand the market, with mobile penetration now at about 45 percent and mobile
broadband penetration at about 40 percent.
50. While the costs of mobile telecommunications services have declined under the new
provider, they remain very high. The main reasons for this include the lack of scale and high costs of
maintaining service on remote and sparsely populated islands, the difficult operating environment –
particularly the high cost of satellite bandwidth since Kiribati does not yet have access to a submarine
fiber optical cable, and the absence of competition in the market. In 2015, the GoK issued a second
mobile operator license to introduce competition in mobile telecommunications services, with
technical assistance for the introduction of competition provided by the World Bank. This reform was
supported by the first operation in the current DPO series. Though progress with the establishment of
the second operator has been very slow, in recent months the GoK has worked to tackle the obstacles
to its establishment that are within the GoK’s control. The interconnection agreement remains
outstanding, however. With respect to access to a submarine fiber optical cable, the World Bank is
supporting the GoK to establish an international submarine cable connection, while the ADB is
supporting a cable connection to Kiritimati (Christmas) Island.
51. Even with the reforms to date, access to telecommunications is far from universal. While
most households in South Tarawa now have at least one mobile subscriber, only about 70 percent of
the population is within mobile network range – with the populations of most outer islands outside
the range. In 2017, Cabinet approved ownership and management plans for telecommunications
assets in the outer islands, detailing the costs, options, and timeline to roll out mobile and internet
services to the outer islands. Cabinet adopted a two-phase approach to the roll-out, aligning priority
areas with the availability of financial resources and implementation capacity, to support the success
of the plan. The Bank’s telecommunications team is of the view that the ownership and management
plans adopted by Cabinet meet the requirements of a universal access program in the Kiribati context,
thus their approval does not represent a substantial change to the original trigger, which was framed
in terms of a universal access plan. Following consultations with the Bank’s telecommunications team,
the GoK has opted for a public-private partnership approach to outer island telecommunications
assets, and has now moved to prepare the necessary documentation to proceed with this approach,
in the four outer islands that will be covered in the first phase of the roll-out.
52. The roll-out of telecommunications services to the outer islands is expected to improve the
environment for inclusive growth across the country, including for women who will potentially be
20
able to utilize these services for small enterprise development, market linkages, and mobile
banking. Broadband internet would also help outer island populations get better access to weather
data, facilitate early warnings via alerts, and facilitate disaster response efforts. Potentially also,
telecommunications infrastructure would facilitate the establishment of sensor networks to monitor
specific climate change impacts and risks. The Bank will continue to provide technical assistance for
the implementation of reforms in the telecommunications sector, including support for the regulator
and for the first phase of the implementation of the outer island roll-out.
53. There are two expected results indicators for this reform area. The first, relating to the prior
action for the previous operation, is that the Tarawa market is served by at least two mobile operators,
with increased mobile penetration and lower prices. Specifically, the penetration rate in the Tarawa
market is expected to reach at least 50 percent by the end of 2018, and the price of mobile calls within
Tarawa is expected to fall by at least 17 percent.8 The second, relating to the prior action for this
operation, is that the penetration rate for mobile phones in the outer islands increases to 20 percent
by the end of 2018.
Prior Action 6: The Recipient, through its Cabinet, has approved: (i) a new electricity tariff that
makes electricity more affordable for the poor while aligning the average tariff with cost recovery;
and (ii) a reduced household electricity connection fee, to expand access to electricity.
54. Access to quality, affordable electricity, water and sanitation services is critical to both the
quality of life of I-Kiribati and the business enabling environment in Kiribati, thereby supporting
inclusive growth. In South Tarawa and Betio, where there is an electricity grid, a reticulated water
system and a sewage system, but where population growth is most pronounced, use of grid electricity
for lighting is quite low by regional standards for capitals (73 percent of households), access to piped
water is also relatively low (37 percent), and only 13 percent of households are connected to the
sewage system. Low levels of access to improved water and sanitation, in combination with extreme
population density, contribute to very significant health problems – including one of the highest rates
of infant mortality in the region and the rise of leprosy in the most densely populated atoll Betio.
Stakeholder consultations at the time of the first DPO series suggested that problems with the
provision of basic services – including water and electricity – have a large impact on the lives of the
poor and especially households headed by women. Women typically bear a disproportionate burden
of household work, which lack of ready access to electricity, water or sanitation increases significantly.
Electricity, water and sewage disposal are the responsibility of PUB, which until recently has been a
very poorly performing SOE. Following on from the broad SOE governance reforms supported by the
first DPO series, and with assistance from a group of development partners including the World Bank,
ADB, MFAT and DFAT, the Ministry of Public Works and Utilities prepared a performance improvement
plan for PUB, identifying short-term measures to improve the operational performance of PUB. These
included the competitive international selection and recruitment of a new CEO, to spearhead the
implementation of the plan. These reforms were supported by the first operation in this DPO series.
55. The original trigger for the second operation in the series was Cabinet adoption of a
medium-term reform plan for PUB, and the implementation of key aspects of the first six months
of the plan. As it turned out, the medium-term reform plan did not ever go to Cabinet, but was
substantially implemented in a short timeframe anyway. The maintenance of electricity generators
was improved, contributing to improved reliability and availability of electricity and a 7 percent
8 The target mobile penetration rate is similar to the rate achieved in Solomon Islands in 2011; the target cost
of a three-minute local call (mobile-to-mobile) is similar to that achieved in Vanuatu in 2011. Solomon Islands
and Vanuatu are reasonable comparators because, like Kiribati, these countries rely on satellite for
international and remote island connections. Solomon Islands and Vanuatu liberalized their
telecommunications sectors in 2010 and 2008, respectively.
