Vanuatu Economic Report 2009

Strategy and Program Assessment Document Stage: Draft for Consultations May 2009 Vanuatu: Economic Report 2009 This draft is for consultation purposes only and does not necessarily reflect the views of ADB’s Management, Board of Directors, or the Government of [country]. Comments may be submitted to [email address] by [deadline]. ASIAN DEVELOPMENT BANK TA6463-REG: VANUATU PIER VANUATU ECONOMIC REPORT 2009: ACCELERATING REFORM May 2009 ii Vanuatu Economic Report 2009 Contents Currency Equivalents.................................................................................................... V Abbreviations................................................................................................................. V Map of Vanuatu............................................................................................................. IX Executive Summary ...................................................................................................... 1 1. Development Performance, Issues, and Policies ................................................. 11 1.1 1.2 1.3 1.4 1.5 2.1 2.2 2.3 2.4 2.5 2.6 An Overview of Human Development .............................................................................. 11 Development Issues ......................................................................................................... 14 Constraints and Opportunities .......................................................................................... 16 Development Policies ....................................................................................................... 18 Outline and Key Issues..................................................................................................... 19 Introduction....................................................................................................................... 21 Macroeconomic Targets ................................................................................................... 21 The Global Economic Crisis ............................................................................................. 22 Economic Growth ............................................................................................................. 23 Exchange Rates, Trade, and the Balance of Payments................................................... 28 Prices and the Monetary Sector ....................................................................................... 32 2.6.1 Wages and Employment...................................................................................... 33 2.6.2 Price Controls ...................................................................................................... 34 2.6.3 Price Distortions................................................................................................... 34 2.6.4 Private Sector Credit............................................................................................ 35 Debt and Liquidity............................................................................................................. 38 2.7.1 Debt Sustainability ............................................................................................... 38 2.7.2 Monetary Policy ................................................................................................... 39 Fiscal Aspects .................................................................................................................. 41 2.8.1 Fiscal Management ............................................................................................. 41 2.8.2 Trade Balance ..................................................................................................... 42 2.8.3 Trade Agreements ............................................................................................... 43 Continuing Reforms.......................................................................................................... 44 Introduction....................................................................................................................... 46 Public Sector Performance............................................................................................... 46 3.2.1 Independent public service .................................................................................. 46 3.2.2 Access to Financial Services in the Provinces .................................................... 47 3.2.3 Performance of Directors-General ....................................................................... 48 3.2.4 Office of the Auditor-General ............................................................................ 49 3.2.5 Expenditure Review Committee........................................................................ 52 3.2.6 Ombudsman’s Office. ........................................................................................ 53 Fiscal Management. ......................................................................................................... 54 3.3.1 Accountability and Fiscal Targets ..................................................................... 54 3.3.2 Sources of revenue ............................................................................................ 55 Budget Process ................................................................................................................ 56 2. The Economy ........................................................................................................... 21 2.7 2.8 2.9 3.1 3.2 3. Governance and Public Sector Management........................................................ 46 3.3 3.4 Vanuatu Economic Report 2009 iii 3.5 3.6 3.7 3.8 3.9 4.1 Service Delivery and the Provinces.................................................................................. 57 Land Management............................................................................................................ 59 3.6.1 Land tenure and access to land........................................................................ 59 3.6.2 Vanuatu Land Sector Framework 2009 – 2018 ............................................... 60 Performance of State Owned Enterprises ........................................................................ 61 The Enabling Environment for Private Sector Activity ...................................................... 62 Governance and Public Sector Management: Conclusions ............................................. 64 The Environment .............................................................................................................. 65 4.1.1 Introduction ......................................................................................................... 65 4.1.2 Issues, Causes and Constraints ....................................................................... 65 4.1.3 Mainstreaming the Environment ....................................................................... 68 Tourism............................................................................................................................. 69 4.2.1 Introduction ......................................................................................................... 69 4.2.2 Sector Performance ........................................................................................... 70 4.2.3 Growing Tourism ................................................................................................ 72 Agriculture ........................................................................................................................ 75 4.3.1 Introduction ......................................................................................................... 75 4.3.2 Institutional Setting ............................................................................................ 76 4.3.3 Policy Setting and Service Delivery.................................................................. 77 Fisheries ........................................................................................................................... 79 4.4.1 Introduction ......................................................................................................... 79 4.4.2 Domestic Fisheries ............................................................................................ 80 4.4.3 Commercial Offshore Fishery ........................................................................... 81 Conclusions ...................................................................................................................... 83 Demographic profile ......................................................................................................... 85 Traditional Social Structure .............................................................................................. 85 Health ............................................................................................................................... 86 5.3.1 Overview ............................................................................................................. 86 5.3.2 Communicable and non communicable diseases ........................................... 87 5.3.3 Maternal and child health .................................................................................. 87 5.3.4 Government health service provision ............................................................... 88 5.3.5 Resource issues in health service delivery...................................................... 89 5.3.6 Health policy, planning and reform ................................................................... 89 5.3.7 Donor assistance to the health sector .............................................................. 90 Education.......................................................................................................................... 90 5.4.1 Overview ............................................................................................................. 90 5.4.2 Educational enrolment and attainment............................................................. 91 5.4.3 Unifying language .............................................................................................. 92 5.4.4 Curriculum .......................................................................................................... 92 5.4.5 Public educational services ............................................................................... 93 5.4.6 Infrastructure ...................................................................................................... 95 5.4.7 Personnel............................................................................................................ 95 5.4.8 Government expenditure ................................................................................... 96 5.4.9 Education policy, planning and reform ............................................................. 96 5.4.10 Donor assistance in education .......................................................................... 97 Employment and livelihoods............................................................................................. 98 5.5.1 Current patterns ................................................................................................... 98 4. Environment, Tourism and the Productive Sectors ............................................. 65 4.2 4.3 4.4 4.5 5.1 5.2 5.3 5. Social Challenges.................................................................................................... 85 5.4 5.5 iv Vanuatu Economic Report 2009 5.6 5.7 5.8 6.1 6.2 5.5.2 Key issues .......................................................................................................... 99 5.5.3 Donor programs.................................................................................................. 101 Gender Equity................................................................................................................. 101 5.6.1 Current situation............................................................................................... 101 5.6.2 Employment ...................................................................................................... 102 5.6.3 Violence against women.................................................................................. 103 5.6.4 Donor activity.................................................................................................... 103 Urbanization: Informal and Squatter Settlements........................................................... 103 5.7.1 Rural-urban drift and urbanization ..................................................................... 103 5.7.2 Social and Health-Related Problems.............................................................. 104 5.7.3 Urban Poverty................................................................................................... 105 Conclusions and recommendations ............................................................................ 106 Introduction..................................................................................................................... 109 6.1.1 Situation Assessment ........................................................................................ 109 6.1.2 Development Partner Activities....................................................................... 110 Economic Infrastructure.................................................................................................. 111 6.2.1 Transport ........................................................................................................... 112 6.2.2 Electricity ........................................................................................................... 118 6.2.3 Telecommunications.......................................................................................... 120 6.2.4 Water supply, sanitation, and solid waste.......................................................... 121 Urbanization ................................................................................................................... 124 6.3.1 Informal and squatter settlements ..................................................................... 125 6.3.2 Urban development projects.............................................................................. 127 6.3.2 Institutional arrangements and capacity ............................................................ 127 7.2.5 Urban Infrastructure Planning with a Focus on Port Vila ................................... 129 Development Policies and Strategies............................................................................. 130 Conclusions and Recommendations .............................................................................. 131 6. Infrastructure Development.................................................................................. 109 6.3 6.3 6.4 Appendix Table 2: Gross Domestic Product by Industry (Constant 1983 prices) ............ 135 Appendix Table 3: Exchange Rates 2000-2009 (Annual average) ...................................... 136 Appendix Table 4: Private Sector Credit – Lending by the Commercial Banks ................ 137 Appendix Table 5: Principal Exports and the Trade Balance ............................................. 138 Appendix Table 6: International and Regional Environment Agreements Ratified by Vanuatu .................................................................................................................................... 139 Vanuatu Economic Report 2009 v Currency Equivalents (As of 5 May, 2009) Currency Unit – Vatu (Vt) Vt1.00 = US$0.009259 US$1.00 = Vt118.10 $ refers to United States Dollars unless otherwise specified Abbreviations ADB AFD ARI AusAID AVL BNPL BPS CAA CDP CEA CEDAW CNFC COM CPI CRP D-G DARD DFID DGMWR DLA DOTS DoW DPH DWA ECE EFA EFA,FTI EAP EIA EMC ERC EU FAD FDI FPL FSB GBE GDP Asian Development Bank Agence Française de Développement Acute Respiratory Infection Australian Agency for International Development Airports Vanuatu Limited Basic Needs Poverty Line Budget Policy Statement Civil Aviation Authority Committee for Development Policy Country Environmental Analysis Convention for the Elimination of all forms of Discrimination Against Women China National Fisheries Corporation Council of Ministers Consumer Price Index Comprehensive Reform Program Director-General Department of Agriculture and Rural Development Department for International Development Department of Geology, Mines and Water Resources Department of Local Authorities Directly Observed Treatment Short Course Department of Water Department of Ports and Harbors Department of Women’s Affairs Early Childhood Education Education For All Education for All, Fast Track Initiative Education Assistance Program Environmental Impact Assessment Environmental Management and Conservation Expenditure Review Committee European Union Fish Aggregating Device Foreign Direct Investment Food Poverty Line Finance Service Bureau Government Business Enterprise Gross Domestic Product vi GEF GFG HDI HDR HIES HPI ICT IFC IMCI IMF IWRM JICA LAR LDC LSCU LSF LTSP MAQFF MBC MCA MCH MCC MDG MFEM MIA MICS MIPU MoE MoH MSG MSP MTEF NBV NGO NTDO NWRAC NZAID OMO PAA PEA PEFA PEIP PFEM PFTAC PGI PICTA PPA PPO PPP POP PPU Vanuatu Economic Report 2009 Global Environment Facility Governance for Growth Human Development Index Human Development Report Household Income and Expenditure Survey Human Poverty Index Information and Communication Technology International Finance Corporation Integrated Management of Childhood illness International Monetary Fund Integrated Water Resources Management Japan International Cooperation Agency Liquid Assets Ratio Least Developed Country Land Sector Coordination Unit Land Sector Framework Long Term Strategic Partnership Ministry of Agriculture, Quarantine, Forestry and Fisheries Ministerial Budget Committee Millennium Challenge Account Maternal and Child Health Programme Millennium Challenge Corporation Millennium Development Goals Ministry of Finance and Economic Management Ministry of Internal Affairs Multiple Indicator Cluster Survey Ministry of Infrastructure and Public Utilities Ministry of Education Ministry of Health Melanesian Spearhead Group Medium Size Project Medium Term Expenditure Framework National Bank of Vanuatu Non Government Organization National Tourism Development Office National Water Resources Advisory Committee New Zealand Agency for International Development Open Market Operations Priorities and Action Agenda Preliminary environmental assessment Public Expenditure Framework Assessment Public Education Improvement Project Public Finance and Expenditure Management [Act] Pacific Financial Technical Advisory Centre Poverty Gap Index Pacific Islands Countries’ Trade Agreement Physical Planning Area Physical Planning Office Purchasing Power Parity Persistent Organic Pollutant Physical Planning Unit Vanuatu Economic Report 2009 vii PRAI PRIDE PSA PSC PSCC PWD RAPT SAS SOE SOPAC SPARTECA SPBEA SRD SWAp TA TSD TVET RBV REMP RTC SME STI STR UN TB TVL UAF UGMS UNDP UNFPA UNELCO UNEP UNESCAP UNICEF UNIFEM URS US VADB VARTC VAT VCMB VCNE VESAP VESS VIPA VIP VIT VLGC VMA VNPF VNTC Pacific Regional Audit Initiative Pacific Regional Initiative for Delivery of Basic Education Private Sector Assessment Public Service Commission Pacific Senior Secondary Certificate Public Works Department Residents Against Processing of Tuna Sub-regional Audit Support Program State Owned Enterprise South Pacific Applied Geoscience Commission South Pacific Regional Trade and Economic Cooperation Agreement South Pacific Board for Educational Assessment Statutory Reserve Deposit Sector Wide Approach Technical Assistance Tourism Sector Diagnostic Tool Technical and Vocational Education and Training Reserve Bank of Vanuatu Rural Electrification Master Plan Rural Training Centre Small and Medium Sized Enterprises Sexually Transmitted Infection Student-Teacher Ratio United Nations Tuberculosis Telecom Vanuatu Limited Universal Access Fund Urban Growth Management Strategy United Nations Development Programme United Nations Population Fund Union Electrique du Vanuatu Limited United Nations Environment Programme United Nations Economic and Social Commission for Asia and the Pacific United Nations Children’s Fund United Nations Development Fund for Women Utilities Regulatory Authority United States Vanuatu Agriculture Development Bank Vanuatu Agricultural Research and Training Centre Value added tax Vanuatu Commodities Marketing Board Vanuatu Centre for Nursing Education Vanuatu Education Support Action Plan Vanuatu Education Sector Strategy Vanuatu Investment Promotion Agency Ventilated Improved Pit [Latrine] Vanuatu Institute of Technology Vanuatu Land Governance Committee Vanuatu Maritime Authority Vanuatu National Provident Fund Vanuatu National Training Council viii VTAP VTO VTSSP WHO WTO Vanuatu Economic Report 2009 Vanuatu Tourism Action Plan Vanuatu Tourism Office Vanuatu Transport Sector Support Programme World Health Organization World Trade Organization Vanuatu Economic Report 2009 ix Map of Vanuatu Source: Asian Development Bank 1 Vanuatu Economic Report 2009 Executive Summary Introduction Vanuatu has made significant economic and social gains in recent years, with growth driven mainly by construction activity, tourism, and services, underpinned by improved economic policy and effective fiscal management. But concerns remain about the distribution of the benefits of development, which do not reach most of the 80% of the population that lives in rural areas. Population growth is estimated at 2.4% per annum, with 50% under the age of 20. Finding employment for and providing services to a rapidly increasing population will present major challenges. The urban centers of Port Vila and Luganville are experiencing high population growth rates as a result of continued rural-urban migration. The provision of infrastructure and other services in urban areas is a pressing need. Population growth and poverty of opportunity are important issues Poverty of opportunity is prevalent in rural areas where health, education and transport facilities are limited, standards of governance are poor, employment opportunities lacking, and income and expenditure restricted. Urban incomes are higher than rural incomes, although a new class of urban poor—particularly in the peri-urban areas—is developing. Economic and social setting Vanuatu’s natural resources support tourism, agriculture, fisheries and some forestry. Critically, they support subsistence, with 80% of the population living in rural areas and about 98% of rural households engaged in agriculture. In rural areas the main economic activity of 50% of the heads of households is subsistence. Despite improvements in its Human Development Index (HDI) and HDI rank, increased life expectancy, and recent strong growth in gross domestic product (GDP) per capita, Vanuatu appears likely to achieve only two of the key Millennium Development Goals (MDG)—reduced maternal mortality and the reversal of major diseases—by the target date of 2015. Concerns arise about issues such as the inequality of income distribution, the poverty of opportunity confronted by much of the population, lack of formal employment and income generating opportunities for school leavers in circumstances of rapid population growth, and limited access to good quality education. Governance and other constraints restrict needed private sector investment Few of the MDGs will be achieved by 2015 Economic performance has been robust since 2003, driven by tourism, real estate, construction and assistance from development partners. Fiscal management has been sound and some reforms introduced. Future performance depends on private sector investment. However, constraints to private sector development stem from inadequate physical infrastructure, poor governance, an outdated legal and regulatory environment for private sector investment, corruption, and government involvement in inefficient enterprises that crowd out the private sector. Vanuatu Economic Report 2009 2 Sustained growth Vanuatu has, over the past six years, achieved its macroeconomic targets relating to sustained economic growth, balanced budgets, sustainable external balances, and prudent debt management. Inflation exceeded the target threshold of 4.0% in 2007 and 2008, but is expected to fall to 3-4% in 2009. The goal of establishing a broad revenue base presents special challenges, however, and there is a pressing need to review the taxation system, which currently relies very heavily on import duties and the value added tax (VAT). The economy is dominated by the services sector which contributes around threequarters of GDP. Investment in economic services, and for infrastructure for land development and tourism-related activities, has led the way for continued growth in services. Agriculture is the mainstay of livelihoods for the 80% of the population living in rural areas, and accounted for 16.1% of GDP in 2007, custom/traditional agriculture contributing 9.4%. But commercial agriculture is moribund and in overall decline. The current account and merchandise trade deficits expanded significantly from 2003 to 2007 as a result of increased construction activity, expanded transport services, and increased private credit and consumption. Weak total merchandise export earnings underlie the current account deficit, which averaged 7.5% of GDP between 2003 and 2007. Tourism earnings and official grants have offset the declining balance on traded goods. The combination of increasing services income, official grants, private capital inflows and the import of project goods has resulted in a positive net overall balance of payments since 2002. However, increasing imports and net income outflows are expected to more than offset increases in tourism earnings in the short to medium term, with the current account deficit likely to widen. The minimum legal wage is significantly above the equilibrium level, thereby reducing employment. Given the large numbers of new job seekers each year there will be continued downward pressure on wages without substantial productivity gains. Wages and salaries absorb more than 76% of the goods and services bill of the government, and account for more than 60% of recurrent expenditure, so funding for operational activities and public investment is limited. Amendments to the Employment Act, passed in late 2008, will have a significant negative impact on the economy, and it is strongly recommended that they are repealed as soon as possible. Vanuatu’s business environment and competitiveness is impacted by a range of constraints, including high electricity tariffs, limited transport and other infrastructure, costly and inefficient port operations, and high transactions costs of establishing and operating businesses. State owned enterprises also crowd out private sector activity. Price and import controls, along with the high level of discretion of Government Ministers in matters such as duty exemptions, should be removed. A national competition policy is an appropriate option for addressing these and related issues. Notwithstanding these issues, various positive reforms have been undertaken in areas such as budget preparation and control, fiscal responsibility, competition in telecommunications, the open skies policy, privatization of some SOEs, and development of a Land Sector Framework to address land tenure and management issues. The services sector drives growth, but agriculture is the mainstay of livelihoods Weak merchandise exports underlie the current account deficit The minimum legal wage is above the equilibrium level While recent amendments to the Employment Act must be repealed A national competition policy would be appropriate 3 Vanuatu Economic Report 2009 Private sector credit expanded rapidly from 2006 to 2008 mainly for housing, land purchases and personal consumption. Growth in lending was particularly strong in 2008 because a fourth commercial bank opened and banks attempted to maintain market share, and because of the ongoing real estate boom. There was a consequent liquidity shortage in the second half of 2008, resulting in the Reserve Bank reducing the Statutory Reserve Deposit (SRD) level. Given continued growth in the economy it seems unlikely that further liquidity difficulties will be experienced in the foreseeable future. The Vanuatu National Provident Fund (VNPF) also has a substantial impact on liquidity, contributing around 40% of the liquidity in the market through term deposits with the local banks. Credit for rural and small businesses remains difficult; the VADB should come under the Reserve Bank's control Interest rate spreads are generally high in Vanuatu, perhaps reflecting the commercial banks’ views on risk levels. Rural enterprises and small businesses find it difficult to obtain credit. Microfinance schemes will address this issue to some extent, with the improving telecommunications system supporting wider credit availability. The recently introduced Personal Properties Security Act is an important positive initiative in support of private sector investment. The new Vanuatu Agricultural Development Bank (VADB) should, however, is brought under the regulatory jurisdiction of the Reserve Bank. ` Fiscal discipline and economic growth have enabled Vanuatu to achieve a sustainable fiscal position, and placed it in a sound position in relation to external debt. While concessionary loan financing for investments with rates of return well in excess of the costs of borrowing could be used, and may be the only means to address needs such as improved urban infrastructure, the uncertainties associated with the global financial crisis mean that caution should be exercised in relation to taking on significant additional debt at this time. However, as the global economy improves this matter should be kept under review, with judicious use of loan financing in priority development areas that bring long-term benefits to the nation. The taxation system should be reviewed The key near-term priorities in support of continued growth and development include a review of the taxation system, duty exemptions, and poor compliance in many areas; repeal of the amendments to the Employment Law; replacement of trade and price controls, and other regulation, with a competition policy; continued efforts to provide credit to rural areas; and bringing the VADB under the jurisdiction of the Reserve Bank. Public sector effectiveness Effective and transparent governance is a fundamental requirement for successful economic and social development. The Parliament and its committees, including the Expenditure Review Committee, along with the public sector, including the Offices of the Auditor-General and the Ombudsman, are central to sound governance. The Council of Chiefs also plays an important role. Municipal appointments should come under the Public Service Act Appointments to the public service at national level are nominally free from political interference, but municipal and provincial governments remain heavily politicized, which is a hindrance to good governance. Plans for municipal administrative appointments to come under the Public Service Act should be given high priority. Vanuatu Economic Report 2009 4 Financial management in the provinces is virtually non existent, which results in dysfunctional service delivery. The establishment of provincial Finance Service Bureaus by the Ministry of Finance and Economic Management (MFEM) will help to overcome this shortcoming. The Ministerial Directors-General (D-Gs) have a major influence on the performance of the public service. But some are struggling to meet the standards of management and governance required to ensure an effective public service, often because they come from a technical background and have little or no management training. The Public Service Commission is working on developing a formal performance management system for D-Gs. Further training and succession planning are required. Performance management and succession planning are needed for D-Gs Governance The institutions that play a central role in ensuring good governance are in a state of disarray. The position of Auditor-General is vacant, the audit office has only unqualified staff, and there is a backlog of accounts requiring audit. Recommendations from the Office of the Ombudsman are largely ignored. Consequently, there are no incentives for improved governance, greater transparency, and the elimination of corruption. The government has acknowledged the seriousness of the situation and pledged to restore the effectiveness of the Auditor-General and the Expenditure Review Committee (ERC), which has recently been reactivated after five years of inactivity; it must also reassert the independence of the Ombudsman and ensure that reports from this office are acted upon. The AuditorGeneral and ERC must be made effective and reports from the Ombudsman acted upon Fiscal management The government is committed to the principles of fiscal responsibility, and MFEM applies the Public Finance and Expenditure Management Act rigorously to ensure good governance in relation to fiscal targets. As a result a recurrent budget surplus has been achieved over the past five years. Tax and duty exemptions are a drain on national finances Tax compliance has been improved, resulting in an increased surplus in recent years, but the granting of tax and duty exemptions continues to be a drain on revenue. The country remains dependent on a narrow base for its revenue and, while the Government appears to have no plans for extending that base, a review of taxation arrangements is recommended, particularly in light of an expected decrease in import duty receipts once various trade agreements come into force. Budget process The budget process is robust although there is currently little opportunity for public comment. The Budget Policy Statement is prepared late in the budget preparation cycle, making it ineffective; the intention to release the Statement in April or May is strongly supported. However, even then it will not provide an effective avenue for comment until the Expenditure Review Committee becomes fully effective. The budget for 2010 will integrate the Development Budget with the national policy priorities. This will serve to align aid expenditure with government policy priorities by 5 Vanuatu Economic Report 2009 considering development partner resources during the budget preparation cycle. Land and land management Under the Constitution the rules of kastom form the basis of land ownership and use. Land is closely linked with heritage, power, and spirituality, it is central to all development activities, whether in the public sector or the private sector, and it comprises the platform for economic reform. But landowners are often disadvantaged by current leasing arrangements, investors find land access is often a stumbling block to investment, and disputes regularly occur amongst landowners and between landowners and lessees. The Land Sector Framework is an important initiative that should be supported The recently implemented Land Sector Framework was developed to provide an enabling environment for multi-stakeholder participation in the effective use, management and stewardship of the nation’s land resources. It provides a roadmap for land sector development over a 10 year period, based on effective oversight of land policy development, planning and resource allocation. State owned enterprises Nineteen State Owned Enterprises (SOEs) are owned in whole or in part by the government; they are engaged either in commercial activities or in the provision of public services. Many are inefficient, lack transparency, accountability, and a framework for monitoring performance, and/or are non-viable. Conversely, most of those involved in regulatory service provision, such as the Reserve Bank of Vanuatu (RBV), the Utilities Regulatory Authority (URA) and the Vanuatu Financial Services Commission (VFSC), have important core roles in governance and financial and economic management. It is specifically recommended that the Vanuatu Commodities Marketing Board (VCMB) is abolished. Creating an SOE Department in MFEM is strongly recommended The SOE sector should be restructured and MFEM given the authority to provide oversight of the sector. It is recommended that the Government Business Enterprise (GBE) Unit in MFEM is upgraded to a department, and that MFEM’s draft Public Enterprise Bill is revised, formally empowering the GBE Unit or Department to oversee and reform SOEs, including reform of corporate governance arrangements and the preparation of as many SOEs as possible for divestiture. Private sector development Policies for private sector development have improved in recent years, but difficulties remain. The system of approving the establishment of new companies is complex and causes unnecessary delays, while the cost of doing business in Vanuatu is extremely high, with infrastructure services that are poor quality, high cost, or both. Other constraints include weak governance and intrusive state interventions, with a propensity to regulate rather than facilitate business development; a complex and outdated commercial legal framework; and a difficult and uncertain land leasing system. Transactions costs are high Vanuatu Economic Report 2009 6 The environment—vital to livelihoods and the economy The environment should be given high priority and the Department of EMC established Vanuatu’s natural environment is critical to livelihoods and is the basis of the nation’s key export industries, particularly tourism and agriculture. Yet little more than lip service is paid to environmental sustainability. Political commitment to the environment is lacking, the budget allocation to it is tiny, and there is evasion or abuse of the requirements of the Environmental Management and Conservation Act of 2002. The Department of Environmental Management and Conservation, which is specified in the Act, has not been established, while the Environment Unit is underresourced. Population growth, rural-urban migration, real estate and tourism developments, deforestation, invasive species, imported energy and transport goods, waste disposal, run-off into bays and lagoons, and increasing tourist numbers are all causes of environmental change. Environmental management should be mainstreamed in government activities and accorded strong standing in all planning and development activities, whether public or private. The first priority is to establish the Department of Environment and Conservation and reposition it in the government structure, possibly in the Office of the Prime Minister. Subsequent priorities are to seek donor technical assistance to examine sustainable environmental financing through such means as fees, charges and performance bonds; and to undertake a strategic environmental assessment and develop a system for examining policies, plans and programs for their environmental impacts prior to their approval. The establishment of a National Council on Sustainable Development and a national environment summit are recommended. And the environment should be mainstreamed in government The initial priorities for environment action are clear Tourism’s comparative advantage Tourism is the leading export industry, typified by continual growth since 2004. From 2002 to 2008 visitor numbers doubled and the length of stay of multiple-day visitors increased from 8.2 to 10 days. Over time there will be need for market diversification, particularly into emerging Asian markets, although growth in visitor numbers might be constrained by accommodation shortages on Efate in the short to medium-term, while the number of tourists arriving by air may plateau in 2009 or 2010 due particularly to constraints on accommodation. The success of tourism relies on political and social stability. Economic reform and increased public investment in physical and social infrastructure is required to make the country an easier place in which to do business and to visit. Land issues also constrain investment in the industry. Careful attention to environmental management is also needed to preserve natural assets. All these factors require the Government to set the policy context and operating environment for the sector, while the private sector drives investment and employment. A robust enabling environment for investment is critical, while there needs to be greater clarity in government policy for tourism development. The Vanuatu Tourism Action Program (VTAP) provides a blueprint for the further development of tourism in a manner that best meets the needs of Vanuatu. It should be given high priority by the Government, the business sector and donors, to ensure A robust policy context and enabling environment are critical to continued growth in tourism The VTAP provides a blueprint for tourism development 7 Vanuatu Economic Report 2009 the further development of the country’s most critical sector in terms of economic growth and employment. Agriculture Agriculture is the backbone of the economy, is fundamental to the traditional and cash economies, and involves all but a small percentage of the population. It is the second largest contributor to GDP, provides commodity exports and meets the subsistence needs of most of the population. A national agricultural policy is urgently needed But the sector is moribund, and lacks leadership and vision. Formulation and implementation of a national agricultural policy is an urgent need, with a focus on the government’s core roles in areas such as regulation, extension and research, rather than market intervention and involvement in commercial activities. Donors have clearly signaled support for development activities in the sector, but require that the Government takes the lead, indicates a vision for the sector, and actively seeks such support. While a national agricultural policy is the highest priority, it is recommended that immediate action is taken to develop, fund and implement a program for the revitalization of extension services in the Ministry of Agriculture, Quarantine, Forestry and Fisheries (MAQFF). The 2008 report of the NZAID-funded review of extension services provides a sound basis on which to revive extension services. But revitalization of extension services should be pursued immediately Fisheries The core functions of the Department of Fisheries are the development of rural fisheries, sustainable management of fisheries resources, and licensing and surveillance of commercial fisheries and the sport fishing charter boat industry. The Department has prepared a number of management plans for domestic fisheries, yet is constrained in its ability to undertake enforcement, or to assist the development of domestic fisheries, by a lack of resources. It has, however, provided guidance for the establishment of more than 70 Fishermen’s Cooperative Associations, with a principal focus on marketing of domestic catches. In 2008 more than Vt144 million was collected from licensing and registration fees for offshore commercial fisheries. The Department has been very successful in increasing revenues from this source, yet seeks to appropriate a greater share of resource rentals—on behalf of the Government—by supporting onshore processing. Again, it has been successful in this initiative, with processing plants under development in Port Vila Bay and at nearby Mele Bay. The Port Vila Bay development is subject to preparation of an Environmental Impact Assessment (EIA), while the Mele Bay plant, being established—and to be operated—by the China National Fisheries Corporation (CNFC), is expected to commence operations in May 2009, although is awaiting the outcome of an independent review of the Preliminary Environmental Assessment (PEA) for the development. Onshore processing must be subject to environmental monitoring; it could be subject to performance bonds Concern has been expressed about the location of the plants, with potential impacts on the important tourism industry, vessel and wharf overcrowding, and increased pollution in Port Vila Bay and Mele Bay central to those concerns. If one or both of the plants commences operations, which seems likely, it is critical that robust Vanuatu Economic Report 2009 8 environmental monitoring and management plans are in place, and that the resources are available to ensure monitoring and management are adequate. The Government should also consider the use of performance bonds for these and other developments that have the potential to impact on the environment. Social Challenges Service delivery is difficult and expensive Rapid population growth, geographic isolation and widely scattered settlements pose major challenges for the delivery of basic services. The rapidly growing population has a young structure, with more than 40% under 15, indicating future population growth momentum. Concomitantly, improvements in health have resulted in longer life expectancy and an ageing population, bringing a new set of challenges in health service delivery. Recent gains in health indicators include reduced infant and maternal mortality rates, improved immunization coverage and prevention of major diseases like malaria and TB, but lifestyle changes are seeing increasing incidence of non communicable diseases such as diabetes, high blood pressure and heart disease. Rapid urbanization is leading to overcrowding, poor housing and lack of clean water and sanitation in many urban and peri-urban areas, especially in Port Vila, exposing urban residents to major health risks. And urbanization is creating some health risks Health Health service quality in rural areas is weak; more use should be made of NGOs to deliver primary health care While there have been improvements in some health indicators, service quality in rural areas is weak, mainly because of extremely weak institutional capacity at the provincial, district and area levels. In the short term, the state will not be able to expand or significantly improve the quality of services at the local level. It is recommended that increased use is made of NGO, church and civil society organizations and networks to deliver primary health care. The outsourcing of services needs to be accompanied by capacity building and effective monitoring to ensure services meet the required standard. Increased attention must also be given to the health needs of the burgeoning urban population, particularly those living in overcrowded, unsanitary conditions in informal and squatter settlements. Lack of access to clean water, sanitation, drainage and proper waste disposal increases the vulnerability of these populations to gastrointestinal diseases, malaria, skin problems and a range of other water and hygiene related illnesses. Raising health awareness amongst youth is critical Targeting youth is important for the delivery of health messages related to STIs, drug and alcohol abuse, and unplanned pregnancy, especially in urban areas. Some NGOs are already playing a valuable role in this area, and further support needs to be directed to these groups to ensure young people have the means to make informed choices and protect their own and others’ health. Education The Government and donors have made significant progress within the last two to three years in tackling the challenges of providing good quality education to all. Major constraints in the quality of teaching will be hard to address in the short term but, in 9 Vanuatu Economic Report 2009 the medium term, the benefits of programs such as the Vanuatu Education Support Action Plan (VESAP) should become evident. Provision of education services is difficult because of the wide dispersion of the student population. The quality of education, particularly of teaching, demands urgent attention. Many teachers at primary and secondary levels lack any training or qualifications, and school enrolment rates are amongst the lowest in the Pacific. The costs of education are one reason for non enrolment; but while the Government’s recent announcement that primary school fees are to be abolished may increase enrolments, other resource constraints such as education materials and infrastructure will remain. There is a need for major revision of the national curriculum, improvement of school infrastructure and facilities, and development of a national education language policy. Vanuatu’s continuing low rates of adult literacy and numeracy, especially among youth and school leavers, are likely to impact significantly on the nation’s ability to take advantage of future economic opportunities. Consideration should therefore be given to a national adult literacy campaign. Finally, reform of the education system must reflect future human resource requirements. Technical vocational education and training (TVET) courses need to be better targeted to the demands of public administration and the productive sector. To this end, the Government needs to prepare an overall national human resources development (HRD) strategy, and education policies and programs need to be realigned to support this strategy. Education quality and resources require ongoing attention A new national curriculum is needed, as is a language policy A national adult literacy campaign could be implemented A national HRD strategy is also needed, and TVET must be better targeted Employment and livelihoods A national human resource development strategy is a key priority Skills shortages currently constrain economic development and limit employment prospects. The most urgent priority is to prepare a comprehensive national human resource development strategy and, thereby, define current and future human resource requirements. A priority area for investigation will be how to ensure that education and training services are closely integrated with the country’s human resource needs, including in the informal sector. Youth employment needs to be given high priority, with youth training programs targeted to match job opportunities. Given the rapid rate of urban growth, investment in targeted training in sectors suffering from acute shortages of skilled or semi-skilled workers in the urban centers must be a high priority for the Government. Strategies to support the creation of jobs for youth, possibly including the creation of apprenticeship schemes and vocational placements, should be an important focus of the national human resource development strategy. Youth employment is the area of greatest need Urban management and development needs are a priority Investment in urban services and infrastructure is needed Rapid urbanization, resulting largely from rural-urban migration, is a critical but largely ignored matter. There is a need to tackle the issues arising from rapid urban growth, to make urban areas more habitable, and to invest in urban services and infrastructure. The Asian Development Bank will begin work in this area in the near future, while a planning process has recently been concluded by the Ministry for Lands and Natural Resources for Luganville and will commence for Port Vila in 2009. Vanuatu Economic Report 2009 10 The institutional capacity of government and municipal authorities for urban planning and management, including urban development, infrastructure works and provision of