TUVALU TRUST FUND - PART 2 REPORT TO THE ......TUVALU TRUST FUND ADVISORY COMMITTEE Mission: 27...

TTFAC ANNUAL REPORT 2016

34TH REPORT OF THE

TUVALU TRUST FUND ADVISORY COMMITTEE Mission: 27 September – 13 October 2016

PART 2 REPORT TO THE GOVERNMENT

TTFAC Secretariat 4 November 2016

TTFAC Annual Report 2016 PART 2 4 November 2016

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Contents: Part 2 Table of Figures 4 Acronyms Used 5

1. Summary & Recommendations 7 1.1 Overview 7

1.2. Recommendations ..................................................................... 7

1.3 Process for the Government’s Response ................................... 8

1.4 Summary of Economic & Social Progress and Prospects ........... 9

1.5. Summary of Fiscal Developments & Prospects ......................... 9

2. Background 11 2.1 Preamble................................................................................... 11

2.2 Mission Focus ........................................................................... 11

3. TTF Valuations, Distribution Prospects & CIF Balances 12 3.1 Maintained Value: ..................................................................... 12

3.2 TTF Market Value: .................................................................... 12

3.3 Fund’s Performance .................................................................. 13

3.4 Distributions & Tuvalu Consolidated Investment Fund (CIF)..... 13

4. Economic & Social Progress & Prospects 15 4.1 Overview ................................................................................... 15

4.2 Base Information on Gender: Fully utilising statistical resources17

4.3 Social Expenditures .................................................................. 17

4.4 Health ....................................................................................... 18 Health Infrastructure 18 Tuvalu Medical Treatment Scheme 18

4.5 Education ................................................................................... 19 Education Infrastructure 20

4.6 The Future of Tuvalu Marine Training Institute (TMTI) .............. 20 Scholarships 21

4.7 Recommendations ..................................................................... 21


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5. Fiscal Developments & Prospects 23 5.1 Overview ................................................................................... 23

5.2 2016 Budget and mini-budget ................................................... 23

5.3 Supplementary/Mini-Budget ...................................................... 24

5.4 Year to date figures ................................................................... 24

5.5 Managing Fiscal Surprises ........................................................ 28

5.6 Holistic budgeting ...................................................................... 31

5.7 Recommendations .................................................................... 31

6. Public Sector Management 33 6.1 Overview ................................................................................... 33

6.2 Progress on PSM Issues: From Plans to Results ..................... 33

6.2 Commercial Management ......................................................... 34 Centralised Contract Management Unit 34

6.3 Public Financial Management ................................................... 35 Cash Management 35 Public Enterprise pay rates 35

6.4 Recommendations .................................................................... 36

7. Private Sector Development 38 7.1 Overview ................................................................................... 38

7.2 Next Steps ................................................................................. 39

7.3 Recommendation ....................................................................... 39

8. Policy Reform Matrix (PRM4) 40

Annex: List of People Met by TTFAC 41


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Table of Figures Table 1: Quarterly CPI data - Sept.2015 to Sept. 2016 (Source www.abs.gov.au) ......... 12 Table 2: Maintained Value Calculations .......................................................................... 12 Table 3: Market Value by Fund Manager ........................................................................ 12 Graph 1: Market Value by Fund Manager ....................................................................... 13 Table 4: Fund Managers’ Investment Returns against benchmark for the year ending

30 Sept. 2016 ........................................................................................................... 13 Graph 2: Tuvalu Economic Indicators 1990-2014 ........................................................... 15 Graph 3: Tuvalu’s Population 1960-2016........................................................................ 16 Table 5: Tuvalu Indicative Social Indicators ................................................................... 17 Graph 4: Tuvalu’s Budget 2005-2016 ............................................................................. 23 Table 6: Tuvalu MTFF 2013-Oct 2016 [1] Domestic Revenues ..................................... 25 Table 7: Tuvalu MTFF 2013-Oct 2016 [2] Expenditure & Domestic Funding Gap ....... 26 Table 8: Tuvalu MTFF 2013-Oct 2016 [3] Calculating the Published Budget Balance 27 Diagram 1: Tuvalu’s Volatile Revenues – 2005 & 2016 ................................................. 28 Graph 5: Atuna Skipjack Price Index 2000-2016 ............................................................ 28 Graph 6: Managing Surprises .......................................................................................... 29 Box 1: IMF Article IV Report on Tuvalu 2016 ............................................................... 30 Diagram 2: Composition of Tuvalu Domestic Revenues 2005 & 2016 .......................... 34


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Acronyms Used

Acronym Description .tv The Tuvalu internet domain name (also “dot.tv” or “.TV”)

ADB Asian Development Bank

APTC Australia-Pacific Technical College

AUD Australian Dollar

CCMU Central Contracts Management Unit

CIF Consolidated Investment Fund (Tuvalu Government)

CPI Consumer Price Index

CPU Central Procurement Unit

DAA Dynamic Asset Allocation

DBT Development Bank of Tuvalu

FTF Falekaupule Trust Fund

GDP Gross Domestic Product

GoT Government of Tuvalu

GNI Gross National Income

HEIS Household Expenditure & Income Survey

IMF International Monetary Fund

LCU Local Currency Unit(s)

MFATTEL Ministry of Foreign Affairs, Trade, Tourism, Environment and Labour

MFED Ministry of Finance & Economic Development

MOEYS Ministry of Education, Youths & Sports

MOH Ministry of Health

NBT National Bank of Tuvalu

NZAID New Zealand Aid

OBAA Objective-Based Asset Allocation

OPEC Organisation of Petroleum Exporting Countries

OPM Office of the Prime Minister


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Acronym Description PE Public Enterprise

PFM Public Financial Management

PFTAC Pacific Financial Technical Assistance Centre

PMU Procurement Management Unit

PU Public Utility

PWD Public Works Department

SAA Static Asset Allocation

SDE Special Development Expenditure

SELF Student Education Loan System

TA Technical Adviser

TCT Tuvalu Consumption Tax

TCS Tuvalu Cooperative Society

TK3 Te Kakeega III (National Strategy for Sustainable Development 2016-20)

TMTI Tuvalu Maritime Training Institute

TMTS Tuvalu Medical Treatment Scheme

TNPSO Tuvalu National Private Sector Organisation

TOR Terms of Reference

TPF Tuvalu Provident Fund

TTF Tuvalu Trust Fund

TTFAC Tuvalu Trust Fund Advisory Committee

TVET Technical & Vocational Education & Training

USD United States Dollar

VDS Vessel Day Scheme

WB World Bank


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1. Summary & Recommendations

The advice in Part 2 is addressed primarily to the Government of Tuvalu (GoT). 1.1 Overview 1. The big picture is still one of good progress on major issues i.e. many of the right steps are being taken to build the strength of the economy, and to ensure that the Tuvalu Trust Fund (TTF) contributes as intended to its social and economic purposes. 2. But new challenges have emerged that do require appropriate responses. And some long-standing problems have still not been fixed. However, this is a very good time for Tuvalu to “spend money to save money”. It is also a critical time for managing “fiscal surprises” in ways that serve the long-term interests of the people of Tuvalu. 1.2. Recommendations 3. TTFAC recommends that

(a.) the Government accelerate establishing a Central Contracts Management Unit and, while waiting for TA, pro-actively prepare for the next steps. Note: Cabinet last year approved the establishment of the Central Contracts Management Unit (CCMU) to help maximise the value and minimise the risks associated with the government’s commercial dealings, and NZAID has offered to support its establishment. TTFAC drew up draft step-by-step TOR for Government consideration. These indicate the kind of preparation that could start immediately. [Suggested responsible lead Ministries: MFED & Office of Attorney General] Reference Section 6.2, p. 32.

(b.) MFED urgently review fiscal resilience measures and recommend reforms to increase certainty of budgetary funding from on-going revenues – primarily revenues from fishing licences – and reduce the destabilising impacts of fluctuating total annual revenue. Note: TTFAC analysis indicates that work is urgently needed to clarify the fiscal implications of high but variable revenues from the fishing sector, and probably to design and introduce new tools to increase fiscal resilience and support fiscally-sustainable decision-making within the Medium-Term Fiscal Framework (MTFF). [Suggested responsible lead Ministry: MFED] Reference: Section 5.5, p. 27.