21
increase in electricity sales in 2016. 1.5 MW of solar PV was brought into service, offsetting a
significant volume of diesel consumption. A dedicated effort was made to create a culture of payment,
with record recovery of electricity revenues – 104 percent for 2016. Losses and wastage across PUB
operations were reduced and the GoK provided a modest community service obligation (CSO) for
water and sewage for the first time in 2016. Overall, and in a very short space of time, PUB went from
making persistent, significant losses to making a very small net profit in 2016.
56. It is proposed that the original trigger for the second operation be revised to capture key
aspects of the medium-term reform plan, since its substantial implementation now makes Cabinet
approval of the plan itself a moot point. The key policy aspects of the reform plan that have required
Cabinet approval pertain to the electricity tariff. In January 2017, Cabinet approved a new tariff
structure that significantly lowers the burden of electricity costs for the poorest households. The first
100 kWh (enough for lighting, a fridge and perhaps a fan for a very small home) is now charged at 10c
per kWh for domestic consumers (down from 40c). From 100 kWh to 300 kWh is charged at 40c per
kWh, and over 300 kWh is charged at 55c per kWh (up from 40c), the same charge as commercial
users and approximately the cost recovery level. At present, industrial users (charged at 70c per kWh)
effectively cross-subsidize the tiered tariff structure that benefits small domestic consumers. PUB has
complemented the new tariff with an education campaign to help households manage their electricity
use better. Cabinet has also approved a reduction in the household electricity connection fee from
A$380 to A$50, prompting over 1,000 households to request electricity connections. Female-headed
households are over-represented among households below the basic needs positive line, so these
measures are expected to have a disproportionate benefit to female-headed households.
57. In the future, PUB will increasingly focus its reform efforts on water, reforms which the Bank
support. Electricity-related reforms will be ongoing at the operational level, but the next critical area
for PUB that requires policy change is in the area of water. At present, PUB is preparing to pilot the
concept of being able to deliver piped water that is available 24 hours a day, 7 days a week through a
pressurized system. PUB’s research suggests that even poor households would be prepared to pay a
usage fee to have water available in this way, in preference to the current situation for many poor
households where water is free but only available from communal standpipes for two hours a day
every second day. At present, however, PUB is prevented by government policy from charging for
water. With a modest CSO and series of misaligned incentives, technical and commercial losses of
water are unlikely to be significantly reduced and household access to piped water is unlikely to be
significantly expanded unless there is a shift in policy, which the current pilot could contribute
towards. Once PUB has proved the concept of this level of service delivery, deliberations over how to
fund the cost of providing it universally and on a sustainable basis can begin.
58. There are two expected results indicators for this reform area. The first, relating to the prior
action for the previous operation, is an improvement in the operational and financial performance of
PUB, including improved electricity service quality. Specifically, the billing collection rate is expected
to rise from 85 percent in 2015 to over 90 percent by the end of 2018, total power losses are expected
to fall from 18 percent in 2015 to less than 15 percent in 2018, the frequency of electricity outages is
expected to fall from 7.8 in 2016 to the regional average of 6 in 2018, and the duration of electricity
outages is expected to fall from 956 minutes in 2016 to 880 minutes in 2018. The second, relating to
the prior action for this operation, is that 70 percent of poor households (defined as households
consuming less than 100kWh) benefit from the new tariff structure.
22
Table 3: DPO prior actions and analytical underpinnings
Indicative Trigger Proposed Prior Action Explanation for Change Analytical Underpinnings
Pillar I: Strengthening public financial management
2. The Recipient, through the Ministry 1. (i) The Recipient, through its Ministry The current government has focused on IMF Country Report No. 9/196 (Selected
of Finance and Economic Development, of Finance and Economic Development, continuing the implementation of Issues Paper I); IMF Monetary and
has developed and submitted to the has completed a review of RERF earlier recommendations to strengthen Capital Markets Department technical
Cabinet the reform options to custodial arrangements to ensure that the management of the RERF. At the assistance report, 2011; IMF Country
regularize the transfers and the services of the provider remain same time, it has taken time to Report No. 15/207 (Box 3); World Bank
withdrawals from the RERF. competitive with current market articulate objectives for the RERF that Treasury RAMP technical assistance
practice and benchmarks; (ii) the seek to strike a balance between reports: especially recommendations
Recipient’s Cabinet has endorsed the benefits to current and future concerning the need to renegotiate the
recommendations of the review; and generations, and is now in the process contract with the custodian and
(iii) the Recipient has issued a request of determining an appropriate strategy strengthen oversight of the asset
for proposal for custodial services. to achieve those objectives. An managers.
approach to transfers and withdrawals
Status: Completed consistent with this strategy could be
supported in a subsequent DPO series.
3. The Recipient has improved 2. The Recipient has improved The change to component (ii) corrects it IMF Establishing a Structure for Public
monitoring of contingent liabilities, monitoring of contingent liabilities, to refer to completion of financial Debt Management technical assistance
through: (a) quantifying the sovereign through: (i) quantifying the statements rather than completion of report, September 2013; Kiribati Debt
guarantees, (b) bringing up to date the government’s guarantees; (ii) bringing external audits, since only the former Management Policy, 2013; 2016 World
external audits of the financial up to date the financial statements of has a timeframe specified in legislation. Bank–IMF Debt Sustainability Analysis:
statements of SOEs including the the five largest SOEs; and (iii) Learning from the ICR of the first DPO especially the analysis and
Development Bank of Kiribati, and (c) submitting the financial statements of series, it also narrows the focus to the recommendations concerning the
submitting the financial statement of the Kiribati Provident Fund to the five largest SOEs (which include DBK), monitoring and management of
the Kiribati National Provident Fund to external auditor. to appropriate reflect scarce capacity. contingent liabilities.
the external audits.