services, is extremely limited. The various roles, responsibilities and operations of different government departments and the different levels of government—national, provincial and municipal—are poorly coordinated. A study of urban areas and infrastructure requirements is needed As is institutional capacity building for the sector A national urbanization policy and planning guidelines are needed, with a national task force comprised of representatives from national and local Government, communities, key donors and NGOs responsible for the development and implementation of a national urban strategy. There is an acute shortage of trained professionals in the area of urban planning and management, and donor support is needed for institutional capacity building, along with technical support in the short to medium term. Infrastructure Policy reform, private sector participation and competition have improved performance The state of infrastructure and associated services provision in Vanuatu is mixed, but policy reform and private sector participation has reduced costs and increased efficiency through competition in some areas. The Government has increasingly moved to focus on its core roles in regulation and to promote private sector provision of services, with significant positive outcomes in sectors such as telecommunications and air services. In the shipping sector, the domestic wharves at Port Vila and Luganville require major rehabilitation. A master plan for port and harbor development in Port Vila is urgently needed, while the institutional arrangements for management of the sector require review and reform. A strategy for improved inter-island shipping services is required, with the potential to subsidize uneconomic routes through a tendering process considered. The rural wharf network should also be assessed and priorities established for a rehabilitation program. Urban development policy and planning, including service and infrastructure provision for informal and peri-urban settlements, requires urgent attention. Findings from the previous ADB funded Sanitation Master Plan should be reviewed in conjunction with any proposed new urban master plan initiative. The electricity sector is functioning well in the urban and peri-urban areas, but coverage in rural areas is poor. The performance of UNELCO should be monitored by the Utilities Regulatory Authority (URA) and any cost savings passed on to consumers. Implementation of the rural electrification plan is a priority. The open skies policy and reform of the institutional arrangements for management of the air transport sector have brought significant benefits. Continued planning for rural airport maintenance is required, while the preparation of a master plan for the upgrading of Bauerfield Airport should be given high priority. Port and harbor development and inter-island shipping are priority areas to be addressed Urban development policy and planning should also be high priority A master plan for Bauerfield should be given priority 11 Vanuatu Economic Report 2009 1. Development Performance, Issues, and Policies 1.1 An Overview of Human Development “An educated, healthy and wealthy Vanuatu” is the National vision, as spelled out in the Priorities and Action Agenda 2006—2015 (PAA)1. Significant economic and social gains have been made in recent years, with real economic growth averaging 5.9% from 2003 to 2007, resulting in per capita income gains2 and improving social welfare. Growth has been driven mainly by construction activity, tourism and agriculture. While economic and social gains have been realized, concerns remain about the distribution of the benefits to all ni-Vanuatu, a situation that occurs at least partly because of the wide geographic spread of the islands that make up the nation. Increasing dualism and rural-urban drift are important issues to be addressed. The population in 2004 was estimated at 212,000, with an annual growth rate of 2.6% reported in the PAA. The Asian Development Bank (ADB), in its Asian Development Outlook, estimated a population of 229,400 in 2007. Uncertainty remains about the true rate of population growth, however, with the rate reported as 2.9% in the recent Vanuatu Diagnostic Trade Integration Study3 (DTIS), and 2.3% (for rural residents) in the 2007 Agriculture Census4. This issue is addressed in Chapter 5 of this report, where a rate of 2.4% is recorded. According to the Agriculture Census, there were 175,051 people in agricultural households, around 80% of the national population. Census results also show that 50% of the population is under the age of 20, indicating that considerable population momentum exists and that the national population is likely to continue to grow at a relatively high rate. A National Census will be undertaken in 2010, bringing population and other information data up-to-date, and supporting improved planning and policy analysis, particularly in relation to service delivery. The degree of urbanization is changing, with rapid rural-urban migration, particularly to Port Vila and Luganville. In the DTIS it is noted that population growth in these two centers exceeds 4% per annum, implying a population in Port Vila of 60,000 by 2020, with much of that population made up of young, unemployed people. The strain on infrastructure and services is already evident in Port Vila. Urbanization and urban infrastructure is, therefore, an important matter to be addressed as a matter of some urgency. Disparities in incomes between urban and rural areas, coupled with better potential access to services in urban areas, are likely to be important incentives to internal migration. As indicated in data from the Household Income and Expenditure Survey (HIES) of 2006, rural incomes are generally well below those for urban areas. But, as discussed in section 1.2 below, living costs are higher in urban areas, particularly The rate of population growth is high A National Census will be undertaken in 2010 Population growth is fastest in Port Vila and Luganville Urban incomes are higher than rural incomes 1 2 3 4 Government of the Republic of Vanuatu, 2007. Priorities and Action Agenda 2006-2015. Ministry of Finance and Economic Management, Port Vila. Although these gains were largely absorbed by substantial “catch-up” pay increases for government employees in 2007 and 2008. Department of Trade, Industry and Development, 2008. Vanuatu: Diagnostic Trade Integration Study, 2008 Report. Published by Blue Planet Media and Communications, Port Vila. National Statistics Office, Vanuatu, 2008. Census of Agriculture, 2007. Ministry of Finance and Economic Management, Port Vanuatu Vanuatu Economic Report 2009 12 Port Vila, with a greater proportion of urban residents than rural dwellers below the basic needs poverty line. Income and expenditure comprise important indicators of wellbeing. But poverty is also experienced when households lack access to basic services, such as water and sanitation; if they are in the remoter parts of the country, away from urban amenities; or in the informal settlements in Port Vila and Luganville. They might also lack access to health, education and transport facilities. This “poverty of opportunity”—e.g. lack of access to basic health and education services, employment opportunities, standards of good governance and equal opportunities across gender and age—is now considered just as important in defining the extent of poverty and hardship in a society as is the lack of income and expenditure. Reference to the HIES data again indicates that such poverty of opportunity occurs in many rural areas and in the periurban areas of Port Vila and Luganville. Vanuatu made significant gains in human development over the past decade. In 19985 the Human Development Index (HDI) was 0.425, and the nation’s global HDI rank was 140. In the 2007/2008 Human Development Report6 (HDR) the HDI is reported as 0.674 for 2005, and the nation’s rank as 120 from 177 countries, placing it in the middle range of the medium human development category. Life expectancy increased from 65.8 in 1998 to 69.3 in 2005, combined gross enrolment (primary, secondary and tertiary education) from 57.4% to 63.4%, and gross domestic product (GDP) per capita from $1,231 to $3,225. The Human Poverty Index (HPI) for 2005 was 24.6%, with Vanuatu ranked 56 from 108 developing countries. Improving the HPI will require improved water and sanitation and continued improvements in health and education outcomes. Human development gains have been made, but progress on some MDGs is lagging …and poverty of opportunity is prevalent The gains described above might indicate that Vanuatu is progressing well in achieving the United Nations’ (UN) Millennium Development Goals (MDG). However, in its 2008 Pacific Survey7 AusAID suggested that Vanuatu is “off-track” on key MDGs (Table 1.1). Of the indicators shown in Table 1.1, AusAID judged that only Goals 5 and 6—reduced maternal mortality and the reversal of major diseases—are likely to be achieved by the target date of 2015. 5 6 9 United Nations Development Programme, 1999. Pacific Human Development Report: Creating Opportunities. UNDP, New York. United Nations Development Programme, 2008. Human Development Report 2007/2008: Fighting Climate Change: Human Solidarity in a Divided World. UNDP, New York. AusAID, 2008. 08 Pacific Economic Survey 2008: Connecting the Region. AusAID, Canberra. 13 Vanuatu Economic Report 2009 Table 1.1: Millennium Development Goals Goal 1 Goal Poverty and hunger reduction % population undernourished Goal 2 Universal primary education % grade 1 students reaching grade 5 Goal 3 Gender equality in education Secondary school enrolment ratio Goal 4 Reduced child mortality Deaths per 1,000 live births (children under 5) Goal 5 Reduced maternal mortality Deaths per 100,000 births Goal 6 Reverse major diseases TB death rate per 100,000 Goal 7 Access to water and sanitation % rural population with access to improved water source 52 Indicator MDG Score 12 70.6 0.86 38 32 9.7 Source: AusAID, 2008. Pacific Economic Survey 2008. Canberra, p. 2. Economic growth has been rapid since 2004 Vanuatu’s recent economic and social progress can be attributed to various factors. First, economic growth has been high by both international and regional standards, with the real annual growth rate accelerating from an average of under 1.5% between 1995 and 2003, to an average of 5.9% from 2004 to 2007. Even with a high rate of population growth, economic growth since 2004 has translated into significant per capita income growth of close to 4.0% per annum. Second, there has been substantial real estate investment and construction activity since 2003, supported mainly by foreign direct investment (FDI) and aid flows. In the period 2003 to 2007 construction activity grew at a real average rate of 11.6%, with the growth rate in 2007 exceeding 18%8. This has been complemented by high levels of growth in the service industries, particularly those related to tourism, such as hotels and restaurants (discussed in Chapter 2). AusAID noted that strong growth has resulted from aid-funded construction (although private sector construction activity has also been strong), tourism expansion, and growth in agricultural exports9.  Third, public expenditure on education has been high, averaging 9.6% of GDP in the period 2002 to 2005, and reaching 26.7% of total government expenditure in this period10. These are amongst the highest levels of expenditure on public education, as a proportion of GDP and government expenditure, in the world. The effectiveness of education expenditure is, however, cause for concern—as discussed in Chapter 5— with both access and quality of education showing little if any improvement. Fiscal responsibility and an environment conducive to reform also appear to have underpinned development. These are amongst the factors that have resulted in increased support from all major donors in recent years. Net current transfers in the financial accounts are dominated by official grants through donor contributions. Official development assistance increased from Vt720.3 million in 2002 to Vt980.1 million in 2007, before increasing sharply in 2008 to Vt3,975.1 million. The substantial increase in 2008 occurred partly as a result of the commencement of road building Construction activity and FDI have been significant Education quality remains a concern 8 9 10 Data from the National Statistics Office: National Accounts of Vanuatu 2007. Ministry of Finance and Economic Management, Port Vila. AusAID, 2008. Ibid. United Nations Development Programme, 2008, op cit. Vanuatu Economic Report 2009 14 Aid flows are amongst the highest in the world with funding by the Millennium Challenge Corporation of the United States. Aid has been an important source of relatively stable income, allowing for balanced national budgets and offsetting vulnerability to natural disasters and fluctuations in world markets. Finally, subsistence activity has continued to make significant contributions to meeting basic food and shelter needs. As shown in the 2006 HIES and the 2007 Census of Agriculture, around 80% of the population lives in rural areas, with about 98% of rural households engaged in agriculture. In rural areas the main economic activity of 50% of the heads of households is subsistence, while consumption of home produced food is the most important consumption category across all households. According to the Census of Agriculture, most rural households still concentrate solely on household production. Subsistence production is also shown by HIES data to be important for urban households, although increasing monetization is apparent in Port Vila and Luganville. But subsistence remains important 1.2 Development Issues Despite a recent general rise in the level of human development a number of concerns remain, most related to the dualistic nature of the economy. These include inequality of income distribution; poverty of opportunity, particularly in rural areas; rapid population growth; lack of formal employment and income-generating opportunities for school leavers; declining school enrolments in the face of an increasing population11; limited access to a high-quality education; and rapid—but unplanned—urbanization in Port Vila and Luganville as a result of accelerating ruralurban migration. Inequality is reflected in various ways, including through the measurement of poverty, derivation of Gini Coefficients of inequality, and levels of household expenditure in different parts of the country. In an analysis of 2006 HIES data the National Statistics Office found that overall poverty was relatively low in Pacific terms, with a national Poverty Gap Index (PGI) of 5.6 (Box 1.1). This compares to higher PGIs of 7.5 for Solomon Islands, 11.2 for Fiji, and 12.8 for the Federated States of Micronesia. The PGI for Port Vila was, however, higher than for the rest of Vanuatu at a value of 10.6, indicating a large difference between the better-off and the poor. The PGI indicates that the average expenditure levels of households in poverty are generally much lower than the poverty line. Box 1.1: The Poverty Gap Index (PGI) The PGI is a measure of the depth of poverty being experienced by those households that are below the basic needs poverty line (i.e. it provides an indication of just how poor the poor actually are). Similarly, the Gini Coefficients calculated by the National Statistics Office indicate that income inequality is greater in Port Vila than other parts of the nation (Table 1.2). The Gini Coefficients of 0.40 and 0.41 are relatively low for a medium human development country, reflecting that income inequality is not particularly high in Vanuatu. Again, however, the figure of 0.46 for Port Vila reflects a greater level of 11 In the 2008 Annual Report of the Ministry of Education and Youth Development and Training it is noted that total school enrolments are gradually declining in absolute terms (p.17). 15 Inequality is greater in Port Vila than elsewhere Vanuatu Economic Report 2009 inequality, with this most likely related to rural-urban drift and the increased number of settlers in the peri-urban area. Increased urbanization and growth of the formal urban economy will, based on regional and international experience, result in increased inequality of income distribution (e.g. Samoa experienced increased income inequality as the economy of the capital, Apia, grew). Table 1.2: Gini Coefficients of Inequality in Vanuatu Region Gini Coefficient National Average 0.41 Rural 0.40 Luganville 0.41 Port Vila 0.46 Note: 0 = perfect equality Source: Vanuatu: Analysis of the 2006 Household Income and Expenditure Survey: A Report on the Estimation of Basic Needs Poverty Lines and the Incidence and Characteristics of Poverty in Vanuatu. National Statistics Office. Draft, March 2008. Poverty of opportunity, as previously noted, refers to poor access to basic services, employment opportunities, and good governance. The Government is focused on improving services to rural areas, yet governance at the provincial, municipal and local levels is constrained by capacity limitations. The provision of infrastructure services will also be important in overcoming the poverty of opportunity. Poverty occurs at different levels in different locations. For example, the cost of living in urban areas tends to be higher, both in terms of basic food needs and other basic needs (non-food essentials). The per capita and per household poverty lines, calculated from the 2006 HIES, are shown in Table 1.3. Based on those data 6% of households, representing 7.4% of the population, have insufficient expenditure to meet basic food needs as defined by the food poverty line of Vt3,064 per person per month. Nationally it is estimated that 12.9% of households, representing 15.9% of the population, had monthly per capita adult equivalent expenditure less than that needed to meet the basic needs poverty line of Vt4,716. Again, however, Port Vila exceeds the national averages with 27.2% of households below the basic needs poverty line, suggesting the existence of a population of “working poor”. Continued rural-urban drift will increasingly present challenges to policy-makers who seek to address the problems faced by the urban poor. Table 1.3: Monthly adult equivalent per capita poverty lines (Vatu) Category a. Food poverty line b. Estimated nonfood expenditure a+b. Basic needs poverty line National Average 3,064 1,651 4,716 Rural 2,589 777 3,366 Luganville 3,594 2,516 6,110 Port Vila 5,034 6,041 11,075 Poverty is also more prevalent in Port Vila Source: Vanuatu: Analysis of the 2006 Household Income and Expenditure Survey: A Report on the Estimation of Basic Needs Poverty Lines and the Incidence and Characteristics of Poverty in Vanuatu. National Statistics Office. Draft, March 2008. Vanuatu Economic Report 2009 16 The creation of formal employment opportunities for the rapidly growing population and increasing numbers of school leavers also presents a formidable challenge. Jobs will have to come predominantly from private sector employment (private sector development is addressed in the ADB’s Private Sector Assessment12). The international financial crisis had had little impact on Vanuatu by early 2009. However, a lag can be expected, particularly in relation to construction activity. If construction and tourism (which accounted for 18% of employment in 200513) both slow significantly, this will have a substantial impact on employment, so the short to medium term challenges may be critical. Vanuatu does not have the advantage of the high rates of emigration and large remittance flows that are found elsewhere in the Pacific. Seasonal work programs in New Zealand and, potentially, Australia, will make only a minor contribution to job creation. The reality is that growth in private sector employment will have to approach 30% annually to absorb new entrants to the workforce14. And this occurs in the face of already low rates of formal employment: according to HIES data 75.8% of all household heads in Port Vila are in some form of full or part time employment, but for the remainder of the country only 15.4% of household heads are in employment. The amendments to the Employment Law, discussed in Chapter 4, will also present a major impediment to employment growth unless they are repealed. School leavers will find it very difficult to find employment With Vanuatu's high rate of population growth there is also likely to have been an increase in underemployment, with labor absorbed into the subsistence sector and working fewer hours at lower levels of productivity than desired. The private sector, and the informal sector through self-employment, must be the source of jobs for the several thousand school leavers and dropouts entering the workforce each year15, as the days of public sector expansion have passed. In the education sector, the major challenges are ensuring that all children of school age actually attend school, and improving the quality of primary and secondary education. Education quality is constrained by resource limitations, particularly the under-supply of trained teachers, which is discussed in section 5.4.7. Access to secondary schooling is limited. In 2008 a total of 40,820 children were enrolled in primary school, while 11,786 were enrolled in secondary school. Currently, students sit a national examination at the end of year 8 which determines if they will gain a place in secondary school. 1.3 Constraints are imposed by smallness, remoteness, and limitations in institutional capacity 12 13 14 15 Constraints and Opportunities Vanuatu has opportunities to grow its domestic economy; but it confronts constraints—some immutable and some that can be eased or removed through appropriate policy action. Key constraints include isolation from international markets; few if any economies of scale; inequality in terms of incomes, opportunities and access to services; limited competition in provision of services and market goods; Asian Development Bank, 2009. A Private Sector Assessment for Vanuatu: Reforms to Sustain Growth, ADB, Manila. AusAID, 2008. Ibid. ADB, Improving Growth Prospects in the Pacific (Manila: ADB, 1998) 74. No estimate was available of the number of school leavers and drop outs, although it is thought to be more than 5,000 each year. 17 Vanuatu Economic Report 2009 rapid population growth that maintains pressure on service delivery; weak institutions; limited and weak infrastructure; and poor regulatory and governance arrangements. The geographic dispersion of the nation and its population, distributed over approximately 80 scattered islands, presents particular challenges for internal transport and public service delivery. Access to infrastructure remains generally poor, particularly in rural areas and more isolated islands, although telecommunications improved substantially with the arrival of a second network provider in 2008. Like most other South Pacific island economies Vanuatu is remote from major centers of trade and commerce. This puts it at a disadvantage in its attempts to use international trade to overcome the inherent difficulties of its small domestic market. Shipping costs are high not only because of long distances between ports of call, but also due to the small and imbalanced cargo flows associated with a high merchandise trade deficit.16 There is heavy reliance on oil imports, while smallness imposes diseconomies of scale. The quality of public administration is also of concern—skilled personnel are thinly spread across 13 ministries and a large number of departments, while many are lost to the private sector; limited institutional capacity is also a constraint on effective absorption of aid flows. Like other Pacific island nations Vanuatu may become more vulnerable to natural disasters in the future as a result of climate change. The coastal fringe areas could experience increased coastal erosion, storm surges, and inundation as the sea level rises, and the intensity of cyclones could well increase.17 In this event, disaster mitigation measures can be expected to become more urgent. There are removable impediments to private sector development Constraints to private sector development come from weaknesses in the legal and regulatory environment within which business operates, inefficiencies in the stateowned enterprise (SOE) sector (including state-owned utilities), and physical infrastructure constraints. Progress has been made in these areas, but constraints could be eased further, as discussed in chapters 3 and 5. Capacity constraints also remain across the public service, with policy analysis and development an area of particular concern. Conversely, the natural resource endowment constitutes a solid asset base for agriculture, fisheries, and tourism development. The nation is typified by significant areas of fertile agricultural land of proven productivity, yet the commercial agriculture sector is largely moribund and, as outlined in section 4.3, has made few gains in the past two decades or more. On the other hand, subsistence agricultural output has broadly increased in line with population growth. Commercial agriculture can make a greater contribution to growth, development and employment than at present. To do so, however, requires that it is revitalized through appropriate policy development and, subsequently, investment by donors and the private sector. These matters are addressed in section 4.3 below. Opportunities also exist in the tourism industry, which has proven to be robust and has expanded rapidly in recent years, with significant private investment. The entry of Virgin Blue to the international airline sector increased access for tourists, while Natural resources provide a strong foundation for development 16 17 Australian Agency for International Development (AusAID), Pacific Regional Transport Study (Canberra: AusAID, 2004). Ibid. 46. Vanuatu Economic Report 2009 18 political unrest in Fiji may have supported further growth in the Vanuatu market. Cruise ship arrivals are set to increase in the short to medium term, while infrastructure development will further support sectoral growth. Public security is also generally sound, which is important to continued tourism development. Despite concerns about the development of coastal land for real estate, Vanuatu has generally been supportive of foreign direct investment (FDI), resulting in significant real estate development in the recent past. Social and cultural systems underpin resilience in livelihoods The social and cultural customs of Vanuatu are a strength that underpins a level of resilience in terms of livelihoods. The extended family system provides a high degree of food security and opportunities to subsist. This resilience is founded on an attachment to custom land, to villages, to chiefs and religious leaders, and to ceremony. 1.4 Development Policies The Comprehensive Reform Program (CRP), begun in 1997, was a major development initiative in response to fiscal fragility, political instability, economic stagnation, inefficient public administration and poor social service delivery in the mid to late 1990s. The CRP was funded through a $20 million loan from the ADB, supported by technical assistance (TA)18, with the third and last phase of TA completed in 2005. It was designed to redefine the role of government, enhance service delivery, increase the productivity and growth of the private sector, and improve social indicators. The CRP was an important catalyst for reform, yet it was too ambitious, particularly because the weak institutional capacity in Vanuatu was underestimated. This also impacted on the sustainability of the CRP, capacity building, and the local control and ownership of reforms. IMF (2007) noted that “Chand (2002) and Henckel (2006) conclude that the Comprehensive Reform Program (CRP), which was launched by the Vanuatu government in 1997 to address structural weaknesses in the economy, has had limited success”19. The need for real and effective reform, while highlighted by the CRP, remains. Public sector institutions are still confronted by capacity limitations, inefficient and costly state-owned enterprises continue to operate, infrastructure is limited outside the two main urban centers, and service delivery is little improved. A recent response to the need to implement meaningful reform was the implementation, in 2007, of the AusAID-funded Governance for Growth (GFG) program. The GFG was designed and implemented in the context of a view that: “Vanuatu’s overarching development challenge is to ensure that economic performance is translated into broad-based economic opportunities and improved service delivery.”20 The governance obstacles to be addressed under the GFG are critical to improved economic and social outcomes; they include:   Need for clear and coherent national economic policy, with policy stability a prerequisite for reduced uncertainty and risk in the private sector Improved policy implementation in the interests of long-term national benefits rather than short-tem political imperatives The CRP was an important catalyst for reform but was too ambitious The GFG is focused on improved governance, economic opportunities, and service delivery 18 19 20 Asian Development Bank, Project Completion Report: Comprehensive Reform Program (Vanuatu) (Loan 1624VAN [SF]). PCR: VAN 31485, ADB, Manila, 27 December, 2002. IMF. Vanuatu: Selected Issues. IMF Country Report No. 07/93, March, 2007. AusAID and the Government of Vanuatu. Governance for Growth Program: Design Document. September, 2007. 19  Vanuatu Economic Report 2009  Stronger policy content in the budget; although budget processes and financial management are relatively sound, expenditure is poorly prioritized, capital spending is low, line ministry control is weak, and concerns arise about the allocation of resources, particularly to rural areas Improved policy and regulatory settings and adequate investment in infrastructure are required. The PAA is consistent with the main themes of the CRP and GFG The Government’s medium-term strategy for development is outlined in the PAA. The priorities and approach set out in the PAA are consistent with those in the CRP and GFG, with an overall objective of linking policy and planning with the limited resources under the control of the government. The priorities and goals listed in the PAA are:        Creation of an environment for private sector led economic growth and employment creation Macroeconomic stability and equitable growth Good governance and public sector reform, with the Government and its agencies focusing on their core roles Primary sector development (natural resources and the environment) Provision of better basic services, especially in rural areas Education and human resource development Economic infrastructure and support services. There is, therefore, unanimity between the Government, donors and other stakeholders in economic development, particularly the private sector, about what is required to improve economic and social outcomes in Vanuatu. The themes implicit in the programs outlined above are continued in this report, although there is a greater focus on particular aspects of development in the following chapters. Furthermore, the government that came into power in September 2008 has stated its intention to pursue reform, enhanced economic management, and policy stability and predictability. It has also signaled a focus on addressing binding constraints to development and recognition of the microeconomic reforms needed in areas such as infrastructure, state owned enterprises, land, education and the productive sectors. Emphasis is also to be placed on distributing the benefits of development more widely across the nation. The Government used the priority areas in the PAA as a starting point in the development of a four year strategy to address specific priorities, presented as Planning Long, Acting Short: Action Agenda for 2009-2012. Success in all of the areas identified by the government will require it to overcome the policy inertia that presently exists and to substantially improve policy implementation. The Action Agenda 20092012 requires improved policy formulation and implementation 1.5 Outline and Key Issues The macroeconomic situation and important economic management issues are addressed in Chapter 2. Concerns about liquidity and inflation are discussed, along with private sector credit growth, monetary conditions, taxation, and trade issues. The focus in Chapter 3 is governance and public financial management, including discussion of institutional structures and resource allocation. The environment for private sector activity, including matters relating to land tenure and the recently introduced Employment Bill, are also addressed. Vanuatu Economic Report 2009 20 The productive sectors of agriculture, forestry and fisheries are addressed in Chapter 4, with the urgent need for a national agriculture policy and improved rural finance discussed. The important role of tourism is outlined, and the critical need to give higher priority to environmental management discussed. The social sectors and the delivery of services, including in education and health, along with employment and gender issues, are addressed in Chapter 5. The issue of rural-urban drift, increasing urbanization, and the needs of people living in peri-urban and informal settlements, is also addressed. Finally, the issue of inadequate infrastructure is addressed in Chapter 6, including interisland transport, communications, urban development, energy, water and sanitation, and waste management. Infrastructure priorities are identified and institutional issues affecting the delivery of infrastructure services reviewed. 21 Vanuatu Economic Report 2009 2. The Economy 2.1 Introduction Vanuatu’s economy is small, with GDP at current prices in 2007 reaching Vt51.9 billion, with per capita GDP around Vt226,000. It is also open, with few trade restrictions, significant foreign investment in recent years, substantial imports of a wide range of goods, and reliance on a limited range of exports. The economy has become increasingly dualistic in the past 20 years as the relative importance of agriculture declined and the significance of the services sector, which is found almost exclusively in the urban areas—and particularly the capital Port Vila—grew continuously. As discussed in section 2.3 below, the economy is now heavily servicebased, despite the fact that around 80% of the population lives in rural areas and most depend on agriculture for their livelihood. A review of economic data indicates that the economy has a narrow base, with services relating to tourism and hospitality, along with real estate, construction and financial services, of particular importance in the past five years. Commercial agriculture, as outlined in Chapter 4, has stagnated, and the exports of goods are limited and, in most cases, declining. Conversely, imports have grown in line with the construction boom in recent years, the greater use of private credit, and increasing transport services. Bilateral development aid has become increasingly important and allows the Government to run balanced budgets. Tourism is a key economic driver of the Vanuatu economy with visitor expenditure accounting for approximately 20% of GDP and an estimated 4,700 jobs21. According to the World Tourism Organization, tourism also accounts for approximately 75% of foreign exchange in the country22. Visitor arrivals increased by more than 80% from 2002 to 2008, while cruise ship arrivals increased by a similar amount and will increase significantly in 2009. More than 75% of arrivals are holiday makers, and survey work undertaken in 2007 indicated that total tourism expenditure in that year was around Vt17.9 billion. Tourism and its importance to the economy are discussed further in chapter 4, where the trends in visitor numbers and earnings are outlined, and a broader view of the sector considered. The narrow base of the economy, coupled with its openness and the high level of imports, means that Vanuatu is vulnerable to changes in international demand, commodity price movements, and changes in tastes such as those in tourism. Structural adjustment remains limited, and government policy initiatives need to be formulated in recognition of this fact. The economy is small and open and becoming increasingly dualistic …and has a narrow base Tourism is a key economic driver 2.2 Macroeconomic Targets Macroeconomic stability and equitable growth are listed as key strategic priorities in the PAA. In the 2009 Budget Policy Statement the Government’s highest policy priority is “to maintain economic growth and the well-being of ni-Vanuatu in a way that is financially sustainable and does not jeopardize future economic growth.” 21 22 TRIP Consultants, 2008. Tourism Baseline Survey 2007. Millennium Challenge Account. June. Quoted in Vanuatu Tourism Action Program. April, 2009. National Tourism Development Office. Vanuatu Economic Report 2009 22 Under the Public Finance and Expenditure Management Act 1998 (PFEM), the Government is required to pursue policies that: (i) ensure that borrowing is kept at manageable levels; (ii) maintain government assets in good condition; (iii) manage fiscal risks; and (iv) maintain stable and predictable tax rates. The long-term fiscal objectives are listed in the 2009 Budget Policy Statement as:   Macroeconomic targets have been achieved in recent years     Maintain a positive recurrent budget balance (estimated at 1.0% of GDP for 2009) Establish a broad revenue base with sufficient revenue to ensure a balanced budget (recurrent revenue is forecast at 22% of GDP in 2009) Ensure recurrent expenditure supports a balanced budget outcome (recurrent expenditure is forecast at 20.0% of GDP in 2009) Manage debt at prudent levels (external public debt is forecast to be 19% of GDP in 2009) The average annual rate of economic growth is kept above population growth (growth is forecast by the government at 4.4% in 200923) Inflation, as measured by the consumer price index (CPI), is kept below 4.0% per annum (forecast at 3-4% in 2009). Although the fiscal position has been impacted by supplementary budgets The Government has been successful in achieving its macroeconomic targets in the recent past, although the fiscal position is sometimes impacted by spending through supplementary budgets, as happened in 2007 when a deficit of 1.0% of GDP was realized. Prior to 2003, however, economic performance was volatile and typified by low or negative growth. Despite the recent solid performance challenges to maintaining favorable economic and social outcomes remain. These are discussed in the following sections. 2.3 The Global Economic Crisis Vanuatu had experienced little, if any impact from the global financial crisis by the end of the first quarter of 2009. The nation has little exposure to international financial markets, and the balance sheets of the local financial institutions appear to be sound. Rapid declines in the international oil price in the latter months of 2008 will also assist to minimize the potential adverse outcomes from the international financial crisis. While bank sector liquidity came under pressure in 2008, as discussed in section 2.4, this resulted from domestic rather than international pressures. Tourism had not suffered a downturn by the end of the first quarter of 2009, although it is expected to slow in the second half of the year (see Chapter 4). Construction activity will also remain strong in 2009 due to a pipeline of aid-funded projects and private sector developments. Construction expenditure in 2009 is projected to exceed Vt6.8 billion, with more than Vt5.7 billion committed to public projects, particularly infrastructure development, and more than Vt1.1 billion to private construction activities24. Inquiries to the commercial banks from potential foreign investors in real estate and tourism developments have, however, declined The global crisis had little impact by the end of the first quarter of 2009 But private sector construction activity will decline in 2010 23 24 This rate was under review by the Economic Research and Expenditure Analysis Unit in April, 2009, and was expected to be reduced to a range of 3-4%. Data provided by the Economic Research and Expenditure Analysis Unit, Ministry of Finance and Economic Management. 23 Vanuatu Economic Report 2009 significantly since November 200825. Private sector construction activity is, consequently, likely to decline in the short to medium-term (Table 2.1). Table 2.1: Construction Projects, 2008-2011 (Millions of Vatu) 2008 2009 2010 2011 Public projects 4,267 4,844 3,119 742 Of which MCA 1,047 2,422 1,632 255 Private projects 663 1,038 200 0 Total 4,930 5,882 3,319 742 Source: Economic Research and Expenditure Analysis Unit, MFEM. And tourism is expected to slow in the second half of 2009 Government authorities expect tourism to slow by mid-year, although officials in the National Tourism Development Office expect the number of cruise ship arrivals to increase in 2009. Vanuatu will experience some negative outcomes from the global financial crisis, particularly as private investment in construction, real estate and tourism declines. Nonetheless, there is cautious optimism that Vanuatu, while not completely escaping its effects, will not be heavily impacted by the global financial crisis, and that economic growth will remain close to target levels. 2.4 Economic Growth From 1995 to 2002 economic growth was extremely volatile (Figure 2.1) and the economy suffered a real economic contraction in this period. The historical volatility of economic growth occurred because of the narrow base of the economy and the significant contribution of agriculture, volatile international commodity prices, exchange rate movements, and vulnerability to natural events such as cyclones. Political instability was also a factor. From 1995 to 2008 real growth ranged from a high of 8.6% in 1997 to a low of -7.2% in 2002 (Appendix Table 1). Not surprisingly, GDP per capita followed the trends in economic growth with significant declines occurring between 1997 and 2002 (Figure 2.2). The average rate of growth in real GDP per capita from 1997 to 2008 was 0.8%, supported by strong growth since 2005. Over time it is likely to be difficult for Vanuatu to achieve an economic growth rate that is consistently at or above the rate of population growth. Growth has been strong since 2003 It is predicted to be around 3.0% in 2009 From 2003 to 2007 Vanuatu experienced very strong growth, which averaged 5.9% and totaled 33.1% for the period. Data are not yet available for 2008, but the Economic Research and Expenditure Analysis Unit of MFEM estimates a strong growth outcome of 6.6% in real terms in 2008, and forecasts growth of 4.4% in 2009. This outlook may, however, prove to be optimistic. A world economy typified by negative growth is forecast for 2009, while discretionary consumer spending in the main tourism markets of Australia and New Zealand has shown a significant downturn in the first quarter of the year. As these factors flow through it is likely that Vanuatu will experience a slowing growth rate, possibly in the third and fourth quarters. Following its recent Article IV discussions the IMF predicted a growth rate of around 3.0% for 2009, while ADB predicts growth of 3.5%. Sector contributions to economic growth in 2008 are shown in Appendix Table 1, and summarized in Figure 2.3 and Table 2.2. 25 At a meeting with the Vanuatu Bankers’ Association in February, 2009, bank officials reported that inquiries had declined “from 25 to 30 a week to zero since November.” Vanuatu Economic Report 2009 24 Figure 2.1: Growth in GDP, 1995-2008 (1983 market prices) 10 8 6 4 % change 2 0 -2 -4 -6 -8 -10 1995 8 6 4 2 % change 0 -2 -4 -6 -8 -10 -12 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* * Estimate. Sources: ADB, Asian Development outlook, 2008 Update; Government of Vanuatu, National Statistics Office: National Accounts of Vanuatu 2007 * Estimate. Sources: ADB, Asian Development outlook, 2008 Update; Government of Vanuatu, National Statistics Office: National Accounts of Vanuatu 2007 1996 Figure 2.2: Change in GDP per Capita, 1995-2007 (1983 market prices) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 25 Vanuatu Economic Report 2009 Notwithstanding the positive outcomes since 2003, policy challenges for Vanuatu include the achievement of greater economic stability than in the past—something that will be facilitated by continued attention to reform, greater policy stability, and improved policy predictability—and ensuring that the benefits of growth and development are distributed throughout the nation. Improving the distribution of development benefits remains challenging While GDP is a useful measure of the market value of goods and services produced in the economy, it provides no information about the distribution of growth or its benefits. The current Government has indicated a focus on decentralization of government services through the relocation or more efficient use of its human resources, but this does not guarantee that an equitable distribution of development benefits will be achieved. Improved infrastructure, better telecommunications since the introduction of competition in 2007, the open skies policy, and the current formulation of provincial tourism strategies are all initiatives that will, to some extent, promote economic stability and enhance the prospects for an improved distribution of developmental benefits. Figure 2.3: GDP by Industry, 2002-2007 25000 (1983 Market Prices) 20000 Agriculture, Fishing, Forestry Million Vatu 15000 Industry Services 10000 GDP 5000 0 2002 2003 2004 Year Source: National Statistics Office: National Accounts of Vanuatu 2007 2005 2006 2007 The economy is dominated by the services sector which, in recent years, has been the main driver of growth. The sector grew by a total of 37.3% in the 2002-2007 period. The Reserve Bank noted that economic growth in 2007 was driven by services and the construction sub-sector26. In 2007 the services sector grew by 7.4% 26 Reserve Bank of Vanuatu, 2008. Annual Report 2007. Port Vila. Vanuatu Economic Report 2009 Recent growth has been driven by services and construction 26 and contributed 73.9% of GDP (Table 2.1 and Appendix Table 2). Investment in economic services, and infrastructure for land development and tourism-related activities, led the way for continued growth in services. The hotels and restaurants sub-sector grew by 13.4%, mainly as a result of a 19.3% surge in visitor arrivals. Transport and communications expanded by 13.1%, largely due to expansion in postal and telecommunications services and land transport services, particularly buses and taxis. The telecommunications sub-sector expanded by 16.8% with the introduction of a second provider resulting in increased competition and further development of telecommunications infrastructure. Real estate activity grew by 7.7% in 2007; this sub-sector may, in the short to medium term be more affected by the international financial downturn than the sub-sectors referred to above. The increase by 5.4% in the government services sub-sector in 2007 was associated with the salary increases received in that year. Table 2.2: Sectoral Composition of Gross Domestic Product (Constant 1983 prices) (Percent) 2002 Agriculture, Fishing and Forestry 1 Custom/traditional agriculture 2 Export agriculture 3 Other commercial agriculture Forestry and logging Industry Manufacturing Electricity and water Construction Services Wholesale and retail trade Hotels and restaurants Transport and communication Finance and insurance Real estate and business services Government services Personal services Domestic services Less imputed bank service charge GROSS DOMESTIC PRODUCT 18.7 11.0 6.6 0.5 0.6 9.6 3.7 2.7 3.3 71.6 31.4 5.8 9.4 7.5 6.5 13.8 1.0 0.9 4.7 100.0 2003 19.3 11.0 7.4 0.5 0.6 9.7 3.7 2.6 3.4 71.0 30.5 5.1 9.5 7.9 7.1 13.8 1.0 0.9 4.8 100.0 2004 19.7 10.6 8.2 0.4 0.4 9.7 3.7 2.5 3.4 70.7 28.4 5.5 10.4 8.0 7.9 13.2 0.9 0.9 4.5 100.0 2005 17.7 10.2 6.1 0.5 0.9 9.7 3.7 2.5 3.6 72.6 29.7 5.5 11.1 9.0 8.1 12.6 0.9 0.9 5.1 100.0 2006 16.8 9.8 6.1 0.5 0.5 9.7 3.5 2.4 3.8 73.5 31.0 5.6 11.2 8.9 8.4 11.8 0.9 0.8 5.2 100.0 2007 16.1 9.4 5.8 0.4 0.5 10.0 3.4 2.4 4.2 73.9 31.2 6.0 11.9 8.5 8.5 11.7 0.9 0.8 5.6 100.0 Notes: 1. Includes production of fruit, vegetables, kava and other food items, and of livestock, poultry, fishing and household forestry activities. 2. Includes copra, kava, beef, cocoa and coffee. 