(c.) Planning & Budget Department change the reporting and integrate the management of GoT transactions and activities to include all donor-funded activities in order to make reporting more compliant with international good practice, reflect growing international partnership opportunities and improve fiscal management. Note: This is a significant move – sometimes called “holistic budgeting” – which is challenging but urgent given foreshadowed increases in external funding. Action on this and recommendation (b) could be included in the PFM improvement package for support from PFTAC (see recommendation (f) below). [Suggested responsible lead Ministry: MFED] Reference: Section 5.6, p. 30


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(d.) Statistics Department ensure sufficient resources are given to analysis of the results of the current Household and Incomes Survey to provide gender disaggregated information on incomes and expenditures. Note: This information is needed to expand TTFACs future advice on social and economic progress including gender outcomes and how social and economic gains are being spread across Tuvalu including outer islands [Suggested responsible lead Ministry: MFED] Reference Section 4.2, p.17

(e.) an inter-Ministry team examine the long-term prospects for seafarers and seafarer training at TMTI and decide the future of the school in the context of a strategy for TVET training for the private sector.. Note: TTFAC suggests a whole of government approach could be taken to determine options for the best use of these facilities. This work (development and evaluation of options for future seafarer training) should be undertaken in conjunction with an assessment of establishing a Tuvalu Institute of Technology (e.g. an APTC certified training institute for certified TVET skills) linked to foreign labour markets. [Suggested responsible lead Ministry: MOYES] Reference Section 4.6, p.20

(f.) MOYES explore the possibility of expanding the Fiji Volunteer Teachers scheme (FVT) to supply TVET teachers. Note: The outstanding success of the FVT for academic subjects could be repeated if a comparable scheme could be implemented for TVET subjects. [Suggested responsible lead Ministry: MOYES] Reference Section 4.5, p.19

(g.) MFED approach PFTAC for a medium-term relationship to help plan, support and monitor a package of public financial management (PFM) upgrades, especially liquidity (cash flow) management and related treasury functions, decision-support information systems and modelling by Planning & Budget Department, and related PFM recommendations in TTFAC’s April 2016 Interim Report. Note: TFAC has had informal discussions to confirm with PFTAC that they would welcome such an approach – although naturally without commitment at this stage. [Suggested responsible lead Ministry: MFED] Reference 6.3, p.35

(h.) a whole of government approach be taken to plan and implement the TK3 goals for private sector development, and to consider adding earlier TTFAC proposals to the TK3 “plan to support private sector development”. Note: The TVET recommendation (e) above in only one of a number of examples (detailed in earlier TTFAC reports) of the need for much more collaboration between ministries that all have a contribution to make to private sector development but are not included in the TK3 Annex 6 listings of responsibilities for implementation. [Suggested responsible lead Ministry: MFED] Reference 7.2, p.39

1.3 Process for the Government’s Response 4. TTFAC also recommends that Cabinet asks the suggested responsible lead Ministries (or alternatives chosen by Cabinet) to organise officials’ consideration of these recommendations and report back to Cabinet within three months on their proposed responses to be advised to TTF and TTFAC.


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1.4 Summary of Economic & Social Progress and Prospects 5. For this report, TTFAC has drawn on external and historical sources to create a longer-term perspective of economic and social progress. Looking forward, the Statistics Department is currently conducting its five yearly Household Income and Expenditure survey. The analysis of this information during 2017 should provide in-depth up-to-date information for understanding patterns of Tuvalu's economic and social progress, including by age, gender, location and other key characteristics. As noted above, there is scope to resource better statistical analysis of the results of Tuvalu's existing survey work, including gender analysis. 6. TTFAC has included commentary on education and health as an aspect of economic and social progress, but they both have other dimensions in addition to direct public sector contributions to the welfare of the people of Tuvalu. These include actions and interactions by government and individuals to maintain and upgrade human capital; and challenges where cost-effectiveness is very important and particularly difficult to achieve, and fiscal risks increase if unchecked. Continuous improvement is required. 7. Our investigations indicate that good progress has been made and more is planned. Success in addressing problems in both education and health is generally very good news in terms of increased welfare and a stronger economy and reduced fiscal risks – three central high-level themes for TTF. These examples of multiple pay-offs from continuous improvement illustrate TTFAC's approach to the areas of Public Service Management and Private Sector Development that we review and report on in more detail below. TTFAC's assessments in these areas tend to encourage people to keep going with performance improvements to the high-level processes because these are essential drivers of improvements to the results achieved. TTFAC recommendations in these areas include specific steps tailored to the circumstances of what is already happening. But major reform is proposed in the area of fiscal policy, tools and practices. 1.5. Summary of Fiscal Developments & Prospects 8. Tuvalu’s budget expenditure has increased by an extraordinary 60% over the last two years, even after excluding certain capital items and a likely under-spend on original budgeted SDE (although greatly reduced from the 2015 SDE under-spend) 9. Fortuitous developments in fishing licenses and exchange rates means that this pattern of expansion has not yet undermined Tuvalu’s fiscal position but this risk must be managed. International organisations and donors may be less willing to invest in Tuvalu if recent clear improvements in public financial management are undermined. 10. The conservative approach being taken towards the 2017 budget is appropriate given the resource uncertainties. After the very large spending increases over the last two years, there are major gains to risk management by limiting any further increases until at least after better resilience measures have been put in place. 11. Uncertainties over the on-going level of fishing license revenues have become the main fiscal risk facing Tuvalu and new arrangements (such as a significantly increased CIF buffer or a new Tuvalu fiscal stabilisation fund) should be urgently considered to deal with “fiscal surprises”. Fishing license revenues are a generational opportunity for Tuvalu, but they also represent a major risk which can and should be managed. TTFAC’s recommendations for MFED to urgently review fiscal resilience measures and recommend reforms and to take urgent action to implement the Central Contract Management Unit are the two major reforms recommended.


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12. Revenue and expenditures are broadly in line with expectations at the time of the 2016 budget and capital expenditure is proceeding faster than in 2015. The largest exception to this is the mini-budget which added nearly $8m to SDEs for a coastal protection project on Nukufetau Island. In the future, major capital works program items should go through the usual budgetary process to ensure activities are prioritised and value for money confirmed. 13. Consideration needs to be given to better integrating donor assistance programs into budget documents. Donor project assistance still represents a major resource for Tuvalu – potentially over half of the Parliament appropriated budget. This will especially be the case with the prospects of increased funding related to the adverse impacts on Tuvalu from climate change (the US$36m funding from the Green Climate Change Fund being a clear example of a material item that should be co-ordinated more comprehensively with current medium-term budgeting arrangements) as well as expanded World Bank and Asian Development Bank programs.


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2. Background

2.1 Preamble 14. The Tuvalu Trust Fund Advisory Committee (TTFAC) convened in Funafuti from 13-22 October 2016. The Committee comprised Paul Flanagan, Malcolm Ponton and Pete Rodger, and was supported by the Trust Fund Secretariat Lee Faiva Moresi. The team is grateful for the goodwill and support from Ministers, public servants and other stakeholders. This is so important for the success of the TTFAC role. The team also wishes to record our grateful thanks to Ms Salai Sualo for her years of service to TTFAC, and we wish her well with her new position in the Budget Unit of Ministry of Finance. 2.2 Mission Focus 15. The Minister asked TTFAC to review work underway on establishing a better system for determining Public Enterprise pay rates. There was also one specific directive from the TTF board: “TTFAC to conduct some analysis of the TTF and overall Australian support for Tuvalu in terms of gender impacts.” This is covered by this report’s renewed focus on the analysis of the impacts of the TTF (Section 4 – which will evolve through time) and the important recommendation to strengthen gender analysis in the forthcoming HIES to provide a better analytical baseline. 16. As proposed in the TTFAC April 2016 report, this mission also followed up on a number of matters to check on progress and, if appropriate, made more specific recommendations in light of additional information and further discussions. As usual, TTFAC also received guidance from the Tuvalu Minister of Finance and his senior officials and representatives of the other two members of the Tuvalu Trust Fund (TTF) Board. This guidance covered requests that TTFAC investigate particular subjects, and suggestions on presentation. TTFAC Interim Report’s recommendations that were followed up included:

suggestions for further improvements to Public Financial Management (PFM) to get full value from reforms in recent years;

suggested lessons from experience with Policy Reform Matrix 3 (PRM3); and suggested specific actions to address long-standing problems in areas such as

education/training, health and private sector development. Additional issues arising from recent developments included:

fiscal management and commercial management of “sovereign rentals”;

stronger gender analysis including next steps for creating better data;

analysis and advice to support the ongoing discussions between the GoT and major donor partners about a new Policy Reform Matrix (PRM4); and

how well public sector management systems are coping with new challenges: o the first stages of implementation of TK III policies; and o a backlog of major infrastructure projects, plus more to come.