Status: Completed
– 3. The Recipient: (i) through its Cabinet, This is a new prior action, reflecting the Kiribati Public Financial Management
has approved the Kiribati Public initiation of reform measures in this Performance Report, 2010; Kiribati
Procurement Reform Plan; and (ii) has critical area of PFM. Procurement System Review Report,
made the Kiribati Public Procurement 2016: recommending a comprehensive
Reform Plan publicly available. reform of procurement legislation,
regulations, processes and institutions.
Status: Completed
23
Indicative Trigger Proposed Prior Action Explanation for Change Analytical Underpinnings
Pillar II: Improving the environment for inclusive growth
1. The Recipient’s Cabinet has approved 4. The Recipient, through its Cabinet, Minor wording changes only. Kiribati Public Financial Management
a fisheries joint ventures policy has: (i) approved a fisheries joint Performance Report, 2010; Kiribati
outlining the criteria for evaluating ventures policy outlining the criteria for National Fisheries Policy 2013-25:
existing and new fisheries joint evaluating the existing and any new particularly the recommendations
ventures, and has approved a plan to fisheries joint ventures; and (ii) pertaining to the need for closer fiscal
annually review the performance of approved a plan to annually review the oversight of the joint ventures.
fisheries joint ventures against this performance of fisheries joint ventures
policy. against this policy.
Status: Completed
4. The Recipient’s Cabinet has adopted 5. The Recipient, through its Cabinet, The World Bank’s telecommunications World Bank Kiribati ICT Development
the revised Universal Access Plan, has approved ownership and team is of the view that the approved Project Appraisal Document, 2012:
detailing costs, options, and the management plans for ownership and management plans for analysis on improving outer island
timeline to roll out the telecommunications assets in the outer outer islands telecommunications connectivity.
telecommunications services to the islands, in order to facilitate the roll out assets meet the requirements of a
outer islands. of telecommunications services to universal access program in the Kiribati
outer islands that do not currently have context, thus this change does not
access to them. represent a substantial change to the
original trigger.
Status: Completed
5. The Recipient’s Cabinet has adopted 6. The Recipient, through its Cabinet, This revision removes the first part of A series of reports prepared under the
a medium-term reform plan of the has approved: (i) a new electricity tariff the indicative trigger which has been Kiribati Utility Services Reform Project,
Public Utilities Board, detailing the that makes electricity more affordable superseded (the medium-term reform including (i) Operational Performance
reform options to achieve operationally for the poor while aligning the average plan was substantially implemented, Assessment; (ii) Financial Performance
and financially sustainable electricity, tariff with cost recovery; and (ii) a without ever having gone to Cabinet), Assessment; and (iii) Service Levels and
water, and sanitation services in South reduced household electricity and specifies the key policy aspects of Operational and Capital Investment
Tarawa, Kiribati, and has implemented connection fee, to expand access to the reform plan (as was needed, in Needs Assessment: recommendations
key aspects of the first six months of electricity. accordance with the wording of the concerning cost recovery tariffs.
the plan. indicative trigger).
Status: Completed
24
4.3 LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY
59. The proposed operation is aligned with the priorities identified in the Regional Partnership
Framework (RPF). The first component of the PDO on strengthening public financial management is
aligned with focus area 4 of the RPF (strengthening the enablers of growth opportunities – specifically
the development and maintenance of frameworks to improve fiscal management). The second
component of the PDO on improving the environment for inclusive growth is aligned with focus area
1 (fully exploiting the available economic opportunities – specifically improved management of
oceanic and coastal fisheries) and focus area 4 (specifically increased access to basic services and
improved connective infrastructure). Both components of the PDO are aligned with the twin goals of
ending extreme poverty and promoting shared prosperity in a sustainable manner, through the way
fiscal management, exploiting available economic opportunities and access to basic services and
connective infrastructure contribute to poverty reduction and share prosperity.
60. The proposed operation is complemented by a number of other Bank engagements in
contributing to achieve the objectives of the RPF. These include: (i) the World Bank Treasury RAMP,
which is helping the government improve the governance, management and strategy relating to the
RERF; (ii) the Telecommunications and ICT Development Project and the Pacific Regional Connectivity
Program Phase 4: KI: Connectivity Project, led by the Transport and ICT Global Practice, which is
helping the country achieve the transition to a market-driven telecommunications sector, expand
services to the outer islands and establish international cable connectivity; and (iii) the Utility Service
Reform Project, led by the Energy and Extractives Global Practice, which is helping government
develop and implement comprehensive reforms of PUB to ensure the sustainable provision of
essential public utilities.
4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS
Consultations
The GoK formulates its national development plans through a consultative process among
government stakeholders, civil society and the private sector. As well as being consulted in its
formulation, civil society and the private sector are invited to provide feedback on drafts of the plan.
It also involves widespread consultation with all government ministries and agencies. The consultation
process for DPOs in Kiribati occurs through the Economic Reform Taskforce (ERT). The ERT was
established prior to the first DPO series, to serve as a forum for consultation, coordination and
management of key economic reforms. It is a joint government-donor working group, chaired by the
Secretary to Cabinet and including the Permanent Secretaries for Finance and Economic
Development, Fisheries and Marine Resources Development, Communications, Transport and
Tourism Development, and Commerce, Industry and Cooperatives, as well as representatives of the
World Bank, ADB, DFAT and MFAT. ERT provides a forum for dialogue, progress monitoring, results
monitoring, and coordination of technical assistance for budget support-related reforms.