3. Includes fishing, poultry, fruit and vegetables. Source: National Statistics Office: National Accounts of Vanuatu 2007 . Agriculture is the mainstay of livelihoods for 80% of the population Agriculture is the mainstay of livelihoods for the 80% of the population living in rural areas. The sector accounted for 16.1% of GDP in 2007, with custom/traditional agriculture contributing 9.4%. The performance of the sector has been mixed, however, with commercial and export agriculture showing significant volatility. The 27 Vanuatu Economic Report 2009 But export agriculture has shown volatility sector grew by only 14.3% from 2003 to 2007. Export agriculture declined by more than 20% in 2005, expanded by 6.4% in 2006, and made minor gains of 2.4% in 2007. With a growing population, the desire to distribute developmental benefits more widely, and the need to keep the export base as broad as practicable in a small economy, there is a pressing need for the Government to formulate a national agriculture policy in support of both subsistence and commercial agriculture, and to facilitate investment in the sector. Critically, however, government must adopt an approach that emphasizes the need for government to focus on its core roles and to not become involved in commercial activities. A robust agriculture sector will support growth and welfare, although it is unlikely to be the main driver of economic activity in the coming years. This issue is discussed further in Chapter 4. The growth in subsistence production has been broadly in line with population growth in recent years, although the contribution to GDP from subsistence activity declined from more than 20% in the early 1980s to less than 10% in 2006 and 2007. This indicates that while declining, subsistence production remains critical to the livelihoods of the majority of the population. Overall, there appears to have been little structural adjustment in the agriculture sector, and concerns are consistently expressed by officials about its poor performance. This is an important issue that is addressed in chapter 4. Industrial production contributed 10.0% to GDP in 2007, including the national power and utilities monopolies, and grew by a total of 38.1% from 2003 to 2007. The major source of growth in the sector has been construction, which grew by 18.3% in 2007. This sub-sector remained strong in 2008, will be still stronger in 2009, but is then likely to fall away quickly as the pipeline of current projects is completed (Table 2.1). The manufacturing sub-sector grew by 4.2% in 2007, largely as a result of increased demand for wood products for building construction, and because of the re-opening of the coconut oil factory—formerly operated by Coconut Oil Production (Vanuatu) Limited—by the local company CL Agencies in Santo. Most manufacturing occurs under sole proprietorship arrangements and is a sub-sector that is unlikely to see substantial growth in the medium term. The opening of a fish processing plant in 2009 on Efate, under Chinese ownership, will contribute to manufacturing to some extent. This issue is discussed further in Chapter 4. Growth of 6.6% in the electricity and water sub-sector also resulted from increased demand from the domestic, industrial and commercial sectors. The economy is undergoing continued structural adjustment, with a relative decline in the importance of the agricultural sector and strong growth in services, particularly in those sub-sectors related to tourism. Such a trend is typical of modernizing economies and indicates the success of certain economic reforms, such as the open skies policy and opening the telecommunications sector to competition. These adjustments serve to reduce reliance on a narrow resource base, as well as the economy’s vulnerability to uncertain commodity export prices and weather-related shocks. More remains to be done, however, as discussed in the subsequent sections of this report, but with a reform-oriented government reforms can be accelerated and the environment for development, and particularly for private sector investment, significantly strengthened. Subsistence production remains critical Manufacturing is unlikely to experience significant growth Structural adjustment has resulted from successful economic reforms Vanuatu Economic Report 2009 28 2.5 Exchange Rates, Trade, and the Balance of Payments In a small, open economy such as that of Vanuatu, exchange rate policy can have an important impact on inflation, real wages, and the balance of payments. The opening up of the economy in recent years means that exchange rate policy is increasingly important to the nation’s economic prospects. Vanuatu pursues a managed exchange rate regime, with the Vatu pegged to an undisclosed transaction weighted27 basket of currencies of Vanuatu’s major trading partners. This approach is appropriate given the nation’s small open economy, its narrow export base, its generally sound fiscal policies, and its limited institutional capacity to conduct monetary policy. The exchange rates for three of the most important currencies relative to the Vatu are shown in Figure 2.4 and Appendix Table 3. The US Dollar exchange rate is significant in relation to merchandise exports, and the Australian and New Zealand Dollars because of the level of services income, including tourism income, derived from these markets. Imports from Australia, Fiji and New Zealand are important and, consequently, the Vatu exchange rate in relation to the currencies of these countries has a significant influence on the import bill. The exchange rate has been quite stable against the Australian Dollar and the New Zealand Dollar in recent years, while it has trended downwards against the US currency. In the first two months of 2009 considerable international financial market volatility resulted in a strengthening US Dollar and weaker Australian and New Zealand Dollars. By late March the picture had started to change again as the US currency weakened in response to increased supply as the United States printed additional money. Concomitantly, the Australian and New Zealand currencies began to strengthen28. Given that most merchandise exports are denominated in US Dollars, a stronger US Dollar is to Vanuatu’s trading advantage. Conversely, stronger Australian and New Zealand currencies are to the advantage of the tourism industry. The Japanese Yen exchange rate has also been quite stable, as shown in Appendix Table 3, although it appreciated in the first two months of 2009. The managed exchange rate policy is appropriate It serves as an anchor on inflation, assists competitiveness and the foreign reserves position The managed exchange rate serves as an anchor on inflation, influences competitiveness, the strength of Vanuatu's foreign reserves position—discussed below—and the prospects for tourism and for other exports if structural problems are overcome. The exchange rate does not appear to be misaligned to any significant extent and the appreciation of the US Dollar against the Vatu in the second half of 2008, coupled with improved export prices, enhanced competitiveness. Consequently, while continued attention to the exchange rate is important to economic outcomes, improved export performance is more critical to overcoming trade deficits and medium to long-term social and economic gains. The heavy reliance on imports of goods for development is also an important factor that has a major impact on the trade deficit. But given that the majority of these goods are financed by development aid, the impacts may not be as severe as appears simply by looking at trade data. Nonetheless, a substantial weakening of the Vatu would make imports more expensive and add to trade and current account deficits. Although improved export performance is important to future prospects 27 28 The transactions weighting is based on trade and tourism receipts. These trends were occurring at a time when there were grave concerns in the US about the global financial crisis, and this resulted in volatility in exchange rates. 29 Vanuatu Economic Report 2009 Figure 2.4: Exchange rates, 2000-2008 Vatu per dollar 160.00 140.00 120.00 Exchange rate 100.00 80.00 60.00 40.00 20.00 0.00 2000 2001 2002 2003 2004 2005 Year Source: National Statistics Office and Reserve Bank of Vanuatu 2006 2007 2008 Jan 2009 Feb 2009 AUD NZD USD Current account and merchandise trade deficits increased from 2003 Vanuatu's current account and merchandise trade deficits both expanded significantly from 2003 to 2007 in line with substantially increased construction activity, along with expanded transport services and increased private credit and consumption (Figure 2.5). Increased oil prices during the period were also an important factor. The current account deficit was reduced in 2008, as was the trade deficit, due to strong third quarter export performance, particularly for copra (as a result of government subsidies), coconut oil and cocoa. Pressure on commodity prices resulting from the world financial crisis since then suggests that the gains in merchandise exports made in 2008 may be short-lived. Weak total merchandise export earnings underlie the current account deficit, which ranged from 5.7% of GDP (VT2.63 billion) in 2006 to 9.0% (Vt4.67 billion) in 2007, and averaged 7.5% between 2003 and 2007. But tourism earnings and official grants have continued to increase, thereby offsetting the declining balance on traded goods. Private capital inflows and project-funded goods have also been significant. The combination of increasing services income, official grants, private capital inflows and the import of project goods has resulted in a positive net overall balance of payments since 2002, the last time that a (small) negative overall balance was recorded. The short to medium-term outlook is less optimistic: increasing imports and net income outflows are expected to more than offset increases in tourism earnings, with the current account deficit likely to widen. But tourism and grant aid have offset the declining balance on traded goods Vanuatu Economic Report 2009 30 Figure 2.5: Balance of Payments, 2002-2008 15000 10000 5000 Millions Vatu 0 -5000 -10000 -15000 -20000 2003 2004 2005 2006 2007 2008* *First 3 quarters. Source: Reserve Bank of Vanuatu Current Account Balance on goods Balance on services Net income Balance of payments surpluses have supported a healthy foreign reserves position The balance of payments surpluses have supported healthy foreign exchange reserve balances (Table 2.3). The Reserve Bank’s policy goal is a minimum of four months of reserves, a target that has been exceeded consistently since 2003 as economic growth has accelerated and donor aid grown. The position at the end of 2008 was weaker than a year previously because of a substantial increase in private sector imports of 42%, but still satisfactory at 5.8 months of import cover. Continued donor aid inflows, coupled with much lower growth in imports in 2009—estimated by the Reserve Bank at 4%—are expected to support a healthy foreign reserves position in the short to medium-term. Table 2.3: Net Foreign Assets (NFA) and Import Cover 2003 NFA: Monetary Authorities (Vt million) NFA: Commercial Banks (Vt million) Total NFA (Vt million) Import cover (months) Source: Reserve Bank of Vanuatu 2004 6,412.8 21,162.3 27,575.1 5.5 2005 7,350.6 22,137.6 29,488.2 5.8 2006 10,960.8 21,631.9 32,592.7 9.0 2007 11,622.7 25,874.3 37,497.0 8.1 2008 12,814.2 28,063.4 40,877.6 5.8 4,737.6 19,941.5 24,679.1 4.7 31 Vanuatu Economic Report 2009 Aid accounts for more than 5% of GDP Official development assistance to Vanuatu directly accounts for more than 5% of GDP and has increased significantly in real terms since 2006 due to larger contributions from Australia—the largest donor—and the implementation of the Millennium Challenge Account (MCA)29, funded by the United States, which resulted in the substantial increase in 2008 (Figure 2.6). New Zealand, Japan, France and the European Union are also important donors. Figure 2.6: Annual Grant Aid Flows, 2002-2008* (Millions of Vatu) 3500.0 3000.0 2500.0 Millions Vatu 2000.0 1500.0 1000.0 500.0 0.0 2002 2003 2004 2005 Year 2006 2007 2008* *First 3 quarters of the year. Source: Reserve Bank of Vanuatu The loss of United Nations’ least developed country (LDC) status (Box 2.1) in the short to medium-term—a possibility raised by some government officials—might result in the loss of access to a range of dedicated funds and programs, such as external funding for representation at meetings and seminars run by UN agencies. Concessions to access European markets for commodities such as coconut oil would also cease. Conversely, the impact on bilateral aid would be minimal, while concessional loans from multilateral agencies would also be unaffected. Graduation from LDC status would only have a minor effect on the economy and, as noted in Box 2.1, appears unlikely in the foreseeable future. 29 The MCA, totaling US$65 million, will pay for the upgrading of the Efate round-island road, along with improvements to a portion of the Santo East road. The role of the MCA is described in Chapter 7. Vanuatu Economic Report 2009 32 Box 2.1: Graduation from LDC Status Least Developed Countries (LDCs) are countries which, according to the United Nations, exhibit the lowest indicators of socioeconomic development. A country is classified as an LDC if it meets three criteria:    low-income: three-year average Gross National Income per capita of less than US $750; this must exceed $900 to for the country to leave the LDC list human resource weakness, based on indicators of nutrition, health, education and adult literacy economic vulnerability, based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, and handicap of economic smallness, and the percentage of population displaced by natural disasters. To graduate out of the LDC classification a country must meet the thresholds for two of these criteria in two consecutive triennial reviews by the United Nations’ Committee for Development Policy (CDP). The classification at January 29, 2009 applied to 49 countries, including the Pacific nations of Vanuatu, Kiribati, Samoa, Tuvalu, Vanuatu and Solomon Islands (along with Timor Leste, which ADB lists as a Pacific nation). Samoa has been listed for graduation since 2006, although a final decision on this was still pending as of February 2009. It is quite unlikely that Vanuatu will exceed the human resource and vulnerability criteria in the medium term, and that it will remain in the LDC category for some time. 2.6 Prices and the Monetary Sector The Reserve Bank’s objective for monetary stability is the maintenance of low and stable inflation. The Bank interprets this as inflation—measured by the Consumer Price Index (CPI)—of less than 4%. It should be noted, however, that the CPI basket is based on import weights for urban residents and, therefore, may not reflect consumer prices across the economy given that 80% of the population lives in rural areas. The CPI target was realized from 2003 to 2006, but exceeded in 2007 when it reached 4.1% (Figure 2.7). Inflationary pressures increased in 2008, mainly as a result of strong global price rises for food and oil, and reached 5.8% by the end of the year. Transport and energy generation costs increased significantly and were passed on to consumers. Inflation is expected to moderate in 2009 due to lower food and fuel prices, and reduced domestic demand, while the relatively stable exchange rate will be a moderating influence. In the medium term inflation is likely to remain in the target range of 3-4%. Continued large aid inflows will, however, maintain some pressure on inflation. Inflation can also be severely impacted by natural disasters, such as occurred when food prices rose following two cyclones in 2001. Inflation is likely to remain in the target range of 3-4% 33 Vanuatu Economic Report 2009 Figure 2.7: Consumer Price Index, 2002-2007 7 6 5 4 % 3 2 1 0 2002 2003 2004 2005 Year Source: National Statistics Office 2006 2007 2008 2.6.1 Wages and Employment The legal minimum wage is above the equilibrium level Wages are regulated, with the minimum legal wage currently set at Vt26,000 per month. This rate is significantly above what is generally paid in the informal sector where it is reported that wages are often half the minimum legislated level, despite the threat of prosecution. This suggests that the legislated wage is well above the equilibrium level, thereby reducing employment. Given the large numbers of new job seekers each year there will be continued downward pressure on wages. The larger businesses and the public sector will continue to abide by the minimum wage requirement, but will draw on the better qualified and skilled workers. As noted in the government's 2008 Diagnostic Trade Integration Study, the only means of raising wages and employment simultaneously is by raising productivity through training and, in an open market economy, through the provision of adequate transport infrastructure30. A 25% salary increase was granted to public servants and delivered in two separate increases in 2006 and 2007. This increase comprised a catch-up in pay rates which had increasingly lagged private sector wages and salaries. The issue that arises, however, is that wages and salaries absorb more than 76% of the goods and services bill of the government, and account for more than 60% of recurrent expenditure31. Consequently, the funding available for operational activities and public investment is limited. This issue is discussed in greater detail in Chapter 3, which deals with Public Financial Management. Amendments to the Employment Act were passed in late 2008, resulting in extremely generous employment provisions for those with formal employment. These Wages and Salaries absorb more than 60% of government expenditure 30 31 Department of Trade, Industry and Development, 2008. Vanuatu: Diagnostic Trade Integration Study, 2008 Report. Published by Blue Planet Media and Communications, Port Vila. Based on data from the 2004 to 2007 Government Budgets and preliminary data and projections for the 2008 to 2010 Budgets. Vanuatu Economic Report 2009 34 Recent amendments to the Employment Act will have strong negative impacts on the economy amendments have not yet been gazetted but, when introduced, will substantially increase employment costs in a situation where formal employment is at a premium and where the imperative is to create more jobs. In the ADB Private Sector Assessment32 it was concluded that the new provisions, if they become law, will: (i) threaten the viability and existence of small businesses; (ii) result in increased unemployment; (iii) exclude women from the workforce; (iv) reduce the competitiveness of the economy; (v) reduce economic growth; and (vi) lead to the substitution of capital equipment for labor where such substitution is possible. The strong negative impacts of the proposed employment provisions on Vanuatu’s economy mean that they should be repealed, and repealed soon to reduce uncertainty in the business community. Price Controls 2.6.2 Price controls would best be relaced by competition policy The Price Control Act (Cap 86) established a framework for price regulation, although it does not specify which goods may be controlled. This leaves considerable discretion in the hands of the Price Control Bureau, which adminsters the Act. A Price Advisory Committee was also created under the Act, which must be consulted if any proposed legislation will impact on, or control prices. But price controls have a poor track record internationally, including in Pacific island nations—they tend to distort the market and, consequently, reduce the supply of goods desired by consumers. Conversely, there is a strong argument to prohibit practices such as monopolistic pricing and collusion, practices that occur due to market failure and that are anticompetitive. Developing and implementing effective competition policy is the direction in which Vanuatu should move, rather than placing reliance on direct price controls. 2.6.3 Price Distortions Power is provided under concessions held by UNELCO Suez, which also operates the Port Vila water supply. UNELCO provides reliable power in Port Vila, Luganville, Tanna and Malekula, with minimal system losses. Tanna and Malekula are operated under one concession and cross-subsidized by the Port Vila and Luganville concessions. Tariffs are comparable to Pacific economies of a similar size and are also influenced by the fact that government does not subsidize energy costs33. Vanuatu has, however, taken steps to improve regulation and expand access to electricity. The Utility Regulatory Authority Act 2007 enhances regulatory oversight of the power and water sectors. The Authority is based in MFEM and is responsible for managing concession contracts. As discussed in Chapter 6 below, a National Energy Policy and Rural Electrification Master Plan (REMP) were also introduced in 2007. Vanutau’s business environment and competitiveness is impacted by a range of other prices. These include:  The Port Vila port is highly inefficient, with stevedoring provided under a monopoly arrangement, comprising a 50 year contract; it features the highest cost in the Pacific—$1,00034—to clear a 20 foot container, five times the price of 32 33 34 ADB, 2009. Sustaining Growth: a Private Sector Assessment for Vanuatu. Manila. Tariffs are adjusted monthly and derived from a base rate tariff, which is indexed quarterly for changes in the costs of fuel, labor, and equipment. Infrastructure costs are discussed in Chapter 5. ADB, 2009, ibid. 35 Vanuatu Economic Report 2009 similar service in Port Moresby. It also has the slowest turnaround time of 17 days. Stevedoring is provided under a monopoly agreement  Telephone charges have been introduction of competition, but importance of the internet to trade important that these costs are competition35 substantially reduced as a result of the internet charges remain high. Given the and commerce, and to rural development, it is reduced, again through the introduction of  Business transactions costs are high The transactions costs of establishing new businesses—and of operating existing businesses—are extremely high. For example, while the Foreign Investment Act 1998 provides a transparent system for foreign investment, there are significant duplications in the system, making it slow and unwieldy. Local businesses must also deal with a number of government agencies to start a business. ADB (2009) observed that “The government appears to focus more on business regulation than business promotion. Foreign investors are often frustrated by the cost and time it takes to obtain government approvals to establish and run businesses.”36 And constrain development and growth Economic development and growth, and therefore social advancement, are constrained by these kinds of costs and it is important that the Government continues, and accelerates efforts to overcome them. Private Sector Credit 2.6.4 Private credit has expanded rapidly since 2006 Private sector credit has expanded rapidly since 2006 (Figure 2.8 and Appendix Table 4), with lending for the purchase of housing and land, and for personal consumption, showing the most significant gains. At the end of the third quarter 2008 private sector advances from the banks had increased by 41.6% from a year earlier, and exceeded Vt31.7 billion, although the data are impacted by one-off large transactions such as the purchase of equipment by UNELCO in 2008. At the end of the third quarter of 2008, 32.8% of the value of outstanding loans was for housing and land, 21.3% for personal uses, 8.9% for construction and 6.5% for tourism. Lending for agriculture and manufacturing has been relatively flat since 2003 (see Appendix Table 4). The significant growth in lending in 2008 related to two factors: (i) a fourth commercial bank opened in Vanuatu and banks freed up lending in an effort to maintain market share; and (ii) the ongoing real estate boom and the rapid demand for credit for consumption purposes. …and in 2008 resulted in a liquidity shortage This expansion in domestic credit resulted in a liquidity shortage in the second half of 2008. The Reserve Bank responded by reducing the Statutory Reserve Deposit (SRD) level from 10% to 8%, which injected Vt600m into the banking sector. However, demand for credit continued to exceed supply, and the SRD was further reduced to 5%. The total increase in liquidity as a result of these two adjustments was Vt1.2 billion, while the Liquid Assets Ratio (LAR) requirement, which had been reduced to 8% in November 2007, fell to 7%. 35 36 It was announced in March 2009 that Digicel and two other providers had been given approval to commence internet services; this should lead to reduced prices. ADB, 2009, ibid, p. 34. Vanuatu Economic Report 2009 36 The Reserve Bank responded appropriately The Reserve Bank’s responses to the liquidity shortage were appropriate in the circumstances. It must, however, maintain close vigilance on the commercial banks, given the current global financial crisis, to ensure their balance sheets remain robust. But given continued growth in the economy, it seems unlikely that the sector will confront further liquidity difficulties in the foreseeable future. Figure 2.8: Private Sector Credit, 2003-2008* 12,000.00 10,000.00 Millions of Vatu 8,000.00 6,000.00 4,000.00 Construction 2,000.00 Tourism 0.00 2003 2004 2005 Year 2006 2007 2008* Housing and Land Personal *End of the third Quarter Source: Reserve Bank of Vanuatu Interest rate spreads are high Official interest rates have been relatively stable, as shown in Figure 2.9. Some increases in the rates for both fixed deposits and bank deposits occurred in the second and third quarters of 2008 as liquidity tightened. At the end of the third quarter the fixed deposit rate was 5.44% and the bank rate 2.56%. The weighted average rate for bank loans was 10.04% at that time. Interest rate spreads are generally high in Vanuatu, perhaps reflecting the commercial banks’ views on risk levels. They did, however, fall to 7.48% by the end of the third quarter of 2008 as a result of the increased competition and reduced liquidity in the sector. The Vanuatu National Provident Fund (VNPF) also has a substantial impact on liquidity and the local financial market. It provides around 40% of the liquidity in the market through placing deposits with the commercial banks, based on whichever bank bids the highest interest rate, and also based on the length of time deposits will be accepted at the agreed rate. Deposits were accepted for two years, beginning in the second half of 2008, compared to the previous one year deposit period. Rates on these deposits were capped at 8% by the RBV in March, 2009. The significance of the VNPF in the market reduces the effectiveness of monetary policy. The VNPF is also the main source of domestic savings. ADB (2007) noted that the rate of savings by those in the non-formal, mainly rural, sector is low, with only 13% The VNPF has a substantial impact on the local financial market But the overall savings rate is low 37 Vanuatu Economic Report 2009 of the rural adult population having bank accounts37. ADB is funding technical assistance to make rural banking services more widely available and to increase the savings rate. VNPF deposits and the reinvestment of surpluses by commercial businesses, particularly in the tourism sector, have meant that sufficient funds have generally been available for commercial lending. Nonetheless, the rate of capital formation is constrained by a low overall savings rate while, as explained by RBV (2009),38 official transfers from donor partners offset the outflows from the RBV to commercial banks to finance imports and other government expenditure. Economic growth therefore relies predominantly on foreign direct investment for developments such as those in tourism and fisheries (see Chapter 4), along with aid inflows. Rural and small enterprises find it difficult to obtain credit While credit has been available for the commercial sector and larger businesses, rural enterprises and small businesses have found it difficult to obtain credit. The loans required are small and, therefore, impose high administrative costs in relation to the size of the loan, and potential borrowers are unable to offer security against loans. Three initiatives may reduce these difficulties: (i) the microfinance programs run by the National Bank of Vanuatu (NBV) and VANWODS; NBV is introducing smart banking initiatives that will expand credit access and banking services to significantly greater numbers of people, based on the use of technology such as mobile telephones and an improved telecommunications system; (ii) the recently passed Personal Property Securities Act39 that allows borrowers to pledge movable property as collateral, thereby reducing lending risks; and (iii) the establishment of the Vanuatu Agriculture Development Bank (VADB). Notwithstanding these efforts, credit to most of the population remains severely constrained and continued efforts will be required to enhance credit availability and use across the nation. Interest rates for microfinance, which are mostly above the flat rate of 20% that is charged by VANWODS will, by necessity, remain high because of high administrative costs. The VADB was established under the Vanuatu Agriculture Development Bank Act 2006, and became operational in September, 2008. It does not currently fall under the regulatory jurisdiction of the Reserve Bank. The VADB received Vt200 million from the Government and expects to receive a further Vt100 million per year over the next three years to bring it to its full capitalization of Vt500 million. It currently provides loans of up to Vt5 million, with a maximum term of five years and interest rates in the range of 14 to 21%. Since operations commenced loans have been averaging Vt11 million per month. A Chief Executive Officer has only recently been appointed so the bank’s operational systems are yet to be fully developed. Given the poor track record of development banks in the Pacific region, including in Vanuatu, there is concern about the long-term viability of the VADB. Most commentators, including the IMF, have recommended that the bank is placed under the jurisdiction of the Reserve Bank so that it operates on commercial principles and remains free of political interference. This would also reduce the potential for “policy lending”, where VADB is pressured to make loans based on government policy initiatives, which will often not lead to genuinely commercial outcomes. VADB should be brought under Reserve Bank jurisdiction 37 38 39 ADB, 2007. Republic of Vanuatu: Expanding Access to Financial Services. Technical Assistance Report, Project No. 40148. Reserve Bank of Vanuatu, 2009. Quarterly Economic Review: December 2008. See p. 19. The new Personal Property Securities Act and regulations were officially launched in April, 2009. The Act will extend access to finance once full implementation has occurred. Vanuatu Economic Report 2009 38 The Government has requested assistance from ADB to review banking legislation40 and the regulation of small-scale lenders such as VANWODS. An important focus of such assistance is that of protecting customers. This is a worthwhile initiative and one under which the regulation of the VADB could also be considered. Figure 2.9: Bank Interest Rates, 2002-2008* 14.00 12.00 10.00 8.00 % 6.00 4.00 2.00 0.00 2002 2003 2004 2005 Year * End of the third quarter; no data available for fixed deposits in 2004 Source: Reserve Bank of Vanuatu 2006 2007 2008* Fixed deposits Bank deposits Bank loans Interest rate spread (Weighted annual averages) 2.7 Debt and Liquidity 2.7.1 Debt Sustainability Government debt is manageable Official government outstanding debt is estimated at Vt3,706 million at the end of 2008, equivalent to 22% of GDP (Table 2.4). It is forecast to decline to 16% of GDP by the end of 2011. This level of debt is manageable, particularly given that the external debt component is on concessional terms. Fiscal discipline and economic growth have enabled Vanuatu to achieve a sustainable fiscal position, and placed it in a sound position in relation to external debt. The Reserve Bank has a goal of keeping total debt below 40% of GDP, although Government policy—as stated in the 2009 Budget papers—is that it will consider all avenues of financing for capital investment projects that deliver economic rates of return well in excess of the cost of borrowing. Debt will not be used to finance recurrent budget activities and the government will continue to ensure that annual net debt service costs reach no more than 8% of domestic revenue. Domestic debt is comprised mostly of Government Bonds, which are held by the RBV (13.2%), commercial banks (16.2%), public corporations (70.4%) and others (0.2%) (Table 2.4).41 Notwithstanding the official Government position with regard to incurring further debt, the uncertainties associated with the global financial crisis mean that caution should be exercised in relation to taking on significant additional debt at the present time. The IMF, in its recent Article IV discussions, advised caution with regard to further Caution about additional debt is advised at present 40 41 ADB, ibid. The data on the proportions of bonds held by different institutions refer to the situation at the end of 2007. 39 Although judicious use of concessional finance for priority developments should not be ruled out Vanuatu Economic Report 2009 borrowing given the current global financial situation and other risks facing Vanuatu's economy. However, while any further borrowing will need to be carefully evaluated by the Government to ensure that public debt remains manageable, as the global economy improves this matter should be kept under review. Judicious use of concessional loan financing in priority development areas that bring long-term benefits to the nation, such as infrastructure, is likely to be appropriate. Table 2.4: Government Debt, 2005-2011 (Millions of Vatu) 2005 Actual External Debt Bilateral CFD China Total bilateral debt Mulitlateral ADB EIB IDA Total mulilateral debt Total external debt Total domestic debt Total stock of debt (in % of GDP) 2006 Actual 2007 2008 2009 2010 2011 Prelimin. Forecast Projection Projection Projection 496.9 0.0 496.9 5,516.7 552.7 1,442.3 7,511.7 8,008.6 3,328.0 11,336.6 31% 485.6 0.0 485.6 5,237.9 540.2 1,406.3 7,184.4 7,670.0 3,103.0 10,773.0 27% 463.1 0.0 463.1 5,024.5 500.9 1,333.0 6,858.4 7,321.5 2,983.0 10,304.5 22% 423.8 3,282.6 3,706.4 4,902.2 440.5 1,294.8 6,637.5 10,343.9 2,583.0 12,926.9 22% 386.8 3,282.6 3,669.4 4,765.2 384.5 1,235.8 6,385.5 10,054.9 2,533.0 12,587.9 19% 349.6 3,282.6 3,632.2 4,614.6 327.8 1,177.2 6,119.6 9,751.8 2,533.0 12,284.8 18% 312.4 3,282.6 3,595.0 4,456.4 269.9 1,116.9 5,843.2 9,438.2 2,533.0 11,971.2 16% Amortisation Domestic 476.1 545.0 External 520.6 193.2 Total Amort. payments 996.7 738.2 Source: 2009 Government Budget papers 320.0 194.3 514.3 1,595.0 268.5 1,863.5 1,088.0 289.0 1,377.0 699.8 303.1 1,002.9 400.0 313.6 713.6 2.7.2 The RBV aims to maintain price stability and to maintain foreign reserves above 4 months of import cover Monetary Policy The primary objective of the RBV is to maintain monetary stability through price stability and to maintain adequate external reserves, with a minimum of four months of import cover42. The policy instruments used to achieve these objectives include: (i) open market operations (OMO), using RBV notes as the main instrument, with OMO the principal means of policy intervention; (ii) setting and enforcing reserve requirements for financial institutions via the SRD (currently 5%) and LAR (currently 8%); (iii) setting interest rates; and (iv) funding the overnight shortfalls that banks may experience through last-resort operations via repurchase and rediscount facilities. Notable trends in monetary conditions since 2003 include continued growth in total money supply (M2) (Figure 2.10). However, money supply declined in the third quarter of 2008 as a result of reduced net foreign assets held by the commercial 42 Reserve Bank of Vanuatu, 2008. Annual Report 2007. p. 15. Vanuatu Economic Report 2009 40 banks and a reduction in net credit to the government. Following the decline in money supply liquidity tightened and, from September to November 2008, the RBV suspended OMO. The RBV also tightened the monetary stance by increasing the rediscount rate—which is linked to private sector credit and money supply—by 0.25% to 6.25% in an effort to curtail inflation, although this was subsequently returned to 6.0%. Figure 2.10: Money Supply 45,000.0 40,000.0 35,000.0 Millions of Vatu 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 2003 2004 2005 Year *End of the third quarter Source: Reserve Bank of Vanuatu 2006 2007 2008* Narrow Money (M1) Total Money (M2) There is limited scope to use monetary policy The RBV has shown its ability to respond quickly to changing monetary conditions in order to meet its goal of monetary stability. Nonetheless, the small size and openness of the economy means that it has limited scope to use monetary policy to influence economic outcomes. As previously noted, the relatively large interest rate spread remains a concern, although the entry of a fourth commercial bank may have had some impact on reducing the rate. But the interest rate spread suggests that the level of risk is seen as high; it also indicates that the level of financial intermediation is shallow. The RBV has foreign exchange controls in place to protect foreign reserves, although it does not at present exercise capital controls. Deregulation of the financial sector has brought benefits such as increased flexibility in lending, greater availability of private credit and, potentially, improved availability of some financial services, such as those for domestic financial transfers. While monetary policy is vital, the reality is that it is of limited effectiveness in a small open economy with a managed exchange rate, a small financial sector where the VNPF has a significant impact on liquidity levels, a relatively large public sector, and a central bank of limited size. Consequently, the main focus for economic policy should be fiscal policy. So fiscal policy should be the main focus 41 Vanuatu Economic Report 2009 2.8 Fiscal Aspects 2.8.1 Fiscal Management The Government has achieved its goal of balanced budgets for several years The fiscal goal of the Government is to maintain balanced budgets, a goal that has been achieved consistently in recent years (Figure 2.11). Even with the responsible approach taken to the budget, however, Vanuatu faces certain risks in maintaining a sound fiscal position. These risks include the current global economic crisis, the inherent vulnerability of a small open economy, a return to high and increasing oil prices, maintaining service quality and delivery to a rapidly increasing population, susceptibility to natural disasters, and market isolation. Government revenues also rely on a narrow base, with VAT and import duties contributing a total of around 80% of taxation. Figure 2.11: Government Budget 18,000 16,000 14,000 Millions of Vatu 12,000 10,000 8,000 6,000 4,000 2,000 0 -2,000 02 20 03 20 04 20 05 20 06 20 07 20 e dg Bu 10 20 n tio ec 09 oj 20 Pr n tio ec oj 8 Pr 00 t2 Total revenue and grants Total Expenditure Balance Year Sources: Reserve Bank of Vanuatu; 2009 Budget The features that will support continued healthy fiscal outcomes include political stability, relatively stable economic performance, and ongoing economic and institutional reforms. Consequently, it remains important for Vanuatu to continue to exercise fiscal restraint, and to continue with—and accelerate—its reform programs. Sound outcomes have included the continued improvement in public financial management and the move to a medium-term budgeting framework. Despite the improvements in fiscal management, areas of concern remain. The Department of Customs and Inland Revenue administers a duty exemptions system which allows the granting of full or partial exemptions on duty, excise and VAT for a wide range of approved economic activities. The Director of Customs, until recently, made the final decision on exemptions. Under an amendment in 2007, however, applicants can lodge an appeal against the Director’s decision with the Minister of Finance and Economic Management. This is likely to have increased inefficiencies in Vanuatu Economic Report 2009 42 The discretionary nature of exemptions imposes significant opportunity costs the system, and certainly increased the discretionary element to the granting of exemptions. MFEM estimated that the losses from such exemptions in 2005 amounted to more than Vt1 billion. Taxation compliance continues to present challenges, and collection of VAT, especially outside the main urban centers, is limited. Land and real estate taxes, which are the responsibility of provinces and municipal authorities, are a particular area of concern, with such taxes not collected in most instances. Around 80% of taxation revenue, as noted above, comes from the VAT and import duties. But with the implementation of duty free trading arrangements under the Melanesian Spearhead Group (MSG) agreement, and the increased likelihood of gaining access to the World Trade Organization (WTO), duty revenues are likely to decline in relative terms. The government may need to implement new taxation arrangements to maintain its revenue streams. The issues of duty and taxation exemptions, the narrow revenue base, compliance with tax requirements, and the future need for revisions to the taxation system were addressed by the Pacific Financial Technical Assistance Centre (PFTAC) in 200743. Each of the recommendations presented above were also made by PFTAC, with a specific recommendation for development of a proposal for revenue reform. This and related recommendations have not yet been adopted, but it is strongly recommended that the Government review the 2007 PFTAC report and seek assistance from the Centre for the development of proposals to reform the taxation system. Further discussion of budgeting processes and the legal and administrative framework under which they occur is provided in Chapter 3. Tax revenue relies on VAT and import duties; new tax arrangements may be needed 2.8.2 Stagnating exports and increasing imports result in an increasingly negative trade balance Trade Balance Merchandise exports are dominated by agriculture which, in 2007, made up more than 85% of domestic exports (Appendix Table 5). Copra, coconut oil and kava were the chief products exported. As noted in section 2.3, merchandise exports are minimal; they are also volatile and undiversified, and relate closely to traditional activities in rural Vanuatu. The negative trade balance, as shown in Figure 2.12, has continued to increase because of stagnating exports and increasing imports. Two pieces of legislation administered by the Ministry of Trade, Industry and Commerce are important to trade and, according to the Government’s Diagnostic Trade Integration Study, have been used with increasing frequency to restrict trade flows. They are, first, the Vanuatu Commodities Marketing Board (VCMB) Act. The VCMB, originally established to purchase copra at subsidized prices using European Stabex funds (the activities of VCMB are described in Chapter 4) is “inefficient and unaccountable; it has an adverse impact on the industries it regulates. The VCMB is strongly criticized by stakeholders and there is said to be substantial political interference.”44 Concerns have also been raised about the lack of accountability of 43 PFTAC, 2007. Developing new sources of revenue and a high-level implementation plan. Prepared for the Government of Vanuatu. ADB, 2009. Sustaining Growth: a Private Sector Assessment for Vanuatu. Manila, March, p. 4. 44 43 Vanuatu Economic Report 2009 The VCMB is no longer relevant and should be abolished the VCMB which, in 2009, was said to be subject to an Ombudsman’s inquiry.45 The reality is that the original rationale for the establishment of VCMB no longer exists, that its marketing activities can now be undertaken by the private sector, and its quality control functions by the Quarantine authorities. Consequently, it has been recommended that the VCMB is abolished.46 Second, the Import of Goods (Control) Act, under which the Minister for Trade has the authority to restrict imports in the interests of “protecting and stimulating local industry”, has been used to ban imported chickens (2004), resulting in a supply shortfall (the ban was then replaced by a tariff)47; to ban imported roofing iron (2004), resulting in local users facing a doubling in prices; and to ban imported Fijian breakfast crackers (2005) to protect a small Santo based factory. The use of bans is normally undertaken on false assumptions about protecting inefficient local businesses, resulting in increased costs for consumers. Figure 2.12: Trade Balance, 2002-2008* 25000 20000 15000 Imports Millions of Vatu 10000 5000 0 -5000 -10000 -15000 -20000 Exports Trade balance 07 20 06 20 05 20 03 20 04 20 *First three quarters Source: Reserve Bank of Vanuatu 02 20 08 20 * 2.8.3 There is renewed interest in WTO accession Trade Agreements Vanuatu is party to a number of multilateral and regional trade agreements. It had also completed negotiations to accede to the World Trade Organization (WTO) in 2001 but chose not to do so at that time for “technical reasons”. Since then its accession has remained in limbo, but there are indications in early 2009 that the 45 46 47 Reported in The Vanuatu Independent, 16 May, 2009. For example, see ADB, 2009. Sustaining Growth: a Private Sector Assessment for Vanuatu. Manila, March; and Department of Trade, Industry and Development, 2008. Vanuatu: Diagnostic Trade Integration Study, 2008 Report. Published by Blue Planet Media and Communications, Port Vila. The local industry had requested increased tariff protection, but the Minister chose to ban imports. When the outcome of the ban was realized it was removed. Vanuatu Economic Report 2009 44 Government will revisit this matter in the near future with a view to pursuing accession. Vanuatu is also a signatory to the Pacific Island Countries’ Trade Agreement (PICTA), under which tariffs on imports from the member nations will reach zero in 2021. However, most of the provisions of PICTA are also covered under the Melanesian Spearhead Group (MSG) agreement where tariffs will reach zero in 2015. Vanuatu also has duty free access to Australia and New Zealand under the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA). Graduation from United Nations’ less developed country (LDC) status, something that could occur in the future as growth continues and human development indicators improve, will have some impact on preferential access to the EU market, although the aggregate impact will be small because exports to Europe are presently limited to copra. Technical cooperation support under WTO arrangements would also be lost upon graduation, should Vanuatu decide to push for accession. Improved export performance is critical While trade agreements are of importance, the most pressing need is to significantly improve export performance. This could be based, to a significant degree, on agricultural products, which would also improve the distribution of income and human development across the nation. The constraints on such improvements, such as inadequate infrastructure, are discussed in subsequent sections of this report. 2.9 Continuing Reforms Vanuatu has achieved macroeconomic stability with strong growth since 2003. But a high rate of population growth and a narrow economic base will make it difficult for the nation to continue that success in the medium to long-term. The approach to economic and fiscal management is generally sound, although some matters require attention, including the following. The taxation system should be reviewed in the near future Revenue, taxation and exemptions There is a pressing need to review the taxation system and to consider the potential role of other forms of taxation. Support from PFTAC might be sought for this purpose. The need to improve taxation compliance through institutional strengthening of the main collection agencies also remains, while the issue of non-collection of revenues from rates and other real estate taxes should be addressed. The system of exemptions for import duties and taxation requires an immediate overhaul. The list of approved items that are eligible for exemptions should be reviewed and a revised list prepared. The central principle should be that exemptions are granted only where the items in question have a public good characteristic— where there is a demonstrable benefit to the public that would otherwise not be provided. The exemptions list should be reviewed; public good the key criterion A long-term move away from wage fixing is desirable. Recent amendments to the Employment Act should be repealed Wages and employment The minimum legal wage is well above the equilibrium level. In the long run it will be important to seek a strategy to move away from wage fixing. The recent amendments to the Employment Act will result in significant negative affects on business, particularly small business, and on employment; the amendments must be rejected as they have the potential to do significant harm to the economy. 45 Vanuatu Economic Report 2009 A competition policy is needed Trade The use of controls on trade, such as those under the Import of Goods (Control) Act, should be removed, as should price controls under the Price Control Act. In the interests of efficiency these should be replaced by a competition policy. Credit Credit to rural areas and small businesses remains very limited and, therefore, the approaches under development by the NBV, using modern communications technology, should be supported. Similarly, the VADB must operate on commercial principles, something its management has signaled that it will ensure. First and foremost though, the VADB should, as a matter of urgency, be brought under the regulatory supervision of the Reserve Bank. Continued efforts to provide credit to rural areas and small businesses should be supported 46 Vanuatu Economic Report 2009 3. Governance and Public Sector Management 3.1 Introduction Effective and transparent governance is a fundamental requirement for successful economic and social development. The previous Comprehensive Reform Program (CRP) and the current Governance for Growth (GFG) program were each implemented on the principle that sound governance is the most critical determinant of national development. It is also critical in ensuring that development provides benefits throughout the nation and to the whole population. Certain institutions play a central role in ensuring good governance. These include the Parliament and its committees, and the public service, including government offices such as those of the Auditor-General and the Ombudsman. Budget processes and fiscal management are amongst the key roles of government that impact on development outcomes. Governance structures are also important and, in Vanuatu, the relationships between the National Government, provincial governments, and the municipal administrations of Port Vila and Luganville, are of particular significance. The manner in which public officials are appointed can also strongly influence the effectiveness of governance. The National Council of Chiefs has a special role under the Constitution, whereby it may be consulted on matters of custom and tradition. It is consulted by Parliament on issues relating to constitutional rights for land, the basis of ownership and use of land, and the rights of perpetual ownership of land (Articles 73, 74, 75). Each Island has an Island Council of Chiefs which has special responsibilities for resolving disputes according to local custom, and for promoting peace, stability and harmony. They are also responsible for promoting and encouraging sustainable social and economic development in their respective islands or urban areas.48 Land tenure is central to development in Vanuatu and influences government decisions on investment and service delivery. It is also the key consideration in relation to private sector development and investment. The involvement of government in commercial activities, through state owned enterprises (SOE), likewise affects private sector development and is an important aspect of the approach to governance. These issues, along with those noted above, are discussed in this chapter. Transparent and effective governance is critical to economic development Certain institutions have a key role in governance As do the national and island Councils of Chiefs Land tenure is central to development 3.2 Public Sector Performance 3.2.1 Independent public service An independent Public Service is crucial to effective governance, and relies on appropriate institutional arrangements. These are enshrined in the Public Service Act 1998 (Box 3.1). 48 National Council of Chiefs Act. 2006, Section 13. 