17. These issues are addressed in the body of this report.


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3. TTF Valuations, Distribution Prospects & CIF Balances

3.1 Maintained Value: 18. The Maintained value of the fund is calculated using the Australian All groups CPI thus adjusting the value of all contributions to the Trust Fund to give an inflation adjusted valuation or “Real” value. The following table shows the Australian inflation index movements for the year 30 September 2015 to 30 September 2016.

Quarter Ending Index %age Change Status September 2015 108.0 Actual December 2015 108.4 0.4 Actual March 2016 108.2 -0.2 Actual June 2016 108.6 0.4 Actual September 2016 109.4 0.7 Actual

Table 1: Quarterly CPI data - Sept.2015 to Sept. 2016 (Source www.abs.gov.au)

19. Based on the above CPI data, the Maintained Value of the TTF is calculated as follows:

Calculation Description Maintained Value Sept. 2015 Mntd Value = 143,219,688 X (109.4/108.0)

$145,076,240

Tuvalu Government contributions 3,000,000 X (109.4/108.4)

$3,027,675

Reinvestment of Distributions 4,782,567 X (109.4/108.4)

$4,826,687

Additional Contributions (June 2016) (Australia & NZ) 1,905,724 X (109.4/108.6)

$1,919,763

TOTAL MAINTAINED VALUE $154,850,365 Table 2: Maintained Value Calculations

3.2 TTF Market Value: 20. As at 30 September 2016 the Market Value of the Fund (after fees and administrative costs) stood at $161,582,321 compared with a Market Value of $148,002,258 as at the beginning of the financial year. The holdings for each of the Fund Managers is summarised in the table below:

Investment Manager 2015 Market Value Market Value (as at 30 Sept. 2016)

Schroders $73,897,937 $79,494,341 AMP $74,104,321 $82,087,980 TOTAL $148,002,258 $161,582,321

Table 3: Market Value by Fund Manager


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21. The following graph shows the growth of the Fund’s Maintained Value versus its Market Value since inception, and the distributions resulting therefrom:

Graph 1: Market Value by Fund Manager

3.3 Fund’s Performance 22. Since 2012 the Fund’s investment strategy changed from a traditional Static Asset Allocation (SAA) type portfolio to the current investment strategy of Objective based Asset Allocation (OBAA) otherwise also known as Dynamic Asset Allocation (DAA). The original investments and subsequent contributions are split 50/50 between two Fund Managers namely Schroders and AMP. Both managers are Australia based with slightly different investing philosophies. Schroders has a more conservative approach with emphasis on downside risk management. AMP on the other hand takes a slightly risker approach. With these contrasting styles, in combination they do tend to counter-balance each other thus offering a combined approach not dissimilar to a Balanced Fund.

Table 4: Fund Managers’ Investment Returns against benchmark for the year ending 30 Sept. 2016

3.4 Distributions & Tuvalu Consolidated Investment Fund (CIF). 23. The TTF Deed spells out the conditions for distribution from the Fund to the Government of Tuvalu and this is on the basis of the market value exceeding maintained value. The valuation date for the distribution trigger is 30 September which coincides with the end of the TTF’s financial year. Based on the above valuations, the amount available for distribution for the year ending 30 September 2016 is expected to be around $6.7 million ($161.6m closing balance less $154.9m maintained value).

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nsTTF Valuations

CIF Automatic Distribution TTF Market Value TTF Maintained Value

Market & Maintained Value -LHS

CIF & Distributions - RHS

Fund Manager

Opening Balance(Sept 2015)

Additional newInvestments

Closing Balance(Sept 2016)

Target Returns

Yearly Return(Pre Fees)

Yearly Return(Post-fees)

Over/under Performance

AMP $74,104,321 2,452,862$ $82,087,980 7.05% 7.35% 6.60% -0.45%Schroder $73,897,937 2,452,862$ $79,494,341 6.30% 5.72% 5.20% -1.10%TOTAL $148,002,258 4,905,724$ $161,582,321 5.80% 6.60% 5.90% 0.10%


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24. The Tuvalu Government’s Financial Instructions stipulates that distributions are to be paid into the Tuvalu Consolidated Investment Fund, (CIF). However, as happened in the previous year, the Government of Tuvalu, if it so wishes, can decide to reinvest the amount available for distribution back into the Trust Fund or take a partial distribution. 25. As at the 30th of September 2016, the balance of the CIF stood at $35,054,372.00 which was $10.2 million above what is expected to be the current target minimum balance of the CIF (i.e. 16% of the Tuvalu Trust Fund’s maintained value).


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4. Economic & Social Progress & Prospects 4.1 Overview 26. This is a new section added to the TTFAC reports. The Deed of Agreement gives the TTFAC the functions of: “advising the Government of Tuvalu on the progress of the economy of Tuvalu and the effect of the Fund socially and economically on Tuvalu”. 27. The social and economic effects of the Tuvalu Trust Fund are intrinsically linked to the overall performance of the Government in providing services to its people. This is because the distributions from the Trust Fund are provided as untied revenue to the budget. In some years, there are no distributions from the Fund and in other years (such as the case in 2015) the decision was made to re-invest these returns back into the Fund. A longer-term perspective is thus necessary to link the effect of the Fund socially and economically on Tuvalu. 28. In addition to budget financing contributions, the TTF can have three other important effects. First, the Fund itself is considered a success story amongst various Sovereign Wealth Funds. Its near 30 year performance and strong governance arrangements provide broader confidence in Tuvalu and its administrative systems. This helps facilitate direct budget contributions from donors as well as broader support. Second, the governance arrangements around the TTF have helped with donor coordination, especially between Tuvalu, Australia, New Zealand the World Bank and the ADB. The regular TTF Board meetings, chaired by Tuvalu, provide a good opportunity for sharing ideas and understanding Tuvalu priorities. Third, the specific recommendations from the TTFAC itself also help to re-enforce confidence in Tuvalu’s systems. The TTFAC’s role in the Policy Reform Matrix is considered a positive in supporting the Government of Tuvalu in implementing its reform programs – “the Tuvalu Trust Fund Advisory Committee (TTFAC) has provided an additional important role in monitoring progress and bring continuity and a depth of knowledge otherwise not available.” (Tuvalu – Review of Multi-Donor Policy Reform Program June 2016 p ii).

Graph 2: Tuvalu Economic Indicators 1990-2014


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29. Tuvalu’s economic and social progress over the last 30 years is extremely positive given the resource constraints and uncertainties facing the country. 30 years ago, as British budget support was being withdrawn, the largest source of domestic revenue was from stamp sales. The possibilities related to tapping into Tuvalu’s sovereignty resources, through items such as .tv revenues, were undreamt of. The above graph provides a broad snapshot of economic progress based on traditional measures of movements in both GDP and GNI. GDP per capita in real terms (after allowing for the impacts of inflation and population changes) has increased from $AUD 2,333 in 1990 to $AUD3,538 in 2014. As shown in the above graph the measure of economic well-bing called Gross National Income (GNI) is significantly higher than GDP. Possibly GNI is a better economic measure of well-being in Tuvalu as it better captures measures of sovereign rent. 30. This progress is usually mapped into per capita terms: i.e. dividing the chosen measure of economic progress (GDP or GNI) by population. It is interesting that there are some significant differences in current population estimates between SPC and World Bank data, as shown in the following graph. Tuvalu’s rate of population growth has slowed over time. Given the differences in data sources, it is unclear whether the impacts of climate change, possibly related to Cyclone Pam in 2015, have had a marked effect on Tuvalu’s future prospects.

Graph 3: Tuvalu’s Population 1960-2016

31. While it is always difficult to collect comprehensive and up-to-date information on broader elements of social progress, the following tables provide an indication of the major improvements that have been made since Independence (the upwards arrows), while noting that some indicators are falling (downward arrows) or staying relatively constant (the sideways arrows). The focus of this table was longer-term indicators, but often Tuvalu lacks consistent data that goes back decades. 32. In addition to the information in the table (which highlights the lower participation rate of women in the workforce and poor representation in Parliament) it is noteworthy that female school enrolment generally is on par or exceeds males. The


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public sector is the primary source of employment and women account for one half of senior positions (53% in 2015, 48% in 2016). Reports of domestic violence are increasing from 6 domestic violence cases out of 190 criminal offences in 2014 to 19 of 89 cases in 2015.