Collaboration with other Development Partners
61. The World Bank has collaborated closely with the ADB, DFAT and MFAT in the preparation
of this operation. In keeping with the established practice in the region, this operation is based on a
joint policy matrix agreed between the GoK and this group of development partners. This approach
improves the feasibility of reforms by having the GoK and key development partners focusing on a
small set of reforms, and coordinating the provision of their technical assistance in support of these
reforms. This approach also reduces the transaction costs on the GoK, by harmonizing a number of
the engagement and procedural aspects of budget support operations. With respect to the actions in
the joint matrix, the World Bank provides technical assistance on the RERF and telecommunications
25
reform areas, the ADB provides assistance on the contingent liabilities and procurement reform areas
as well as on broader SOE monitoring and reform, and MFAT provides assistance on the fisheries
reform areas. The Bank, ADB MFAT and DFAT also work together to provide assistance to PUB. In
addition, the Bank collaborates closely with the IMF and with the Pacific Financial Technical Assistance
Centre (PFTAC) on macro-fiscal policy and PFM issues.
5.1 POVERTY AND SOCIAL IMPACT
62. Policies supported by the proposed operation are expected to have a positive impact on
poor people and vulnerable groups. Strengthening public financial management and safeguarding
fiscal sustainability should help ensure that the government can maintain public services and public
investment in human and physical capital, which are of disproportionate importance to the poor.
Improving the financial and operational performance of the RERF is vital to fiscal sustainability in
Kiribati. Improving public debt management, including the management of contingent liabilities,
should help avoid unsustainable borrowing, the realization of contingent liabilities, and, ultimately, a
debt crisis that would disproportionately hurt the poor who are less able to accumulate buffers or
insure against risk. Improving the efficiency of public procurement should contribute to higher quality
public spending, again of disproportionate benefit to the poor.
63. Improving the returns Kiribati obtains from its fisheries assets is expected to benefit the
poor, primarily through the public services and public investment that sustained higher revenues
enable. The current DPO series focuses on the returns to Kiribati from its fisheries joint ventures.
Through the supported reforms, the GoK is ensuring that the concessions it grants through joint
ventures (tax concessions or concessional access to its fisheries – both of which take away from the
revenues otherwise available for public services and public investment) are worth the benefits (in
terms of domestic economic activity and employment generation). The criteria approved for the
evaluation of joint ventures also include their impact on local fisheries and fishing operations.
Although the impact of these joint ventures on local fisheries is typically minimal, because the joint
ventures are concerned with access to oceanic – not coastal – fisheries, the inclusion of this criteria
should help to mitigate any potential negative poverty and social impact.
64. Facilitating competition in the telecommunications market and expanding access to
telecommunications services in the outer islands are expected to be pro-poor. Competition is
expected to improve services and lower prices for the population of South Tarawa, where the largest
numbers of poor people live. Rolling out telecommunications services to the outer islands is expected
to help reduce isolation and potentially also improve the quality of public services, like health and
education, in the outer islands. In so doing, it may reduce the intensity of some of the push factors in
internal migration to South Tarawa – access to health and education – which, in turn, could help to
moderate population pressures, health and sanitation challenges, and environmental degradation in
the capital. More broadly, the reforms in the telecommunications sector are expected to improve the
business environment in Kiribati, enabling the private sector to take advantage of the economic
opportunities that do exist, with consequential benefits for job creation.
65. Improving access to and quality of essential services is also expected to disproportionately
benefit poor people and vulnerable groups. Consultations with women’s groups at the time of the
first DPO series confirmed the significance of basic services – including water and electricity – to
wellbeing, especially to the welfare of households headed by women. The reforms at PUB are
improving the reach and quality of services, which should improve rates of electrification, access to
an improved water source and access to improve sanitation in South Tarawa, where the largest
numbers of poor people live. Over time, this should improve the health of residents in the capital. The
specific measures supported by this series include a substantial reduction of the electricity tariff for
the first portion of household electricity consumption, of particular benefit to smaller electricity users
26
who are typically poorer, and a major reduction of the household connection fee, of disproportionate
benefit to those who have, until now, been unable to afford an electricity connection. Approximately
150 households fall into the highest bracket of domestic electricity consumers (over 300kWh), so will
be adversely affected by the increase in the tariff for units of electricity over 300kWh (to match the
commercial tariff, which is approximately the cost recovery level). If a future DPO series supports
reforms to water tariffs that introduce usage fees to improve access and quality of water services in a
sustainable manner, any such reforms would be preceded by distributional analysis and examination
of options for mitigating the impact on the poor, with technical assistance provided by the World Bank
and the other donor partners supporting the PUB reforms. More broadly, the reforms in the utilities
sector are expected to improve the business environment in Kiribati.
5.2 ENVIRONMENTAL ASPECTS
66. Policies supported by the proposed operation are not expected to have any significant direct
adverse effects on the environment, forests and natural resources. In the team’s judgment,
improving the performance of the RERF, improving public debt management, and improving the
efficiency of public procurement, are not expected to have any environmental impact. Improving the
returns Kiribati obtains from its fisheries assets is not expected to have a direct environmental impact.
It may have a small positive indirect impact, because one of the criteria established for the evaluation
of joint ventures is their compatibility with regional and international fisheries instruments. The
regional VDS sets limits on the level of fishing effort based on a regional determination of sustainable
effort levels. Thus, including this criteria brings sustainability into the considerations applying to the
evaluation of joint ventures. In addition, the degree of cooperation by joint venture partners with
agreed policies allows for the evaluation of joint ventures to take account of their adherence to
environmental and social policies and regulations. The reforms supported in relation to PUB are not
expected to have direct environmental impacts.
67. The reforms in the telecommunications sector supported by the proposed operation are
likely to have direct effects on the environment, because the ownership and management plans for
telecommunications assets in the outer islands approved by Cabinet represent a strategy for rolling
out telecommunications services to the outer islands, which will necessarily involve infrastructure
development. For the first phase of the roll out of telecommunications services, covering four outer
islands, the infrastructure development that will occur as a consequence of Cabinet’s approval of the
ownership and management plans will be supported through the Bank’s Telecommunications and ICT
Development Project. The Project itself will finance the delivery of telecommunications services, with
bidders for the provision of these services constructing towers for the mobile networks. The Project
is subject to an Environmental Code of Practice, which was approved during Project preparation and
remains current. Bidders for the provision of telecommunications services will need to comply with
this Environmental Code of Practice.