47 Vanuatu Economic Report 2009 Box 3.1: Objectives of the Public Service Act The objectives of the Public Service Act 1998 are to:  Establish an independent Public Service that is efficient and effective in serving the Government, the Parliament and the public leadership of employees  Provide a legal framework for the effective and fair employment, management and  Establish the rights and obligations of employees Public service appointments are mostly free of political interference The Act sets out the process for the appointment of all staff to the Public Service and, as a result, it is now largely free of political interference. The process for appointment to the key positions of Director-General or Director must be made by the Public Service Commission (PSC) under a process that is prescribed in the Act. Provincial government is the responsibility of the elected Provincial Councils, where the Secretary-General and the accountant are public servants appointed under the Act, but where all other staff members are political appointees. In the Municipal authorities all officers are political appointees. The lack of professional personnel who have appropriate training and qualifications, and who are appointed under an independent process, results in weak governance and administrations that are open to external influence. This situation has been recognized by the National Government, and the Minister for Internal Affairs, in early 2009, issued instructions for the drafting of legislation that will require all municipal administrative staff to be appointed under the Public Service Act. Municipal and Provincial Governments, as outlined above, remain heavily politicized and they are a hindrance to good governance. The Municipalities raise their own funds from sources such as business license fees and property taxes, while Luganville also receives a small grant from the government appropriation. There is little if any accountability. There is a requirement for accounts to be prepared and audited each year, but this does not happen and the Audit Office has not been in a position to take corrective action (as discussed in section 3.2.4 below). While the provinces have, until recently, been little better, the Provincial Affairs Department has taken action that has resulted in an improvement in the past year. All provinces have now filed accounts to December 2007 with the Auditor-General. Action to improve the accountability and financial management of the municipalities and provinces is long overdue and the proposal for staff to be appointed under the Public Service Act, combined with a restructuring of the Auditor-General’s Office, should largely address these problems. But provincial and municipal authorities are politicized and unaccountable 3.2.2 Access to Financial Services in the Provinces A problem faced by many government departments in the provinces is limited access to financial services. Financial management by the line ministries—primarily Health, Education, Lands, Public Works, Agriculture and the Vanuatu Police Force—in the provinces is virtually non-existent, limiting the government’s ability to ensure the effective, efficient and equitable utilization of public funds. This results in dysfunctional service delivery. Two examples commonly cited are the difficulties in 48 Vanuatu Economic Report 2009 ensuring that school grants actually reach schools, and difficulties encountered in purchasing goods and services using imprests (Box 3.2).49 Box 3.2: The Imprest System In the provinces government officers purchase a range of items and services; e.g. cleaning supplies, fuel, transportation, power and water. Larger purchases, such as textbooks or medicines, are managed in Port Vila at Ministry headquarters. These arrangements can have a significant impact on the ability of an agency to deliver services. For example, without fuel police cannot conduct patrols and agriculture officers cannot carry out extension work. Health officers may not be able to arrange and pay for transportation of a critically ill person. Due to their size and nature most of these transactions are conducted on a cash basis using the imprest process. These expenses must be accounted for before the imprest is topped up, but the process is subject to delays and it can take several weeks between the time the imprest is expended and reimbursement received. Finance Service Bureaus will improve financial services in the provinces The introduction of Finance Service Bureaus (FSB), a new project to be funded under the GFG, will support improved public financial management in the provinces. These offices will focus on practical financial tasks that directly affect the ability of government departments to deliver services. The FSBs will provide departments with access to government financial systems that allow local purchase orders, and that support improved financial management, bank account management and financial reporting. In the case of the Ministry of Education, for example, finance bureau services will result in better expenditure control and the tracking of school grants. Leakages will be reduced and grants will have a far greater chance of reaching the schools than at present; this should improve performance and may result in reductions in school fees. 3.2.3 Enhanced performance management of D-Gs is required Performance of Directors-General The D-Gs, as functional heads of government ministries, have a major influence on the performance of the public service. They have substantial management and leadership roles, yet there is considerable anecdotal evidence that the performance of some is not up to the standard required for good management and governance. The Public Service Commission (PSC) has been working on developing a formal performance management system for evaluating the performance of D-Gs for some time. One reason given for the poor performance of some is that they are technically skilled people who have been appointed to management positions, but who are largely untrained in management and leadership. The PSC is providing training but, at this stage, it is not adequate and highlights the need for a system of succession planning so that appropriate training is provided before a person is appointed to a management position. Although the management of the D-Gs is an important function for the PSC this is not clearly set out in the Public Service Act, while the program budget narrative for the Commission does not even mention D-Gs. In order to highlight the importance of D- 49 NGOs also experience considerable delays in receiving funds from donors as a result of cumbersome systems in the Department of Finance and the Office of the Prime Minister. A simplified process that results in the timely delivery of grants is required. 49 Vanuatu Economic Report 2009 Gs and the key role the Commission plays in managing them, a separate activity should be shown in the PSC program budget narrative with accompanying objectives and performance measurement targets. The PSC should work with Ministers to review the performance of D-Gs …and the Act amended in relation to removal of a D-G from office The D-Gs sign annual performance contracts directly with their Minister, but this should not prevent the PSC from carrying out performance reviews. A review would incorporate the Minister’s views on the performance of the D-G, while the PSC would evaluate the D-G in light of the Ministry’s performance. It would be the responsibility of the PSC to reward or censure based on performance and to take corrective action where necessary. The Public Service Commissioner has few tools at his disposal for addressing poor performance, however. The removal of a D-G is the ultimate tool available to the Commissioner, but the Act only allows the exercise of this power subject to the provision that states: “The Commission must not remove a directorgeneral or a director from office unless the Commission has received a complaint in writing from the Prime Minister, a Minister, the Ombudsman or the Auditor-General”50. This provision should be removed as the Act sets out a rigorous and independent process to be followed to ensure that a Director-General receives a fair hearing if termination is under consideration.51 Training can only go so far in lifting management performance, while the alternative of using expatriate technical assistance has had mixed success. The risk remains that foreign personnel end up as a substitute for, rather than an adviser to the D-G. Consequently, the intended enhancement of national capacity is not achieved. AusAID commented that “Effective skills transfer from foreign advisers to national personnel is difficult to accomplish, due to cultural and communication barriers, poor understanding by foreign advisers of the political and institutional context, high turnover among national staff and other factors.” 52 Too often the technical advisors are chosen because of their technical skills rather than their training ability. 3.2.4 Office of the Auditor-General The Office of the A-G is ineffective at present The Office of the Auditor-General is in disarray and largely ineffective. The AuditorGeneral resigned in June 2008 and a replacement had not been appointed by March 2009. The office is staffed by seven auditors and two administration staff, none of whom have relevant qualifications. The last State Accounts audited were for 2004. The accounts for 2005 and 2006 were being audited by the previous Auditor-General, but no action has been taken to complete them since her resignation; nor is there anyone in the office authorized to sign an audit report. The last provincial accounts audited were for 2006, apart from those for Shefa, which had not filed accounts since 2001. The position has improved during the past year as all provinces have now filed accounts to December 2007, and these are in the process of being audited. Unfortunately, there has been no improvement in the performance of the municipalities, with the last accounts filed by Port Vila in 1995, and by Luganville in 2000. In the latter case the accounts were, however, not in a state that would allow them to be audited. Despite not having completed accounts for many years Port Vila was provided with a Vt10 million loan by the Government in 3 51 52 Public Service Act 1998 sec 19B(1) Ibid sec 19B(2) AusAID, 2007. The Unfinished State: Drivers of Change in Vanuatu. 50 Vanuatu Economic Report 2009 October, 2006, with a loan period of 5.5 months—but no repayment has ever been made. As a matter of urgency a new and appropriately qualified Auditor-General must be appointed, along with at least one qualified and experienced auditor to assist with the training of staff. The structure of the Office should be reviewed to ensure that there is a satisfactory ratio of qualified and experienced staff to unqualified staff. Staff procedure manuals and checklists for audits should be prepared and staff training provided. If a suitable candidate cannot be found then it will be necessary to employ a qualified expatriate for a transitional period until a suitable local replacement can be appointed. The arrears of audit work, indicated for most of the key SOEs in Table 3.1, are such that additional experienced auditors should also be employed to bring the work up-to-date. This would then permit the new Auditor-General to concentrate on restructuring the office and place pressure on those organizations that are not providing accounts for auditing. The appropriation for the National Audit Office for 2009 was Vt33.05 million, which is likely to be inadequate for the restructuring of the Office; a supplementary appropriation may be required for this purpose. The current Government stated that “We also understand and support the crucial work which the National Audit Office has to perform. It is an absolute priority to fill the vacant position of the Auditor-General and ensure that our nation's finances are audited and made public on a regular and timely basis"53 To achieve these outcomes requires immediate action to upgrade the Office of the Auditor-General. A new A-G and restructuring of the National Audit Office are urgently required Vanuatu could consider future access to the Sub-regional Audit Support Program The Sub-regional Audit Support (SAS) Program under the Pacific Regional Audit Initiative (PRAI) has potential implications for the National Audit Office. The SAS Program is being implemented in 2009 and involves Kiribati, Nauru and Tuvalu working together to enable the public accounts of these countries to be audited to uniformly high standards in a timely manner. An SAS Team is being established which will work under the auspices of the three Auditors-General to conduct financial audits. SAS Team members will be seconded from each SAI and will be supplemented and led by outside audit staff. Vanuatu might consider monitoring the implementation of the SAS Program with a view to reviewing potential benefits of future participation. 53 First Political Advisor to the Minister of Finance Augustine Garae in the opening address on behalf of the Minister of Finance at the Public Expenditure Framework Assessment (PEFA) meeting in Port Vila March 2009. 51 Vanuatu Economic Report 2009 Table 3.1: Government Business Enterprises: Status of Ownership and Audited Accounts Statutory Corporations Ownership Government Business Enterprises under the Companies Act Air Vanuatu MFEM/MIPU/PMO Airports Vanuatu Ltd MFEM/MIPU Global Trading and Manufacturing PMO Ifira Wharf and Stevedoring MIPU Metensel Estates MFEM/MAQFF Northern Island Stevedoring MIPU Vanuatu Livestock Development MFEM/MALFFQ Vanuatu Post MFEM/MIPU Vanuatu Abattoirs MFEM Corporate Government Business Enterprises under their own Acts National Bank of Vanuatu MFEM Vanuatu National Housing Corporation MIA Vanuatu Broadcasting and Television Corporation PMO Vanuatu National Provident Fund MFEM % 100 100 31 34 99 10 100 100 33 Last Accounts Prepared Audited 31-Dec-06 31-Dec-04 31-Dec-06 31-Dec-04 Comment 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 Shareholding reduced from 85.4% on 7 Aug 2007 100 100 100 100 31-Dec-97 31-Dec-95 31-Dec-06 31-Dec-05 31-Dec-04 31-Dec-01 31-Dec-01 31-Dec-95 30-Apr-00 31-Dec-97 Last accounts heavily qualified Since incorporation in 1992 produced only one set of accounts 31-Dec-06 31-Dec-05 31-Dec-01 31-Dec-01 Interim assessment 30/09/07 insolvent Oct 2006 Government loan VT10 million no repayments made. Not able to be audited Non-corporatised Government Business Enterprises Under their own Acts Vanuatu Tourism Office MTNVB 100 Vanuatu Financial Services Commission MFEM 100 Reserve Bank of Vanuatu MFEM 100 Asset Management Unit MFEM 100 Utility Regulatory Authority MFEM 100 Vanuatu Commodities Marketing Board MTNVB 100 Municipalities Port Vila Municipality Luganville Municipality Provincial Government Councils Torba Provincial Government 31-Dec-07 31-Dec-06 2006 audited and 2007 being audited Malampa Provincial Council 31-Dec-07 31-Dec-06 2007 audited and 2007 being audited Penama Provincial Council 31-Dec-07 31-Dec-06 2008 audited and 2007 being audited Sanma Provincial Council 31-Dec-07 31-Dec-06 2009 audited and 2007 being audited Shefa Provincial Council 31-Dec-07 31-Dec-01 Being audited including 2005 and 2006 no accounts 2002-2004 Tafea Provincial Council 31-Dec-07 31-Dec-06 2009 audited and 2007 being audited Note that NBV, the Financial Services Commission and the RBV are not included in the table, but are up-to-date with their audited accounts Sources: Auditor-General and Government Business Enterprise Unit 52 Vanuatu Economic Report 2009 3.2.5 Expenditure Review Committee The problems of the Auditor General’s Office have been compounded by the fact that the Expenditure Review Committee (ERC—now referred to as the Public Accounts Committee, PAC) has not functioned for the past five years. The ERC is a key parliamentary committee and its work is essential to ensuring transparent government. Its role is to ensure Parliament is informed about the scrutiny of public expenditure and the management of public money (see Box 3.3). The ERC comprises a Chairperson,54 appointed by the President on the advice of the Prime Minister, who undertakes prior consultation with the leaders of all the political parties represented in Parliament, and with a representative of the private sector. The chair must be a person with detailed knowledge of the law, accounting or commerce, and must not be a Member of Parliament or hold any other public office. In addition to the chair the committee comprises55 not less than two or more than four parliamentary members who also are appointed by the President on the advice of the Prime Minister, following consultations similar to those for the appointment of the Chairperson. There must be an equal number of members from the Government and from opposition parties. But its work is critical to transparent government The ERC had been defunct for 5 years The Expenditure and Audit Act serves to emphasize the importance of the Committee by specifying that “the Committee shall meet at least once in every month, whether Parliament is in session or not”. Box 3.3 Objectives and Functions of the ERC 14. (1) In the performance of its duties it shall be the objective of the Committee with the assistance of the office of the Auditor-General to ensure that adequate public accountability is achieved by: (a) confirming that the obligations under the Act are met, in particular: (i) required economic and financial statements are produced and are reviewed; (ii) adherence to fiscal disciplines is explicit; (iii) statements of responsibilities are completed and sufficient undertakings exist in order to rely on them; (iv) that all obligations of directors-general of ministries are met; (b) providing a mechanism for public consultation about budget and expenditure matters; (c) undertaking or supervising all audits in order to ensure the reliability of systems and procedures and the integrity of information produced. (d) the pursuit of legitimate issues of public concern that affect the management of public money; (e) review the efficiency and effectiveness of the financial performance of those persons, organizations or entities managing, collecting, expending or administering public money. Source: Expenditure and Audit Act. 54 55 Expenditure and Audit Act sec 5. Ibid. sec 9. 53 Vanuatu Economic Report 2009 Despite the importance of the ERC it has effectively been in recess for several years, even though funds have been appropriated for it annually. The Government has, however, acknowledged the importance of the ERC and stated recently56 that it is “keen to get the Public Accounts Committee [ERC] working” and that “The Committee has an important task to fulfill with regards to public finance management”. It took the first step by increasing the 2009 Budget appropriation for the ERC from Vt5,995,959 to Vt8,612,051, and a new Chairperson has been appointed. The ERC, although recently re-established, should be provided with training in the methods of scrutiny of public accounts and the undertaking of performance reviews of ministries and state agencies. It should also require each ministry and government agency to provide an annual report of expenditure. Each ministry should be required to appear annually before the ERC to provide an account of their performance in the context of their corporate objectives. The recent reestablishment of the ERC is a positive move 3.2.6 Ombudsman’s Office. The establishment of the Office of the Ombudsman is enshrined in the Constitution57 and its roles and responsibilities detailed in the Ombudsman’s Act 1998. The primary responsibility of the Ombudsman is to enquire into the conduct of any government agency, and an inquiry can be undertaken whether or not a complaint has been made. The Ombudsman’s Office allows for the independent investigation of complaints from the public about allegedly unfair treatment by government ministries or agencies. The Ombudsman’s Office is competent but unable to meet its legislative intentions The functions of the present Ombudsman’s Office have been undertaken in a competent manner. It has prepared a number of reports in recent years, and delivered introductory programs to parliamentarians on the purpose of the Act and the principles of the Leadership Code. Despite the good work of the Ombudsman’s Office, however, it is not achieving the intentions of the legislation. Rather, the Ombudsman appears to be treated as a figurehead to give the appearance of good governance. The Ombudsman has made recommendations to the Public Prosecutor to prosecute public officials where a criminal offence may have occurred. Little if any action on these recommendations has been taken. The reports are also tabled in Parliament but no debate takes place. Furthermore, if charges are laid the police cannot use evidence previously given in the Ombudsman’s inquiry, but must obtain the evidence again. This acts as a disincentive for any action. The investigators employed in the Ombudsman’s Office are employed by the Public Service Commissioner and not by the Ombudsman. This places extra stress on the investigators when they are required to investigate a senior public servant, and might serve to undermine the investigation. The staff of the office should be employed directly by the Ombudsman to ensure the independence of the Office. The legislation should also be reviewed to remove the roadblocks that prevent action being taken on Ombudsman’s reports. A review of the Ombudsman Act and Leadership Code was Roadblocks to action based on Ombudsman’s reports should be removed 56 57 First Political Advisor to the Minister of Finance Augustine Garae in the opening address on behalf of the Minister of Finance at the PEFA meeting in Port Vila March 2009. Constitution of the Republic of Vanuatu sections 61 to 65. 54 Vanuatu Economic Report 2009 undertaken in 2004 and the recommendations made at that time could provide the basis for a new review. The Ombudsman has expressed the belief that there are many instances of improper behavior by state employees or politicians that are not reported because of “respect for the big man”. This cultural reality was echoed by another senior public servant who commented that, “We live in an unaccountable society. No one will come forward and complain. There has to be a demand from the people for good governance before it will happen”. Leadership from the most senior levels of government is, therefore, required to overcome the reluctance to report corruption. Until the message is conveyed—perhaps through an appropriate publicity campaign—that corruption is unacceptable, and that reporting it is acceptable, little will change. In summary, the Office of the Ombudsman, like that of the Auditor-General and the ERC, is ineffective through no fault of its own. There are no incentives for improved governance, greater transparency, and the elimination of corruption. The Government has indicated its intentions to address the problems confronted by the Office of the Auditor-General and to reactivate the ERC. These are initiatives that should be implemented as a matter of priority. Additionally, the independence of the Office of the Ombudsman should be reasserted and reports submitted to the Parliament and to the Public Prosecutor acted upon. This will require, amongst other actions, amendments to the Act. There are no incentives for improved governance, transparency, or elimination of corruption 3.3 Fiscal Management. 3.3.1 Accountability and Fiscal Targets MFEM applies the PFEM Act rigorously and oversees good governance for fiscal targets The Public Finance and Economic Management (PFEM) Act 1988 was introduced to ensure effective and responsible economic, fiscal and financial management by the Government. It also requires compliance with the arrangements for accountability, including regular reporting of fiscal and economic outcomes. The MFEM applies the Act rigorously and, as a result, is the one agency that oversees good governance in its sphere of influence.58 The principles of fiscal responsibility laid out in the Act include that the Government is to: (i) reduce and manage state debt at prudent levels; (ii) maintain the state’s net worth at a level to provide a buffer against unexpected events; (iii) manage fiscal risks prudently; and (iv) pursue policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years. The Act refers to the total overall revenue and expenditures of the State when determining the budget surplus, but the government has adopted a more limited interpretation based on recurrent revenue and expenditure, with the revenue and expenditure targets actively managed by MFEM. In the 2009 Budget Policy Statement (BPS) the Government reiterated its long term objective of maintaining a positive recurrent balance. This definition does not include such items as the purchase and sale of fixed assets, borrowings, grants and development expenditure. As shown in Table 3.2, the recurrent balances since 2004 have been positive, apart And the targets have been met consistently in recent years 58 MFEM was the recipient of AusAID technical assistance for capacity building from 2000 to 2005. The training and systems established under the technical assistance underpin the governance outcomes achieved by the ministry. 55 Vanuatu Economic Report 2009 from 2004 when a small deficit was recorded. The preliminary surplus for 2008 shows a surplus of Vt719.4 million after the additional expenditure of Vt548.4 million, detailed in the retrospective Supplementary Budget passed in February 2009, is included. Table 3.2: Fiscal Responsibility and Recurrent Surpluses (Millions of Vatu) Year Revenue Expenditure Surplus 2004 7,330.1 7,331.4 (1.3) Actual 2005 7,991.7 7,575.6 416.1 2006 Preliminary 2007 2008 Budget 2009 Projection 2010 2011 9,156.5 11,041.4 12,635.4 13,000.0 13,577.5 14,148.6 8,658.6 10,975.0 11,916.0 12,552.8 13,136.1 13,669.4 497.9 66.4 719.4 447.2 441.4 479.2 Sources: Budget presentations 2008 and 2009. Salaries and wages absorb a high proportion of the budget; benchmarks are needed The targets set for fiscal responsibility, while addressing recurrent income and expenditure, do not address the issue of the size of the public service. The percentage of goods and services represented by wages and salaries is quite constant at around 75%, or 58-60% of total recurrent revenue. Consideration should therefore be given to setting a ratio or bench mark to ensure that expenditure growth for wages and salaries is carefully monitored. The benchmark could be a percentage of GDP, revenue, or total expenditure. It is preferable that staff numbers are managed to prevent the need to resort to redundancies at a later stage, with the resultant social and economic upheavals that occur. In the 2009 Budget Commentary the Government announced that its “short term fiscal objective is to accrue surpluses, in order to meet the long-term aim of reducing the stock of Government debt.” The Government’s domestic debt was Vt2.58 billion at the end of 2008. The case for reducing debt is a sound strategy in the short to medium term in the context of the current global financial crisis but, as previously noted, concessional debt can still be considered for priority projects that will provide clear economic benefits. It should also be acknowledged that Vanuatu’s sound fiscal position means that it is relatively well placed to deal with any negative impacts caused by the crisis. 3.3.2 Sources of revenue VAT and import duties are the primary sources of revenue The primary sources of revenue are the VAT and import duties. VAT receipts increased by 21% in 2008 due in part to increased efforts to enforce compliance and by extending the coverage of the outer islands by the Department of Customs and Inland Revenue. Despite the improvement in compliance, however, the country is still dependent on a narrow base for its income. Previous recommendations have been made59 for the longer term widening of the tax base through a combination of direct 59 E.g. Asian Development Bank and AusAID, 2002. Vanuatu: Economic Performances and Challenges Ahead. ADB, Manila; Department of Trade, Industry and Development, 2008. Vanuatu: Diagnostic Trade Integration Study, 2008 Report. Published by Blue Planet Media and Communications, Port Vila. PFTAC, 2007. Developing new sources of revenue and a high-level implementation plan. Prepared for the Government of Vanuatu. 56 Vanuatu Economic Report 2009 taxes, indirect taxes, improved taxation compliance and implementation of user-pays systems. While the Government appears comfortable with the current revenue sources, and has given no indication of widening the tax base in the near future, this is an issue that should be revisited and, as noted in Chapter 2, a request made to PFTAC for further assistance to develop proposals for reform of the taxation system to ensure future revenue flows to the Government are sufficient for its budgetary needs. The discretion available to the Minister for Finance to grant tax and duty exemptions was discussed in Chapter 2, where it was pointed out that exemptions have had a significant adverse effect on revenue collection. As noted in Chapter 2 this is an issue that should be addressed through clear definition of those circumstances under which exemptions may be granted and through removing ministerial discretion for granting exemptions. 3.4 Budget Process The Budget process is managed by MFEM and commences in February each year with a preliminary estimate of GDP. The government investment program (GIP) is also reviewed and the priority projects of government that can be funded from aid or government revenue identified. The information from the GDP estimate is used to calculate the percentage of revenue to be allocated to each Ministry, with a small margin retained as a reserve for adjustments later in the budget process. The allocations are approved by the Council of Ministers (COM) and then provided to the Ministries. The Ministries prepare their own initial budget estimates, including new initiatives, usually resulting in requests for budgets that are higher than the amount initially allocated by MFEM. After review by MFEM the budget proposals are considered by the Ministerial Budget Committee (MBC). The Budget is then returned to the COM for approval and, subsequently, to Parliament for appropriation. The budget process is sound But the Budget Policy Statement comes out too late The Minister for Finance must publish the BPS by the end of September.60 The PFEM Act specifies that the BPS must set out the Government’s long-term fiscal policy objectives and specify the broad strategic priorities by which Government will be guided in preparing the estimates for the next financial year. However, by the end of September most key budget decisions have already been made, implying that the BPS plays little or no role in guiding budget preparation. The Act also provides for any member of the public to make a submission to the Chair of the ERC in respect of the BPS. This section of the Act is relevant to good governance and transparency but, again, its usefulness is constrained by the delivery of the BPS at a late stage in the budget process. The Government has recognized this constraint and is revising the process to require publication of the BPS in April or May. A Supplementary Appropriation Bill was passed, retrospectively, in February 2009, authorizing the expenditure of Vt548,396,952 incurred during 2008. Passing an appropriation bill retrospectively is only allowed under the PFEM Act when there has 60 Public Finance and Economic Management Act 1998, section 10. 57 Retrospective authorization of expenditure will not be allowed in future Vanuatu Economic Report 2009 been a natural disaster or unforeseen exceptional circumstances. The Government has acknowledged that this process was inappropriate and a current Bill for the amendment of the PFEM Act addresses the issue. The Bill makes it explicit that a supplementary bill “must be passed by the Parliament before an amount specified in the Bill is issued from the Public Fund”. In the BPS for the 2009 Budget the Government acknowledged that the development budget would become an integral component of the national budget, thereby allowing better management of donor funding in accordance with national policy priorities. Donor resources will be considered during the budget preparation cycle and, beginning in 2010, the development budget will integrate the GIP with the annual recurrent budget. This will overcome the weakness in the links between national and sector policies, an issue that was raised in the 2006 PEFA report. 3.5 Service Delivery and the Provinces The disparities in service delivery and the standard of living between urban and rural areas have led to a concern that government is favoring Port Vila at the expense of other areas when it prepares the Appropriation Bill. This is inevitable to an extent as Port Vila is the seat of government and the location of ministry head offices. The accounting and reporting by most ministries does not provide sufficient detail for an analysis of the distribution of expenditure on the basis of location. The exceptions are Health and Education, for which it is possible to perform limited analyses of expenditure. The Ministry of Health was appropriated Vt1,501 million for 2008. The expenditure break up, summarized in Table 3.4, is used to indicate how spending by the ministry is allocated. Concern that Port Vila receives preference in Government expenditure Table 3.4: Ministry of Health Appropriation 2008 Corporate Drugs Public Health Northern Group Southern Group Total % Budget 18.7 8.5 4.5 34.2 34.0 100.0 Millions of Vatu 281 127 68 514 511 1,501 Population Per person 125,396 108,895 234,291 4,099 4,693 6,407 Source: Ministry of Health 2008 budget analysis The total of the appropriation spent in the Northern Group—comprising the provinces of Malampa, Penama, Sanma and Torba—is virtually the same as that for the Southern Group—comprising Shefa and Tafea. The position is, however, different when the average per person expenditure is considered. Each person in the Southern Group receives an average of 14.5% more than each individual in the Northern Group. This difference is explained largely by the cost of running Port Vila Central Hospital, which is the national referral hospital (Table 3.5). 58 Vanuatu Economic Report 2009 Table 3.5: Ministry of Health Analysis by Province Population Estimate Northern Group Malampa Penama Sanma Torba Sub-total Southern Group Shefa Tafea Sub-total 36,693 34,860 44,121 9,721 125,395 Direct Budget (Vt'000) Hospitals Total 181,000 13,000 57,000 35,000 286,000 248,000 74,000 117,000 63,000 502,000 Average per person Direct Hospitals Total 1,826 1,750 1,360 2,880 1,723 4,933 373 1,292 3,600 2,281 6,759 2,123 2,652 6,481 4,003 67,000 61,000 60,000 28,000 216,000 73,334 35,562 108,896 51,000 41,000 92,000 342,000 67,000 409,000 393,000 108,000 501,000 695 1,153 845 1,315 4,664 1,884 3,756 2,966 5,359 3,037 4,601 4,281 Total 234,291 308,000 695,000 1,003,000 Source: Ministry of Health 2008 budget analysis Although this is not borne out in the health sector Furthermore, the cost per person varies between islands—those with smaller populations have a higher average cost to provide basic services. When provincial factors are taken into account the amounts spent do not justify a claim of preference for Port Vila. Nonetheless, different standards of health service will be experienced in each province, differences that the financial figures do not readily disclose. The Ministry of Education is not able to provide a complete analysis of student enrolments by province; nor is it able to provide a breakdown in costs between early childhood, primary, junior secondary and secondary schools. However, as shown in Table 3.5, the appropriation spent directly on the delivery of education is 83.7%, on corporate services 15.4%, and on Cabinet support 0.9%. Table 3.6: Ministry of Education Appropriation 2006 Province Torba Sanma Penama Malampa Shefa Tafea Total Provinces Category of Expenditure Private School Grants Materials for Schools Corporate Cabinet Support Total Appropriation Vatu 95,375,670 351,257,566 239,649,273 331,122,846 605,873,595 307,708,085 1,930,987,035 613,074,351 122,682,000 490,075,266 28,268,555 3,185,087,207 Percent 3.0 11.0 7.5 10.4 19.0 9.7 60.6 19.2 3.9 15.4 0.9 100.0 Source: Ministry of Education Expenditure Analysis 59 Vanuatu Economic Report 2009 In both the Ministries of Health and Education the analysis of the appropriation shows that the majority is being spent on direct services. An analysis of the financial figures can provide information on how and where the funds were spent, but it cannot provide an indication of the quality or adequacy of the services provided (these matters are discussed in Chapter 5). In education, for example, there are serious issues surrounding the qualifications and training of teachers. While Vanuatu has a reasonable attendance rate at the primary school level, the same cannot be said of the secondary and tertiary levels. There is a high dropout rate or non-attendance at the secondary level due to high fees and the limited availability of school places for students. Recurrent expenditure in the provinces is 20% of gross appropriation Notwithstanding the expenditure pattens in health and education, the aggregate recurrent expenditure in the provinces by all ministries is 20% of the gross appropriation. While development and capital expenditure might increase in the provinces in future years, it is unlikely that the proportion of recurrent government expenditure at provincial level will increase to a marked extent for some time. Increased investments in the provinces, coupled with decentralization policies, may have some impact, but the reality remains that the majority of recurrent expenditure will occur in the main urban areas. 3.6 Land Management 3.6.1 Land tenure and access to land Land is central to all economic and social activities At Independence in 1980 land in Vanuatu was formally restored to the customary owners. The new Constitution proclaimed:61 “All land in the Republic of Vanuatu belongs to the indigenous custom owners and their descendants”. It further proclaimed that the rules of kastom shall form the basis of land ownership and use. Land is, therefore, closely linked with heritage, power, and spirituality. Custodianship and the exchange of rights are central to kastom practice, ensuring that harmony, authority, relationship networks and social responsibility are maintained. In Vanuatu, land has traditionally served as a source of subsistence, a source of power and status, and a source of identity and culture. The traditional land tenure system has ensured that all family and clan members have access to land; it is consistent with the country’s strong kinship bonds and with customs that encourage traditional sharing of economic wealth. This communal approach has allowed niVanuatu to avoid deep poverty by providing an informal social support network. Nevertheless, the pressures of development and the growing desire of the niVanuatu to participate in the country’s market economy have led to radical changes in patterns of landholding in some parts of the country, particularly Efate Under the current law, government, or private investors, can negotiate long term leases62 with the customary owners. These leases are deemed to be incontestable by law and, while this provides legal protection for the lessee, it can lead to disputes with and between customary owners, particularly when not all landowners were fully consulted or where they did not fully appreciate the implications of the lease. 61 62 The Constitution of the Republic of Vanuatu sections 73 and 74 Leases can be for up to 75 years and can be renewable. 60 Vanuatu Economic Report 2009 The inherent subtleties of custom law, the uncertainty of custom authority and the lack of recognition of the customary group as a legal entity, has led to many reports of inequitable land dealings. This has resulted in not all landowners benefiting from leases and some ni-Vanuatu being estranged from their land because the lease terms and conditions include unfavorable clauses for renewal, and fail to provide an economic return over the life of the lease. In this latter case a once only payment is normally made at the commencement of the lease. Furthermore, current land policies and tenure arrangements are inefficient63, and often result in disputes among landowners and between landowners and lessees. Current land policies and tenure arrangements are inefficient 3.6.2 Vanuatu Land Sector Framework 2009 – 2018 The need for land reform is recognized by government The former Government recognized the overwhelming need for land reform and the growing concerns being expressed by both landowners and investors. This led to a land summit in 2006 at which the existing laws and policies were assessed. Twenty resolutions were formulated at the summit; these were subsequently grouped into three categories: 1. The need to build knowledge and skills to a level that supports informed decisions about land use options beyond leasing to other users 2. Ensuring that the governance system for land is participatory at the family, community, national and government level. Determining who will be involved in governance, what their role will be, and the strengthening of the capacity of stakeholders, thereby ensuring transparency and sound governance, were identified as priorities 3. The creation of a new enabling environment to achieve the above outcomes. The approach agreed on was to build on existing laws, policies and systems. This would include strengthening the Lands Tribunal to make ownership more certain, and to use technology to facilitate the replacement of the existing cumbersome manual records system. The Land Sector Framework (LSF) involves all stakeholders and services and enables actions and resources to be prioritized. Its purpose is stated as64 “To provide an enabling environment for multi-stakeholder participation in the effective use, management and stewardship of Vanuatu’s land resources.” Under the LSF plans will be developed to integrate climate change, risks, and town and regional planning. Four principles will guide decision-making and, thereby, ensure that land sector activities are aligned with the Government’s development agenda; these are: 1. Management of land resources must comply with social and economic objectives 2. Stewardship of land resources must guarantee environmental sustainability 3. Land agencies must be relevant, cost-effective, efficient and sustainable Land Sector Framework involves all stakeholders 63 64 “Inefficient" here refers to economic inefficiency. Efficiency requires that the nation’s resources, including land, are allocated and used in a manner that provides the greatest benefits to the nation. Vanuatu Land Sector Framework 2009-2018 61 Vanuatu Economic Report 2009 4. Planning, implementation, decision making and monitoring of activities must be participatory, transparent and accountable to protect the rights and interests of all stakeholders. …and provides a roadmap for land sector development The LSF provides a roadmap for land sector development over a 10 year period. It is based on a fundamental premise that land is not the sole responsibility of the government but that all stakeholders should share the responsibility for its management. The LSF is divided into two periods of five years, and will be aligned with the government budget cycle and planning horizons. This will facilitate its integration into the corporate and annual planning activities of government agencies and other stakeholders involved in its implementation. The multi-dimensional and multi-stakeholder elements of the LSF highlight the need to clarify the responsibilities and linkages between the stakeholders involved in the governance arrangements. The Ministry of Lands (MoL) will have responsibility for administration and implementation of the LSF, including oversight of land policy development, planning and resource allocation. This oversight will be facilitated by a multi-stakeholder Vanuatu Land Governance Committee (VLGC), established to develop and maintain a strong strategic focus on the LSF. The D-G of Lands will be the focal point and will be supported at the national level by a Land Sector Coordination Unit (LSCU) which will be based in the ministry. The LSCU will be responsible for the day-to-day administration of LSF implementation, including monitoring and evaluation. A National Lands Forum will be launched in September 2009, with a focus on land reform through consultation with stakeholders. This will be an important initiative under the LSF, and will serve to initiate the actions to be taken under that process. 3.7 Most SOEs are inefficient, nontransparent and unaccountable Performance of State Owned Enterprises Nineteen SOEs, known as Government Business Enterprises (GBEs),65 are owned in whole or in part by the government; they are engaged either in commercial activities or in the provision of public services. Many are inefficient, lack transparency, accountability, and a framework for monitoring performance, and/or are non-viable. Conversely, most of those involved in regulatory service provision, such as the Reserve Bank of Vanuatu (RBV), the Utilities Regulatory Authority (URA) and the Vanuatu Financial Services Commission (VFSC), have important core roles in governance and financial and economic management. The NBV operates under professional commercial management and is also performing well. The accountability of the SOEs is complicated in many cases by overlapping accountability to a number of ministries. In an effort to address the issue of accountability, MFEM established a GBE Unit that is nominally responsible for overseeing the SOE portfolio. However, the unit is not legally empowered to request financial reports or to provide any management or governance inputs. MFEM also drafted a Public Enterprise Bill, but the State Law Office redrafted it, with the result that the only effective change was the power to require financial accounts. Because the revised Bill did not address the more substantive governance and management issues afflicting the SOEs, consensus on it was not achieved, and it has not been tabled in Parliament. 65 Asian Development Bank, 2009. Sustaining Growth: A private sector assessment for Vanuatu. 62 Vanuatu Economic Report 2009 Improvement in the performance of SOEs is not possible until the government is prepared to address the transparency, accountability and framework issues noted above. The existing structure is unlikely to be successful while Board members are politically appointed and management is spread over many ministries. The recommendation to restructure the SOE sector, presented in the ADB Private Sector Assessment (2009),66 is strongly supported. Restructuring, under the recommendation made, would require the establishment of a new legal framework for SOEs and improvement in their effective oversight by providing MFEM with the authority and information it needs to provide such oversight. The most effective way to do this is to upgrade the previously established GBE Unit to the status of a department, and revisit and revise MFEM’s draft Public Enterprise Bill, giving it real teeth to allow MFEM to reform SOEs. This would include the reform of corporate governance arrangements and the preparation of as many SOEs as possible for divestiture. In 2007 legislation was enacted to establish the Utilities Regulatory Authority. The purpose of the Act is to regulate certain utilities to:   Ensure the provision of safe, reliable and affordable services Maximise access to regulated utility services throughout Vanuatu. Upgrading the GBE Unit in MFEM is recommended The Utilities Regulatory Authority could be given wider powers The initial reason for the Act was to review the power sector where a high standard of service is provided to those areas serviced by the utility but where prices are very high. There is currently a review of the electricity tariff with an intention of tendering when the Luganville contract comes up for renewal. The Utilities Regulatory Authority could be given wider powers, if and when various SOEs are privatized, to safeguard the interests of users where market failure occurs as a result of service provision by a monopoly. Specific recommendations were made in relation to the Vanuatu Agricultural Development Bank in Chapter 2, and are provided in relation to the Vanuatu Commodities Marketing Board in Chapter 4. 3.8 The Enabling Environment for Private Sector Activity While the economy has been expanding and there have been positive signals regarding reform initiatives from the government in some areas, significant action is needed in other areas to ensure that sustained growth is facilitated. In many sectors of the economy, infrastructure is high cost, as are the costs of doing business. Regulation and interference are still common, reflecting a propensity of government and its agencies to go beyond their core roles. The main constraints are outlined below. Infrastructure costs are among the highest in the Pacific 66 Infrastructure services are poor, or high cost, or both Significant costs are incurred in certain key areas, including:  A private monopoly generates electricity, while access remains limited Asian Development Bank, 2009. Ibid. 63  Vanuatu Economic Report 2009 Port charges are the highest in the Pacific and the recent 50-year extension of the stevedoring monopoly will do nothing to bring these down; Vanuatu’s competitiveness is reduced by these high costs  The regulatory framework for infrastructure is not adequate and requires substantial upgrading Regulation of the electricity sector by the URA, competitive bidding for the provision of power, and the establishment of alternative energy generation capabilities, are amongst the responses currently being implemented or considered for the power sector. These initiatives are addressed in Chapter 6 below. The VCMB harms the performance of the agricultural sector. Weak Governance and intrusive interventions by the State reduces productivity The VCMB is one outstanding example of this situation and, as discussed in Chapter 4, its activities constrain structural adjustment and productivity growth in the agriculture sector. The management of the VCMB and transparency in the use of the funds it controls and disperses is also the subject of ongoing concern. Regulation of foreign investment discourages potential investors, especially in sectors other than property; as previously noted, high transactions costs constrain investment. It appears that the focus of government is more on business regulation than promotion. Investors express frustration with the cost and time it takes to obtain government approvals for establishing and running businesses. Lack of certainty is also a concern, with a common theme among business people that of the perceived risk of changes in government policies concerning businesses. The commercial legal framework constrains business activity The commercial legal framework is complex and costly to access The commercial legal framework serves to discourage business transactions. There are several weaknesses that make if difficult to use, including:      Many laws governing commerce are based on legislation in Britain, which has long since been modified Current company law discourages the formation of local companies, because of cost and complexity, with the result that sole proprietors rarely incorporate Even though trusts are used widely in Vanuatu, the Trustee Act is based on UK legislation that is nearly 100 years old Bankruptcy legislation is based on the UK Act of 1914. Additional uncertainty arises because of the possible application of French insolvency laws Improvements are needed for the contracting framework—a particular problem in Vanuatu is the delay in the execution of judgment orders, which adds substantially to the costs of doing business. But positive reforms are being developed and implemented A number of reforms are, however, underway, reflecting an acknowledgement of the difficulties encountered in doing business in Vanuatu, along with a willingness to address those problems. For example, Companies and Trustee Acts are in draft form and progress is being made on a Bankruptcy Act. Once enacted into law, these initiatives will substantially modernize Vanuatu’s commercial legal framework. 