Table 5: Tuvalu Indicative Social Indicators

4.2 Base Information on Gender: Fully utilising statistical resources 33. Tuvalu is currently undertaking a comprehensive Household Income and Expenditure Survey. The survey should be completed this year with analysis being undertaken during 2017. The experience with the previous survey was that some useful information gathered in 2010 has not been fully analysed – specifically information disaggregated on a gender basis. TTFAC recommends that this gap be fixed in future. 34. The significant investment in collecting such important information on Tuvalu’s economic and social situation should be backed with sufficient resources to ensure that the analysis includes gender disaggregated information on incomes and expenditures. 35. This information will be important for supporting GoT understanding of issues and design of solutions, as well as expanding the TTFACs future advice. Linked to this is an interest on how the gains are being spread across Tuvalu including outer islands. 4.3 Social Expenditures 36. Access to higher living standards and improved overall welfare in the community depends on government and individual actions to upgrade human capital, through higher educational attainment, better learning, and skills that are suited to the needs of the private sector, including TVET. Promotion of good health and effective services to combat disease are also important: i.e. fiscal policy has an impact on human capital accumulation through spending on education and health. In short, there is a good case for recognising that social expenditures such as health and education have a significant investment justification as well as the direct benefits to people receiving these services. 37. Investments in infrastructure and physical capital also can have large welfare pay-offs and almost immediate growth payoffs. These are considered below under “Private Sector Development”.


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4.4 Health 38. The Ministry of Health continues to implement its programme of activities based on its Health Reform Strategy 2016-19. 39. Being able to attract long-term expatriate specialist staff, especially a physician, remains difficult but there seem better prospects of finding an anaesthetist, surgeon and dentist. The recent recruitment of a Health Adviser (Australian funded) provides much needed technical assistance to medical staff and will help ease heavy workloads, especially that of the Director of Health. 40. Retention of trained Tuvaluan specialist staff remains difficult. Often the country loses trained specialists to New Zealand and Australia and elsewhere because of the better salary and conditions. One solution may be for government to draw-up and agree a list of essential technical positions, assign a remuneration package commensurate with the going rate in the Pacific region and advertise/ tender the posts internationally. Should a Tuvaluan candidate be selected he or she will have participated in an open and transparent selection process with the contract awarded based on merit. Tender procedures could be administered through the Central Purchasing Unit thus ensuring the selection process is transparent.

Health Infrastructure 41. Refurbishment of the Princess Margaret Hospital has started with work being managed by Tai Nippon, a Japanese firm. Progress on other infrastructure work, particularly repair work to outer island Medical centres damaged as a result of Cyclone Pam, is slow due to capacity constraints within PWD. There are few private contractors on the outer islands and those in Funafuti all seem occupied on other projects. 42. Government intentions to establish ‘Mini-hospitals’ on Vaitupu and Nanumea are currently without design plans or full costings, nevertheless, a sum of $500,000 appears to have been place-marked for 2017. 43. The Government of India has offered to assist Tuvalu establish Telemedicine services but detailed information is waited from ‘Fortis’, Tuvalu’s health service provider in India. However, MOH has concerns that the system on offer might not be robust enough for local circumstances requiring a level of telecommunications bandwidth not yet available to outer island clinics. Indeed, telecommunications with the outer island clinics is currently so bad that MOH is considering reintroducing radio telephones.

Tuvalu Medical Treatment Scheme 44. In recent months there has been some progress in managing the Tuvalu Medical Treatment Scheme (TMTS). The 2016 budget remains at $3.7 million accounting for about 8% of total Tuvalu operational expenditure. Year-to-date expenditure of around $3.0 m suggests that annual expenditure will come within budget. As reported in April, there is still a need to improve data tracking of TMTS through a simple database or logbook to obtain a better understanding of cost drivers. In the absence of accurate data the cost-per-patient remains estimated at around $40,000. 45. In the past six months there has been an attempt to curb costs by limiting ‘caretaker’ travel to only those patients considered critically ill. However, this has proven difficult to implement as most patients claim to be in need of caretaker support and appeals are common.


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46. It is expected that the number of people needing to access TMTS will drop once a full complement of medical specialist staff is on board. Plans to deploy some of the ten newly qualified Cuban-trained general practitioners to the outer islands may have a similar impact, tending to ailments before they become critical. 47. However, the main health issue affecting Tuvalu is the rise in Non-Communicable Diseases, especially on Funafuti where 60% of the population reside. In the early years following independence the country only had one doctor, little in the way of health infrastructure and no resources to fund anything resembling a TMTS. Yet, in those days, life expectancy was higher than it is today. 48. Changing lifestyles, a taste for imported processed food, sugar and high-fat content foods combined with a higher percentage of disposal income and increasing sedentary lifestyles has led to range of NCD illnesses, particularly diabetic and cardiac diseases. This is a common problem facing Pacific Island countries and one which health authorities and regional and international agencies continue to grapple. 49. Increasing the percentage of the health budget to finance preventative health may produce better health outcomes in the near term but significant long-term change requires a sustained national effort. The arrival next year of the Cuban-trained doctors provides an opportunity to ‘ramp-up’ efforts in preventative health. 50. MOH is currently in discussion with the World Health Organisation (WHO) to establish a Health Trust Fund that may be used to finance on-going preventative health care costs. However, it is not yet clear how such a health Trust Fund would work or whether it would have links to the TTF, similar to FTF and Provident Fund investments. 51. Savings in TMTS expenditure might also be realized through better negotiation and management of contracts with foreign health service providers. Current ad hoc arrangements developed between the MOH and individual hospitals and independent Health Care agencies appear inadequate. Once established, the Central Contracts Management Unit, could possibly assist in negotiating high value contracts and developing high volume standardised contracts – possibly with assistance from the Central Procurement Unit (CPU) and donors that face similar challenges in dealing with the global “medical tourism” industry. The CPU and procurement TA have been investigating the scope for improvements, but TTFAC suggests that CPU would nevertheless need specialised commercial legal advice – especially to deal with issues like jurisdiction and dispute resolution. 4.5 Education 52. Currently there are two secondary, ten primary and eighteen kindergarten schools in Tuvalu with a combined enrolment of 3,159 pupils. In total there are 238 teachers making an average student-teacher ratio of 13/1. 53. In recent years the teaching complement has been augmented by the Fiji Volunteers Scheme (FVT), which provides each of the nine government primary schools with two qualified teachers, and five teachers at Motufoua Secondary School. The FVT scheme has been key in improving pass rates in both primary and secondary school education exams. At both primary and secondary levels girls continue to outperform boys. Given the success of the FVT, TTFAC recommends that the Government explore the possibility of expanding the FVT to supply TVET teachers. 54. A previous TTFAC recommendation to abolish secondary school fees for government schools is due to be implemented in 2017. This offers to improve secondary


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school gross enrolment rates, which in 2015 stood at 57.5% for boys and 76.9% for girls or 66.7% combined.