68. Kiribati’s institutional capacity for environmental assessment and climate risk management
is rated 3.0 according to the latest CPIA, indicating that the legal and regulatory framework are in
place for effective environmental assessment system but weak capacity constrains monitoring and
enforcement. The Environment Act 1999 (with 2007 Amendments) and the Environment Regulations
2001 provide the legal and regulatory framework for the country’s environmental assessment system.
The draft Environmental Regulation 2009 is currently being redrafted to update the processes for
environmental impact assessment. The Environment and Conservation Department is responsible for
implementation and enforcement. Its capacity remains weak due to staff turnover, inadequate budget
allocations to monitoring and enforcement, and a lack of capacity to carry out technical reviews of
complex applications. Technical assistance is being provided through a number of sector-specific Bank
projects, to help mitigate these institutional capacity weaknesses. This capacity building assistance
has included support in the areas of social safeguards, community engagement and social inclusion,
27
and the implementation of environmental management plans. Further support is also likely to be
provided in the future in the areas of sustainable use and management of oceanic fisheries and coastal
fisheries and wider ecosystems. With respect to mainstreaming climate change management in
national policy, Kiribati is committed to integrating climate risk awareness and responsiveness into its
economic and operational planning frameworks. In vulnerable areas, such as fresh water management
and coastal protection, climate risks are integrated into projects and plans. Overall, while
administrative capacity for environmental protection in Kiribati is weak, a combination of the existing
environmental regulatory framework, the capacity building assistance being provided by the Bank, the
nature of the reforms supported in the proposed operation, and the risk mitigation measures relating
to the telecommunications reforms, support the conclusion that the proposed operation is unlikely to
lead to significant adverse environmental impacts.
5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS
69. Overall, the fiduciary risk to this operation arising from Kiribati’s public financial
management framework is assessed as substantial.
70. The 2010 Public Financial Management Performance Report identified relative strengths in
Kiribati’s public financial management in several areas. These included: (i) credibility of the aggregate
expenditure program; (ii) credibility of the expenditure composition; (iii) transparency of inter-
government fiscal relations; (iv) orderliness of and participation in the annual budget process; (v)
predictability of taxpayer obligations and liabilities; (vi) predictability in the availability of funds for
commitment of expenditures; (vii) scope, nature and follow-up of external audit; and (viii) legislative
scrutiny of external audit reports (all scoring better than a C).
71. At the same time, the report highlighted a number of weaknesses. These included: (i)
revenue estimates in the budget; (ii) classification of the budget; (iii) oversight of aggregate fiscal risk
from other public sector entities; (iv) multi-year perspective in fiscal planning, expenditure policy and
budgeting; (v) recording and management of cash balances, debt and guarantees; (vi) competition,
value for money and controls in procurement; (vii) quality and timeliness of in-year budget reports;
(viii) effectiveness of internal controls; and (ix) timeliness and regularity of accounts reconciliation (all
scoring below a C).
72. Following the 2010 Public Financial Management Performance Report, the government has
worked to strengthen public financial management, with technical assistance from donors.
Information sharing between MFMRD and MFED on the sources of fisheries revenues has improved
significantly, strengthening the ability of the GoK to project fisheries revenues in the budget (a
measure supported by the previous DPO series). There has been some progress in strengthening
expenditure controls, through improved accounting systems and the move toward a more standard
budget classification. However, issues remain in relation to the effectiveness of the controls and in
reconciling the central accounting system with the separate systems in line ministries. There has been
some incorporation of a multi-year perspective in budgeting. The backlog of annual financial
statements of the government has been eliminated, and progress has been made in eliminating the
backlog for the large SOEs (a measure supported by the current operation). The government has
strengthened the transparency of SOE-related financial activities, breaking down transfers to SOE
between CSOs and other transfers). Procurement reforms have also now been initiated (a measure
also supported by the current operation). Kiribati’s annual budget is publicly available on the GoK’s
website.
73. External audit functions reasonably well in Kiribati. The Audit Office is considered to function
well, although it struggles with limited resources and capacity, and its recommendations are not
consistently implemented. While audit reports on the government’s financial statements are available
28
within eight months of their receipt, there have in the past been delays in the submission of the
financial statements to the Audit Office. These delays have now been eliminated. The government’s
2015 annual accounts were subject to a qualified opinion with the Auditor-General unable to satisfy
herself as to the accuracy of the financial statements. Approximately 50 percent of expenditure is
audited annually. There is strong parliamentary scrutiny of the audit reports. Parliament reserves one
day per session for debate of the reports and the government is required to table a response to the
Public Accounts Committee’s recommendations. Parliamentary proceedings are broadcast on public
radio, which has wide listenership. Nevertheless, issues relating to the coverage of the budget –
including limited information on public debt and guarantees, and lack of disclosure on fishing license
and joint venture agreements signed and fees received – limit the extent to which public scrutiny of
the report provides a full picture of the government’s fiscal operations.
74. Kiribati does not have a central bank or its own national currency. It has not, therefore, been
subject to an IMF Safeguards Assessment. The disbursement measures proposed are that the grant
funds disbursed by the World Bank be deposited into a dedicated Local Currency Deposit Account and
from it into the budget account of the government and thus available to finance budgeted
expenditures. The grant will be disbursed according to IDA disbursement procedures for development
policy operations. The full grant amount of US$5 million equivalent will be disbursed against
satisfactory completion of the specified policy actions as listed in Table 3, the government agreement
as summarized in the Letter of the Development Policy, and adequacy of the macroeconomic policy
framework, and is not tied to any specific purchases. Once the grant is approved by the Board and
becomes effective, the proceeds of the grant will be deposited by IDA in one tranche, in Australian
dollars, at the request of the Recipient, into a dedicated Local Currency Deposit Account, at the ANZ
Bank. ANZ is a large Australian Bank and owns 75 percent of the ANZ Banking Company operating in
Kiribati. The government owns the other 25 percent. This is the only commercial bank operating in
Kiribati. All investment lending funds to Kiribati which require a Designated Account have used the
ANZ.