64 Vanuatu Economic Report 2009 The Personal Property Securities Act and Registry will increase access to finance once they are fully operational Access to Finance Domestic credit, especially for small businesses and rural enterprises, is limited although, as previously discussed, various microfinance schemes are making some contribution to overcoming this constraint. The recent launch of the Personal Property Securities Act and Registry will also extend access to finance once full implementation has occurred. The National Bank of Vanuatu’s pioneering small loan scheme and the ADB funded extension of both the scheme and greater access to financial services in a number of islands should also have a strong positive impact on financial sector development. Land As discussed in section 3.6 above, land issues have pervaded development efforts and continue to present difficulties for investors. The LSF puts in place a 10 year program to address the key issues, which include:   Large numbers of new leases have often been consummated without full understanding of the implications on the part of landowners Lease structures contain potentially damaging incentive problems: in most leases, the largest portion of lease payments are made upfront. While there are provisions for renegotiation every few years, this raises transactions costs There is a danger that heirs of the current owners will consider that lease agreements unfairly favored past generations, with potential for conflict in the future The digitization of land records is welcome, but many private sector people involved in the land market complain of delays.   3.9 MFEM is performing well in budget and fiscal management Five priority areas should be addressed Governance and Public Sector Management: Conclusions The budget process is well managed by MFEM, the standard of forecasting and budgeting continues to improve, and the principles of fiscal responsibility set out in the PFEM Act are adhered to. But line ministries do not undertake such tight control, while auditing of public accounts remains severely limited. The priority actions to overcome the key weaknesses in public sector management and governance are:    Urgent revitalization of the Office of the Auditor-General and the Office of the Ombudsman, and training support for members of the ERC Establishment of an effective performance management system for D-Gs Continued promotion of the LSF to facilitate the development of policies that allow landowners to benefit from their land while facilitating access to land for development purposes Establishment of robust arrangements in MFEM for the oversight of SOEs to improve their performance, along with rationalization of those enterprises that are non-viable or where government ownership is not essential Continued improvements to the enabling environment for private sector development.   65 Vanuatu Economic Report 2009 4. Environment, Tourism and the Productive Sectors 4.1 The Environment67 4.1.1 Introduction Sustainability is the central theme that underpins the national vision for Vanuatu, based on the notion that all development activities should be sustainable economically, socially and environmentally. Most programs and projects espouse sustainability in one form or another. Yet, despite the promulgation of the Environmental Management and Conservation (EMC) Act 2002, little more than lip service has been paid to environmental sustainability. This occurs despite the critical role of the natural environment in: (i) underwriting livelihoods for the rapidly growing population in the production of food and materials for shelter and other purposes; and (ii) acting as the basis of the nation’s key export industries, particularly tourism and agriculture. Despite the obvious importance of the environment, however, it was recently concluded that there is “a distinct lack of political commitment to the environment, a tiny allocation of the budget to environmental issues, a virtually defunct Environment Unit…and widespread evasion or abuse of the carefully crafted laws”68. This conclusion is reinforced by the fact that, in its recent policy priorities for 2009-2012, the Government did not include actions to strengthen environmental management, despite the priorities including “equitable and sustainable development of land.” Vanuatu’s environment underwrites livelihoods and exports But there is a lack of political commitment to the environment 4.1.2 Issues, Causes and Constraints The key environmental issues facing Vanuatu include climate change and sea level rise, land degradation, coastal erosion, inappropriate development activities in the coastal zone, forest loss, loss of biodiversity, availability of potable water, waste disposal and recycling, quarrying in coastal areas, over-exploitation of marine resources, and natural disasters. Population growth will put increasing pressure on the environment Amongst the main causes of environmental change is that of population growth—the rapidly growing population puts increasing pressure on agricultural land for livelihoods, marine resources, and water and waste disposal, pressure that is exacerbated in some areas by the high rate of rural-urban drift. Population growth also means that there is increasing pressure to produce export commodities to derive the income needed to provide more and better services. Real estate and tourism developments, deforestation, invasive species, imported energy and transport needs and increasing tourist numbers are all causes of environmental change. Environmental management is constrained in a number of ways and by certain realities in Vanuatu. The widespread islands, scattered population and geographic diversity make it a complex and expensive undertaking, while the Kastom land tenure system adds to the difficulties of implementing policies such as land use controls. 67 68 This section draws on the ADB’s 2007 Country Environmental Analysis in which a thorough review of the situation in relation to the environment and environmental management was presented. Asian Development Bank, 2007. Vanuatu Country Environmental Analysis. p. 1 Vanuatu Economic Report 2009 66 The Department of Environment & Conservation has not been established The Environment Unit is underresourced The provision in the Environmental Management and Conservation Act 2002 to create a Department of Environment and Conservation has not been acted on (the establishment of this department was also a recommendation under the CRP in 1997), and this constrains environment activities. Furthermore, the existing Environment Unit is under-resourced in terms of personnel and budget requirements and, consequently, there is a lack of capacity within government and its agencies to develop and implement environmental policy; the 2009 Budget includes Vt10.1 million for the Environment Unit, Vt7 million of which goes to the salaries of the five employees. The lack of enforcement of environmental laws and by-laws (e.g. Environmental Impact Assessment laws and the by-law in Port Vila that prohibits the use of plastic bags) and the disregard for environmental laws, result from the limited capacity of the Environment Unit. An example of the disregard for laws occurred in the preparation of the preliminary environmental impact assessment for the fish processing plant under construction on the shores of Mele Bay—the assessment was prepared by a consultant, yet the law stipulates that it should have been prepared internally by the Environment Unit or other government approved agency (this particular issue is discussed further in section 4.4.3 below). Capacity limitations for environmental management also result in the abuse or misuse of provisions for preventing inappropriate development in coastal/foreshore areas under the Physical Planning Act 1986 (administered by provincial governments or municipal councils) and the Foreshore Development Act 1975, under which the Minister for Internal Affairs has considerable discretionary powers.69 The growing population and increased level of consumption of imported goods adds to waste disposal and local pollution concerns. Rural-urban migration and increasing urbanization also add to concerns about sanitation and matters such as the protection of water catchments and vehicle emissions from uncontrolled expansion of the urban transport sector, while peri-urban residents are more at risk from tidal surges and other natural events. There is no established system of fees and charges, performance bonds and other incentives applied to land developers and other groups, nor to the disposal of toxic waste such as batteries, all of which result in further potential for environmental degradation. Vanuatu is signatory to a significant number of international and regional agreements, many of which have reporting requirements (Appendix Table 6); staff of the Environment Unit spend considerable time on such reporting activities rather than on environmental management activities in-country. The Government also relies heavily on foreign funding for those environmental functions that are undertaken, but this renders environmental management itself unsustainable; funding under the Global Environment Facility (GEF) is available on a competitive basis for national projects (Table 4.1), while Vanuatu is also involved in a number of regional GEF projects relating particularly to biodiversity and climate change. Environmental laws are often disregarded Inappropriate coastal development is poorly controlled Urbanization adds to environmental pressures There is no system of fees and charges for environmental management 69 A current example is the development that is occurring in Erakor Lagoon, which has resulted in the removal of mangroves and infilling of the lagoon; permission for these activities was provided by the Ministry of Lands and Ministry of Internal Affairs, not by the Environment Unit. 67 Vanuatu Economic Report 2009 Natural disasters, including cyclones and earthquakes, occur regularly, yet despite the preparation of a natural disaster risk reduction and management plan,70 no funding is provided to ensure that the plan can be quickly implemented. Rather, the Government takes a passive approach, seemingly based on the proven willingness and ability of donors to quickly provide support and reconstruction following natural disasters. Table 4.1: National GEF-Funded Projects Project name National biodiversity strategies, action plan, national report Clearing house mechanism Assessment of capacity building needs for biodiversity and participation in CHM Project type and Agency Focal area Enabling activity; biodiversity Enabling activity; biodiversity Enabling activity; biodiversity UNEP UNEP UNEP Date approved 15 Jan 1997 10 June 1988 7 Sept 2000 Grant ($’000) 207 13 132 Facilitating/strengthening the MSP1; biodiversity conservation initiatives of traditional landowners to achieve biodiversity conservation objectives National adaptation programme of action National capacity needs self assessment for global environmental management POPs2 enabling activities for Stockholm convention on POPs; national implementation plan Enabling activity; climate change Multi-focal areas UNDP 10 Mar 2004 771 UNDP UNEP 7 April 2003 5 May 2004 200 225 Enabling activity; POPs UNEP 24 Mar 2003 393 Notes: 1. MSP: medium size project; 2. POP: persistent organic pollutant Source: ADB, 2007 Country Environmental Analysis Environment Unit staff must set priorities for in-country work Staff of the Environment Unit, faced by severe resource constraints, must set realistic priorities and, thereby, focus on those areas where a real difference can be made, something they have been attempting to do. This indicates the downside with the GEF programs shown in Table 4.1. These programs take up the time of Unit staff, yet they are not sustainable and are likely to make little difference to environmental outcomes in Vanuatu. They also suffer from the common affliction of often being driven by international agencies rather than by demand from the recipient country. The nation can ill-afford such diversionary activities and must focus on its priority needs first and foremost. 70 Government of Vanuatu, 2006. Supplementary Priorities and Action Agenda: Disaster Risk Reduction and Disaster Management for a Safe, Secure and Resilient Vanuatu. MFEM, Port Vila, Vanuatu Economic Report 2009 68 4.1.3 Mainstreaming the Environment The natural environment is central to livelihoods and the commodity export industries of Vanuatu. It also underpins tourism, the nation’s leading sector. Environmental management should, therefore, be accorded pre-eminence in all planning and development activities. The first priority must be to establish the institutional arrangements that support a country-driven process for prioritizing environmental issues, and to provide adequate human and financial resources for routine environmental activities. A Department of Environment and Conservation, as provided for under the EMC Act 2002, should be created as soon as practically possible. The Department needs to be properly staffed and given the resources required for it to meet its responsibilities. Capacity building for the Department, with donor support, is important to ensure that it can meet the requirements of the Act and undertake its enforcement responsibilities. The cross cutting responsibilities of the Department mean that it is also important to consider where it is located within government. For example, it might be moved to the Prime Minister’s Office so that the staff can work closely with the aid planning, negotiation and coordination staff. It will be important for a new Department of Environment and Conservation to establish priorities for its work. There will be a number of issues for it to deal with but, with limited staff and other resources, it must focus its attention on the most important matters. The process for setting priorities is an important one, and one that should involve consultation. To this end, the recommendation in the Country Environmental Analysis (CEA)71 to establish a National Council on Sustainable Development is supported. In establishing a Department of Environment and Conservation the mix of skills required must also be considered. The Department will have responsibility for developing and implementing environmental policy, and this requires skills beyond those in the physical sciences. One important issue to address is that of environmental fees and charges, such as performance bonds (see Box 4.1) for new developments or the use of natural resources, fees for accepting toxic materials, charges for inspection services, charges on developers for the preparation of a Preliminary Environmental Impact Assessment, and so on. An appropriate use of such fees and charges might mean that the Department is largely self-funding, although care must be taken to not introduce fees and charges simply to raise money. Policy development also requires that other professional skills, such as those in resource economics, are brought to bear. Capacity development is needed The Environment Department should be relocated 71 Asian Development Bank, 2007. Country Environmental Analysis, Vanuatu. Project 38031, ADB, Manila. 69 Vanuatu Economic Report 2009 Box 4.1: Performance Bonds A performance bond is a surety bond, usually issued by an insurance company or a bank—although it may be issued by the company itself—to guarantee satisfactory completion of a project by a contractor or other person. Performance bonds are sometimes used as a permit requirement where there is potential for environmental damage. The bond provides a guarantee that, if environmental damage occurs as a result of the activities of the holder, then funds are available to cover the costs of clean-up and/or removal of structures. A well known example is the use of performance bonds by Australia’s Great Barrier Reef Marine Park Authority as a requirement of permits for construction and use of structures such as pontoons on the reef. The bond ensures that rehabilitation of the reef is undertaken if an operator fails to meet environmental standards or if there is damage as a result of an accident or an event such as a cyclone. The proposed fish processing plants in Mele Bay and Port Vila Bay, discussed in section 4.4.3 below, are the sorts of developments that could require performance bonds if they were an environmental management instrument available to authorities in Vanuatu. Based on the discussion above three immediate actions are recommended: 1. Establish the Department of Environment and Conservation with an appropriate level and mix of professional staff, and carefully consider its location within the government structure 2. Seek donor support for technical assistance to examine the potential for, and approach to sustainable environmental financing through such means as fees, charges and performance bonds 3. Seek donor support for technical assistance to undertake a strategic environmental assessment in Vanuatu and to develop a system for examining policies, plans and programs for their environmental impacts prior to their approval.72 This activity should involve the establishment of a National Council on Sustainable Development and might also support a national environment summit. 4.2 Tourism 4.2.1 Introduction Vanuatu’s tourism product is based on its island geography, relatively pristine environment, traditional cultures, and connections with the ni-Vanuatu people. In 2006 it was identified as the “happiest country in the world”. The nation is easily accessed, particularly by visitors from Australia, New Zealand and New Caledonia, airfares have declined significantly since 2003, there are an increasing number of cruise ship visits, and Vanuatu is seen as a safe destination with a relaxed lifestyle. These and other factors have contributed to its increasing popularity as a tourist destination in recent years. Tourism, if well managed, has several potential benefits, including that it:  Makes a positive contribution to the balance of payments 72 This recommendation was made in the ADB Country Environmental Analysis of 2007, as was the proposal to hold a national environment summit. Vanuatu Economic Report 2009 70    Tourism brings many benefits but must be carefully managed Is relatively labor intensive and creates substantial employment Provides incentives to retain cultural traditions and activities Uses the nation’s scarce resources in a mostly low impact manner. Conversely, international experience shows that social problems often accompany the development of tourism, including increases in prostitution, drug use and crime. Poorly designed and managed developments can also have a substantial impact on the environment. Consequently, tourism development plans should take account of these factors, rather than focusing solely on the physical and market development aspects. 4.2.2 Sector Performance It is the leading export industry and has grown strongly in recent years Tourism is Vanuatu’s leading export industry and has been typified by continual growth since 2004. The numbers of non-resident visitors arriving by air and by cruise ship are shown in Figure 4.1. From 2002 to 2008 visitor numbers increased from 99,488 to 202,943, or 104%. Those visitors arriving by air comprise virtually all of the tourists who stay for a number of days, with a small number of yacht arrivals also making multiple-day visits. The number of tourists in this category increased from 49,461 in 2002 to 96,805 in 2008, an overall increase of 96%. The length of stay also increased from 8.2 days to 10 days. Since 2002 between 75% and 80% of visitors arriving by air stated their purpose as “holiday”, indicating the relative strength of this component of visitor arrivals (Table 4.2). Figure 4.1: Non-resident Visitor Arrivals 250,000 200,000 Numbers 150,000 Air 100,000 50,000 0 2002 2003 2004 2005 Year Source: National Statistics Office 2006 2007 2008 Cruiseship Total 71 Vanuatu Economic Report 2009 2002 2003 2004 2005 2006 2007 2008 Table 4.2: Air Arrivals by Purpose of Visit, 2002-2008 Stopover Holiday % of Total VFR Business Other 611 38,740 78 3,563 6,544 4 835 38,924 77 3,887 6,746 8 1,521 46,805 77 4,593 7,685 6 1,326 47,865 77 4,451 8,411 29 775 53,030 78 5,061 9,312 1 1,020 63,323 78 6,161 10,837 0 1,235 72,278 78 9,783 9,965 0 Totals 49,462 50,400 60,610 62,082 68,179 81,341 93,261 Source: National Statistics Office   Cruise ship visits have increased; a cruise ship strategy will be prepared in 2009 The cruise-ship sector has also seen significant growth, with arrivals increasing from 50,027 in 2002 to 106,138 in 2008, or 112%. Cruise-ship passengers are day visitors, with ships calling in to Port Vila. Occasional day-visits are also made to Champagne Bay in Santo, to Malekula, and to Pentecost. A “Cruise Ship Strategy” is to be prepared by the National Tourism Development Office (NTDO) in 2009 with funding support from the EU, based partly on a predicted significant increase in the number of cruise ships visiting Vanuatu over the next four years. The International Finance Corporation (IFC) is also undertaking a tourism sector diagnosis for Vanuatu during 2009 (Box 4.2). Box 4.2: The IFC Tourism Sector Diagnostic (TSD) Tool The TSD is designed to support assessment of a country’s position in enabling or impeding sustainable development of the tourism sector according to the sector’s three key, interdependent drivers: 1. The destination: characteristics of the destination relating to the tourism product(s) offered (supply) and management of and support for tourism in the destination by the host community, local industry and government 2. The market: market perceptions and activity affecting existing or potential demand 3. Investors: investor requirements and perceptions of the investment climate. Source: IFC brochure on the TSD Tool; released 1 March, 2009.           Market diversification is desirable Vanuatu’s main tourism source markets are Australia, New Zealand and New Caledonia which contributed 55%, 14% and 10%, respectively, to tourist arrivals by air in 2008. The market is, therefore, heavily dependent on the short to medium haul markets within the region. Over time it is desirable for Vanuatu to seek to diversify its market, perhaps with some focus on China and other emerging Asian markets. However, as discussed in the 2009 Vanuatu Tourism Action Program (VTAP)73, such an initiative requires the development and implementation of a strategy to ensure a market focus that brings the strongest benefits to Vanuatu. 73 TRIP Consultants, 2009. Vanuatu Tourism Action Program (VTAP): Building Tourism Today for Tomorrow. National Tourism Development Office, April. Vanuatu Economic Report 2009 72 Tourism creates around Vt10.2 billion in local incomes, 3,300 full time jobs and 1,400 parttime jobs (2007) The most recent survey work on tourism, undertaken in 200774, resulted in the following estimates of the impact of the industry:      Total direct tourism expenditure in 2007 was estimated at Vt14.7 billion Spending by tourism agents on behalf of visitors was Vt3.2 billion Local incomes derived from tourism totaled Vt10.2 billion (direct incomes plus indirect (i.e. value added) income locally) Approximately 3,300 full-time and 1,700 part-time jobs resulted from tourism spending, with about half these in the hotel/accommodation sector Around 60% of air visitors, 63% of yacht visitors and 40% of cruise ship arrivals visit sites and attractions outside Port Vila; approximately Vt3.3 billion, or 22.6% of all tourist spending, is on local transport The contribution of tourism to GDP is approximately 20% Approximately 14% of tourist nights are spent on islands other than Efate, accounting for total expenditure of around Vt1.5 billion.   Tourism is, therefore, a sector that brings considerable economic benefits to Vanuatu. It is also a sector that can bring still greater benefits through increased tourist numbers and through the realization of increased yields from tourism spending. Further growth of the sector will almost certainly occur, although it will be constrained in a number of ways—at least in the short to medium term—as discussed below. 4.2.3 Growing Tourism Tourism relies on political and social stability The success of tourism relies on political and social stability to ensure continued market growth. Further economic reform and greater public investment in physical and social infrastructure is required to make the country an easier place in which to do business and to visit. Careful attention to environmental management is also needed to preserve natural assets.75 The process for developing tourism must be one where government sets the policy context and operating environment for the sector, but the private sector drives investment and employment. The deregulation of the airline sector in 2003 led to a significant reduction in airfares from Australia and New Zealand, resulting in a spike in visitor numbers. This coincided with the commencement of services from Australia by Pacific Blue, which now provides flights from Brisbane, Sydney and Melbourne. Air Vanuatu has code sharing arrangements with Qantas and, since 2006, Air New Zealand, and added flights from Melbourne to its schedule in 2008. It also provides international services to Pekoa Airport in Santo. Solomon Airlines and Air Pacific also fly into Bauerfield Airport in Port Vila. The most commonly visited islands, other than Efate, are Tanna, because of the attraction of Yasur Volcano, and Santo, mainly because of the attraction of scuba 74 75 TRIP Consultants, 2008. MCA Vanuatu Tourism Survey: Baseline Study. Undertaken for the Millennium Challenge Account to prepare baseline data for monitoring and evaluation purposes. A follow-up survey is planned 2010. C.f. AusAID, 2008. 08 Pacific Economic Survey: Connecting the Region. AusAID, Canberra 73 Vanuatu Economic Report 2009 Accommodation infrastructure and costly flights constrain tourism outside Efate diving on the sunken vessel the USS President Coolidge. While efforts have been made—with funding from France—to bring the airports on Tanna and Santo up to international standard, and to develop the airports at Ambae and Pentecost, the limited accommodation infrastructure, coupled with the high cost and irregularity of domestic flights, constrains tourism development in all those locations. Similarly, cruise ship visits to islands other than Efate are constrained by a lack of infrastructure. These issues are well recognized, however, and in March 2009 a strategic plan for tourism in Sanma Province was completed. A strategy for tourism development in Tafea Province will also be released during 2009. Growth in visitor numbers in 2008 was supported by a significant increase in room availability in 2007, when around 500 rooms were added to the stock of accommodation. An increase in the number of international flights in 2008 also supported growth. But further growth in visitor numbers might be constrained by accommodation shortages on Efate in the short to medium-term. An analysis by Boudart and Gavotto in 2008 indicated that there could be a hotel room shortage by 201076, although a representative of the Vanuatu Hotel and Resorts Association suggested that such a constraint is already occurring in 2009. The Boudart and Gavotto analysis was based on occupancy rates in 2008 and the fact that there were no investments planned for facilities of more than 50 rooms. In the present international financial crisis there is reduced likelihood of significant tourism investment in the short term, although the Vanuatu Investment Promotion Agency (VIPA) reports that construction of a “high end” resort has commenced on an island nearby to Santo, while approval has been granted for the construction of a five star resort at Malapoa Point, Port Vila77. These developments, once completed, will make only a minor contribution to the overall stock of accommodation, which will be in a particular segment of the market. Consequently, the number of tourists arriving by air will plateau in 2009 or 2010 due to constraints on accommodation and airline capacity, even if Vanuatu avoids the impacts of the global financial crisis. Other constraints on tourism growth, and issues that must be addressed, include: Accommodation and airline capacity constraints will limit visitor numbers in the near future Land, credit, infrastructure and suitably trained staff each comprise constraints on tourism development  Land issues make it difficult to obtain land with well-specified property rights, including certainty of tenure; the establishment of specific tourism zones on some islands might be one means of partly addressing this issue, particularly in provincial locations outside Efate, while progress might also be made under the Land Sector Framework (discussed in Chapter 3) Credit constraints limit the ability of ni-Vanuatu to develop accommodation, and there is a shortage of properties in the one and two star range, such as beach fares; the cost of credit is also high Conversely, there are no five star resorts or hotels, so the higher end of the market is not catered for at present, meaning that an important sub-sector of the international resort market is not catered for (as it is in Fiji)   76 77 Andre Boudart and Pascal Gavotto, 2008. Research on the development of tourism in Vanuatu: Analysis and general recommendations. BVA Consultants, December. While land negotiations have taken place, a lease signed, and an upfront payment made to landowners, this development is currently held up by a dispute between groups of landowners. Vanuatu Economic Report 2009 74  A range of infrastructure constraints additional to those summarized above, such as limited availability of electricity, water and sanitation outside the main centers; the high cost of electricity, and the perverse incentives that discourage the installation of alternative generation systems such as solar (this matter is discussed in Chapter 7) are a particular issue of concern to the operators of tourism properties The key government institutions responsible for tourism are the Vanuatu Tourism Office (VTO) and the National Tourism Development Office (NTDO), but both are under-resourced and lacking in capacity which, amongst other outcomes, has resulted in a lack of cohesion and focus on important policy development initiatives The lack of appropriately skilled staff, although this constraint is now partly addressed through the Certificate of Hospitality delivered by the Vanuatu Institute of Technology under its dedicated Tourism and Hospitality Training Center. Short course training modules are being developed for delivery to outer islands The list of business activities reserved for ni-Vanuatu includes buses, taxis and small-scale accommodation facilities; however, this may restrict investment in inbound tour operations and on niche accommodation properties by limiting both international and joint-venture activities.    An improved enabling environment for business is crucial to investment in the sector Two other matters are also important. First, tourism development requires foreign investment, but the environment for investment is complex, bureaucratic, and often unpredictable (this issue was discussed in Chapter 3). It is also subject to political interference. Continued efforts to improve the enabling environment for business activity are critical to the facilitation of investments in tourism facilities. Second, there is no clear government policy for tourism development in Vanuatu. For example, the governments of Fiji and Samoa have taken a proactive stance in facilitating investment in particular types of tourism facilities by providing certain incentives for such investments. The central issue in Vanuatu is, however, what type—or types—of tourism is to be encouraged, and in what locations? Ideas such as the establishment of tourism zones, resulting in clusters of resorts and other developments, and the role of eco-resort developments might, for example, be considered. Furthermore, the definition of the tourism sector can be widened. For example, international retirement complexes might be an additional form of residential development that results in investment and increased visitor numbers. Importantly, policies that provide incentives for tourism development, such as offered in Samoa, are not required in Vanuatu. Tourism is a priority sector and developments are therefore eligible for duty exemptions on imported goods. Rather, the focus must be on overcoming the constraints outlined above and improving the enabling environment for investment. Based on the considerations above, the VTAP contains a number of strategies that are appropriate to the situation. These are as follows. 1. Improve policy coordination and increase capacity to sustainably plan and market tourism. Tourism is the leading sector in Vanuatu, providing economic benefits 75 Vanuatu Economic Report 2009 and employment; it therefore must receive greater priority in terms of institutional strengthening and funding support from both the Government and donors 2. Increase the awareness of the unique selling points of Vanuatu as a tourist destination in identified priority markets. This relates to the regular criticism that there is no clear view of how to market tourism or what kinds of tourism products Vanuatu wishes to develop. The VTAP includes a range of specific actions to address these and related issues. 3. Support greater local and international participation in the sector by improving the business enabling environment, investment attractiveness and product range of Vanuatu. This strategy relates to all investment activity and serves to emphasize the importance of the Government focusing on its core roles, thereby facilitating investment in the economy. 4. Increased destination accessibility and infrastructure use and viability through strategic investment, maintenance and market development. This strategy provides a response to the issues of infrastructure constraints and the desire to spread tourism activities more widely across the whole country. 5. Develop a coordinated approach to human resource development planning and training delivery for the tourism sector which meets industry, government and community needs. The institutional and skills constraints referred to above are covered under this strategy. The VTAP will provide a blueprint for tourism development The VTAP provides a blueprint for the further development of tourism in a manner that best meets the needs of Vanuatu, development that is appropriate to the economic, social and geographic setting. It should, therefore, be given high priority by the Government, the business sector, and donors, to ensure the further development of the country’s most critical sector in terms of economic growth and employment.   4.3 Agriculture 4.3.1 Introduction Agriculture remains the backbone of the economy, is fundamental to the traditional and cash economies, and involves all but a small percentage of the population. It is the second largest contributor to GDP and provides virtually all of the goods exports from Vanuatu (Appendix Table 5); it also provides the subsistence needs of most of the population. Agriculture is the backbone of the nation but is moribund Vision for the sector is lacking Despite its importance, however, the sector is moribund. Earnings from the key commodities, excluding copra, have remained virtually stable since 1990 (Figure 4.2). Following a period of high prices in the mid to late-1990s, with prices supported by the Vanuatu Commodities Marketing Board (VCMB) using European Stabex funds, export earnings from copra also fell away sharply. As the nation attempts to broaden its economic base, and as it adjusts to meet the needs of a rapidly growing population, development of the agriculture sector, structural adjustment, productivity gains and value-adding will become still more critical. There is a pressing need to develop real vision for the sector and to put in place the institutional structures, along with the approaches to service delivery, which will support more productive and vibrant agricultural enterprises. Vanuatu Economic Report 2009 76 Welfare policy should not be disguised as agricultural policy There are, however, critical caveats on the recommendations for a national agricultural policy and associated activities (discussed in section 4.3.3 below). First, the government must focus on its core roles in areas including regulation, quarantine, information provision through extension services, and research. Government involvement in the sector, such as through the VCMB, should cease altogether, and associated policies such as price support for copra should be terminated. Such policies are inefficient, inequitable and counter-productive, and limit structural adjustment within the sector. If the intention is to increase rural incomes then this should be treated as a part of welfare policy, not disguised as an agricultural policy. Figure 4.2: Value of Export Commodities, 1990-2007 Copra 3,500 3,000 2,500 Millions of Vatu 2,000 1,500 1,000 500 0 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 Beef Timber Cocoa Total Source: ADB: Key Indicators for Asia and the Pacific 2008 Year 4.3.2 Institutional Setting The Ministry of Agriculture, Quarantine, Forestry and Fisheries (MAQFF) is responsible for policymaking, implementation of policy and legislation, and the delivery of a range of assistance programs and services. The Ministry is also responsible for a number of Government owned enterprises. MAQFF is comprised of four departments: Agriculture and Rural Development, Livestock and Quarantine, Forestry, and Fisheries. It lists its four major medium-term programs as: (i) increased resource production; (ii) market access and trade facilitation; (iii) biosecurity; and (iv) agro-processing and value-adding. The other significant agriculture institutions are the Vanuatu Agricultural Research and Training Centre (VARTC), the Agricultural College, and VCMB. VARTC 77 Vanuatu Economic Report 2009 Agricultural research is a core role for government undertakes applied research but is under-resourced and, therefore, limited in its capacity to influence agricultural development. Research is, however, an important core role for a government agency, and a role that is vital if agriculture is to make significant advances. The Agricultural College, based on Santo, was funded by China and commenced limited operations in 2007. It currently runs short courses for farmers, with those courses delivered by MAQFF extension officers. It is also developing curricula for horticulture, forestry and livestock management courses, each of which must eventually be accredited by the Vanuatu National Training Council (VNTC). Like the VARTC the College is under-resourced but will rely on adequate funding, staffing and operational budgets to be effective. Coordination of the activities of VARTC and the Agricultural College will make both institutions more relevant and should, therefore, be considered by MAQFF management. The VCMB, originally established to support quality improvement and price stabilization for copra, using EU Stabex funds, has been the subject of a number of recent reviews, including those under the ADB’s 2002 agricultural policy review78, an EU report by Gay in 200579, the DTIS in 200880 and ADB’s Private Sector Assessment (PSA, 2009)81. According to the PSA “The Vanuatu Commodities Marketing Board (VCMB) is inefficient and unaccountable; it has an adverse impact on the industries it regulates. The VCMB is strongly criticized by stakeholders and there is said to be substantial political interference.”82 In the 2005 EU report Gay concluded that “…the VCMB has become outdated following the end of Stabex and its role as a vehicle for delivering price support to farmers…The VCMB currently performs only a marginally useful role, one that could better be achieved by existing government departments. The levy on exports is effectively a tax that disincentivizes a sector the government should be doing everything in its power to promote.”83 VCMB is no longer relevant and should be abolished There has clearly been a loss of confidence in the VCMB which is seen by independent analysts as no longer relevant. Little, if any, of the original rationale for its existence remains. Exporters can and do take more responsibility for quality control, while the Quarantine Inspection Service provides the final assurance for export documentation. There is no sound reason for allowing VCMB to continue to operate and, in the interests of developing an efficient and productive agriculture sector, it should be abolished as a matter of priority. 4.3.3 Policy Setting and Service Delivery The second national priority listed in the PAA is: “Improving the lives of the people in rural areas by improving service delivery, ensuring market access to rural produce, lowering costs of credit and transportation, and ensuring sustainable use of natural resources.” Transport and market access issues are addressed in Chapter 6, while the improving situation in relation to credit was discussed in Chapter 2. But productive use of credit and the benefits of better market access and transport 78 79 80 81 82 ADB, 2002. Policy Issues in the Agriculture, Fisheries and Forestry Sectors. Gay, D., 2005. Baseline Study of the Trade Situation and Business Environment in Vanuatu. Vanuatu Department of Trade, Industry and Investment and Transport for the European Commission. Department of Trade, Industry and Development, 2008. Vanuatu: Diagnostic Trade Integration Study, 2008 Report. Published by Blue Planet Media and Communications, Port Vila. ADB, 2009. Sustaining Growth: a Private Sector Assessment for Vanuatu. Manila, March Gay, D., 2005. Ibid Vanuatu Economic Report 2009 78 systems by farmers requires: (i) research and extension services that lead to increased productivity; (ii) better use and management of the scarce natural resources used in agriculture; and (iii) accessible market information. The Department of Agriculture and Rural Development (DARD) undertakes programs relevant to each of the needs noted above. Programs focused on improved production, processing and marketing, farming systems, horticulture, and the provision of information are all in place. Similarly, the Department of Livestock and Quarantine, in addition to animal health and quarantine programs, seeks to deliver livestock production services. Extension services are limited by a lack of resources Despite the existence of a number of programs, however, the outcomes have been very limited over a long period of time. Two major constraints appear to limit the success of MAQFF programs. First, the ability of staff to deliver programs is limited by a lack of suitable extension materials, funding, staffing, and transport access. Future programs will need to take account of funding and other limitations and seek alternative means, such as the use of modern telecommunications systems, to deliver information and other support to farmers. Second, and more important, is the lack of a nationwide agricultural policy which underpins a strategic development program. One result of this has been piecemeal, disconnected projects, funded by a range of donor agencies that, while useful, tend to be one-off and not sustainable. There is agreement by the management of MAQFF and donors that the development and implementation of a national agricultural policy should be given the highest priority. This has been the subject of a series of joint donor inputs, involving the Government, AusAID, the European Commission, and NZAID. The principal conclusions, as listed in the aide-mèmoire from the most recent mission—completed in February, 200984—were:  A comprehensive cross-government policy for productive sector development is lacking, with such a policy requiring adjustments to public policy across multiple institutions such as those responsible for land, transport, taxation, labor and energy When such a policy, and associated strategies, is developed, then longer-term support for the sectors will become available from donors Certain sub-sectoral initiatives can, however, be supported immediately, including: (i) strengthening of agricultural food export inspection, standards, certification and quarantine service capacity; (ii) institutional strengthening of extension services in agriculture, fisheries and livestock; (iii) development of crop and livestock enterprise value-chains; (iv) market and other information; (v) rural financial services; and (vi) domestic shipping. Development of a national agricultural policy is the highest priority   The third of these conclusions runs the danger of perpetuating the current situation of piecemeal developments which are not guided by a policy framework. Questions such as the level of focus on commercial versus subsistence activities are important to policy development, as is agreement on the fundamental core roles of government. The role of the private sector and both domestic and foreign development should also be considered in policy development, along with the potential role of formers’ 84 The full report from this mission is due in June, 2009. 79 Vanuatu Economic Report 2009 cooperatives such as those that have been developed in the fisheries sector (see section 4.4.2 below). A review of agricultural extension services, funded by NZAID, was released in June, 200885. A number of recommendations are made in the review document, with capacity building central to those recommendations. The important point is made that what is needed is a new extension system, not merely a revised extension service. Aspects of this proposal are summarized in Box 4.4. But the Government and MAQFF must provide leadership on this issue Development of a new extension system is an immediate priority There is clear agreement on the need for a cross-government policy for the productive sectors. But government officials have noted that the donor group dealing with this issue has moved very slowly. It is, however, important for the Government to provide the leadership required and to decide, in consultation with its development partners, how best to take policy development forward in an expeditious manner. This is the highest priority for agriculture and agricultural development. The recommendations for capacity building of extension services are strongly supported, and backing for a capacity building program should be sought as soon as practicable. The NZAID-funded review of extension services provides a sound framework on which to base such a program. Box 4.4: Framework for a Revitalized Extension System 1. MAQFF to have the capacity (with donor support) to provide public services on a sustainable basis. In addition to capacity building, this should involve staff rationalization and restructuring through voluntary redundancy 2. Support to non-government and private sector providers through collaborative and integrated programs with MAQFF, especially for specialist technical support for specific products (e.g. coffee and vanilla) and to achieve National Plan of Action objectives in relation to agriculture and women 3. Private sector providers having access to contestable public funds and donor funds for agricultural extension 4. Use of participatory approaches to determine producer needs and priorities      Revitalization of MAQFF to include: Capacity building for extension workers, including gender awareness Adequate logistical and administrative support to provincial offices Rationalization of provincial offices, housing and equipment Development of efficient and low cost media for dissemination of information through radio, DVD and mobile phone technology. Source: NZAID, 2008. Review of Vanuatu’s Agriculture Extension Services, p. 52. 4.4 The Fisheries Department is responsible for domestic and offshore fisheries Fisheries 4.4.1 Introduction The core functions of the Department of Fisheries are development of rural fisheries, for both income earning and subsistence purposes; sustainable management of fisheries resources, including management plans for the main fisheries; and licensing and surveillance of commercial fisheries and the sport fishing charter boat industry. 85 NZAID, 2008. Review of Vanuatu’s Agriculture Extension Services. Prepared by Greer Consulting Services. Vanuatu Economic Report 2009 80 4.4.2 Domestic Fisheries Fisheries Development Officers seek to support the management and development of the local fishing industry, including through the provision of ice making machines, fish aggregating devices (FAD), provision of technical advice, information and training, improvements to marketing networks, and development of alternative fisheries. Activities in this sector are mostly in the coastal and near-shore zones, although some deepwater and pelagic fisheries also operate and supply urban markets, mainly in Port Vila. Other activities include coastal fishing for local markets and home consumption, with results of the 2007 Agriculture Census indicating that 75% of rural households are involved in fishing. Moratoriums have been placed on green snail and sea cucumber Trochus, green snail and sea cucumber are also harvested, although concerns about over-exploitation resulted in: (i) a 15 year moratorium on green snail harvesting, which began in 2006; and (ii) a five year moratorium on sea cucumber, which began in 200886. An aquarium products industry has developed recently (Table 4.3)—of 358 export permits issued for fisheries in 2007, 96% were for marine aquarium products87. A National Aquarium Trade Management Plan was launched in 2008, under which limits are placed on the number of traders and allowable activities. Table 4.3: Exports of Aquarium Products by Volume and Value, 2007 and 2008 Product Quantity Live fish Live rock Live clam Coral Invertebrates Total 175,283 pcs. 17,464 pcs. 11,883 pcs. 6,543 pcs. 5,273 pcs. 2007 Value (USD) 99,103 24,240 33,768 35,893 4,400 200,404 Quantity 148,194 pcs. 11 m. ton 13,002 pcs. 279 pcs. 19,740 pcs. 2008 Value (USD) 450,000 11,187 84,125 2,085 4,142 551,539 Sources: MAQFF, Annual Report 2007; Department of Fisheries, Annual Report 2008 Aquarium Trade and aquaculture management plans were released in 2008 An Aquaculture Management Plan was also launched in 2008, following the commencement of aquaculture activities in 2005 when the first local prawn farm was established. The farm produces around 30 metric tons each year, all of which is sold locally, mainly to restaurants and resorts. Small community trials of freshwater tilapia production are also underway, while a local company produces around two metric tons of tilapia each month, with this sold locally. Domestic fisheries are an important asset that provide income earning opportunities and serve as an important source of nutrition. With a growing population, near-shore areas are likely to come under increasing fishing pressure. Previous support to rural communities was provided under the EU funded Village Fisheries Development Project, which ran from 1982 to 1987, and the follow-up Vanuatu Fisheries Training Center and Extension Services, which ran over two phases from 1987 to 1996. Since 86 87 Small quantities of sea cucumber are still allowed to be caught and processed for medicinal uses. MAQFF, Annual Report 2007. 