Education Infrastructure 55. Construction of the new primary school on Nukufetau has started, with completion expected in 2018. However, the new school to be built on Nanumea has been further delayed due to land issues. The architectural designs for both schools have been modified, with strengthened construction allowing them to double as community cyclone shelters. 4.6 The Future of Tuvalu Marine Training Institute (TMTI) 56. Once the flagship of Tuvalu’s nation building goals and a deep source of national pride, the TMTI has fallen on hard times. In the 1980s and 1990s the seamen produced by the school were internationally renowned as the best in the world. At its peak in the mid-90s almost 600 Tuvaluan seamen were employed in the international merchant fleet producing an estimated $4 million p.a. in remittances to their families, mainly in the outer islands. 57. Today there are over 900 registered seafarers in Tuvalu, but only 85 are actively employed on overseas vessels. Despite the decline in demand for seafarers the TMTI continues to produce 60 new graduates each year. At a cost of $8,000 per graduate plus an operational grant of $100,000 the total cost to keep TMTI running is close to $600,000 per annum. 58. Reasons for the decline are complex and include; a general downturn in the international shipping industry post GFC; difficult and costly flight connections from Tuvalu; disciplinary issues among new recruits; the loss of industry contacts and foreign teaching staff at TMTI; the emergence of Fiji as a source of labour for the industry; the establishment of long-term contracts between Kiribati and key recruitment agencies; and the loss of recruitment agencies in Tuvalu. In this context, finding placement opportunities for new graduates is very difficult and producing 60 graduates with few employment prospects year-on-year makes very little sense. 59. The Government must seriously consider the future of TMTI. A decision must be taken to either, try re-establish links with the industry by cutting a deal with an overseas shipping company that can guarantee employment for new graduates, or, convert TMTI into an APTC certified training institute for certified TVET skills at the same time forging new links with foreign labour markets. 60. Running parallel courses at TMTI, seafaring and TVET, may seem a good idea on paper, but caution is advised. It is no accident that seafarer training was established on an island location, Amatuku islet. This was to replicate the confines of a ship and to instil trainees with the necessary discipline to operate a vessel at sea. Broadening the scope of training on Amatuku to include TVET skills would mean having to ferry TVET trainees back and forth each day. Not only would this prove expensive, distraction levels for seafarer cadets would increase, very quickly disrupting discipline. IMO accreditation may even be jeopardized. 61. Already MOYES has made preliminary enquiries with APTC to strengthen links with Tuvalu. Responses appear to be favourable and linkages with APTC could be useful in realizing Tuvalu’s ambition to set-up a Tuvalu Institute of Technology. Partnering with a body able to certify graduates to Australian standards has obvious benefits.


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62. Currently a team from MFATTEL is visiting the Cook Islands to explore work opportunities for Tuvaluans. Similar labour market studies are required elsewhere. The foreign labour market for aged care workers is growing. The International Labour Organisation (ILO) may be enlisted to assist.

Scholarships 63. As reported in TTFAC’s April report the 2016 Budget for government sponsored overseas Scholarships is $5.2 million. Measured against the TK II Fiscal Ratio of 5% of domestic revenue the cost of scholarships, including those financed through the Student Education Loan Scheme (SELF), is about 9.7%, roughly $2.5 million more than target. 64. In an attempt to curb spiralling costs and to better align skills with jobs a comprehensive review of the manpower planning needs of the government was undertaken in 2016. The results of the analysis led to a proposal to cut in the number of Government sponsored pre-service and in-service awards to a total of 25 for 2017. Significantly, all of the proposed awards are for technical and vocational studies. 65. The SELF programme, which was in danger of consuming ever greater amounts of government funding, will now be used to finance form 7 and foundation course completion. It will act as a stepping-stone for students wishing to access fully funded scholarships. SELF funding will be available to students for a period of one-year only, thus limiting government’s risk exposure. Risks may be further lowered if loan repayments are guaranteed against individuals’ Provident Fund deposits. 66. Another feature of the reform is to improve the management and monitoring of students studying in Fiji by mobilizing training officers to serve three-year terms attached to the Tuvalu High Commission in Suva. 67. The reform offers the opportunity for government to better determine training needs, to tailor scholarship awards to employment needs, to redirect loan financing towards areas of greater need and to improve overall scholarship administration. 4.7 Recommendations 68. TTFAC recommends that:

(a.) Statistics Department ensure sufficient resources are given to analysis of the results of the current Household and Incomes Survey to provide gender disaggregated information on incomes and expenditures. Note: This information is needed to expand TTFACs future advice on social and economic progress including gender outcomes and how social and economic gains are being spread across Tuvalu including outer islands [Suggested responsible lead Ministry: MFED] Reference Section 4.2 p.17 (b.) an inter-Ministry team examine the long-term prospects for seafarers and seafarer training at TMTI and decide the future of the school in the context of a strategy for TVET training for the private sector.. Note: TTFAC suggests a whole of government approach could be taken to determine options for the best use of these facilities. This work (development and evaluation of options for future seafarer training) should be undertaken in conjunction with an assessment of establishing a Tuvalu Institute of Technology (e.g. an APTC certified training institute for certified TVET skills) linked to foreign labour markets. [Suggested responsible lead Ministry: MOYES] Reference Section 4.6 p. 20


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(c.) MOYES explore the possibility of expanding the Fiji Volunteer Teachers scheme (FVT) to supply TVET teachers. Note: The outstanding success of the FVT for academic subjects could be repeated if a comparable scheme could be implemented for TVET subjects. [Suggested responsible lead Ministry: MOYES] Reference 4.5 p.19


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5. Fiscal Developments & Prospects 5.1 Overview 69. There have been four significant fiscal events over the last 12 months:

(a.) The delivery of an expansionary 2016 budget (b.) A Mini-budget with a further $8m of expenditure (c.) An IMF Article IV mission visit and report (a short summary is provided in Box 1). (d.) Securing additional donor assistance, especially in the context of climate change but also planned major expansions from the World Bank and ADB.

5.2 2016 Budget and mini-budget 70. The 2016 Budget was expansionary on the back of large increases in fishing license revenues. On top of the large planned increases in expenditure, the government decided to “top-up” the budget by a further 10% with an $8 million mini-budget mid-year. Overall, after excluding capital transfers and some likely under-expenditure in the SDE program, it is estimated that expenditure in 2016 will be an extraordinary 60% higher than in 2014. The stacked columns in Graph 1 indicates this rapid pattern of expenditure increase.

Graph 4: Tuvalu’s Budget 2005-2016

71. Such rapid expansions in expenditure inevitably create risks. The quality of expenditure and its value for money can be harder to ensure when expenditure is increasing so rapidly. In addition, this rapid increase in expenditure appears based on the assumption of strong, on-going revenues especially from fishing licenses. However, as discussed below, such revenue can be highly volatile. It is generally much harder to adjust down the size of expenditure than to increase it, especially for recurrent expenditure. As shown in the graph, the growth in recurrent expenditures was particularly strong in 2015 but has moderated somewhat in 2016. On the other hand, SDE and other capital expenditure has increased very rapidly in 2016 (especially in the context of the effective underspend in 2015 of $4.7 million in SDE that were re-directed into the Tuvalu Development Fund).

- 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 Tuvalu's Budget 2005 to 2016 Capital Budget SDE + TTFcontributionRecurrent ExpenditureTotal Domestic Revenues


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5.3 Supplementary/Mini-Budget 72. A Supplementary Budget of $7,994,371.27 was passed by Parliament in mid-year for “Dredging and Reclamation Works Coastal Intervention for Nukufetau Island”. The argument in favour of fast-tracking this project related to the availability of the dredging equipment which had originally come in for the work on the NZ-funded ‘borrow’ pit reclamation project and later retained to reclaim land directly in front of Government buildings in Vaiaku, creating a new main beach/promenade in Funafuti. 73. The Nukefetau intervention does not appear to have been in the infrastructure pipeline being considered by Tuvalu (as part of investment planning and prioritisation with technical assistance from the ADB). 5.4 Year to date figures 74. The following tables set out more detailed revenue and expenditure figures including actuals through to late October 2016 and MFED forecasts. 75. Overall, revenues are tracking higher than forecasts in most areas, especially taxation revenue, investment revenue and government charges. In part, the outcome will be dependent on the forecasting methodology which makes assumptions about monthly revenue collections at the start of the year. For example, it is forecast that $2m in company tax will be received in November (reflecting the timing of tax payments). 76. The biggest possible variability in the forecast revenues are for fishing license revenues. Indications are that an extra $3.8m is unlikely to be collected over the next two months in terms of 2016 revenues (there may be early payments on 2017 fishing licenses but these would go into next year). The actual outcome is likely to be closer to the October actuals of just over $32m rather than the $36m forecast. Interest receipts have been much higher than expected reflecting the large early payment of fishing license fees in January 2016. 77. On the expenditure side, the largest area of over-expenditure is currently showing as goods and services. However, this is largely a coding issue because of the $8m mini-budget SDE expenditure being placed in the Goods and Services line. SDE expenditure itself is proceeding much more quickly than last year with most activities showing expenditure. The main exceptions are $2m for renovation of the government complex, $3m for extra housing for the Pacific Islands Forum and one of the schools is proceeding slowly. The high level of expenditure on ‘travel and communications’ is a concern and may reflect the large recent increase in travel allowances that may not have gone through normal co-ordination processes before going to Cabinet. The low figures for SELF and scholarships may reflect that some of these costs are not claimed until well into the next year. 78. Overall, SDE expenditure is likely to be $8m lower than expected and this is driving the improvement in the ‘domestic funding gap’. This gap is likely to be some $4m higher than shown as fishing license revenues are likely to have been over-estimated (paragraph above). The large mini-budget is effectively being financed by the near $6m increase in budget support from donors relative to the initial 2016 estimates ($2m extra from ROC, $4m from the World Bank).