75. Flow of funds is subject to the government’s regular financial management processes. Grant
proceeds once deposited into a dedicated Local Currency Deposit Account will be transferred into an
account of the government available to finance budgeted expenditures, and will thus be subject to
the government’s regular PFM processes and procedures. As a due diligence measure, within 30 days
of receipt of the IDA funds the Recipient will provide, by way of a letter, confirmation to the World
Bank that the grant amount has been credited to an account used to finance budgeted expenditures.
Disbursement would not be linked to specific purchases. The proceeds of the operation would not be
used to finance expenditures excluded under the legal agreement. If, after being deposited in a
government account, the proceeds of the operation are used for excluded expenditures as such term
is defined in the legal agreement, IDA will require the Recipient to refund the amount directly to IDA.
Any such amounts refunded to IDA shall be cancelled.
76. As an additional risk mitigation measure, the World Bank will require the auditors of the
government, in this case the Kiribati National Audit Office, to conduct a special audit of the
dedicated Local Currency Deposit Account. The audit will cover the following: (i) the accuracy of the
summary of the transactions of this account, including the accuracy of any exchange rate conversions;
(ii) that this account was only used for the purposes of the operation and that no other amounts were
deposited into this account, including confirmation from corresponding bank(s) involved in funds flow;
and (iii) that payments from this dedicated Local Currency Deposit Account were in a timely manner
(normally within 30 days of disbursement) transferred to an account available to finance budgeted
expenditure. The audit will be provided to the Bank as soon as available, but not later than six months
after the end of the Recipient’s financial year in which the grant is disbursed, and will be made publicly
available in a timely fashion.
29
77. The closing date for the proposed operation would be 31 December, 2018. The Bank’s
experience with DPOs in Pacific Islands suggests the utility of a closing date approximately 12 months
after the expected disbursement of the proceeds of the operation.
5.4 MONITORING, EVALUATION AND ACCOUNTABILITY
78. The ERT provides the structure supporting the monitoring and evaluation of the proposed
operation. Progress against actions and outcomes will be collaboratively tracked, and any necessary
remedial actions identified and executed jointly by the members of the ERT. Monitoring and
evaluation will be supported by the data provided by relevant government ministries and agencies,
donors, and those available from publicly available sources. As far as possible, results indicators rely
on data that would be produced anyway or, where it does not, technical assistance has been
committed to support the GoK to measure the required indicator. The paucity of data is a significant
constraint in some areas, particularly with respect to the telecom and PUB reforms which can be
expected to have significant positive impacts on women, but where the data will not exist to measure
these effects by the time the ICR is undertaken. In addition, the Bank’s approach to DPOs in Kiribati
(which is essentially to undertake annual DPOs, where each indicates triggers for the next operation
– whether it is in the same series or the next series) means that some continuous sequences of reforms
are split across different series, so the relevant baseline is not the beginning of the current series but
before the final operation in the previous series (as for the RERF and telecom reforms in the first
operation of this series). That continuity across series needs to be understood in order to explain the
choice of baseline year.
79. Grievance Redress. Communities and individuals who believe that they are adversely affected
by specific country policies supported as prior actions or tranche release conditions under a World
Bank DPO may submit complaints to the responsible country authorities, appropriate local/national
grievance redress mechanisms, or the World Bank’s Grievance Redress Service (GRS). The GRS ensures
that complaints received are promptly reviewed in order to address pertinent concerns. Affected
communities and individuals may submit their complaint to the World Bank’s independent Inspection
Panel which determines whether harm occurred, or could occur, as a result of World Bank non-
compliance with its policies and procedures. Complaints may be submitted at any time after concerns
have been brought directly to the World Bank's attention, and Bank Management has been given an
opportunity to respond. For information on how to submit complaints to the World Bank’s corporate
GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the
World Bank Inspection Panel, please visit www.inspectionpanel.org.
6. SUMMARY OF RISKS AND MITIGATION
Risk Categories Rating (H, S, M or L)
1. Political and governance S
2. Macroeconomic S
3. Sector strategies and policies M
4. Technical design of project or program M
5. Institutional capacity for implementation and sustainability H
6. Fiduciary S
7. Environment and social S
8. Stakeholders M
9. Other -
Overall S
30
80. The overall risk rating for the proposed operation is substantial.
81. Institutional capacity risks are rated as high, because of the extremely thin capacity of the
public sector to implement the reform program and sustain it over time. Kiribati struggles with thin
capacity – with a small number of public servants and external consultants responsible for carrying
out a large number of tasks and implementing a large number of reforms. Those with well-developed
technical skills and experience are often difficult for the public service to retain, due to the relatively
compressed salary structure of the public sector in Kiribati and the attractive opportunities offered by
development partners with local offices or employment overseas. Program implementation and
especially sustainability is constrained by thin capacity, and can be significantly affected whenever
public servants or external consultants leave their positions. This risk is mitigated somewhat by: having
a relatively strong engagement with government that has been maintained over a number of years
and has thus become somewhat institutionalized; selecting a limited number of policy actions;
ensuring an alignment between those policy actions and government priorities; having dedicated
technical assistance from various development partners to support the implementation of the policy
actions; and having regular missions to help maintain the momentum of the reform program. That
said, some of the reforms supported in the current operation are more demanding of implementation
capacity than those supported in the previous operation (outer island telecommunications versus the
issuance of a second license, for instance) posing a particularly high risk to the operation.