81 Vanuatu Economic Report 2009 Fishermen’s Cooperative Associations support local marketing then there has been little or no direct support to rural fishers, although the Department of Fisheries has recently provided support for the establishment of Fishermen’s Cooperative Associations for marketing purposes. By the end of 2008 a total of 71 fish markets had been established in this manner. The Department is also currently developing a coastal fisheries policy and plans, subsequently, to provide more support to rural fishers. The Department of Fisheries, while achieving success in areas such as the preparation of management plans is, like DARD, constrained by limited resources to undertake its local fisheries development roles. Under the Rural Enterprise Development Initiative, a component of the CRP, ice machines and other facilities were made available to rural fishing associations. Since 2000, the Fisheries Department has installed a total of seven ice making machines in the six provinces. The Department has continued to support the maintenance and operation of these plants, and has also been involved in activities such as the JICA funded Malampa butchery and fish market in 2008. 4.4.3 Commercial Offshore Fishery The offshore fishery is based on tuna, mainly albacore but also yellowfin and bigeye. Fishing is undertaken by foreign vessels fishing under license, and by vessels registered on the Vanuatu Shipping Registry which operate as Vanuatu-flagged vessels, 30 of which were licensed to fish in Vanuatu waters in 2008. In 2008 a total of 142 fishing licenses were issued to foreign vessels and 11 to local vessels. In 2008 a total of Vt144.9 million was collected from licensing and registration fees, more than three times the budget allocated to the Department of Fisheries for the year. Vanuatu is now seeking to increase domestic value-adding for the offshore fisheries, noting that all the tuna currently caught in its waters are delivered to American Samoa, Papua New Guinea or Fiji. A greater share of economic rents will normally be captured if more value-adding is undertaken locally. Two shore-based processing facilities are currently under development and will result in significant value-adding. These are, first, a tuna longlining base at Blacksands within Mele Bay—quite close to Port Vila—to be managed by the China National Fisheries Corporation (CNFC), and to commence operations in May, 2009. The plant, which will be jointly owned by CFNC (as majority shareholder) and the Government of Vanuatu (with local management the responsibility of Vanuatu Livestock Development), will process (loin) and pack for export the tuna catch of 40 Chinese longline vessels. The vessels will unload an estimated 300 metric tons per month at the main wharf in Port Vila Bay, with the catch transported to the processing plant by road. A second tuna processing plant is also proposed in Port Vila Bay, located between the Department of Fisheries and the main wharf. Thirty Vanuatu flagged long line vessels will deliver directly to the plant, although estimates of the total amounts were not available. In March 2009, this development was subject to the preparation of an environmental impact assessment (EIA). The two tuna processing plants are contentious because of their locations License fees in 2008 totalled Vt144.9 million Onshore processing should mean a greater share of rents for Vanuatu The CNFC development at Blacksands has been very contentious within the local community, resulting in the establishment of a community group known as Residents Against Processing Tuna (RAPT). The main concern is the potential impact on tourism, the nation’s main industry, because of the unloading of a number of fishing Vanuatu Economic Report 2009 82 vessels each week at an already over-crowded wharf and the potential for pollution from fish effluent and fuel spills from vessels. The development was also not subjected to an EIA, which was again a cause of concern. The situation as of midMay 2009, was as follows: 1. Under the Environmental Management and Conservation Act 2002, the preparation of an EIA is a two-step process. First, a preliminary environmental assessment (PEA) is undertaken by the Environment Unit or another approved government agency; the findings can result in a recommendation that an EIA is not needed or, conversely, that it is needed which means that step 2 is initiated. In the case of the CNFC development an independent consultant found that a full EIA was not required, but the use of an independent consultant was a contravention of the Act, as the preparation of a PEA is an internal responsibility of the Environment Unit or other government approved agency. 2. Subsequently, the findings of the PEA were the subject of a legal challenge; the court ruled that the PEA, and the associated environmental management and monitoring program should be independently reviewed. This review was undertaken in February and March, 2009, but the outcome had not been released at the time of preparation of this report. Conversely, the development in Port Vila Bay is the subject of a full EIA, although it had again been recommended, following the PEA, that an EIA was not required. However, the Environment Unit ruled that an EIA should be undertaken, perhaps because of the community response experienced in relation to the CNFC development. Properly resourced environmental management and monitoring programs are critical; a performance bond for each plant could be considered Clearly it remains important, no matter what the outcomes of the activities summarized above, that marine and terrestrial pollution is avoided, particularly in the inner harbor where there is already a high organic loading and bacterial coliforms, partly as a result of limited tidal flushing88. Bilge water, biological waste89 and fuel oil spills from fishing vessels are all of concern, indicating the importance of a robust environmental management and monitoring program and the need for the government to ensure that the capability to undertake monitoring is in place. The fish processing plant proposals are also ideal candidates for performance bonds, thereby ensuring that resources are available to address any adverse impacts of the developments. There are also benefits to Vanuatu from on-shore processing, despite the concerns over the locations chosen. The Fisheries Department will be able to undertake vastly better monitoring of catches and implement its observer program more readily. The largest direct revenue benefits to the Government will be a 4% export levy on all fish exported by the processing plants, expected to return around Vt1.4 billion in revenue each year90. Substantial returns will also be realized by the land owners of the CNFC site, who have received Vt28 million in a lease payment, and will receive Vt2 million 88 89 90 C.f. Vanuatu Diagnostic Trade Integration Study Report 2008. Biological waste refers to the heads, tails blood, frames and skins of the processed tuna. Three local companies have approached the Department of Fisheries with proposals to take the waste and process it into fish meal and related products. Such downstream processing is important and should be supported provided that the manufacturing locations chosen are appropriate. Based on a loin yield of 35% and an FOB price of US$10 per kg. 83 Vanuatu Economic Report 2009 each year as rental, along with 5% of the gross value of the fish91 processed. The landowners also have first preference for employment in the plant. In summary, value-adding through onshore processing should ensure that Vanuatu receives a greater share of the rents from tuna fishing. But concerns remain about vessel crowding in the harbor and at the main wharf, and particularly about adverse environmental impacts on the important tourism industry. Well-resourced environmental management and monitoring programs should be a critical criterion for final approvals for operation of the processing plants. The potential to require performance bonds should also be investigated and, if found appropriate at this late stage of the process should also be required. 4.5 Conclusions Environment The natural environment provides the basis for livelihoods and the principal economic activities in Vanuatu. It is critical that it is accorded the highest possible priority by: 1. Upgrading the Environment Unit to a Department of Environmental Management and Conservation, as provided for in legislation 2. Reviewing the positioning of the department in the government structure, ensuring that it can meet its cross-cutting responsibilities (at the least it should be moved from the Ministry of Lands) 3. Ensuring that the department is sufficiently resourced to meet its mandate. Environmental management must be given high priority A robust business enabling environment will support tourism development Tourism Tourism is the nation’s leading industry with potential to expand. The VTAP provides a blueprint for the development of tourism. Key issues for the sector include environmental protection and management, development of a clear government policy for sector development, and spreading tourism activity to the provinces. Land, infrastructure and rural credit are constraints to be addressed, while an accommodation shortage may occur in the short to medium term. The most important requirement for further development is, however, to put in place a robust enabling environment for private sector investment. Agriculture The urgent priority is the preparation of a national agricultural policy, supported by a strategy for development of the sector. At the same time the organizational structure of MAQFF should be reviewed, with a view to combining the various extension services. Donor funding for capacity building, resulting in the development and implementation of a new extension system should also be high priority. Fisheries A priority is to ensure that the enforcement capacity exists to fully implement the various management plans that have been prepared. Continued support for fishermen’s cooperative associations is also appropriate. The two onshore tuna processing facilities are contentious because of their locations, although they will bring economic benefits. Given final approvals for either or both these facilities to A national Agricultural policy and extension system development, are priorities 91 It is reported, however, that disputes over ownership of the land are possible because of internal disagreement about who had the rights to sign a lease. Vanuatu Economic Report 2009 84 Environmental monitoring for fish processing is critical; performance bonds might be considered commence operations the implementation of environmental management and monitoring plans is crucial, and the capacity to undertake monitoring and to enforce compliance must be in place. The government, through the Environment Unit, could also consider a requirement for performance bonds for each facility 85 Vanuatu Economic Report 2009 5. Social Challenges 5.1 Vanuatu’s population growth is one of the highest in the Pacific Demographic profile Vanuatu’s population is currently estimated to be around 240,000 and forecast to reach 270,000 by 2015.92 While the country’s population growth rate has fallen significantly in recent years, at around 2.4%93 it remains one of the highest in the Pacific, with a fertility rate of just under four children per woman. According to some estimates, the population will double by 2030.94 Like its Melanesian neighbors, Solomon Islands and Papua New Guinea, Vanuatu has a very young population, with more than 40% under 15 years. The median age is estimated at 19.4 years, with a dependency ratio of 80. This clearly has serious implications in terms of the growing demand for education, employment, and other basic services. Currently, around 80% of the population lives in the rural areas and depends on subsistence agriculture as the primary form of livelihood. The proportion of the population living in urban centers, notably Port Vila and Luganville, has grown significantly—from around 13% in 1975 to around 25% in 2009—mainly due to high in-migration from the islands, placing pressure on housing, infrastructure and services. Current trends indicate that the urban population is likely to increase to around a third of the total population by 2015, and could be even higher. Around 80% live in the rural areas and depend on subsistence agriculture 5.2 Traditional Social Structure Family structure Traditionally, the family has played a central role in social and economic life in Vanuatu, with extended family networks and kinship groups forming the basis of complex customary laws, beliefs and practices (kastom) which lie at the core of political, social, economic and spiritual life. Customary systems of kinship determine people’s rights and obligations, most notably to land and resources, while kastom governance and leadership, built around a chiefly system that is both inherited and earned, reinforce social, economic and spiritual relationships, often through complex rituals and gift-giving. Breakdown of traditional family values and structures is, however, a growing feature of societies such as Vanuatu which are undergoing transformation, with the focus of social and economic life increasingly shifting from the kinship group, or community, to the individual, particularly in the urban areas. This, together with changing values around land and resources (e.g. commoditization of land), contribute to increasing social and political instability. Kastom continues to play an important role in social life Land is the source of identity, spirituality and livelihood The importance of land Land is traditionally the source power and economic livelihood; Land is commonly referred to relationship between people and of personal and clan identity, spirituality, kastom, without land, one lacks the very basis for survival. as ‘the mother’, denoting the importance of the the land associated with their kin group or clan. The 92 93 94 Department of Economic and Social Affairs of the UN Secretariat, 2008. World Population Prospects: The 2006 Revision. UN Secretariat, ibid. WHO Pacific Regional Office, Suva, 2008. Country Health Information Profile: Vanuatu. 86 Vanuatu Economic Report 2009 right to occupy an area of land is the closest traditional equivalent to the westernized concept of ‘ownership’, with these rights determined by chiefs and almost without exception held by men. Even in parts of Vanuatu where inheritance is matrilineal, decision-making about land―including the transfer of rights to land―is generally solely a male domain. Rights to utilize land (usufruct rights), or to make use of the natural resources on the land are generally vested in both men and women, with women traditionally having the main responsibility for tending home gardens. 5.3 Health 5.3.1 Overview Health indicators show considerable improvements in recent years, due in large part to improved health services in both rural and urban areas, such as improved prenatal care, attendance at births by trained health workers, increased immunization coverage, better access to clean water and sanitation facilities, and greater emphasis on preventive programs aimed at raising awareness of health, hygiene and disease prevention. Infant mortality rates are relatively low at around 28 deaths per 1,000 live births. Life expectancy has also improved over the last 10 years, from 66.5 years to 70 years, with women expected to live on average around four years longer than men (72.1 years for women, 68.3 for men)95. Whereas in the past the leading causes of morbidity and mortality were largely preventable or treatable diseases—such as acute respiratory infection, pneumonia, gastrointestinal diseases, skin infections, parasitic infestation, and complications associated with pregnancy and birth—resulting from little or no physical access to health services, recent years have seen an increase in lifestyle diseases associated with poor nutrition, increased consumption of alcohol, drug abuse and unprotected sexual activity. Changes in diet and occupation, rural–urban migration, exposure to foreign influences and other factors have contributed to increasing incidence of diabetes and sexually transmitted infections (STIs), as well as social problems such as alcoholism, drug dependency and teenage pregnancies. Psychosocial problems such as depression, anxiety and suicide are also on the increase, possibly resulting from rural-urban migration and the associated dislocation and landlessness, unemployment, domestic violence and family breakdown. As discussed below, younger people are the most vulnerable in this area. With about 50% of the population under 20 years of age, an annual population growth rate of around 2.4%, and increasing life expectancy, the population is expected to continue to grow very rapidly. The implications for health care and service provision are serious. Demand for maternal and infant care, together with treatment of childhood diseases, can be expected to grow significantly; at the same time, diseases of the elderly will continue to rise. Changes in lifestyle are reflected in an increase in non-communicable diseases such as hypertension and associated complications, heart disease, cancer and diabetes. This trend is expected to continue and accelerate as urban populations grow, and these diseases will place an increasingly heavy burden on health services. There have been major gains in health over the last 10 years… …but increasing rates of non communicable diseases like diabetes Longer life expectancy will mean changing needs for health care 95 United Nations Development Programme, 2008. Human Development Report 2007/2008: Fighting Climate Change: Human Solidarity in a Divided World. UNDP, New York. 87 Vanuatu Economic Report 2009 5.3.2 Communicable and non communicable diseases Communicable diseases Acute respiratory infections (ARI) are a major health concern, with 25,411 cases reported in 2000 and 27,926 in 2007. It is estimated that about 50% of all hospital admissions are for children less than two years of age suffering from ARI. Diarrhoea is still a major cause of morbidity in young children The Multiple Indicator Cluster Survey (MICS) conducted in 2007 found that just fewer than 14% of children under five had suffered from diarrhoea in the previous two weeks. Diarrhoeal diseases, particularly waterborne and water-related diseases and those related to poor hygiene, are commonly associated with poor housing and living conditions. Improved access to clean water and proper sanitation, particularly in rural areas and in areas of high density housing such as in informal settlements in periurban areas, together with effective public health awareness campaigns, including for food safety, will reduce the incidence of diarrhoea. Malaria is still a major public health problem, with a prevalence rate of 111 per 100,000 reported for 2006, although reliable data are not available. The main strategy for combating malaria has been the introduction of long-lasting, insecticidetreated nets, with 69.3% of households having at least one long-lasting, treated net.96 Tuberculosis, dengue fever, dengue haemorrhagic fever and filariasis are also of concern and the Ministry of Health has run control and awareness programs for the past 20 years in an effort to eradicate these diseases. Other communicable diseases include viral hepatitis, typhoid and measles. In 2007, 65% of infants under one year were reported to have been immunized against measles.97 Malaria remains the number 1 public health issue Rates of STIs are very high, increasing the risk of HIV infection Data from 2000 and 2001 indicate a high prevalence and incidence of sexually transmitted infections (STI), although current data are unavailable. The first reported case of HIV occurred in 2002, with four additional confirmed cases of HIV infection since, one AIDS related death in 2006, and a second in 2007. Non communicable diseases The incidence of diabetes and hypertension is reported to be increasing. Statistics for 2006 include 85 inpatient cases of diabetes mellitus, with eight deaths related to diabetes, while hypertension accounted for 62 inpatient cases and eight deaths. Non communicable diseases accounted for 89% of the 10 leading causes of death in 2006, with heart attacks, cancer, asthma and stroke the principal causes. 5.3.3 Maternal and child health Antenatal clinics, child immunization and contraception are provided under the Maternal and Child Health (MCH) Programme of the Ministry of Health (MoH). The programme also offers support, information and advice on parenting, child health and 96 97 Ibid. WHO Regional Office for Western Pacific, data from technical units. 88 Vanuatu Economic Report 2009 Improved antenatal care and attended births mean lower maternal and infant mortality development, maternal health and well-being, child safety, immunization, breastfeeding, nutrition and birth spacing. In 2006 a total of 61% of reported births took place in health clinics, 29% in hospitals, and 7% were attended by traditional birth attendants. Data from the MICS indicate that about 60% of mothers attend some form of antenatal care, although the level is lower in remote areas such as Torba. It was also found that only around 40% of children between 12 and 23 months were fully immunized. The Integrated Management of Childhood Illness (IMCI) strategy aims to address this problem. 5.3.4 Government health service provision Infrastructure Vanuatu confronts the major challenge of providing health services to a widely scattered population with severely limited human and material resources. There are two tertiary hospitals in Vanuatu: the Northern District Hospital in Luganville, Santo, and the Central Vila Hospital in Port Vila (Table 5.1). Provincial hospitals are located in Lenakel, Lolowai and Norsup. Primary health care centers provide outpatient and inpatient services (mostly deliveries), and health promotion and health preventive services such as immunization. Health centers are the referral centers for dispensaries (also known as Primary Health Care Centers), while 180 aid posts have been established in villages, funded by the community, with MoH providing basic medicine and training for the staff. Table 5.1: Health infrastructure, 2008 Public health facility Tertiary hospitals Provincial hospitals Specialized hospitals Health centers Primary health care centers/ dispensaries Village based aid posts Number 2 3 1 32 89 180 Number of beds 374 443 146 376 0 0 Source: Health Information System, Ministry of Health, shown in draft Health Policy Report, March 2009 Trained health personnel are in critically short supply Human resources The lack of trained health personnel, in particular nurses, is a major constraint, and recruitment of suitable staff has proved a huge challenge. Of the approximately 950 health positions, only about 700 are occupied. In 2007 a total of 96 nursing positions remained unfilled. Of the 29 physicians and 51 paramedics working in the country in 2007, only 14 were ni-Vanuatu doctors; a further 15 physician positions could not be filled. In Malampa Province around 40% of health personnel positions remain unfilled; in Lolowai Hospital, 60% of staff positions are vacant. The Vanuatu Centre for Nursing Education (VCNE) graduated 21 nurses in 2007 and an intake of 25 nurses will graduate in 2010. However, these graduates will hardly compensate for the loss of 40 to 50 nurses who are due to retire in the next few years. 89 Vanuatu Economic Report 2009 5.3.5 Resource issues in health service delivery The high unit cost associated with providing basic primary health care to a small population scattered throughout more than 80 inhabited islands is a key problem in service delivery. By international standards, Vanuatu devotes a high proportion of its recurrent budget to delivering health and education services but, despite this investment, the quality of services remains low, particularly in rural areas, and especially as a result of a shortage of health professionals. The cost of health services is also a major challenge for many people. Access to outpatient hospital services, for example, is a problem for those who cannot afford the Vt200 “contribution fee” charged at the two tertiary hospitals. The cost of transport to the tertiary hospitals from outer islands is also prohibitive for most, and the question of subsidizing the transfer of critically ill patients could be considered. Some costs might be reduced through rationalization of services, but basic health services must be readily accessible to rural communities without them having to travel long distances. This means that the cost of delivery will necessarily remain high, and the ratio of qualified medical personnel per capita needs to remain relatively low. As noted above, however, many positions remain unfilled. There is a particularly urgent need to fill a significant number of vacant nursing positions with suitably qualified and experienced personnel. Until such time as suitably qualified niVanuatu professionals are trained and can fill these positions, consideration should be given to increasing the number of foreign personnel employed on contract, funded through donor programs. There is an urgent need to fill vacant nursing positions 5.3.6 Health policy, planning and reform The public health service is undergoing major restructuring and reform… The MoH is currently planning major institutional restructuring and reform. This reform is regarded as an important step in the achievement of the MoH’s four broad policy objectives: improving the health status of the people; improving access to services; improving the quality of services delivered; and more effective use of resources. These policy objectives are also highlighted in the Priorities and Action Agenda 20062015, MoH’s Master Services Plan 2004-2009, and its Corporate Strategic Plan. The new program of reform aims to refocus attention on rural health service provision with a strong emphasis on improving the quality of and access to primary health care. The planned reforms include the revitalization and strengthening of a number of key areas of the health system which are in urgent need of attention. These areas include human resource development (HRD), planning, financial management and health information management. The strategies to achieve the policy objectives are: 1. Base health services delivery on a primary health care approach to ensure access to sustainable provincial services 2. Improve the health status of ni-Vanuatu by: (i) reducing illness and death in children under five; (ii) promoting birth spacing and reducing teenage pregnancies; and (iii) reducing disability and deaths amongst productive adults …including HRD, planning, financial management and information management 90 Vanuatu Economic Report 2009 3. Improve access to services through: (i) distributing resources more fairly based on community health needs; (ii) evaluating tertiary services and providing guidance for their access; (iii) developing an integrated primary health care strategy and public health care strategy; and (iv) improving transportation and communication to improve access for patients, reduce the isolation of health workers, and improve and strengthen the coordination of donors and NGOs 4. Improve the quality of services delivered through: (i) implementation of a comprehensive hospital and health service quality and safety standards program; and (ii) recognition of the potential for a key role to be played by health professionals in providing leadership and ensuring there is continued skills-base development and retention in the workforce 5. Make more effective use of resources by: (i) improving the collection of data to enable monitoring of health status and support health planning and management; and (ii) adopting only those health initiatives that are cost-effective and proven in the South Pacific, and continuing to roll out the planning process to include high priority services and new programs. 5.3.7 Donor assistance to the health sector Donors provide major support to health infrastructure and provincial services Donor assistance provides the major source of funding for health infrastructure and assets development throughout Vanuatu. In 2007, MoH received donor assistance worth a total of Vt955.5 million, of which about 63% was directed to the six provinces98. Australian aid activities support the priorities of the MoH’s Master Health Services Plan. Australia provided support for hospital and village health services that focus on women and children, which helped the MoH reach 90% coverage for measles immunization in 2006, while its Village Health Worker Program increased the coverage of rural health care in two provinces. NZAID is also focusing on improving water service delivery, including help in coordinating the heavily donor-dependent water resources sector, as Vanuatu works toward the MDG of halving the number of people without access to clean water by 2015. Civil society organizations also play a significant role in this sector. MoH also receives TA support, including expatriate medical staff undertaking placements at the two tertiary hospitals, along with aid in the form of cash donations and volunteer work. 5.4 Education 5.4.1 Overview School enrolment rates are among the lowest in the Pacific 98 The per capita costs of delivering education services are, like health services, high in Vanuatu. Basic education is not compulsory and enrolments and attendance are among the lowest in the Pacific: only 74% of primary school aged children are The major contributors were WHO, UNICEF, AusAID and NZAID, with international NGOs also providing significant support. 91 Vanuatu Economic Report 2009 enrolled, only 63% reach Grade 5,99 and less than 3% of children who enroll in primary school manage to make it through to Year 13.100 The literacy rate for the rural population is considered low, at around 69%101 and 74% overall, based on the findings from the 1999 Census. Given that the official definition of literacy is simply having completed four years of formal schooling, however, the actual rate of functional literacy is likely to be much lower. There is little prospect of Vanuatu achieving either the MDG or Education For All (EFA) goals102 for improved literacy in the short to medium term.103 School fees and associated costs are a major disincentive for many families to send their children to school, and undoubtedly impact on school enrolments and attendance. The Government recently announced that it would abolish primary school fees, which should result in increased enrolments. While this is a laudable initiative, the reality is that funding will be a major constraint on the provision of needed school infrastructure, the supply of teachers—particularly qualified teachers—and the need to significantly improve the quality of education. These are critical policy issues that need to be addressed as a matter of some urgency. The national curriculum is widely regarded as inappropriate to the needs of most niVanuatu children and has been criticized as too academic and biased towards urban life. It is widely reported that the current formal education system—and the national curriculum in particular—is not responsive to the human resource demands of the public or productive sectors. Until very recently, little attention has been paid to developing a more relevant curriculum that addresses the needs of the majority of students and provides the kinds of skills they will need as they enter adulthood, such as core life, entrepreneurial, and livelihood or enterprise development skills. And the functional literacy rate is low Free primary schooling will support enrolment levels, but meeting the cost will be difficult The national curriculum urgently needs a major overhaul 5.4.2 Educational enrolment and attainment As noted above, only 74% of primary school age children are enrolled in school, with 91.2% of these continuing through to Grade 5. MoE analyses suggest the net enrolment rate (see Box 5.1) may be as low as 63% of the total number of children in the Grade 5 age group. Vanuatu also has the highest proportion of children in the Pacific who have never attended school.104 Non attendance occurs due to the cost of fees, poor quality of teaching and irrelevant curriculum 99 100 101 102 103 104 105 There are differences in enrolment rates across the provinces and between urban and rural areas. Several areas have more than 65% non-attendance (e.g. south-west Tanna, middle Santo and urban informal settlements). There are also high rates of student “drop-outs”, repeats, withdrawals, and absenteeism.105 The reasons cited are largely related to costs (including fees, uniforms and transport to and from school); long distances to the nearest school; poor quality of teaching; the curriculum being seen as irrelevant; and the poor condition of school buildings and facilities. Other NZAID, 2007. NZAID Making a difference in Vanuatu, Wellington. NZAID, 2006. Vanuatu Development Programme Strategy 2006-2010. Government of Vanuatu, 2000. Main Report, 1999 Vanuatu National Population and Housing Census, National Statistics Office, Port Vila, December. The EFA goal for literacy is to achieve a 50 per cent improvement in levels of adult literacy by 2015, especially for women. Government of Vanuatu, 2008. Vanuatu Education Support Action Plan 2008, Ministry of Education, Port Vila. Government of Vanuatu, 2008. Vanuatu Education Support Action Plan 2008, Ministry of Education, Port Vila. Government of Vanuatu 2008, op. cit., p.26. 92 Vanuatu Economic Report 2009 reasons not directly related to access or quality of education services include kastom or cultural prohibitions and practices, families giving higher priority to domestic tasks, such as subsistence farming, and the low value placed on formal schooling by parents, particularly those who have received little or no education themselves. Box 5.1: Gross versus net enrolment A distinction is made between gross and net enrolments. The gross enrolment rate refers to the total number of children enrolled in early childhood education (ECE), primary or secondary education, expressed as a percentage of the total number of children in that official age group for that level of education. Because many pupils repeat a year (sometimes several times), or are enrolled at either a younger or older age than the official age range for any specific level, the gross enrolment can appear quite high. The net enrolment rate refers to the total enrolment of children of the official age range for that level, expressed as a percentage of the total number of children of that official age group for that level. This rate is generally considerably lower than the gross enrolment rate because it only includes those children who are within the official age range for their level. 5.4.3 Unifying language Vanuatu’s language policies and languages of instruction are an integral part of the national and cultural identity, and are enshrined in the Constitution and the draft National Language Policy. The education system inherited at independence in 1980 was based on a dual system of delivery—Francophone and Anglophone—and, in 2008, there were 1,266 primary and 525 secondary Anglophone schools, compared to 563 and 211 Francophone primary and secondary schools, respectively. Bilingualism in English and French is regarded by many as a competitive advantage and a national asset. But maintaining two global languages of instruction increases costs, duplication and inefficiencies, and there is increasing pressure to introduce a unified system of education. At the same time, there is recognition both in Vanuatu and internationally of the value of using selected vernacular languages during the early years of education until children develop more complex language skills. The costs and benefits of a dual language system should be reviewed as a matter of urgency Language policy has far-reaching consequences in terms of resources, the quality of education, availability of teachers, parents’ choice of schooling, and student attainment. There is an urgent need to review the current bilingual system and in particular to analyze the costs and potential impacts of different language of instruction options, including impacts on the national curriculum. The development of a comprehensive education language policy is a priority, and would constitute an important first step in the move from a dual system to a national unified system. 5.4.4 Curriculum The school curriculum in Vanuatu is in need of a major overhaul. This has become more urgent with the recent announcement by the Government that it intends to extend the period of universal basic education from six to eight years and, in the process, to give schooling a strong community focus. 93 Vanuatu Economic Report 2009 Over the last few years there have been repeated calls for “…a long-term, 10-year commitment to reform that matches the Republic’s vision for the development of its youth, and harnesses national and donor resources in the interests of creating a progressive, coherent, and consistently high quality curriculum”.106 Under the Vanuatu Education Support Action Plan (VESAP), plans to address the current shortcomings of the national curriculum have been given high priority. This is discussed in more detail in section 5.5.10 below. 5.4.5 Public educational services The education system in Vanuatu currently consists of:      Early childhood centers (ECEs) / Pre-schools: Years K1-K2 (ages 3 to 5) Primary education: Years 1 to 6 (ages 6 to 12) Junior secondary education: Years 7 to 10 (ages 13 to 16) Senior secondary education: Years 11 to 13/14 (ages 17 to 20) Technical education: Years 7 to 12 (ages 13 to 18)  Tertiary education (VIT, etc.) (ages 19 and up). The MoE is, however, currently in the process of extending primary schooling from Year 6 to Year 8, thus phasing out Years 7 and 8 in junior secondary schools. Consequently, the future structure of the primary and junior secondary system will be:   Primary education: Years 1 to 8 (ages 6 to 14) Junior secondary education: Years 9 and 10 (ages 15 and 16) A total of 645 pre-schools were recorded in 2008 Early childhood / pre-school education A total of 645 pre-schools (K1 and K2) were recorded in the Ministry of Health Annual Report for 2008, scattered across all the provinces. In 2008 total enrolments were 11,322, including 5,872 boys and 5,450 girls. Most pre-schools are organized and run by individuals or community groups, with the result that activities, resources and standards vary significantly from one location to another. They are not, however, recognized as part of the formal education system. In 2007, net enrolments in pre-school, i.e. the percentage of children of the official pre-school age (3 to 5 years) enrolled, accounted for approximately 29% of the total number of children of this age range. Gross enrolments were around 54%. There is recognition in Government—and a strong demand from parents—of the need to improve the quality of pre-school education, with trained staff, adequate resourcing and effective monitoring of standards. Primary education A total of 435 primary schools were listed in 2007 (Table 5.2). 106 Austin, Tony, Report on Education in Vanuatu, 2003. 94 Vanuatu Economic Report 2009 Table 5.2: Primary schools by province, 2007 Province A total of 435 primary schools were listed in 2007 Primary Schools 90 65 94 80 83 23 435 Malampa Penama Sanma Shefa Tafea Torba Total Vanuatu Source: Annual Report 2008, Ministry of Education, Government of Vanuatu But gross and net enrolment rates have been declining Primary school enrolments increased in absolute numbers, from 37,874 to 40,820 from 2007 to 2008, a 7% increase. However, from 2005 to 2008 both gross and net enrolment rates—for both boys and girls—declined steadily, indicating that the percentage of children attending primary school has been declining (Table 5.3). Table 5.3: Primary school gross and net enrolments by gender, 2005-2007 Male 105 100 95 Gross enrolment rate Female Total 103.1 104.1 98.4 99.3 92.5 93.8 Male 95.6 89.9 86.2 Net enrolment rate Female 94.5 89.3 84.5 Total 95.1 89.6 85.4 2005 2006 2007 Source: Digest of Education Statistics 2007, Ministry of Education, Government of Vanuatu A total of 81 secondary schools were recorded in 2007 Secondary education At present, secondary schooling includes Year 7 to Year 13 in Anglophone schools, and to Year 14 in Francophone schools. The official age for junior secondary school, (Year 7 to Year 10) is 13 to 16 years, and for senior secondary school (Years 11-13) 17 to 20 years. However, as noted above, the Government is in the process of extending primary schooling from Year 6 to Year 8, thus phasing out Years 7 and 8 in junior secondary schools. There was a total of 81 secondary schools in 2007, with 8,276 students enrolled in junior secondary and 3,428 in senior secondary. The gender split was relatively even. In contrast to primary school, gross and net enrolments in secondary school have been increasing. Still, less than half (46.6%) of the total number of children of junior secondary age were actually enrolled in junior secondary school in 2007, one of the lowest enrolment rates in the Pacific. In the period 2005 to 2007, an average of only 11.7% of youth of senior secondary school age (i.e. 17 to 20 years) was enrolled in school. Only 46.6% of children of junior secondary age were enrolled in 2007 Technical and vocational education and training Currently there is a wide range of modes of delivery of formal and informal technical and vocational education and training (TVET). The only publicly funded TVET is provided by the Vanuatu Institute of Technology which delivers a range of courses for Year 10 graduates to prepare them for jobs in the modern sector. Non-formal 95 Vanuatu Economic Report 2009 education and training is provided by NGOs, including church-based organizations, and the private sector. An extensive network of 36 rural training centers (RTCs) is run by NGOs and church-based organizations with no government funding support. 5.4.6 Infrastructure School infrastructure is generally in a poor state Most schools are disadvantaged by poor infrastructure and facilities, with 58% of school buildings reported to be in a poor to very poor condition. Sixty-seven percent of schools lack adequate water supplies, and more than 80% have toilets in poor or very poor condition. Almost half of school buildings are constructed from temporary or semi-permanent materials (64% in Torba) and almost 70% of staff housing is reported to be in a fair to very poor condition. Many schools also lack power, communications, or a library. 5.4.7 Personnel A significant proportion of teachers are unqualified A major concern in the education system is the significant proportion of teachers who are unqualified and lack any form of teacher training. A teacher is considered “qualified” if they have completed senior secondary schooling to Year 12, although they have not received any formal teacher training or qualification testing. A “certified” teacher is one who has undertaken formal teacher training for a minimum of two years. The minimum requirement for teaching at ECE or primary level is the Pacific Senior Secondary Certificate (PSSC). The numbers of qualified and unqualified teachers in each province is shown in Table 5.4. Table 5.4: Number of qualified and unqualified teachers by province, 2008 Province Malampa Penama Sanma Shefa Tafea Torba Total Yes 215 163 238 223 198 48 1,085 Primary No 143 128 148 185 123 26 744 Total 358 291 386 408 312 74 1,829 Yes 76 73 145 159 42 9 504 Secondary No 42 54 16 92 27 1 232 Total 118 127 161 251 69 10 736 Source: Annual Report 2008, Ministry of Education, Government of Vanuatu 41% of primary and 32% of secondary teachers are unqualified The total number of primary school teachers is 1,829, of which 59% are qualified and 41% are not (Table 5.4). Based on the number of primary teachers and the total primary enrolment, the student–teacher ratio (STR) is 1:21. There are 736 secondary school teachers, of whom 68% are qualified and 32% are not. The STR at secondary level is 1:16. This means that well over a third (37%) of all teachers in Vanuatu have not completed secondary schooling. This has major implications for the quality of teaching across all levels of education. Improving teaching quality is an important focus of the Primary Education Improvement Project (PEIP) funded by the Pacific Regional Initiative for the delivery of basic education and a major objective of the Vanuatu Education Support Action Plan (VESAP), discussed in more detail below. 96 Vanuatu Economic Report 2009 5.4.8 Government expenditure In 2007, 26% of the national recurrent budget was directed to education, amounting to Vt3.2 billion, of which approximately 85% was used to pay salaries. Of the remainder, just over 9% was spent on MoE operating expenses, and about 6% (Vt205.7 million) was provided as grants to government and non government educational institutions. Low institutional capacity at the provincial level, coupled with inadequate operational funding to provincial services, has resulted in schools not receiving the support or resources they need and to which they are entitled. Anecdotal accounts suggest that direct grants to schools in the provinces are being diverted and serious concerns have been expressed by parents about the use of school fees. Without firm evidence, little more can be said about this, but what is clear is that rural schools have suffered from severe under-resourcing, with the result that they often lack basic teaching materials, equipment and facilities. An initiative to provide grants directly to schools, rather than through provincial Department of Education authorities, is due to begin in 2009 under the VESAP. Payment of grants to schools will be conditional on them opening a new bank account, a move aimed at improving accountability and transparency in school financing arrangements. 5.4.9 Education policy, planning and reform The VESS is a blueprint for education sector development for the next decade The MoE finalized the Vanuatu Education Sector Strategy 2007-2016 (VESS) in December 2006 (Box 5.2). The Strategy, which was endorsed by the Council of Ministers, identifies investments and policy reforms throughout the education system. It provides the foundation for education sector development for the next decade, and emphasizes the need for improvements in quality, efficiency, equity and relevance in order to develop a system that meets national needs and that is financially sustainable in the long term. In July 2007, the MoE prepared a draft Medium Term Expenditure Framework (MTEF) for 2008-2010, which identified priority investments within four broad areas: (i) improved access to basic education; (ii) improved quality; (iii) capacity building and policy development; and (iv) preparation of a national human resources plan. Improvements in TVET are prioritized in the TVET Masterplan A number of plans have been prepared for the TVET sector since 2003. The TVET Masterplan 2003-2010: Skills for a Self-Reliant, Productive and Proud Vanuatu, identifies seven goals: (i) strong policy coordination and support for TVET; (ii) expanded practical, high quality and relevant competency-based courses to meet the economy’s development needs; (iii) expansion and strengthening of TVET in rural areas; (iv) a strong VIT as one, sustainable, multipurpose campus national institute; (v) strong, community responsive non-formal TVET; (vi) an accessible and equitable TVET system; and (vii) sustainable funding for formal and non-formal TVET. 97 Vanuatu Economic Report 2009 Box 5.2: Goals of the Vanuatu Education Sector Strategy (VESS) The goals of the VESS are to:  Achieve universal primary education completion, strengthen literacy, languages, and numeracy, and develop a national pre-school curriculum and pre-school teacher training program  Continue to expand and improve affordable bi-lingual secondary, technical, and higher education which meet national and international standards  Provide more relevant and accessible curriculum, materials and assessment systems  Provide qualified, productive and well-supported teachers for every school and strengthen the professional competence of teachers  Bring the education, management and facilities of every school up to a sustainable minimum standard, able to provide a safe and caring learning environment, and continuously improving its services  Strengthen the effectiveness, productivity, accountability, transparency, governance, and decentralization of the education system and build capacities for results-based management at all levels  Strengthen partnerships at national, provincial and local levels, and empower school communities. The VIT Strategic Plan 2004-2007 recommends a strategy to upgrade VIT from a senior secondary level institution (Years 11-12) to a tertiary institution (Years 13-14) and to diversify course offerings, including Information and Communication Technology (ICT). In the long term the aim is to create a polytechnic institution by combining other post secondary institutions (agriculture, nursing, and teacher training) under one administration. TVET will help address Vanuatu’s major skills shortages A study published by the ADB in 2008 highlighted the important role of TVET in helping to address the major skills shortages across the Pacific.107 ADB recommended that investment in TVET should be based on evidence of success in achieving employment with minimum resource outlay. Specifically, enterprise-based training should be expanded through such means as apprenticeships and institutional training closely linked with the labor market. These recommendations remain relevant. 5.4.10 Donor assistance in education Government and donors have developed a SWAp for the education sector In 2008 the MoE, together with its donor partners, prepared the Vanuatu Education Support Action Plan (VESAP) in which a SWAp for support to education is outlined, including resourcing, capacity building, teacher training and refurbishment of schools. The VESAP, which is supported by several donors, in particular AusAID and NZAID, will facilitate a move from traditional project financing to on-budget support to education. External financing will be integrated with funds from the national budget appropriation and fully managed by MoE. This will, however, require substantial strengthening of MoE’s administrative capacity. AusAID recently supported the Vanuatu Secondary School Extension Project 2 (2002-2007) valued at AUD8 million. The project helped to accommodate increasing 107 Asian Development Bank, 2008. Skilling the Pacific: Technical and Vocational Education and Training in the Pacific, Pacific Studies Series. 