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Table 6: Tuvalu MTFF 2013-Oct 2016 [1] Domestic Revenues


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Table 7: Tuvalu MTFF 2013-Oct 2016 [2] Expenditure & Domestic Funding Gap


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Table 8: Tuvalu MTFF 2013-Oct 2016 [3] Calculating the Published Budget Balance


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5.5 Managing Fiscal Surprises 79. Within the structure of revenue over 2005-2016, there has been a generational shift from domestic taxation, TTF fund receipts and .TV license fees to fishing license revenue. Fishing license revenue has increased from 13% of all domestic revenue in 2005 to an estimated 58% in 2016 (based on 2016 forecast outcomes) – see Diagram 1.

Diagram 1: Tuvalu’s Volatile Revenues – 2005 & 2016

80. This is a major structural shift in Tuvalu’s revenue base. Despite recent strong growth in fishing license revenues, with a clear step up with the introduction of the VDS, such resource revenues have a history of being very volatile. The VDS regulatory arrangements can be likened to an OPEC supplier arrangement and, as recent OPEC meetings indicate, these supplier agreements can be volatile. For a VDS example, last year moves to reduce Tuvalu’s share of the quota by 25% were successfully resisted by Tuvalu. This illustrates why such negotiations, so vital for Tuvalu’s future, should have the Fisheries Department backstopped by a Contract Management Unit strongly recommended in this and previous TTFAC reports. Fishing prices also inevitably fluctuate. The following graph shows movements in recent years.

Graph 5: Atuna Skipjack Price Index 2000-2016


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81. The significant fall in the market value of tuna by over a third from 2013 to 2016 has been masked in part by the appreciation in the US dollar relative to the Australian dollar. Inevitably, in some future years, the volatility in tuna prices and the volatility in exchange rates will shift in the same direction, exacerbating the volatility in fisheries revenues received by Tuvalu. Weather conditions can also have a significant impact on the number of days of fishing in Tuvalu’s waters. Climate change may also have a significant impact on future fish availability, fishing patterns and Tuvalu VDS values. 82. This unpredictability in what has become Tuvalu’s dominant revenue source - the ability to “surprise” – raises questions about whether the current fiscal arrangements around the TTF provide appropriate levels of resilience, including for the impacts of climate change. The following graph tracks movements in distributions from the TTF relative to movements in fishing license revenues. The variability in TTF distributions has been managed through the creation of a buffer fund – the CIF. This buffer is currently considered adequate when it reaches 16% of the TTF, based on four years of expected annual TTF returns of 4%. However, the TTF’s investment manager’s now target a higher rate of 5% per annum. Arguably, based on the original concept of the CIF buffer being equivalent to 4 years of target distributions, the CIF should target at least 20%. 83. More fundamentally, over the last 10 years, average fishing licences have been nearly three times as large as average TTF distributions. This is shown in the dashed lines below. The target CIF buffer is shown as the dotted yellow line. Arguably, a target fishing license buffer, if designed on similar principles, could be shown by the blue dotted line. With fishing license revenues currently significantly above even the average since the introduction of the VDS, there are strong arguments that this “excess” should be built into a buffer. This would not necessarily be a long-term savings fund. Rather, it could be a buffer available to the budget simply to manage “surprises” if fishing licenses dipped to much lower levels for several years before recovering again.

Graph 6: Managing Surprises

0

10

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40

50

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mill

ions

$A

Managing surprises

Target CIF 16% maintained TTF Fishing License

TTF distribution Average Fishing license

Fishing License buffer? Average TTF distribution


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84. It is proposed that the government seek assistance as a matter of urgency in analysing in greater depth the options for managing such likely “surprises” from fishing license revenues. Based on such analysis, the issues around fiscal resilience could receive a more thorough investigation as part of the April 2017 mission, including the CIF and the possible implications of an increased number of dedicated Funds (including the Green Climate Fund).

Box 1: IMF Article IV Report on Tuvalu 2016

Box 1: IMF Article IV Report on Tuvalu 2016 – Summary of Key Points The IMF conducts a review of Tuvalu every two years. Its report is a significant opportunity to get access to an independent expert view on Tuvalu’s policy settings. Executive Board Assessment Executive Directors noted that the near-term macroeconomic outlook is stable and growth is picking up, partly owing to recovery spending following Cyclone Pam. Directors commended the authorities for the substantial progress achieved under their Policy Reform Matrix, 2012-15, as well as the commitment to continue these efforts under the national strategy for sustainable development, 2016-2020. However, important medium- and long-term challenges remain. These relate to sustaining investment to mitigate the effects of climate change, strengthening fiscal frameworks, public enterprise reform, and financial sector oversight. Directors observed that Tuvalu’s fiscal challenges are centered around revenue volatility and meeting the long-term costs associated with climate change while maintaining a sound fiscal position. They welcomed the recent initiatives to develop a climate change risk assessment framework and to incorporate disaster costs into budget planning. Directors noted, however, that improvements in public financial management were also needed, particularly with respect to the framework for capital budgeting. Directors welcomed the rebuilding of fiscal buffers on the back of higher fishing licensing revenue in recent years. They underscored that sustaining adequate fiscal buffers is a critical element in the policy strategy to manage future risks. In this respect, Directors called for restraint on recurrent expenditure to sustain buffers and enhance debt sustainability. More broadly, the adoption of a medium-term fiscal framework that targets a small structural budget surplus will boost resilience. Directors also encouraged the authorities to continue seeking access to global climate change funding, with the assistance of development partners. Directors emphasized that public enterprise reform remains a key policy priority, including improving corporate management and clearly defining and pricing social services. On financial sector oversight, they highlighted that the banking commission should conduct a review of nonperforming assets and on-site supervision of banks, in collaboration with external advisors. Directors also urged the authorities to make use of technical assistance to improve economic statistics.


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5.6 Holistic budgeting 85. A key element in the design of a good budget system, where the government is well informed of issues and trade-offs when deciding how to allocate spending, is ensuring that relevant information is easily accessible and integrated into decision-making. Tuvalu continues to receive significant support from development partners. In 2016, direct grants to the budget are forecast to total $17.6 million. This budget support assistance is appropriately incorporated into budget documentation. 86. Project grants from international partners are larger than budget support assistance, and are forecast to grow significantly over the next few years. In 2016, project grants are estimated to total a further $21.5 million. Project grant support is expected to increase significantly with additional funding from climate change activities (such as the recently secured US$36 million from the Green Fund) as well as proposals from the World Bank and ADB to lift their programs to around US$20 million per annum each over coming years. 87. However, such project grant assistance receives insufficient treatment in the budget papers – it is limited to a simple annex that does not track donor commitments through time. This extra-budgetary support also receives no coverage in key fiscal monitoring information such as the dashboard. When departments are making their annual budget bids, no information is included on project assistance. This means that, for example, if major infrastructure has been constructed, the resulting need for additional maintenance funds is not integrated into the budget cycle. Likewise, if Tuvalu is funding new wharf facilities, this would not necessarily be integrated through budget processes with donor funding for new seawalls – and there are strong arguments that such activities should be linked for design and planning purposes. 88. This lack of integration of project assistance into budgeting, monitoring and reporting is unusual and appears to be inconsistent with IMF and International Public Sector Accounting Standard Board (IPSASB) guidelines on these matters. There is scope to strengthen future budget decision-making by including such information in a more integrated and transparent fashion. The government could seek the assistance of PFTAC in making suggestions on what has worked with other Pacific nations. 5.7 Recommendations 89. TTFAC recommends that:

(a.) MFED urgently review fiscal resilience measures and recommend reforms to increase certainty of budgetary funding from on-going revenues – primarily revenues from fishing licences – and reduce the destabilising impacts of fluctuating total annual revenue. Note: TTFAC analysis indicates that work is urgently needed to clarify the fiscal implications of high but variable revenues from the fishing sector, and probably to design and introduce new tools to increase fiscal resilience and support fiscally-sustainable decision-making within the Medium-Term Fiscal Framework (MTFF). [Suggested responsible lead Ministry: MFED] Reference: Section 5.5 p. 27. (b.) Planning & Budget Department change the reporting and integrate the management of GoT transactions and activities to include all donor-funded activities in order to make reporting more compliant with international good practice, reflect growing international partnership opportunities and improve fiscal management.