82. The political and governance risk is rated as substantial because the reform program
supported by the DPO series includes areas that have tended to be politically sensitive. These
include the management of the RERF, the governance and reform of SOEs, and the management of
fisheries joint ventures. To mitigate these risks, the dialogue accompanying the proposed operation
has focused on reaching shared understandings, building common platforms, and taking a step-by-
step approach to reforms. Still, there is a large degree to which these political risks cannot be
mitigated, because the reforms pertain to Kiribati’s key assets and major established interests – this
makes the reforms potentially very important, but it means they are inherently risky.
83. The macroeconomic risk is rated as substantial because Kiribati’s economic and fiscal
situation is inherently volatile and any economic or fiscal shock will inevitably detract from the
policy focus on the reform program. A major downturn in fisheries revenues, a major shock to global
financial markets that affects the value of the RERF, or an extreme weather event that provides a large
negative shock to the economy, would each intensify fiscal pressures and likely divert scarce
administrative effort away from the reform program and towards addressing the shock. These are not
the kind of risks that should be mitigated, because in any of those events, addressing the impact of
the shock would likely be a higher priority than pursuing the broader reform program. To the extent
that it is appropriate to maintain the reform momentum, the strong policy dialogue and technical and
financial assistance provided by the group of development partners should serve as mitigating factors.
84. A further risk to the operation is posed by Kiribati’s high degree of vulnerability to natural
disasters and the effects of climate change. If Kiribati experiences a natural disaster over the medium
term, its macroeconomic stability may be threatened and significant parts of the bureaucracy may
have to shift their attention to disaster recovery efforts. This poses a risk to the operation through the
adequacy of the macroeconomic framework, and also through the potential diversion of scarce reform
effort away from the reforms in the policy matrix. This risk is mitigated somewhat by the selection of
a limited number of high priority reforms, but in the event of a major natural disaster it may well be
that the reforms in the policy matrix rightly considered lower priorities relative to disaster response
and recovery efforts.
85. As noted in Section 5.3, the fiduciary risk is rated as substantial. The last Public Financial
Management Performance Report identified a number of significant weaknesses. Considerable
31
reform work has been undertaken since, but a subsequent assessment is yet to be carried out, so the
impact of these reforms has not been validated. As a risk mitigation measure, within 30 days of receipt
of the IDA funds the Recipient will provide, by way of a letter, confirmation to the World Bank that
the grant amount has been credited to an account used to finance budgeted expenditures. As an
additional risk mitigation measure, the World Bank will require the auditors of the government, in this
case the Kiribati National Audit Office, to conduct a special audit of the dedicated Local Currency
Deposit Account. The audit will be provided to the World Bank as soon as available, but not later than
six months after the last disbursement from the Association, and will be made publicly available in a
timely fashion.
32
ANNEX 1: POLICY AND RESULTS MATRIX
DPO3 Prior Actions DPO4 Prior Actions Results
Pillar I: Strengthening public financial management
1. The Recipient has implemented the key 1. (i) The Recipient, through its Ministry of 1. The return on the RERF portfolio is aligned with the relevant
reform actions to improve the Finance and Economic Development, has market benchmark.
management of the Revenue Equalization completed a review of RERF custodial Baseline: a return 8.29 percent below the benchmark (year to
Reserve Fund by: (a) appointing two new arrangements to ensure that the services March 31, 2014);
external asset managers through a of the provider remain competitive with Target: a return 0.25 percent below the benchmark or better
transparent and competitive selection current market practice and benchmarks; (2018).
process; and (b) executing the approved (ii) the Recipient’s Cabinet has endorsed
strategic restructuring of the RERF the recommendations of the review; and 2. The RERF is managed according to prevailing market standards,
portfolio to better align with the RERF’s (iii) the Recipient has issued a request for with reduced costs.
long-term investment objectives. proposal for custodial services Baseline: Costs of 0.2 percent of market value (2015);
Target: Costs of no more than 0.1 percent of market value
(2018).
2. The Recipient has improved management 2. The Recipient has improved monitoring 3. Public sector debt, including contingent liabilities, is monitored
of its public debt by establishing a of contingent liabilities, through: (i) effectively through a comprehensive and up-to-date public sector
comprehensive database of public debt, quantifying the Recipient’s guarantees; debt database.
including the debt of state owned (ii) accepting the financial statements of Baseline: The debt database covers only central government
enterprises and joint ventures. the five largest state-owned enterprises external debt (Dec 31, 2015);
for the Recipient’s financial year Target: The debt database covers public sector external and
commencing January 1, 2016; and (iii) domestic debt, including contingent liabilities, and all debt and
submitting the financial statement of the debt-related transactions (including repayments and
Kiribati Provident Fund for the disbursements) are recorded within a three-month lag (Dec 31,
Recipient’s financial year commencing 2018).
January 1, 2016 to the external auditor.
3. The Recipient: (i) through its Cabinet, has 4. Through the implementation of the KPPRP, the CPU has become
approved the Kiribati Public Procurement operational, as indicated by the delegation of the relevant
Reform Plan; and (ii) has made the procurement powers to the CPO.
Kiribati Public Procurement Reform Plan Baseline: No CPU (Dec 31, 2016);
publicly available. Target: The CPO holds delegated procurement powers (Dec 31,
2018).