98 Vanuatu Economic Report 2009 demand for secondary education by developing 350 new senior secondary places. AusAID has also been providing substantial support to TVET. The current Technical and Vocational Education and Training (TVET) Strengthening Program (2005-2011) aims at strengthening delivery of formal and non-formal TVET and building the capacity of national TVET institutions. The program also supports the development of a TVET quality framework with the Vanuatu National Training Council and will help with training the TVET trainers. Australia has also been providing around AUD2 million a year to support scholarship and training programs in priority areas. These include scholarships for study in Australia, within the Pacific region, and in Vanuatu. NZAID will also continue to provide assistance in several key areas of education, including the Education Assistance Programme (EAP), which is aimed at improving the quality of basic education. It is also working with the Government to ensure the best use of its tertiary scholarships and training awards. NZAID is also involved in developing a Long-term Strategic Partnership (LTSP) with the region’s key educational agencies, the University of the South Pacific and the South Pacific Board for Educational Assessment (SPBEA). 5.5 Employment and livelihoods 5.5.1 Current patterns Subsistence agriculture remains critical to livelihoods Based on data from the 1999 National Census, more than 78% of the population aged between 15 and 64 was economically active. More than 67% were engaged in subsistence farming, with significantly more females (72.9%) than males (62.5%) working in this sector. A quarter of the workforce was working for pay, salary or profit, with about two-thirds of those in this group being male and one third female. The largest occupation group in 1999 was agricultural and fisheries workers, including subsistence farmers (71.8%). The second most common occupation group was categorized as ‘technicians and associate professionals’ (5.4%), which includes teachers and nurses, followed by ‘service workers and shop and market sales workers’ (5.2%). More than two thirds of economically active men and women were engaged in agriculture and fisheries. The second largest group of occupations for women, employing 6.1%, was ‘elementary occupations’, including occupations such as house girls (hausgels), cleaners, and preparing and selling food at the market. The occupation profile of the economically active rural population is, as expected, quite different from those living in the urban centers (Table 5.5). Predictably, a larger percentage of people living in towns are looking for work (6.2%) as opposed to those living in rural areas (0.6%). Amongst agricultural and fisheries workers, almost a quarter had never been to school, while more than a third had been to school but had no qualifications. In contrast, of those working in other occupations only 3.4% had never been to school, and 16% had been to school but had no qualifications. A much higher percentage of those working in other occupations had achieved a qualification higher than a primary school leaving certificate: 44.1% had a higher qualification in contrast to only 6.7% of those engaged in agricultural and fisheries occupations. More women than men are engaged in subsistence farming The urban labor market is very different to the rural situation 99 Vanuatu Economic Report 2009 Table 5.5: Main occupations in rural and urban areas Occupational Group Agricultural/fisheries workers Service workers/ shop & market sales workers Craft and related workers Technicians & associate professionals Clerks Looking for work/unemployed Rural % 86.2 2.4 2 3.6 0.6 0.6 Urban % 8.3 17 15.4 13 9.5 6.2 Source: National Statistics Office, 2000. Main Report: 1999 Vanuatu National Population and Housing Census. 5.5.2 Key issues A burgeoning youth population and the lack of opportunities to earn livelihoods are major concerns in Vanuatu, like other parts of the Pacific. The majority of school leavers complete only a few years of primary or junior secondary school, with many lacking basic functional literacy or numeracy skills. Most of these early school leavers have only two options: to remain in the village and seek a livelihood in subsistence and/or commercial agriculture, or try to find paid work in the informal sector in Port Vila or Luganville. Work in the urban centers, however, generally requires some vocational, technical or business skills. Increasing numbers of youth, especially those who migrate into the towns from the rural areas, have great difficulty finding jobs, and a high percentage are unemployed for long periods. Their choices, therefore, are extremely limited, and many are forced to work in poor conditions or for less than the legal minimum wage. As well as the direct economic impacts on themselves and their families, this situation is also likely to contribute to growing social unrest, conflict and crime.108 At the same time, many positions in the public sector remain unfilled and the private sector suffers from acute shortages of skilled personnel. Vocational education and professional training opportunities are limited and fall far short of meeting human resource development needs in areas such as health, education, management, accounting, IT, agriculture, fisheries, forestry and tourism. According to the ADB (2008), 2008 skills shortages are a major constraint on the development of the private sector in Vanuatu.109 Similarly, in a report on constraints to effective governance AusAID110 noted that skills shortages were severely hindering the capacity of the public sector to deliver basic services, such as in health and education. Skills development has become a priority. It is an essential element in developing the economy in both the formal and informal sectors. Developing the skills of young people is the key to enabling them to respond to income-earning opportunities and providing them with choices of occupation, enabling them to break out of cycles of poorly paid casual work, unemployment and poverty. 108 109 110 School leavers often lack basic literacy and numeracy skills Unemployment in towns has the potential to cause social discord NZAID/Vanuatu Development Programme Strategy 2006-2010, June 2006. Asian Development Bank, 2008. Skilling the Pacific: Technical and Vocational Education and Training in the Pacific, Pacific Studies Series. AusAID, 2008. The Unfinished State: Drivers of Change in Vanuatu, Canberra. 100 Vanuatu Economic Report 2009 Improved skills in the rural sector will support a move to the formal sector and enhance productivity The informal sector The rural informal sector accounts for most of the current labor market in Vanuatu, and is where the majority of school leavers will need to earn their livelihoods. The sector includes the production, processing and marketing of agricultural produce and livestock; fishing and fish processing; services such as carpentry and mechanical repairs; transport services, in particular sea transport (generally using small craft, such as motorized canoes); and small-scale marketing, handicrafts and dressmaking. Rural women play an important role, including growing, processing and selling home produce, and making and selling clothing and handicrafts. ADB (2008)111 highlighted the need for skills in processing and merchandizing of economically important products, like cocoa and coffee. Entrepreneurial skills are also needed because of the predominance of self-employment. Such skills development will support a transition of rural producers into the formal sector, along with productivity gains in rural enterprises. In urban centers, the informal sector also plays a significant role in providing a wide range of services such as cleaning, hotel and café work, retail, plumbing, electrical and mechanical repairs, and informal construction services. Many jobs in the hospitality and entertainment industry, including cafés, bars and kava bars, are included in the informal employment sector. Skills are also in short supply in the formal sector The formal sector Skills shortages exist throughout the formal employment sector, both in the public and private sectors. Support for skills development is a priority, and a key element of this support will need to be in TVET. Rural versus urban employment: a question of priority It appears that many analyses of current skills shortages in the Pacific, and in Vanuatu in particular, focus on the need for technical and vocational training in the rural sector.112 These analyses recommend heavy investment in developing rural skills to boost productivity and address poverty. But some caveats might be applied to the conclusions of these analyses. First, there is evidence that subsistence productivity is keeping pace with population growth. In other words, rural ni-Vanuatu are able to meet their immediate food needs and are generally also able to generate some cash to meet costs like school fees and health care (although they would undoubtedly benefit from more opportunities to earn cash for these purposes). Second, the existing trends towards urbanization and monetization of the economy will continue and most likely accelerate. Rural people’s reliance on subsistence agriculture is likely to decrease over time as more people participate in the cash economy and large numbers―particularly of young people―move to the towns. As discussed in section 5.7 below, Vanuatu’s urban centers are growing faster than the rural areas as people move in search of cash employment and better access to services, material goods and lifestyle choices Consequently, While improving the productive and business skills of those who remain in the rural areas is undoubtedly important, the need to address skills Skills training and job creation is needed in both rural areas and urban centers 111 112 ADB, 2008. Op. cit. ADB 2008, op. cit., and ADB and Pacific Islands Forum Secretariat, 2007, op. cit. 101 Vanuatu Economic Report 2009 shortages and increase employment opportunities in the informal and formal sectors in the urban centers is just as important. 5.5.3 Donor programs Australia and New Zealand are both providing assistance in the areas of employment and livelihood development, focusing on raising productivity, developing human capital and creating employment and entrepreneurial skills and opportunities in the rural areas. NZAID has funded a number of studies to assist the Government to identify and analyze the constraints to economic growth, particularly in agriculture, including an agricultural census in 2007 to provide planners with a more accurate picture of economic activity in the rural areas. Australia is also planning to target rural productivity, income generation and youth employment, focusing on creating an enabling environment for growth through legislative reform, for example to remove constraints to investment and trade, improving market access, and enhancing business management and small and medium enterprise development. 5.6 Gender Equity 5.6.1 Current situation Government endorses equity and elimination of all forms of discrimination Increasing awareness of social equity and discrimination issues is evident in public life in Vanuatu. The Government is a signatory to CEDAW (Convention for the Elimination of All Forms of Discrimination Against Women) and to conventions on disability and the rights of the child, reflecting heightened recognition of these issues and the need to make provision in legislation and policies to support the principles of equity and respect, the elimination of discriminatory policies and practices and the protection of all citizens, young and old. The Government plans to promote gender equity and actively support the principles of CEDAW and the other conventions. The Department of Women’s Affairs (DWA), for example, has recently sought donor funding to undertake a stocktake of its own programs and those of other departments to assess the extent to which they have contributed to promoting gender equity and improving the status of women. Based on the findings and recommendations of the stocktake, proposals for priority initiatives will be prepared. But ni-Vanuatu women continue to have low social status Aside from these encouraging developments, however, ni-Vanuatu women continue to suffer the consequences of low social status and discrimination. Many rural women in particular have little or no education, and with limited literacy or other skills, compounded by the limitations on economic life in remote areas, most have very few opportunities to earn cash or improve the standards of living for themselves or their families. The pursuit of economic livelihood opportunities and employment has been perceived as the exclusive domain of men, with women to take care of the children, grow most of the food in kastom gadens, raise pigs and chickens, and gather fuel and water. Women play an active role in church-based groups, mothers’ groups and other community-based organizations, but rarely take part in public life in their villages (Box 5.3). Lack of access to credit or loans through the formal banking sector mean that most rural women are unable to develop small businesses or have the 102 Vanuatu Economic Report 2009 means to earn cash, except through the sale of produce from their home gardens or of handicrafts such as baskets. VANWODS does, however, provide microcredit to women in support of activities such as handicrafts Box 5.3: Rural women in public life At a meeting of members of the Women’s Centre in Santo, discussion turned to the role of rural women in public life. The women agreed that although they often feel they have something important to say about matters like health services, education, water supply, power, transport, and land, they are in effect excluded from planning and decision-making about these important community concerns. Membership of village committees dealing with these issues is generally regarded as a male prerogative; and while there may not be a formal ruling to exclude women, there are strong social pressures that effectively prevent women from nominating themselves or other women. “Men nominate other men,” one woman said, “and if any one of us was brave enough to be nominated, her husband would probably punish her for doing so.” While they do attend village meetings, the women agreed that only very rarely, if ever, would they be “brave enough” to speak up in public. Women are often inhibited from participating in public life 5.6.2 Employment Strong cultural influences inhibit women from participating actively in many occupations, as they are not seen as suitable for women. There is still some stigma attached to the idea of women working in wage employment, although there are indications that this is changing, particularly in urban areas, with employers reporting anecdotally that they prefer to employ women in certain administrative roles because they are seen as more reliable than men. Changing roles in the family due to economic pressures may cause conflict There is evidence from studies of urban informal settlements113 that women from poor urban households are more likely to work in cash jobs than are their counterparts in rural areas. Partly this is due to the greater number of opportunities for casual cash employment offered in an urban situation. The difficulties often experienced by men in securing employment in the towns also mean that female members of households are encouraged or obliged to seek work, with male household members often expected to take on more of the household tasks. These changing economic roles are challenging many families and may be a cause of conflict and domestic violence, often associated with alcohol consumption and drug abuse. Further research is needed to investigate these issues in more depth. Lack of skills and education reduce women’s options for paid work in towns, exposing them to exploitative employment practices. The amendments to the Employment Act in late 2008 will significantly improve conditions for women through, for example, increasing the period of paid maternity leave. The danger is, however, that these reforms might actually reinforce discriminatory practices by discouraging employers from recruiting women, or dismissing them before they became eligible for benefits. Labor law amendments may reinforce discrimination against women 113 E.g. Chung, Margaret and David Hill, 2002. Urban informal settlements in Vanuatu: Challenge for equitable development, report for Pacific Islands Forum Secretariat and UNESCAP, Suva. 103 Vanuatu Economic Report 2009 5.6.3 Violence against women Domestic violence continues to be widespread in Vanuatu, as it is throughout Melanesia. There is evidence that abuse of women is more common in areas where Violence against women’s status is lower and there is less recognition of their potential or actual contribution to social, cultural, political and economic life. Violence is often associated women is widespread and with alcohol or drug abuse, and the pressures and insecurities resulting from the may be transition from rural to urban life appear to increase the likelihood of abuse. Recent increasing attempts to introduce a Family Protection Act, which would provide greater protection for all family members against any forms of violence or abuse, have met with resistance from conservative groups, mainly on the grounds that the legislation would constitute a breach of families’ privacy and interfere with the role of the chiefs as the main custodians of peace within communities and arbitrators in matters of family conflict. 5.6.4 Donor activity AusAID has been supporting the promotion of gender equality and women’s participation in public life. A five year program of support to the Vanuatu Women's Center, in partnership with the Fiji Women's Crisis Center, aims to reduce violence against women and children, and has placed the issue on the national agenda as a major social and economic problem. As well as providing counseling services, the center was the major advocate in lobbying Parliament to pass the Family Protection Bill. Other activities include the Women in Decision-Making and Leadership initiative, supported by UNIFEM Pacific. 5.7 Urbanization: Informal and Squatter Settlements 5.7.1 Rural-urban drift and urbanization Informal settlements in Port Vila have grown substantially in number and size since first developing in the 1960s. Approximately 30% to 40% of Port Vila’s population currently lives in temporary dwellings in various informal squatter and peri-urban settlements. A study of urban migration and informal settlements conducted in 2000 noted that “The dramatic increase in urban growth has led to overcrowding, poor housing conditions, high rents, poor sanitation and rapid development of squatter and informal settlements”, and further observed that “the number and size of squatter or informal settlements has burgeoned in the last decade… [and that] the most notable feature of Port Vila is the speed at which informal settlements are growing”114. High urban population growth rates mean that infrastructure and services cannot meet demand In small economies such as Vanuatu, high urban growth rates pose major challenges to government as infrastructure and services cannot meet demand. The result, particularly in Port Vila, is overcrowding, unemployment and deteriorating living conditions. There is limited current information on the composition of the migrant populations in Port Vila and Luganville, but research conducted elsewhere in the Pacific indicates that the majority of migrants to urban centers are young people aged between 18 and 114 Mecartney, Sarah A.N., Blacksands settlement: A case for urban permanence in Vanuatu, unpublished MSc thesis, University of Sydney, 2000. 104 Vanuatu Economic Report 2009 25. The reasons for in-migration reflect the usual aspirations of youth: education, training, employment, marriage, the attractions of the “bright lights” of the town, and escaping from the strictures of rural village life. The economic gap between rural and urban areas is also important Rural-urban migration and urban growth will continue and must be addressed One of the most obvious causes of rural-urban migration is the economic gap between rural and urban areas, exacerbated by what some analysts have called “urban-biased economic development”. This gap is particularly acute between Port Vila and the rest of the country, but is also evident in the main secondary urban center, Luganville. There is a tendency within official circles and elsewhere to view rural-urban migration as a problem which can and should be addressed through greater investment in services and infrastructure in rural areas and improvements in rural living standards. This view is reflected in public criticism of the 2009 national Budget, in which just 16% of government funds were directed at rural services and development. But evidence from both developed and developing countries indicates that in-migration to the towns will continue at some level no matter what services and infrastructure is provided in rural areas. Consequently, policies and strategies to deal with growing urban populations must be developed. Notwithstanding the causes of rural-urban migration, certain outcomes are apparent:      There is a greater chance of gaining access to improved educational opportunities in urban areas Urban dwellers are more likely to find paid employment, either full-time or parttime, and have greater scope to establish a business There is improved access to services such as health services There is increased pressure on infrastructure services, including water, sanitation and roads, while urban areas, both formal and informal, become more crowded Living conditions may deteriorate in many areas as a result of heavily used infrastructure that is not appropriately maintained, or as a result of increased pollution from increased run-off and, consequently, lower water quality. 5.7.2 Social and Health-Related Problems Rapid urban growth is commonly associated with a range of social problems, with these stemming from the supply of jobs, housing, services and amenities falling far short of demand. Young recent migrants are at most risk of social, emotional and health problems There is strong evidence that the most vulnerable group comprises the young, recent migrants—many of whom are poorly educated. These young people may be vulnerable to depression and loss of self esteem due to the loss of family support networks, unemployment (and hence lack of cash) and poor living conditions. These factors undoubtedly contribute to rising crime rates, increasingly widespread alcohol and drug abuse, high incidence of sexually transmitted infections (STIs), teenage pregnancy, and prostitution. Anecdotal evidence indicates very high rates of kava consumption are causing concern, as is the increasingly common use of marijuana, especially among young people. Evidence from interviews with students and voluntary staff of youth drop-in centers indicates that marijuana use is widespread and growing, and alcohol abuse is also prevalent. 105 Vanuatu Economic Report 2009 Lack of traditional authority may be a factor in increased social problems Domestic violence is common throughout Melanesia, and is often associated with gender inequality. As yet, there is no research on its prevalence in urban centers, but evidence elsewhere shows that domestic violence is often linked with poverty, unemployment, alcohol and drug abuse, social dislocation, instability, insecurity, and family breakdown. Again, anecdotal evidence from ni-Vanuatu informants indicates that domestic violence is extremely common in urban centers, where there are no chiefs or village elders to arbitrate in matters of family strife or exercise their traditional authority in dealing with offenders. Although there are currently no reliable data to support the perception that crime rates are rising in urban centers, there is substantial anecdotal evidence that property-related crime in and around Port Vila has increased significantly over the last decade. Along with vandalism and theft, the incidence of violent crime is also thought to have increased in recent years. 5.7.3 Urban Poverty More than a quarter of households and one third of adults in Port Vila are poor Children of poor urban families are much less likely to attend school As noted in the previous discussion on poverty, data from the most recent Household Income and Expenditure Survey (HIES, 2006) show that, in Port Vila, more than a quarter of households (27%) and one third of adults (33%) are living in poverty, defined in terms of their average expenditure being insufficient meet their daily food and other needs. In a center where the cost of living is higher than anywhere else in the country, these families spend around 40% less on their daily needs than the average. They face a daily struggle to balance income and spending, and paying for one basic requirement, like sufficient food for their families, is likely to be at the expense of another. They may not be able to afford to buy enough nutritious food every day, and covering expenses like transport may at times be difficult. For these people, meeting larger bills like rent and utilities can pose a major problem, and school fees and other related expenses such as uniforms and books may at times be beyond their means. As shown by the results of the HIES, the children of poor families are less likely to attend school. For a further 5.4% of the population in Port Vila, or 4.7% of households, average expenditure levels are below the national food poverty line; in other words, they cannot meet their basic daily food requirements. A comparison between data on the populations of Port Vila and Luganville shows that those living in Luganville appear to be at less risk of poverty than those in Port Vila. Luganville seems to have more opportunities for income generation, combined with cheaper food costs and higher levels of home consumption. Unemployment is a major reason for poverty Employment Being employed, and the type of employment, is among the most accurate predictors of who is poor and who is not. Unemployment is a major factor contributing to urban poverty. Of all unemployed adults in Port Vila, 38% are living below the basic needs poverty line (BNPL). In this group, 27% are working in the home (domestic duties), 41% are attending full time education, and the remaining 32% are reported to have “other” main daily activities, or are retired or otherwise unable to work. Of those who are working for wages or profit, one third of adults (33%) are poor, while another 10% are defined as vulnerable. 106 Vanuatu Economic Report 2009 Poor families are much more likely to live in poor quality housing Housing The poor are significantly more likely to live in poor quality housing constructed of temporary or traditional materials. In Port Vila, about 15% of all families live in makeshift or traditional style housing; of this number, 60% of households are poor. Only about 20% of poor families live in housing constructed of permanent materials, compared with double that number of non-poor households (40%).115 About 40% of poor households in Port Vila pay rent for housing, compared with 26% of wealthier households. Just over one third of poor households own their own home (33.7%) compared with about two thirds of wealthier households (63%).116 Five times as many heads of poor urban households have never attended school Education Only about 6% of adults in Port Vila are reported as having no schooling,117 but among the poor the percentage is much higher, with 29%118 of heads of poor households reported to have never attended school. Similarly, while 42% of urban residents have attended primary school, only 10% of those deemed as poor have had primary schooling. The link between poverty and low educational attainment has been well established, and the data on poverty in Port Vila confirm that those with the least education are overrepresented among the poor. 5.8 Conclusions and recommendations Health The poor quality of health services in rural areas is attributable largely to extremely weak institutional capacity at the provincial, district and area levels. It is recommended that the outsourcing of primary health care services to NGOs is significantly expanded, supported by capacity building for selected organizations. The more efficient use of limited resources must be a focus of the Ministry. Efforts should also be made to make increased use of foreign medical and nursing staff, funded by aid, as local capacity continues to be developed. Greater attention must also be given to the health needs of the burgeoning urban population, particularly those living in overcrowded, unsanitary conditions in informal and squatter settlements. More information is needed on the health profile of these groups is also needed. Targeting youth is important for the delivery of health messages related to STIs, drug and alcohol abuse, and unplanned pregnancy, especially in urban areas. Community education programs and radio announcements might be amongst the strategies for delivering these messages. NGOs and church groups should be assisted to expand primary health care services Informal and squatter settlements in urban and periurban areas should be targeted Raising health awareness amongst youth is critical Education In the medium to long term the major challenge is to ensure that all teachers at all levels are better trained and equipped to teach (a key objective of the VESS). In the 115 116 117 118 National Statistics Office, 2008. Analysis of the 2006 Household Income and Expenditure Survey: A report on the estimation of basic needs poverty lines, and the incidence and characteristics of poverty in Vanuatu, Port Vila. National Statistics Office, 2008, ibid. 1999 National Census, quoted in Chung, M. & Hill, D., 2002. Urban Informal Settlements in Vanuatu: Challenge for equitable development, report prepared for Pacific Islands Forum Secretariat and UNESCAP. The Vanuatu Poverty Record Card 2006. 107 Vanuatu Economic Report 2009 In-service training to improve the quality of teaching is critical short term, it is recommended that there is greater investment in regular and appropriate in-service training for teachers. Consideration should be given to the introduction of compulsory primary education (now extended up to Year 8, age 14). Coupled with the forthcoming abolition of primary school fees, this will have a direct positive impact on the number of years of formal education for school age children. The development of a national education language policy, developed in consultation with key stakeholders in the public and private sectors, is strongly recommended. The comparative costs and benefits of an integrated system will need to be carefully assessed. Consideration should be given to a national adult literacy campaign, while TVET courses must be better targeted to the demands of public administration and the productive sector. It is therefore recommended that a national human resources development strategy is prepared, and that education policies and programs are realigned so that they support the strategy. A national education language policy is vital Support for a national adult literacy campaign is recommended Youth employment is the area of greatest need Encouraging employers to engage and train school leavers should be investigated Employment and Livelihoods Youth employment needs to be given the highest priority, with youth training programs targeted to match job opportunities. Investment in targeted training in sectors suffering from acute shortages of skilled or semi-skilled workers in the urban centers must be a high priority for the Government. The feasibility of offering incentives or other subsidies to employers to provide onthe-job skills training to young school leavers should be investigated. Such a scheme would enable school leavers to develop skills in specific areas while also earning an income. Donor support for vocational placements—such as those already provided by New Zealand in a range of industries—should be expanded to respond to demand both from potential students and employers. Gender As signatory to key agreements on equality the Government should take positive steps to introduce the Family Protection Act, giving legal protection to women. The recently introduced amendments to the Employment Act should be reviewed urgently, with specific attention to the likelihood that women will be discriminated against in employment and the workplace as a result of the changes to employment conditions. Urbanization A number of social problems are associated with rural-urban migration, including concerns about health problems associated with poor housing, overcrowding and poor sanitation. 108 Vanuatu Economic Report 2009 It is recommended that the Government give much higher priority to urbanization and urban planning and management. Infrastructure provision will be a particularly important consideration. The priority urban infrastructure needs are addressed in section 6.3 below. 109 Vanuatu Economic Report 2009 6. Infrastructure Development 6.1 Introduction 6.1.1 Situation Assessment Adequate interisland transport is lacking The geographic dispersal of the population of Vanuatu means that it relies critically on infrastructure services, particularly in communications and transport, for the achievement of its development goals. Income-generating opportunities are scarce in rural areas, where most of the population lives and where the economy is based on agriculture and fishing and, increasingly in some areas, tourism. Improved accessibility within and between islands is essential for rural development and poverty reduction, but adequate transport infrastructure and services are lacking. The main means of travel in the country is by sea, using small craft in coastal areas and combined passenger and freight vessels for inter-island movements. Outside of Port Vila and Luganville, shipping services call at about 36 small jetties or wharves and many more informal anchorages or beach landing sites. The land transport network consists of about 1,800 km of roads, of which less than 100 km are sealed and less than 400 km have gravel surfaces. Most of the network is on the two main islands and around Port Vila and Luganville. Many islands have no roads at all. Vanuatu depends on international air services for international trade and tourism, and good quality domestic services for tourism and service delivery. Recent liberalization of international access has led to a dramatic increase in services. There are three international airports and 26 domestic airfields, not all of which receive scheduled services. It also relies on international shipping for the movement of goods from and to other nations, while the cruise ship tourism industry has become an important economic sub-sector. Urban planning and development has received little priority Urban planning and development has received relatively little priority until very recently. Yet, with rapidly growing urban areas, particularly those of Port Vila and Luganville, the pressure on existing urban infrastructure, and the need for development of this infrastructure, has become critical. There has been little new capital investment in recent years. The Ministry of Infrastructure and Public Utilities (MIPU) and the Public Works Department (PWD) have responsibility for the provision and maintenance of transport infrastructure. Although MIPU was allocated about 12% of the total 2008 government budget, inefficient conversion to actual operations and infrequent recourse to external funding has resulted in little progress in improving the country’s poor physical infrastructure. Most capital investment on infrastructure has been provided by development partners, while deferred maintenance has led to widespread deterioration. Road and maritime infrastructure is inadequately maintained and typically in need of both rehabilitation and ongoing maintenance; however, budgetary resources are insufficient to address the backlog. Until 2007, funding for road maintenance was less than $2 million per year. Under a compact with the Millennium Challenge Corporation, annual funding for maintenance has now increased to $5 million per And there has been little recent urban capital investment Roads and maritime infrastructure are inadequately maintained Vanuatu Economic Report 2009 110 year. Even at this level, the road maintenance budget is only about 25% of the estimated amount required for routine maintenance of the network, and there is little funding allocated to rehabilitation. Road conditions are, therefore, deteriorating every year, reducing levels of service, increasing operations and maintenance costs, and creating a growing backlog and consequent financial liability. Amongst the priorities for infrastructure are:     Lowering the costs of doing business through reduced costs of transportation and utilities Expanding access to markets for products from rural areas and supporting more widespread development of the important tourism sector Improving roads, jetties, and other infrastructure in the rural areas and outer islands, thereby improving inter-island transport Giving greater attention to urban planning and development and the provision of infrastructure services such as roads, water supply and sanitation facilities. 6.1.2 Development Partner Activities A number of donor sponsored interventions in the infrastructure sector have been focused on public sector reforms through capacity building, including institutional strengthening and improved governance. Prominent interventions in this context were the previous CRP and the current GFG. The GFG is a particularly useful program that has provided specific assistance in the electricity, telecommunications and air transport sectors, with a focus on improving competitiveness through private sector participation and increasing the Government’s capacity as a regulator.119 Several development partners are funding assistance to the transport sector. The bulk of external assistance is focused on land transport, with key elements of: (i) improving sector performance and reforming planning and budgeting frameworks; (ii) strengthening asset management; and (iii) providing opportunities for private sector participation, and developing capacity in MIPU and PWD. The MCC is providing $65 million for roads The United State's Millennium Challenge Corporation (MCC) is implementing the Vanuatu Transport Infrastructure Program through grant assistance of approximately $65 million for rural infrastructure. This was initially intended to include roads, wharves, and an airstrip, as well as institutional support and capacity building, but implementation has been delayed and costs have been higher than anticipated, and the scope has been scaled back to land transport only. Australia and New Zealand are providing financing to complete several of the key roads originally identified for MCC funding. AusAID is implementing the Vanuatu Transport Sector Support Program (VTSSP) through grant assistance of approximately $11.5 million for civil works, maintenance, and capacity development. The VTSSP will focus on strengthening and using private sector capacity to undertake works, employing small and medium scale contracting and labor-based appropriate technology methods, and using government processes as much as is practicable. The VTSSP is proposed to be the first phase of a long AusAID is implementing the Transport Sector Support Program 119 AusAID and the Government of Vanuatu. 2007. Governance for Growth Program: Design Document. September. 111 Vanuatu Economic Report 2009 term partnership (10-15 years) between the Governments of Vanuatu and Australia in the transport sector. While NZAID has supported maritime planning NZAID has been active in the maritime sector, most notably conducting an interisland shipping study with assistance from ADB in 2008. The study recommended institutional reforms, a shipping support scheme, and limited infrastructure investments. NZAID intends to provide a second phase of technical assistance to begin implementation of high-priority recommendations in 2009. The only activity in the aviation sub-sector is provided by Agence Française de Développement (AFD), which is supporting an Outer Islands Airport Upgrading Project to upgrade two provincial airfields. The government has recently passed legislation to facilitate public-private partnerships for international aviation, but there are no short-term proposals in this area, nor any indications of significant work required to support domestic aviation. The Japanese International Cooperation Agency (JICA) is funding an upgrade of the main international wharf, which will strengthen the existing facility and provide additional cargo handling capacity. This project affects only international shipping. Past project performance of has been mixed ADB has funded a number of infrastructure projects over the last 15 years, including support for urban infrastructure in Port Vila and Luganville, outer island wharves, and rural roads.120 The performance of these projects has been mixed, with a number of lessons apparent:  Subproject selection must include careful consultation with local communities to ensure proper site selection, ensure that there is demand for the services to be provided, and that appropriate technology and design for local conditions are employed to ensure beneficiary buy-in Project design must account for the capacity constraints of national agencies Sufficient contingency must be included as a means to offset potential delays in implementation and unexpected inflation of cost estimates Civil works must be integrated with the Government’s priorities and plans for governance and institutional reforms, and there must be improved coordination across sectors and agencies in planning infrastructure projects.   Infrastructure planning across sectors requires better coordination  JICA, NZAID, the World Bank, the Millennium Challenge Corporation (MCC) and AusAID have also provided support for infrastructure development, including urban infrastructure, hydroelectricity, rural roads, improved sanitation, wharves, inter-island shipping, stevedoring, and the provision of machinery and equipment. 6.2 Economic Infrastructure Infrastructure development and service provision in Vanuatu is difficult and expensive because of the geographic dispersal of the islands that make up the nation. Land tenure also creates uncertainty and often impedes land acquisition for rights of way or the leasing of easements that are required for infrastructure projects. 120 These include: ADB Loan 766-VAN (SF) Multi-project Loan; ADB Loans 843/1080-VAN (SF) Santo Port Project; and ADB Loan 1448-VAN (SF) Urban Infrastructure Project. Vanuatu Economic Report 2009 112 Infrastructure demands differ between rural and urban areas The infrastructure demands of the rural economy are different in some ways to those of urban areas, mainly in terms of scope due to population densities and the lack of scale economies. Similarly, the supply solutions are often different in terms of appropriate technology, scale, service provision challenges and opportunities, and potential funding mechanisms. Another dichotomy is that between infrastructure that can and should be provided by the private sector, versus infrastructure that has public good characteristics and should, therefore, be provided by government. Numerous reports characterize Vanuatu’s infrastructure as “expensive”—for instance, its shipping services are the most expensive in the Pacific.121 Unfortunately, neither state nor private provision of infrastructure in Vanuatu has, in the past, often resulted in value for money service. Apart from the issues of geography and scale economies, government provision often suffered from the common public sector issues of weak incentives for efficiency, political accommodations made at the expense of customer service, and institutional overstaffing. Private provision in the past has often suffered from the inexperience of government in negotiating competitive concession agreements, coupled with ineffective or non-existent regulation, with important examples provided in the maritime and electricity sectors (Box 6.1). However, as described below, recent developments suggest that positive changes are resulting from private sector participation in areas such as telecommunications and the introduction of competition. Improved regulation is also developing, with the establishment of the Utilities Regulatory Authority (URA) a first step in this direction. Box 6.1: Monopoly Agreements A 50-year monopoly arrangement is in place for the management and operation of the Port Vila wharf, the principal maritime gateway. The wharf is the most expensive and most inefficient in the Pacific, and comprises a significant constraint on trade and economic development. While it is acknowledged that there are difficult political issues to deal with, the reality is that market failure occurs as a result of the monopoly agreement. In line with other moves by the Government to introduce competition and improve the environment for private sector operations, the potential for introducing competition for wharf management and operation is worth examining. Similarly, UNELCO holds long-term electricity supply contracts. Such contracts can be relevant to induce investment, but they should then come under appropriate and transparent regulation—which is now occurring through the URA. Allowing increased competition in electricity supply and generation is, nonetheless, important and will lead to cheaper and more widespread provision of services. 6.2.1 Transport The establishment and maintenance of transport infrastructure is particularly challenging in island nations, but is vitally important to economic growth. The three main types of transport infrastructure required to support growth are: (i) wharfs which serve to link rural areas to the two major urban centers or markets via inter-island shipping services; (ii) air transport, both inter-island and international; and (iii) rural roads. 121 Asian Development Bank, 2009. A Private Sector Assessment for Vanuatu: Reforms to Sustain Growth, ADB, Manila. 