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Note: This is a significant move – sometimes called “holistic budgeting” – which is challenging but urgent given foreshadowed increases in external funding. Action on this and recommendation (b) could be included in the PFM improvement package for support from PFTAC (see recommendation (f) below). [Suggested responsible lead Ministry: MFED] Reference: Section 5.6 p. 30


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6. Public Sector Management 6.1 Overview 90. Pleasing progress has been made. For example, the extraction of MTFF information included in Section 5.4 is now done entirely by the MFED when in previous year’s this was a significant task for the TTFAC mission. But more progress is needed in addressing the major concerns expressed in this year’s Interim TTFAC report about how well public sector management systems would cope with the first stages of implementation of TK III policies and the backlog of major infrastructure projects that had developed last year, with more projects due to launch. It is understandable that new processes for translating TKIII into corporate planning, investment planning, project management and management of physical infrastructure are still settling in. 91. However, it was disappointing to find that, almost twelve months after Cabinet approved the establishment of a Central Contracts Management Unit, little had happened. TTFAC considers our recommendation below on the CCMU is our highest priority action point for GoT. 6.2 Progress on PSM Issues: From Plans to Results 92. Good progress has been made in designing improvements to some of the core management processes – but generally implementation is lagging. For example, in February officials with ADB assistance produced some excellent work on investment planning, asset management, capital budgeting, etc that establishes standards for built infrastructure and procedures for meeting them. But these improvements have not yet been formalised and implemented. Another example is that almost all Ministries missed the July 2016 deadline for integrating the TK3 action plans into each Ministry’s corporate plan. Since then, corrective action has been “spotty”. 93. It appears that in both cases a large capability gap has been exposed as was feared and documented in the previous two TTFAC reports. Suitable training and support for “learning by doing” should establish the necessary skills and the confidence to use them. If this is not part of the ADB TA, perhaps the proposed PFTAC TA could include this. 94. Similarly, the skills and confidence to use performance measurement and reporting at the organisational level – especially non-financial measures of target outcomes – are essential tools for effective organisational performance management. They are the core mechanism for aligning final results with original plans. The work to date by the staff of the Audit Office on performance auditing should provide extremely useful guidance on general approaches plus some specific regional “good practices” in very relevant areas such as disaster recovery, access to safe drinking water, etc. 95. A reinvigorated Development Coordination Committee is definitely reducing the dangers of a “silo” approach. In another positive and practical development, the Climate Change Department is exploring the possible benefits of programme management in the form of a small coordinating entity across the project management units for a number of projects all involving the same donor (so standardising and integrating problems should be minimised). And there are, in effect, DCC sub-committees that bring together relevant ministries to address the most critical “cross-cutting” issues such as gender (CEDAW committee), climate change, disaster recovery, human resource planning. 96. Overall, the strong leadership from the OPM, helped by their practical focus on human resource requirements for whole of government, has contributed to a substantial strengthening of public service management systems and processes. However, it will


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take time for GoT to complete and embed the reforms, and an end to the recent extraordinary annual increases in spending will test the new system’s resilience. 6.2 Commercial Management

Centralised Contract Management Unit 97. As previously reported, improving government’s capacity to negotiate and manage external contracts generally, and so-called sovereign rentals in particular, could greatly improve revenue streams and the quality of services provided. As shown in Diagram 2 below, currently sovereign rentals thorough fishing access agreements and the lease management of Tuvalu’s Top-Level Internet domain ‘.tv’ make up almost 70% of gross domestic income – a dramatic increase from 24% in 2005.

Diagram 2: Composition of Tuvalu Domestic Revenues 2005 & 2016

98. However, the resources and the frameworks to manage such agreements; to explore and exploit new opportunities to maximise value and minimise risks from commercial management of sovereign rights are limited. 99. The same is true of the capability to conduct disciplined and professional negotiations of the commercial aspects of major service delivery and project contracts. 100. In addition, contract administration is not being resourced and performed at levels that reflect the very large sums of revenue involved. Often the Ministries responsible for negotiating, concluding and managing international contracts are over-burdened, lacking the time and skills necessary to maximise value. The Office of the Attorney General is the repository of all signed contracts but it does not have the capacity to actively administer complex commercial contracts. 101. Closer monitoring of external contracts would not only alert government to any shortfall in contract performance but may provide line Ministry negotiators with information crucial for contract management, negotiation and renegotiation. 102. Cabinet recognises the need to maximise returns from existing sovereignty rentals and, to this end, has approved the establishment of a Central Contracts Management Unit (CCMU). NZAID has offered to support its establishment, but TTFAC recommends that, while waiting for TA, Government should be pro-active in preparing


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for establishing the CCMU. TTFAC drew up draft TOR for Government consideration. These indicate the kind of preparation that could start immediately. 103. The approved scope of work of the CCMU will primarily focus on high-value (over $1 million) sovereignty rental contracts, with immediate attention being given to the .tv contract due for termination or renewal in 2021. But TTFAC considers that CCMU support may also extend to some of the areas listed below.

.TV (due to be terminated if not renegotiated by 2021)

Fisheries access agreements (annual)

Joint Venture fishing agreements

Tuvalu’s shipping registry (Singapore)

Telecommunication / Internet contracts

Overseas Health Service providers for Tuvaluan patients

Airline agreements

Seafaring agency contracts 6.3 Public Financial Management

Cash Management 104. Although very welcome, the year-on-year increases in annual fishing license revenues are causing new challenges for fiscal policy; and the monthly revenue fluctuations within each year have introduced a major challenge for good cash management in Tuvalu. For example, in the month of January 2016, fishing license revenues of $14.5m were banked to the budget but monthly cash deposits had fallen to only $0.1M in August. This is extreme variability. This variability is also in a major item in the budget – the January monthly fishing license payment is double the expected annual revenue from traditional revenue resources such as taxation. The level of future revenues, even over the next two months, are also uncertain (see revenue discussion at . 105. The existing dashboard is a useful tool for managing these fluctuations but it could be improved including reviewing key monthly forecast information. In Diagram 2 at the end of this section is a summary of suggestions for improving the presentation on cash flow information through this very important management tool. PFTAC would be an appropriate provider of such assistance to cash flow management and decision-support information systems – and more generally to give advice and support for responding to the TTFAC April 2016 Report’s suggestions for further improvements to Public Financial Management (PFM).

Public Enterprise pay rates 106. A very comprehensive study has been made of the current salary and allowances structures of Public Enterprises and Public Utilities. Policy decisions will next be needed on the main objectives if reforms are made – e.g.:

Is the drive for reform coming from a belief that current arrangements are unfair in terms of relativities? If so, comparability with other local pay (between PEs, PUs, etc and/or perhaps with Public Service rates as well) may be the solution that will meet the reform objective. But such moves may actually prevent other objectives from being achieved – see the following examples.


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Or is there a concern about difficulty to recruit and retain people in key positions? In this case, comparisons may need to be made with other countries – mainly the neighbours who are attracting such people.

Or is the aim to strengthen the incentives for good performance? In this case, it is essential to have a well-tested and objective performance measurement and management system for the organisation’s overall goals as the foundation for performance pay for responsible members of staff and management. This means relating performance bonuses to commercial results – not to individual efforts. Also, it may be necessary to reward groups rather than individuals. And the base salaries – before bonuses – will still have to be competitive.