33
ANNEX 1: POLICY AND RESULTS MATRIX
DPO3 Prior Actions DPO4 Prior Actions Results
Pillar II: Improving the environment for inclusive growth
3. (a) The Recipient has reviewed all existing 4. The Recipient, through its Cabinet, has: 5. All fisheries joint ventures are reviewed annually based on the
fisheries joint ventures to examine their (i) approved a fisheries joint ventures approved criteria and, for joint ventures that the review finds do
financial performance, contribution to the policy outlining the criteria for evaluating not offer value-for-money to Kiribati, remedial actions are agreed.
economy, and consistency with the existing and new fisheries joint ventures; Baseline: Two-thirds of joint ventures were assessed as providing
National Fisheries Policy and regional and (ii) has approved a plan to annually value-for-money to Kiribati (Dec 31, 2015);
agreements; and (b) the Recipient’s review the performance of fisheries joint Target: All remaining joint ventures were assessed as providing
Cabinet has approved the restructuring or ventures against this policy. value-for-money to Kiribati in the latest annual review, or had
dissolution of the fisheries joint ventures associated remedial actions agreed (Dec 31, 2018).
as appropriate based on the findings and
recommendations of the review.
4. The Recipient has issued a second mobile 5. The Recipient, through its Cabinet, has 6. The telecommunications market in Tarawa is served by at least
operator license so as to introduce approved ownership and management two mobile service operators competing on access and price.
competition in the cellular mobile plans for telecommunications assets in Baseline: The Tarawa market is served by one mobile service
communications services in the the outer islands, in order to facilitate operator, with the mobile phone penetration rate at 12 percent
Recipient’s territory. the roll out of telecommunications (Dec 31, 2014) and the cost of a three-minute peak-hour mobile-
services to outer islands that do not to-mobile call in Tarawa at A$0.90 (Dec 31, 2013);
currently have access to them. Target: The Tarawa market is served by at least two mobile service
operators, with the mobile phone penetration rate at least 50
percent and the cost of a three-minute peak-hour mobile-to-
mobile call in Tarawa no more than A$0.75 (Dec 31, 2018).
7. There is increased penetration of mobile telephones in the outer
islands.
Baseline: 12 percent penetration rate (Aug 13, 2015);
Target: 20 percent penetration rate (Dec 31, 2018).
5. The Recipient has implemented short 6. The Recipient, through its Cabinet, has 8. The financial and operational performance of the Public Utilities
term measures designed to quickly approved: (i) a new electricity tariff that Board and the quality of electricity services have improved, as
improve the operational performance of makes electricity more affordable for the measured by the billing collection rate, total power losses from the
the Public Utilities Board, including poor while aligning the average tariff distribution network, and the frequency and duration of electricity
appointing, through a competitive and with cost recovery; and (ii) a reduced outages.
transparent process, an international chief household electricity connection fee, to Baseline: Billing collection rate of 85 percent (2015), total power
executive officer for the PUB to manage expand access to electricity. losses of 18 percent (2015), SAIFI of 7.9 interruptions (2016) and
and implement the PUB’s medium-term SAIDI of 946 minutes (2016);
reform plan.
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ANNEX 1: POLICY AND RESULTS MATRIX
DPO3 Prior Actions DPO4 Prior Actions Results
Target: Billing collection rate of at least 90 percent, total power
losses of less than 15 percent, SAIFI of 6 interruptions and SAIDI of
880 minutes (2018).
9. The is an increase in the proportion of poor households in Tarawa
benefiting from the new electricity tariff structure.
Baseline: 0 percent of poor households (households consuming
less than 100kWh) benefit from the new tariff (Dec 31, 2016);
Target: 70 percent of poor households (households consuming less
than 100kWh) benefit from the new tariff (Dec 31, 2018).
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ANNEX 2: LETTER OF DEVELOPMENT POLICY
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ANNEX 2: LETTER OF DEVELOPMENT POLICY
37
ANNEX 2: LETTER OF DEVELOPMENT POLICY
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ANNEX 3: IMF ASSESSMENT LETTER
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ANNEX 3: IMF ASSESSMENT LETTER
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ANNEX 3: IMF ASSESSMENT LETTER
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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Prior actions Significant positive or Significant poverty, social or
negative environment distributional effects –
effects positive or negative
(yes/no/to be determined) (yes/no/to be determined)
Pillar I: Strengthening public financial management
1. (i) The Recipient, through its Ministry of
Finance and Economic Development, has
completed a review of RERF custodial
arrangements to ensure that the services of
the provider remain competitive with
No Yes – positive
current market practice and benchmarks; (ii)
the Recipient, through its Cabinet, has
endorsed the recommendations of the
review; and (iii) the Recipient has issued a
request for proposal for custodial services.
2. The Recipient has improved monitoring of
contingent liabilities, through: (i) quantifying
the Recipient’s guarantees; (ii) accepting the
financial statements of the five largest state-
owned enterprises for the Recipient’s
No No
financial year commencing January 1, 2016;
and (iii) submitting the financial statement of
the Kiribati Provident Fund for the Recipient’s
financial year commencing January 1, 2016 to
the external auditor.
3. The Recipient: (i) through its Cabinet, has
approved the Kiribati Public Procurement
Reform Plan; and (ii) has made the Kiribati No No
Public Procurement Reform Plan publicly
available.
Pillar II: Improving the environment for inclusive growth
4. The Recipient, through its Cabinet, has: (i)
approved a fisheries joint ventures policy
outlining the criteria for evaluating existing
and new fisheries joint ventures; and (ii) No Yes – positive
approved a plan to annually review the
performance of fisheries joint ventures
against this policy.
5. The Recipient, through its Cabinet, has
approved ownership and management plans
for telecommunications assets in the outer Yes – potentially negative,
Yes – positive
islands, in order to facilitate the roll out of risk to be mitigated
telecommunications services to outer islands
that do not currently have access to them.
6. The Recipient, through its Cabinet, has
approved: (i) a new electricity tariff that
makes electricity more affordable for the poor
while aligning the average tariff with cost No Yes – positive
recovery; and (ii) a reduced household
electricity connection fee, to expand access to
electricity.
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