N.B. This is part of a wider set of issues about access to international-level specialists in areas of critical importance e.g. health, environment, fisheries, commercial lawyers, etc; and also about managing for results through performance measurement & reporting – especially non-financial measures. 6.4 Recommendations 107. TTFAC recommends that

(a.) the Government accelerate establishing a Central Contracts Management Unit and, while waiting for TA, pro-actively prepare for the next steps. Note: Cabinet last year approved the establishment of the Central Contracts Management Unit (CCMU) to help maximise the value and minimise the risks associated with the government’s commercial dealings, and NZAID has offered to support its establishment. TTFAC drew up draft step-by-step TOR for Government consideration. These indicate the kind of preparation that could start immediately. [Suggested responsible lead Ministries: MFED & Office of Attorney General] Reference Section 6.2 p. 32. (b.) MFED approach PFTAC for a medium-term relationship to help plan, support and monitor a package of public financial management (PFM) upgrades, especially liquidity (cash flow) management and related treasury functions, decision-support information systems and modelling by Planning & Budget Department, and related PFM recommendations in TTFAC’s April 2016 Interim Report. Note: TFAC has had informal discussions to confirm with PFTAC that they would welcome such an approach – although naturally without commitment at this stage. [Suggested responsible lead Ministry: MFED] Reference 6.3, p.35


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Diagram 2: Possible Improvements to Cashflow Management Information


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7. Private Sector Development 7.1 Overview 108. Tuvalu’s Private Sector is constrained by many factors including scarcity of land and poor soil, distance from international markets, high cost of transportation, few natural resources and severe weather and climate related events. For these reasons, business development has in large centred on the import/retail sector. 109. In the post-independence period up until the early 2000s the Tuvalu Cooperative Society (TCS) was the dominant commercial organisation, supplying a wide range of imported goods to its retail shops in Funafuti and the outer islands. Being a cooperative, TCS cross-subsidised between Funafuti prices and outer islands: a freight equalisation levy ensured products were priced the same on each island. From the mid-2000s non-Tuvaluan players entered the Funafuti market forcing the TCS to cut Funafuti margins thereby making it difficult to bear the costs of shipping to outer islands. Eventually TCS went into receivership in the late 2000s, to be replaced by a number of small traders. 110. There has been some attempt to develop small manufacturing facilities but these have never endured. At one time copra was an important source of income to the outer islands but this too has declined. In the immediate post-independence era philatelic sales were important but the market collapsed following an ill-fated attempt to increase revenues to meet the cessation of British budgetary aid. 111. Business development is often constrained by cultural norms, because giving to needy relatives is a strong tradition in Tuvalu. A sense of community obligation still prevails, but there is growing understanding and acceptance of the need for entrepreneurs and risk-takers. 112. Access to finance – especially concessionary finance – remains difficult. The Development Bank of Tuvalu (DBT) is unable to extend loans of any magnitude and charges only slightly below the NBT loan rate of 9% p.a. Some people do borrow against their personal Tuvalu Provident Fund (TPF) holdings at 8% p.a. but only to a maximum of 10% of their total savings. 113. Recovery rates on loans at both NBT and DBT are poor with the TPF faring better because loans are 100% secured against deposits; both the default rate and the write-off rate are much lower because of TPF lending to public servants whose pay can be subject to automatic deductions for loan repayments; and the maximum loan limits tend to restrict their loans to “chattels” that can be repossessed. 114. TK III recognises that the private sector is under-developed, caused in part by weak government policies and unnecessarily expensive but unreliable information, communications and technology (ICT) services, yet it offers significant potential to generate new employment and stimulate economic growth. Currently, the private sector generates less than 30% of GDP. 115. A key TK III goal is for government to provide a more aggressive policy framework so to stimulate and support private sector growth, by providing economic and financial incentives (tax relief and start-up capital). In the near term, government plans to boost the private sector by introducing a credit guarantee scheme and to establish a Tuvalu-specific business incubator. But there are no clear and credible plans to improve the quality of private sector proposals for business finance. If there are no real changes in the quality of the business proposals being funded, it is unclear how past problems can be overcome.


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7.2 Next Steps 116. It is important that a private sector development framework be driven forward with commitment. Of twelve private sector policy objectives listed in TKII, only three were ever fully met. 117. Various regional agencies and International Development Partners are making a major contribution to improved infrastructure, including ICT services. but they are also in a position to assist Tuvalu with the development finance aspects of its PSD goals because they have had years of experience in Pacific nations with reducing similar problems through comprehensive but integrated programmes including:

(a.) for higher-level secondary school courses – by introducing “financial literacy” programmes that encompass teaching materials and instructions; and (b.) targeted TVET for business owners – training in preparation of business cases and loan applications.

118. However, this form of support remains largely overlooked and untapped. 119. Another area of missed opportunities is the employment and procurement needs created by major aid-funded projects wanting to source some of their labour and materials locally. Some donors are prepared to assist in maximising local sourcing, but one of the first steps in that process – a directory of local suppliers – is not available. 120. Support to the principal government-private sector body (Tuvalu National Private Sector Organisation – TNPSO) - possibly in the form of a long-term expert in commercial loans for small businesses may also help in this area (AVI could be a source). This expert could support:

efforts by NBT to improve staff capability to make loan appraisals and approvals, backed by better credit assessment and loan management software; and

the proposed (DBT) credit guarantee scheme. 121. TTFAC has been recommending action along the above lines for some time. Earlier reports contain more detail. Because responsibilities for private sector development are spread between a number of bodies (MFED, MFATTEL, MEYS, TNPSO, NDT, DBT, NPF) it can be unclear where policy leadership belongs. But it is clear that private sector development is being held back by the lack of a unified comprehensive strategy backed by sufficient people with commercial expertise and the sort of private sector experience that is not yet readily available in the Tuvaluan economy. 7.3 Recommendation 122. TTFAC recommends that: a whole of government approach be taken to plan and implement the TK3 goals for private sector development, and to consider adding earlier TTFAC proposals to the TK3 “plan to support private sector development”. Note: The TVET recommendation (e) above in only one of a number of examples (detailed in earlier TTFAC reports) of the need for much more collaboration between ministries that all have a contribution to make to private sector development but are not included in the TK3 Annex 6 listings of responsibilities for implementation. [Suggested responsible lead Ministry: MFED] Reference 7.2, p.39


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8. Policy Reform Matrix (PRM4) 123. TTFAC was asked to review the proposals that went to donors, including the specific reforms under the three “agreed” areas for reform:

(a.) health, (b.) education, and (c.) public financial management.

124. We commented (to the officials involved) on these three topics, and proposed four other reform topics. These were (in rough order of priority):

(d.) Central Contracts Management Unit (e.) Managing fiscal surprises (f.) Reform of telecommunications sector (mobile phones & internet especially) (g.) Private sector development.

125. All seven topics are covered in this report (above).


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Annex: List of People Met by TTFAC Hon Maatia Toafa Minister of Finance and Economic Development

Hon Satini Manuella Minister of Health (& President TNPSO)

Hon Monise Lafai Minister for Transport & Communication

Limasene Teatu Secretary to Government

Fakavae Taomia Secretary, Office of the Prime Minister

Isaia Taape Secretary for Health

Taukave Poolo Secretary for Communication &Transport

Letasi Iulai Secretary for Finance & Economic and Planning

Puaita Pitoi Ag. Secretary for Education

Vavau Fatuga Ag. Senior Assistant Secretary, MFED

Lototasi Vaguna Coordinator for Evaluation & Coordination Unit, OPM

Tusipese Molikao Head of Aid Coordination Unit & Ag. Assistant Secretary, MFED

Niuatui Niuatui Director of Planning, Budget & Aid Coordination, MFED

Dr Nese Conway Director of Health

Temetiu Maliga Director of Rural Development

Pepetua Latasi Director of Climate Change

Lupe Tavita Ag. Director of Women’s Affairs, OPM

Clare Whelan Health TA

Kate Morioka Climate Change Unit TA

Garry Preston Fisheries TA

Natalie Markhoul Gender TA

Tony Prcevich Auditor TA

Katrina Rajak Public Sector Reform TA

John Richardson Procurement TA

Sunema Maheu Government Accountant & Head of Treasury

Nuausala Nuausala Office of Budget & Planning

Kelena Sione Ag. Director of Budget

Salai Sualo Budget Advisor

Eli Lopati Auditor General

Setima Pita In-Service Scholarship Officer


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Nemaia Paulo Pre-Service Scholarship Officer

Grace Alapati Statistic Department

Seipua Scott Treasury Department

Misalaima Titvalu Policy Procurement Officer. Central Procurement Unit, MFED

Bikenibeu Paeniu National Project Officer, Pacific Climate Change Migration Program

Feue Tipu Coordinator, LoCAL Project

Peteli Fakatoafe Ag. General Manager. National Bank of Tuvalu

Tene Laupepa Former Secretary, Tuvalu Seafarer Union

TUVALU TRUST FUND - PART 2 REPORT TO THE ......TUVALU TRUST FUND ADVISORY COMMITTEE Mission: 27...

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