113 Vanuatu Economic Report 2009 The Ministry of Infrastructure and Public Utilities (MIPU), through the Civil Aviation Authority (CAA), the Department of Ports and Harbors (DPH), and the Public Works Department (PWD) is responsible for:    Safety and regulation of civil aviation The national road network and overall infrastructure, including both construction and maintenance Administration and management of the two main ports and harbors at Port Vila and Luganville. Maritime subsector The cost of moving goods through Vanuatu’s ports is the highest in the Pacific. There are 22 ports and wharves, although both international and inter-island shipping is centered on the facilities at Port Vila and Santo. Approximately 70% of all imports and 30% of all exports are handled at Port Vila wharf, which was recently overhauled through the ADB-funded Urban Infrastructure Project. While more than 80% of cargo is containerized, Port Vila has inadequate container handling facilities, which restricts the ability of the port to handle more vessels and results in it being the worst performing port in the Pacific. Despite the recent overhaul there is an urgent need to increase wharf capacity while, in the longer term, a dedicated container port is needed. The main Port Vila wharf, which is owned by the Port Authority, has been earmarked for further improvement under a JICA grant, but the works planned are limited to specific wharf civil works, rather than taking a holistic view of the demands of the port and the services to be provided. Port Vila’s privately operated domestic wharves are also in very poor condition and are unsafe for cargo or passenger operations.122 Port facilities in Port Vila, whether for international or inter-island shipping, require a specific master plan for infrastructure and cargo and passenger handling systems. Growing dissatisfaction over the queuing procedures for the main wharf has been expressed by stakeholders. Currently, cruise ships are given berthing preference over cargo vessels, while container movements and warehousing operations in the international terminal area are halted due to space limitations when cruise ships are berthed. Santo Port, which is also owned by the Port Authority but privately operated, handles the remainder of the overseas traffic and serves as an international collection point for the northern islands. The ADB-funded rehabilitation project for the port in the late 1990s enhanced its performance significantly, reducing average ship turnaround time by 50% and reducing ship waiting time to almost zero.123 While expansion of the international facilities at Santo Port is not required, the domestic wharves are in a state of disrepair and require considerable upgrading. There are few jetties or wharves still operational in the outer islands and, for the most part, beaches and lightering operations are utilized. Inadequate initial site planning, the poor design and construction of wharves, a lack of ownership and maintenance, and damage from storms and wave action have all contributed to the deteriorating A master plan for port facilities and services in Port Vila is required Domestic wharves at Santo Port require upgrading Rural wharf redevelopments should consider complementary infrastructure 122 123 NZAID, 2008. Final Report. Vanuatu Inter-island Shipping Study Phase I. World Bank, 2006. Pacific Infrastructure Review. Vanuatu Economic Report 2009 114 state of the country’s rural wharves. Consequently, domestic inter-island shipping services reach fewer destinations, while services are more infrequent in many locations. Any redevelopment of the nation’s network of rural wharves should be carefully examined in the context of complementary infrastructure such as the rural road network. DPH is responsible for the management and operation of the Port Vila and Santo Ports, providing pilotage services, administering the government owned wharves, and maintaining navigation aids and maps. It is also responsible for national shipping and ports administration, legislation, control of shipping, and maritime safety. Maritime safety had previously been the responsibility of the Vanuatu Maritime Authority (VMA), which was established in 1999, but abolished in 2007 following allegations of corruption. In 2002 it was noted that the DPH was understaffed and in need of capacity strengthening.124 Aside from some professional appointments, no significant organizational capacity building efforts have been undertaken. Staff numbers and capacity remain near 2002 levels, yet the DPH is now responsible for the functions of the disbanded VMA. The provincial governments are responsible for the operation and management of ports in their areas of authority. Given the capacity constraints of the DPH and the lack of an effective regulator, owner-operators of the nation’s wharves are not meeting their obligations regarding maintenance and repair of facilities. Ship operators typically arrange their own stevedoring services, usually utilizing the ship’s crew.125 For most communities, maritime services are relatively frequent and reliable, but more remote locations where populations are small, economic activity is low, and the cost of providing regular, reliable and safe services is high, do not receive regular services. At many locations, vessels cannot berth and passengers and cargo are carried ashore in motorized canoes. This adds to the costs and detracts from the security of passengers and cargo. Because poor transport and accessibility problems are identified as binding constraints to the country’s development, and because a number of development partners are heavily engaged in land transport, ADB will focus on domestic maritime transport. It will, in 2009, prepare an interisland shipping support project with a goal of improving the efficiency and effectiveness of services through provision of an integrated package of assistance comprising infrastructure investments in rural wharves, a shipping support scheme for uneconomic routes using an output-based ADB will prepare aid approach, and reforms to sector governance and regulation. The components will complement each other so that services to remote communities increase to selfan interisland shipping support sustaining levels. The ensuing project is estimated at about $11 million and is program targeted for approval at the end of 2009. ADB is working closely with NZAID, which is undertaking a second phase of technical assistance for implementation of a shipping support pilot scheme and urgent reforms to safety regulation and oversight. These short-term measures will inform ADB's project design. Poor maritime transport and accessibility are binding constraints on development DPH capacity building is needed The provision of regular shipping services to islands and locations that are commercially non-viable will be a component of the ADB’s interisland shipping project. The mechanism for providing such services will need to be agreed upon. 124 125 Asian Development Bank, 2002. Vanuatu Infrastructure Master Plan. NZAID, 2008. Final Report. Vanuatu Inter-island Shipping Phase I. 115 Non-viable shipping routes will be subsidized under a competitive process Vanuatu Economic Report 2009 However, a suitable approach would be one where shipping services to those locations are subsidized; but the subsidies would be advertised and put to tender, resulting in the best use of the scarce resources used to provide subsidies. Apart from price, service quality, including reliability and safety, would be an important criterion. Air subsector Vanuatu’s air transport infrastructure is a critical asset, supporting international tourism and internal movements, including medical evacuations and the delivery of urgent supplies. There is a total of 29 airports, four of which have paved runways.126 Of the four facilities with a paved runway, Bauerfield on Efate is the primary international gateway, while White Grass on Tanna, and Pekoa on Santo are also international airports. A master plan for expansion of Bauerfield Airport should be prepared Options for expansion of the air transport infrastructure, particularly at Bauerfield, are under assessment. The topography and maximum runway length limit potential future expansion options at Bauerfield to B767 class flights.127 Current terminal and other airside facilities further restrict it to B737 class operations.128,129 Given existing conditions, and the importance of tourism, investigations into physical capacity expansion and upgrading options at Bauerfield should continue. It is recommended that a master plan, focused on terminal and apron expansion, is prepared. Given the restrictive costs to small Pacific Island nations of individually ensuring air sector safety and security compliance with the International Civil Aviation Organization (ICAO) standards, the ADB supported the establishment of a Pacific Aviation Safety Office (PASO) in 2007. Based in Port Vila, the PASO provides considerable technical support to its nine Pacific Island member countries for safety and security, government regulators, and airport operators. Maintenance of airstrips is generally inadequate Maintenance work on international and domestic airstrips is routinely reported as inadequate and the remoteness of many of the domestic airstrips substantially increases maintenance costs. These issues will be amplified if more remote airports are upgraded. It was reported during preparation of this report that, given safety issues related to operations and maintenance, three rural airports require immediate work or will have to be closed. Aviation management was corporatized on 1 January, 2000, with the establishment of a new Civil Aviation Authority (CAA) and Airports Vanuatu Limited (AVL). AVL is a government owned corporation responsible for providing all aviation services at the nation’s three international airports. The remaining facilities are operated by the CAA, which is also responsible for regulating all airports, including the international airports operated by AVL. Additionally, the CAA is responsible for issuing an Aircraft Operating Certificate to airlines wishing to operate in Vanuatu, and for subsequently 126 127 128 129 The actual total number of airports reported varies from 29 to 31, based on doubts about the operation of two remote airstrips. In addition to simply runway length, the topography may hinder ICAO Code 4 precision instrument runway requirements, an issue that should be investigated in any future study. Asian Development Bank, 2002. Development Framework: Vanuatu Master Plan. Asian Development Bank, 2003. Vanuatu: A Private Sector Assessment – Issues, Challenges, and Policy Options Vanuatu Economic Report 2009 116 regulating those airlines. Overall institutional responsibility for policy development in the sector resides with the MIPU. The open skies policy generated growth in service provision and economic benefits The Government also retains a commercial interest in air services through the national carrier, Air Vanuatu, which is 100% Government owned. Historically, the airline did not operate profitably which constrained service provision and limited tourism. To overcome this constraint the Government implemented an Open Skies policy in 2005. Since then a number of other international carriers have offered services to Vanuatu (Table 6.1), some under code-sharing arrangements. Table 6.1: International Carriers Serving Vanuatu Airline Air Vanuatu Qantas Solomon Airlines AirCalin Air New Zealand Virgin Blue Air Pacific Routes Australia, New Zealand, Solomon Islands, Fiji, New Caledonia-Vanuatu Australia-Vanuatu Solomon Islands-Vanuatu New Caledonia-Vanuatu New Zealand-Vanuatu Australia-Vanuatu Fiji-Vanuatu The Government merged Air Vanuatu with Vanair, its domestic service provider, in 2004. Since then, Air Vanuatu’s operations have reportedly been more successful. However, despite Air Vanuatu achieving improved viability, in 2007 the Government enlisted the assistance of the IFC, with the support of AusAID’s GFG, to fully privatize it through public tender. The tender process eventually resulted in only one bid, which the Government considered inadequate and the process was abandoned. PWD lacks capacity and needs a road asset management system. Road subsector According to its National Road Inventory PWD was responsible for 1,766 km of roads in 2006, while the six provincial governments were responsible for another 225 km of roads.130 It is generally agreed that the overall condition of the national road network is poor due to inadequate government funding and limited availability of maintenance equipment. The actual length of the operational road network and its condition in 2009 is not known with certainty, however, given that the existing road inventory has not been recently updated. PWD has limited capacity in terms of staffing, budget, and equipment in the provinces for proper road asset management, planning and maintenance. In 2006 Vanuatu became the only Pacific Island country to receive funding from the US’ Millennium Challenge Corporation (MCC). The MCC agreed to provide nearly $66 million for infrastructure civil works, with a focus on transport, over the five year period 2006-2011. A total of 35 potential subprojects were initially identified for further analysis, resulting in a final list of 12 for possible funding.131 These included the The MCC identified priorities for transport infrastructure 130 131 Of this total only an estimated 256 km (13%) is paved. There is some question over the initial number of subprojects and which were dropped and why they were dropped. The long list of MCC projects would appear to be based on those identified in ADB TA 3224-VAN, Outer Island Infrastructure Development project. 117 Vanuatu Economic Report 2009 upgrading of pavement and drainage works for rural and urban roads, construction of causeways leading to wharves, strengthening existing wharves, construction of bridges and creek crossings, construction of new runway pavement for rural airfields, the construction of warehouses near wharves, and the procurement and supply of road building equipment. This list of activities reflects what were seen as the priority needs for transport infrastructure improvement, with particular emphasis on the estimated economic benefits of complementary investments in rural roads linked to outer island wharves. Due to delays in implementation, and as a result of international currency movements and cost escalations, however, only two subprojects are currently being implemented: the Efate Ring Road, totaling 92 km, and the Santo East Coast Road from Luganville to Port Olry, a distance of 70 km. The VTSSP will focus on PWD capacity and implement unfunded MCC subprojects AusAID has developed a design for the Vanuatu Transport Sector Support Program (VTSSP), which will be managed through the GFG. The VTSSP will include both physical works and institutional development for MIPU and PWD. The VTSSP will also implement three of the subprojects identified by the MCC but not funded: (i) the Whitesands rural road on Tanna, totaling approximately 15 km; (ii) upgrading of the Norsup–Lits Lits Road on Malekula over a distance of 12 km of rural and urban road; and (iii) construction of river crossings on Ambae.132 The roadworks under the MCC and the planned VTSSP are mostly rural roads, yet the urban roads in and around Port Vila are also in need of maintenance. Port Vila’s roads are also becoming increasingly congested as its population increases. Drainage is also inadequate, reducing road design life and increasing the need for maintenance. The discussion above serves to emphasize the problems confronted in relation to road maintenance. According to PWD, maintenance expenditures have historically been less than 10% of the total amount needed. At present, in value terms, about 60% of road maintenance is undertaken by private firms under contract, with the remainder carried out by PWD. Most of the private sector participation occurs in Santo, Efate, and Malekula, but is limited in all other areas. JICA has provided considerable assistance by providing road maintenance equipment, yet there is still insufficient equipment and staff to undertake the work required.133 PWD also lacks an efficient asset management tool for synthesizing the survey data on road conditions, traffic volumes, and the setting of maintenance priorities. Recent policy developments include the Public Roads Act, under which roads will be categorized as national, provincial or municipal, based on traffic volumes and other criteria. It is envisaged that PWD will only be responsible for the maintenance of those roads that are categorized as national, while the remainder will be either municipal or become the responsibility of the provincial governments. In preparation for the transfer of roads to provincial governments, scheduled to begin in June 2009, PWD is reportedly gravelling as many as possible to ensure they are handed over in reasonable condition.134 Given the limited capability of provincial governments to PWD lacks staff and equipment to plan and manage the nation’s road network Provinces will be unable to maintain roads transferred under the Public Roads Act 132 133 134 Under the MCC design these were projects MCA08, MCA05 and MCA10, respectively. PWD staff estimates vary, but a figure of 72 current staff was recently given. The significant increase in expenditures required for this work is being funded partially through the MCC Compact. Vanuatu Economic Report 2009 118 maintain infrastructure, concern arises that the transfer of road assets may result in deterioration of the national road network. 6.2.2 Access to electricity is poor, particularly in rural areas Electricity Electricity is important for both economic and social development. Education, health, tourism and hospitality, manufacturing, telecommunications, retail businesses and other sectors rely on an affordable and reliable supply of electricity. However, only about 27% of the population has reliable electricity, with just Port Vila, Luganville, Malekula and Tanna supported by municipal electricity networks.135 Given budgetary constraints and the geographic nature of the country, it is not surprising that service provision is low. Nonetheless, when per capita income is taken into account Vanuatu continues to have relatively low access to electricity in comparison to similar nations in the region. Electricity is expensive, but this can be explained largely by the small size of the systems, the reliance on imported fuel for diesel generators, and the fact that the provider is financially self-sufficient and unsubsidized. Those areas serviced by reticulated electricity do, however, enjoy relatively good quality service with infrequent service cuts. The electricity generation and reticulation infrastructure is owned and operated by Union Electrique Du Vanuatu Limited (UNELCO), under a concession contract with the Government. The Port Vila and Luganville networks are operated by UNELCO under concession contracts until 2031 and 2010, respectively.136 UNELCO is also providing power to Malekula and Tanna under a concession that runs to 2022. Among comparable Pacific-based utilities UNELCO performs well on quality of service indicators, labor productivity, and levels of system loss. However, as discussed above, its tariffs are relatively high, which reflects the fact that it completely recovers its costs, including depreciation. The 2007 Utility Regulatory Authority Act (URAA) strengthened regulatory oversight of the power sector, with the URA responsible for managing the concession contracts.137 UNELCO recently established a 2.5MW wind farm on Devil’s Point outside of Port Vila. The first 11 windmills are operational and, according to UNELCO, are working well and providing extra system capacity. A second wind farm is under consideration for Efate, although the proposed ownership arrangements and feasibility study have not yet been released. Alternative energy generation systems also underpin the provision of electricity to rural village communities in various parts of the country. The Energy Unit of the Ministry of Land and Natural Resources is responsible for rural electrification and establishes solar or mini hydropower projects in rural locations. Vanuatu’s National Energy Policy guides the Rural Electrification Master Plan, under which more than 3,000 sites, with 1,700 possible generating facilities, have been But UNELCO performs well on quality and service indicators Rural villages increasingly rely on alternative generation systems 135 136 137 According to a recent survey of the telecommunications sector only 47% of rural respondents have access to electricity, compared to 85% in urban areas. Clearly, overall access to electricity is relates to the urban-rural service provision divide, and emphasizes the need for further rural electrification. Electricity is now also provided to some of the unplanned peri-urban settlements nearby to Port Vila. Prior to the recent legislation questions arose about the process for tariff setting and adjustment. Electricity tariffs are now set on a uniform basis across the three concessions operated by UNELCO. The tariffs charged are derived from a base rate tariff, which is indexed quarterly for changes in the costs of fuel, labor, and equipment. 119 Vanuatu Economic Report 2009 identified.138 A pilot subproject at Port Olry on Santo was launched in October 2007 to generate electricity for around 260 households using 100% coconut oil as fuel. The projected end user cost is, however, high at more than Vt100 per KWh, whereas base service for households on the existing urban networks have recently paid approximately Vt40 per KWh. Nonetheless, the Port Olry site comprises an excellent pilot project and the EU is funding two further, similar projects in Vanuatu. The World Bank, IFC and AusAID recently initiated a regional program for renewable energy projects under its Global Environmental Facility (GEF). The GEF includes Vanuatu and a feasibility study on micro hydropower on the Talise River, Maewo Island will commence in June 2009. JICA has also been funding the continual improvement of the Sarakata River hydroelectric scheme as a means to reduce the need for diesel fueled power generation for the network around Luganville. Related to the above regional program, the Government has requested assistance from ADB for national planning activities in the area of renewable energy139. The first component is to support the development of the Vanuatu Rural Electrification Master Plan, including: (i) analyzing sites identified in the off-grid electrification expansion document and developing an implementable electrification expansion action plan; (ii) conducting feasibility studies of initial priority projects; (iii) developing projects to support distribution of small-scale solar lighting systems; (iv) developing a financing program to support implementation of priority projects (including grant and possible ADB lending support); and (v) providing assistance to Vanuatu's Designated National Authority to support the carbon financing of energy projects in Vanuatu. The second component is to assist in expanding the existing Sarakata Special Reserve Fund (SSRF) into a national Rural Electrification Fund (REF). The REF will support implementation of priority projects under the national rural electrification master plan. The REF will be designed to utilize funds from the SSRF, donors and Government sources. Assistance will be provided for: (i) design of the structure and management of the REF, including oversight functions and governance criteria; (ii) design of modalities for financial assistance; and (iii) project and developer selection criteria. The third component will assist with the development of the proposed Port Vila grid Eastern Efate Wind Farm through: (i) assisting with development of feasibility studies, including due diligence assessments of existing studies; (ii) developing options for structuring project financing; and (iii) analyzing alternative grid-based renewable energy options. More needs to be done on demand management ADB has been asked for TA for renewable energy planning Finally, it is noted that there has been very little focus on demand side management for electricity. Such approaches should be incorporated into all electricity projects and supply systems. 138 139 The Rural Electrification Master Plan, prepared by UNELCO for the Government, was financed by the Sarakata Fund from revenue generated through the hydropower facility of the same name. However, is only in draft form and has not been officially endorsed by the Government. ADB, 2009. Promoting Access to Renewable Energy in the Pacific (Cofinanced by the Clean Energy Fund under the Clean Energy Financing Partnership Facility). Technical Assistance Report: Project Number: 42465-01, May 2009. Vanuatu Economic Report 2009 120 6.2.3 Telecommunications Telecom access and sustainable livelihoods are linked A recent Department for International Development (DFID) study linked access to telecommunications by rural populations to their ability to develop sustainable livelihood strategies and to effectively implement poverty reduction measures.140 Other studies suggest there is a strong correlation between teledensity, defined as lines per 100 persons, and the level of development. The nature of this relationship may be changing with the rapid proliferation of increasingly cheaper mobile technology, but relative teledensity still serves as a benchmark for gauging the level of development. Vanuatu’s overall teledensity has not only been low when compared to neighboring Pacific Island countries, but it is also low relative to its reported income levels.141 By 2007 there were only 23,300 mobile phone subscribers and 7,300 fixed line subscribers, representing a penetration level of 3% and 11%, respectively.142 This situation has started to change rapidly, however, as a result of the introduction of competition for mobile telecommunications, supported by appropriate policy reforms under which minimum service levels are prescribed. Until recently, Telecom Vanuatu Limited (TVL), owned in equal parts by the Government of Vanuatu, Cable and Wireless, and France Cable and Radio, was the sole provider of public telecommunications services. Data on service provision and usage supported accusations that, as a monopolistic provider, TVL provided poor service, had high calling costs, limited mobile network coverage, and relatively low teledensity levels. In 2007, the Government amended the Telecommunications Act and made the following legislative changes:143    The Government gave up its one-third share of TVL, making it a fully privately owned company An independent telecommunications regulator would be established to ensure compliance with licensing conditions A Universal Access Fund (UAF), funded by donors and licensing fees, would be established and administered by the regulator with the aim of subsidizing telephone and internet operations in loss making rural areas A requirement for interconnectivity between the networks of service providers was introduced.  The GFG supported this initiative by assisting in the design and creation of the independent regulator and through provision of advice during the tendering process. It is currently supporting efforts to assess the socio-economic impact of increased service coverage following deregulation. 140 141 142 143 Souter, D., N. Scott et al., 2005. The Economic Impact of Telecommunications on Rural Livelihoods and Poverty Reduction: A Study of Rural Communities in India (Gujurat), Mozambique and Tanzania, Commonwealth Telecommunications Organization for UK Department for International Development. World Bank – PPIAF, 2004. Infrastructure Regulatory Review for the Government of Vanuatu. World Bank, 2008. Telecommunications in the Pacific. Background Paper for the Pacific Economic Survey, Jakarta: World Bank. Some of these are yet to be fully implemented but are nonetheless underway. 121 Vanuatu Economic Report 2009 In December 2007, a second company, Digicel, was granted a license to provide mobile telecommunications, thereby breaking the TVL monopoly. Under a further initiative of the GFG, a performance-based contract was established where Digicel was provided with a significant financial incentive to achieve service area coverage of more than 85% of the country by the end of 2009. In a 2008 study on the liberalization of telecommunications in Vanuatu it was concluded that the lower cost telecommunications services needed to be supported by additional complementary infrastructure to promote economic development.144 The findings included: Liberalization of the telecom sector provided real benefits     There is significant increased access to and use of mobile telecommunications throughout Vanuatu and particularly in rural areas A revealed preference for mobile mode access over fixed line in both rural and urban areas Increased telecommunications access in rural areas is reducing the digital divide between rural and urban populations Increased telecommunications access can significantly assist in the promotion of SMEs. Infrastructure that complements telecom developments is also needed Notwithstanding these positive outcomes, and as supported by the AusAID Pacific Economic Survey,145 it was concluded that improved telecommunications also need complementary infrastructure for the actual production and movement of goods from rural areas to markets; i.e. improved market access is required. In Vanuatu this complementary infrastructure would include reliable electricity supply, rural roads, and consistent and competitively priced inter-island shipping facilities and services. 6.2.4 Water supply, sanitation, and solid waste Water supply All water supply infrastructure assets are owned by the state in Vanuatu.146 Accurate data on the total percentage of the population with regular access to safe drinking water are not available, with estimates varying from around 65% to 88%.147 Urban water supply in Port Vila is provided by UNELCO Until the mid-1990s, all urban water services in Vanuatu were provided by PWD. At that time service quality and tariff collections were low, and PWD was unable to cover operating costs or to undertake new investment. In 1994, the Government let a contract to UNELCO to supply water to Port Vila for a period of 40 years. Under this contract, all management, operating and investment functions are delegated to the concessionaire. Asset ownership and contract performance monitoring is controlled by the Government, based on periodic technical and financial reports. UNELCO is required to guarantee quality, quantity and continuity of service and incurs penalties 144 145 146 147 Pacific Institute for Public Policy, 2008. Social and Economic Impact of Introducing Telecommunications throughout Vanuatu: Research Findings Report. AusAID, 2008. 08 Pacific Economic Survey, AusAID: Canberra. Asian Development Bank, 2003. Vanuatu: A Private Sector Assessment – Issues, Challenges, and Policy Options. The low estimate was provided by the Department of Geology, Mines and Water Resources, while the high estimate was cited in the MDG report. Vanuatu Economic Report 2009 122 for non-compliance.148 The URA is responsible for regulation of UNELCO and its service delivery. Water supply infrastructure and services in Luganville, Isangel, and Lakatoro continue to be provided by PWD. However, service in these locations is reportedly not of the standard experienced in Port Vila, although tariffs are lower. Systems managed by PWD generally operate at a loss, failing to recover operating and maintenance costs. Given current population growth rates, demand for water supply services will soon exceed the capacity of the current infrastructure, along with the financial, technical, and human resources capabilities of PWD.149 In rural areas, water supply is the responsibility of the Department of Geology, Mines and Water Resources (DGMWR). The existing National Rural Water Supply Program has a goal of providing potable water to all of the rural population. The approach is one based on community access to water rather than individual household connections. Despite Government commitment to this program, however, many rural communities still lack adequate water supply. Supply systems are provided to communities on an ad hoc basis, usually as funding is made available after communities make requests to the DGMWR for new systems, repair, or rehabilitation of existing systems. There are approximately 1,200 small water supply systems scattered across Vanuatu. Based on the rural water supply database, about 663 of these systems are functioning well, 269 are in need of repair, and 189 are not operating at all. When a water supply system is established it is the responsibility of the local community to set an appropriate tariff, collect user fees, and implement maintenance works as required.150 However, local communities are hindered by a shortage of spare parts and materials, as well as a lack of training or availability of skilled technicians. The rural water supply systems are implemented with a 15 year life cycle design but, due to the lack of proper maintenance, most have a lifetime of only five to 10 years. There are no water quality guidelines or monitoring of provincial or private suppliers Many rural communities lack adequate water supply The DGMWR is also responsible for water resources legislation, management, and quality monitoring. Waterborne illnesses, particularly amongst children, are common, as previously noted in section 5.3.2. Water treatment is undertaken for the Port Vila and Luganville urban supplies, but there are no drinking water quality guidelines. Furthermore, there is no regular monitoring of provincial water systems or of the private water suppliers around Port Vila.151 Sanitation: sewerage and wastewater Sanitation management represents a substantial and growing environmental and public health issue. There is no comprehensive sanitation infrastructure in the urban areas of Port Vila or Luganville. Both municipalities lack sewerage and wastewater treatment systems, and waste is generally disposed of via illegal stormwater connections, direct discharge into waterways, or poorly designed and maintained septic systems, which in turn leach contaminants into groundwater. 148 149 150 151 A Case Study of the Privatisation of Port Vila, John Chaniel, UNELCO Vanuatu Ltd; and Infrastructure Regulatory Review for Government of Vanuatu, Castalia, July 2004. DGMWR, 2008. Vanuatu National Water Strategy 2008-2018. In Shefa province it was reported that the tariff was typically Vt100 per month per household. Interestingly, UNELCO has been contracted for quality monitoring of PWD’s Luganville system, while DGMWR is monitoring UNELCO’s operations of the Port Vila system. 123 Vanuatu Economic Report 2009 Sewerage service provision and utilization is low Most systems in the formal residential areas of Port Vila are septic tank systems. However, only toilet wastes are typically discharged to septic tanks, while grey water is discharged either to the septic soakway or over the garden. Typical households have little understanding of septic tank maintenance requirements. While there are public and private service providers for maintenance and emptying of septic tanks, with the sludge deposited at the local Bouffa landfill, few residents utilize the services, which are expensive. Sewerage services outside Port Vila are limited or nonexistent, with informal settlements commonly using pit latrines, communal toilets, or bush latrines. A number of private sewage treatment plants are found in Port Vila, including those at Port Vila Central Hospital, Iririki Island Resort, Le Meridien Resort, Le Lagon Resort and at the University of the South Pacific complex. Sanitation issues were previously managed by the Ministry of Health (MoH), with trained Sanitation Officers working at provincial level to ensure the proper construction of pit latrines. This system is no longer operational and, consequently, there is no clear delegation of responsibility for ensuring provision of appropriate sanitation infrastructure or services. Furthermore, there are no regulations for wastewater management or for the monitoring of receiving environments. A sewerage collection system for Port Vila was proposed in the 1998 ADB-funded Sanitation Master Plan, along with primary and secondary treatment and final effluent disposal to land, but no action was taken. With increasing populations and urbanization, contamination of potable water, fishing resources, Port Vila Bay and other nearby waterways such as Erakor Lagoon, and/or popular tourist areas because of improper sewage disposal is likely to occur with increasing frequency. This will impact on health indicators, such as infant mortality and overall morbidity, and will also result in negative economic outcomes. Sanitation is therefore an issue that must be addressed in the very near future. There are no regulations for wastewater management or monitoring of receiving environments And concerns arise about water contamination There is no legislation for waste management Solid waste Solid waste disposal services, like water supply services, vary depending on location. Service levels, frequency, methods, and costs are different in the municipal areas than they are in local communities under provincial government authority. But in either case, the key point is that there is no legislation for waste management, and the quantity of waste being generated is not known. Port Vila Municipality operates a landfill at Bouffa for disposal of residential, commercial, and industrial waste, and provides kerbside refuse collection services. The landfill, which opened in 1995, has a capacity of 525,000m3 and an original design life of 15 to 20 years, suggesting that it will soon reach full capacity. Approximately 10 tons of waste are currently collected and disposed of each day. The municipality operates waste collection services for both residents of the municipality and for some of the residents in the informal settlements located outside the Port Vila municipal boundaries in Shefa Province. The costs of waste collection and the landfill are funded from the collection of property taxes, and from waste collection and tipping fees. The aim is self-funding, based on the user-pays principle. Rates charged to users vary depending on user characteristics and estimates of the type of waste and quantity collected. Typical household users pay Vt6,000 per year. Vanuatu Economic Report 2009 124 And there is uncertainty about Port Vila's ability to sustain its waste management operations While the solid waste collection system in Port Vila is functioning reasonably well at present there is uncertainty about the municipality’s ability to sustain operations in the long run, particularly as waste levels and demand for services increase. This occurs despite the 2005-2006 JICA TA and grant funding to: (i) upgrade Bouffa landfill; (ii) strengthen the solid waste management operational capacity of the municipality; (iii) draft a solid waste management plan; and (iv) provide additional equipment for landfill operations. The location of a new landfill site for Shefa Province has been under investigation by the South Pacific Applied Geoscience Commission (SOPAC), but no new facility has been constructed. Shefa provincial council has foreshadowed a property tax system that will specifically include a contribution to support a more comprehensive provincial solid waste collection service. Few solid waste removal services are currently provided in provincial locations. Rather, local communities or villages are responsible for their own solid waste collection and disposal.152 In some cases, waste disposal services are provided by locally contracted private sector operators who negotiate rates and the frequency of collection services with community residents. The National Water Strategy 2008-2018 is awaiting implementation Water supply and sanitation sector developments The Vanuatu National Water Strategy 2008-2018, prepared under NZAID funding, was recently released and endorsed by the Government, but is now waiting for additional funding to implement the Strategy. Key actions in the Strategy include:    Adoption of integrated water resources management (IWRM) principles, including project facilitation and regulation under a SWAp Major changes in the role of DGMWR from that of service provider to main proponent and facilitator of the IWRM SWAp Establishment of a Department of Water (DoW) to serve as a regulator for the water sector, and strengthening of the National Water Resources Advisory Committee (NWRAC) to provide representative and expert input and advocacy across the sector Transfer of urban water scheme management from PWD to DoW with a longer term view of promoting private sector participation in the sector Incorporation of sanitation issues into the DoW, with a focus on more appropriate sanitation solutions for Port Vila and reinstatement of the Provincial Sanitation Officers.   6.3 Urbanization Urban centers in Vanuatu, and in the Pacific in general, are a relatively new phenomenon. Introduced under colonial rule, they are still small by international standards. Nonetheless, over the past 50 years they have become the focus of finance and commerce, manufacturing and processing, transportation and marketing. 152 In the case of Shefa, solid waste is supposed to be delivered to the Bouffa landfill. However, due to tariffs charged at entry to the site, many provincial residents reportedly prefer to dispose of waste locally through a combination of composting, burying, and burning. 125 Vanuatu’s urban centers are the focus of political, financial and commercial life Vanuatu Economic Report 2009 They are also the home of government and the public service. Consequently, the majority of formal sector jobs—in both the private and public sectors—are found in the urban centers. Port Vila and, to a lesser extent, Luganville, are now the main centers of economic growth and development in Vanuatu, while a third municipal area—Lenakel on the island of Tanna—was established in July 2008. The quality of urban development directly impacts on the prospects for national and provincial development as a whole, yet there has been a policy vacuum in relation to urban development and rural-urban migration. Urban growth, resulting from in-migration from the rural areas, is generally high in Pacific Island countries, and in most cases is higher than overall national population growth rates. Vanuatu, along with Solomon Islands and Kiribati, has one of the highest rates of urban population growth in the Pacific, currently estimated at around 4% per annum. Port Vila and Luganville, the two main urban centers in Vanuatu, had estimated populations of approximately 42,000 and 15,000, respectively, at the beginning of 2009153. They are managed by municipal councils. Vanuatu's urban population represents approximately 24% of the National population. By the year 2020, Vanuatu's urban population is projected to be approximately 89,000 (or 27% of the National population). Some analysts have suggested that there has been inadequate recognition of the importance of the urban economy to national development, or of the problems resulting from rapid, uncontrolled urban growth.154 As urban centers grow in importance it is crucial that they develop and function effectively. If they fail to do so, then both urban and rural populations will suffer. However, a lack of understanding at the broad policy level of the critical role of urban centers in development has resulted in urban development remaining low on the political agenda. There is evidence that this is changing: last year, the country’s first urban zoning and development planning exercise was conducted for Luganville, and was due to be tabled in Parliament in April, 2009. Once gazetted, this Development Control Plan will provide a model for a similar plan to be prepared for Port Vila. While only in its infancy, the introduction of this zoning and planning process represents a significant step towards more proactive urban planning and, ultimately, more orderly development of urban areas. There has been a policy vacuum in relation to urban planning and rural-urban migration 6.3.1 Informal and squatter settlements are overcrowdedhave Settlements and lack basic grown rapidly in services size and number in the last 20 years Informal and squatter settlements Squatter and informal settlements were becoming established in and around Port Vila in the early 1960s, when the lack of available land within the official municipal boundary forced increasing numbers of migrants from other islands to move into the town’s peri-urban areas. Since then, these settlements have grown significantly, both in number and size. These are areas of unplanned, high density and poor quality housing, characterized by a lack of basic services (water, sanitation, electricity, waste collection) and insecurity of tenure. In the case of squatter settlements, residency status is illegal and usually no rent is paid. In informal settlements, there has usually been some form of agreement with the landowner and some rent is paid. 153 154 The population estimates for Port Vila and Luganville are based on 1999 Census data and an urban population growth rate of 4% per annum as reported in The 1999 National Population and Census Main Report published by the National Statistics Office in December 2000. The next Census is scheduled for 16 November 2009. E.g. Storey, Donovan, 2006. Urbanisation in the Pacific, research paper produced for the State, Society and Governance in Melanesia Project, Massey University. Vanuatu Economic Report 2009 126 A study of urban migration and informal settlements conducted in 2000 noted that “The dramatic increase in urban growth has led to overcrowding, poor housing conditions, high rents, poor sanitation and rapid development of squatter and informal settlements”, and further observed that “the number and size of squatter or informal settlements has burgeoned in the last decade… [and that] the most notable feature of Port Vila is the speed at which informal settlements are growing”.155 There is evidence that this trend is continuing. Based on current growth rates, the population of informal settlements in the peri-urban areas around Port Vila and Luganville could reach 19,000 by 2010, constituting approximately 25% of the total urban population of these centers. This is clearly a very sizeable proportion and one that demands the urgent attention of national, provincial and municipal authorities. In addition to the rural-urban migration described above, growth in the size and number of informal settlements has also taken place within the urban areas themselves. There are many reasons for this internal movement, but one of the more obvious reasons is the economic status of the household, with unemployment or low income employment of the main income earner causing families to seek cheaper housing. This was a factor in the rapid growth of some informal settlements in the late 1990s, when real per capita incomes of many households in Port Vila fell as a consequence of the public service “right-sizing” exercise conducted under the CRP, when an estimated 15% of public servants were made redundant and were obliged to move to cheaper housing. The growth of informal settlements in peri-urban areas, on customary land, is largely attributable to the increasing pressure on limited land and an acute shortage of affordable housing within the municipal boundaries of Port Vila and Luganville. Landowners, concerned about allowing settlers to stake a permanent claim to the land, often impose conditions such as only permitting the building of temporary dwellings and limiting services and amenities. Given the rights of landowners to utilize, manage and dispose of their customary land as they choose—rights that are enshrined in the Constitution and deeply held and defended by customary landowners—the settlers on these lands have little choice but to accept whatever conditions are imposed upon them, including living in sub-standard housing with little or no access to basic services or amenities. It would appear that government bodies such as provincial and municipal councils are hard pressed to know how to deal with the so-called squatter or informal settlements around the periphery of urban centers. Because most are located outside the municipal boundary of Port Vila, for example, they are not able to access services such as garbage collection, which are normally provided by the municipal council. Urban bodies have no authority and little capacity to enforce building or urban service standards in periurban areas Existing legislation includes provisions to control urban development, including housing and associated services, to ensure these meet specified standards. However, unlike housing plots on government-owned land—i.e. land within the municipal boundaries—which are required to be adequately serviced with water, sewerage, drainage and electricity before leases can be issued, there is no legal requirement to impose similar housing or service standards in the peri-urban settlements as they lie outside the jurisdiction of the municipal councils. 155 Mecartney, S., 2000, op cit., 127 Vanuatu Economic Report 2009 6.3.2 Urban development projects In the early 1990s, the World Bank funded an affordable housing project with the aim of establishing low-cost housing at Freswota, the site of a formal subdivision managed by the National Housing Corporation in Port Vila. Due to the high cost of house plots, however, the area has been increasingly settled by middle class, higher income residents. The $10 million ADB-funded Urban Infrastructure Project, implemented in the 1990s, was one of the largest donor funded programs of assistance to the urban sector. The five year program consisted of road and bridge rehabilitation, port rehabilitation, water supply, drainage and sanitation in Port Vila and Luganville, and achieved some significant improvements in these areas. An internal evaluation later reported that although the scope of the project had to be reduced, and that physical implementation took several years to commence, most of the works were completed by the end of the loan period in December 2001. In addition to physical infrastructure improvements, the project also realized some important achievements related to environmental and water resource regulation and building codes. However, inadequate funding and severe institutional capacity constraints resulted in two major components being put “on hold”: the sanitation component and the Port Vila traffic intersection improvements. 6.3.2 Institutional arrangements and capacity Planning policies are urgently needed The Physical Planning Act 1986 resulted in the establishment of the Physical Planning Unit (PPU) within the Department of Local Authorities (DLA), itself located in the Ministry of Internal Affairs (MIA). The PPU provides development planning guidance and advice to province-based planning officers and the municipal councils, and is responsible for creating physical planning areas (PPA) for each province and city to delineate planning control boundaries. However, it has no power to implement plans or enforce design standards. Furthermore, while the Physical Planning Act provides for the formulation of planning policies, none have been prepared. Shefa Planning Office is responsible for planning within the province. It works under the guidance of a Physical Planning Committee, comprised of Shefa Councilors. While the Physical Planning Act provides for the declaration of PPAs, and a new PPA is planned, to date none has been formally approved for Shefa. Municipal planning within the PPA of Port Vila is carried out by the Port Vila Municipal Council. Its Physical Planning Office (PPO) prepares assessments of development applications (DA), drawing advice from a range of relevant government departments. DAs are then passed for final assessment to the Town Planning Committee, which is made up of councilors, and which can seek technical input when necessary. A strategic planning framework was proposed in the 1992 Draft Physical Plan and the 1997 ADB-funded Port Vila Urban Growth Management Strategy (UGMS). The UGMS emphasized the need for an integrated growth management strategy for Port Vila to coordinate the physical planning process and to establish an institutional and legislative framework to better manage infrastructure development. The UGMS included a sanitation master plan to address the critical issue of pollution of Port Vila harbor and lagoon by unmanaged domestic and commercial sanitation systems. …as is the declaration of a PPA for Shefa Vanuatu Economic Report 2009 Urban growth management and sanitation plans have not been implemented 128 While the Government supported the proposal at the time, there has been no significant action to implement either the UGMS or the sanitation plan. Although the PPU can devise plans and advise other stakeholders, ultimate responsibility resides with politicians in the municipal or provincial government councils. As a result, planning is limited and often reflects political rather than service imperatives. The quality, reliability and delivery mechanisms of urban services within Vanuatu vary widely. Water supply and electricity services to Port Vila and its per-urban areas are provided under long-term concession agreements between the Government and UNELCO Suez Ltd. UNELCO also supplies electricity to residents of Luganville. Water supplies in Luganville and Lenakel are provided by the Public Works Department (within the Ministry of Infrastructure and Public Utilities). There are no sanitation policies… …which has resulted in polluted groundwater, urban streams and coastal foreshores The responsibility for the provision of sanitation services lies with the provincial and municipal governments. However, in practice, treatment and disposal of wastewater is left to individual households and businesses due to the absence of sewerage systems and supporting sanitation policies. Septic tanks are the most common form of on-site wastewater treatment facilities within the formal areas of Port Vila and Luganville, while pit toilets are the most common sanitation facilities in the informal settlement areas. In general, sanitation facilities are poorly designed and maintained. Water quality monitoring data indicate high levels of fecal contamination of groundwater, urban streams and the coastal foreshore, which can be attributed to the poor sanitation practices. The PWD is responsible for the development and maintenance of road and drainage systems throughout Vanuatu. Road maintenance expenditures have historically been less than 10% of the total amount required. At present, about 60% of road maintenance is undertaken by private firms under contract, with the remainder carried out by PWD. Expenditure on the development and maintenance of drainage systems is almost non-existent. The limited drainage infrastructure not only creates a flood hazard, particularly to the residents of low-lying area (including several densely populated informal settlements) but also is a major cause of the failure of road pavements. In general, the capacity of the national, provincial, and municipal planning agencies to prepare and implement spatial plans is limited and coordination between the planning agencies and other key stakeholders poor. The result has been ad hoc urban development and a reactive approach to urban infrastructure development. Weak institutional capacity also means that there are neither the human resources nor the funds to enforce compliance with regulations. In some cases, political interests, inertia and corruption can also undermine regulatory controls. In addition, in relation to planning approvals, discretionary powers vested in the Minister of Lands to grant approvals in cases of dispute (e.g. over land ownership) effectively undermine legal requirements, for example to conduct environmental impact assessments on proposed development sites. Critically, there are no formally trained urban planners within government at any level. This is an important capacity issue that should be addressed. The training of town planners will take some time and, in the interim, support from donors for the appointment of foreign planners should be considered. Expenditure on drainage systems is virtually nonexistent Institutional capacity is weak And there is no capacity to enforce compliance with regulations There are no formally trained urban planners 129 Vanuatu Economic Report 2009 ADB’s proposed support for urban infrastructure will strengthen capacity and address priority needs ADB has indicated support for urban planning and development. Specific target assistance may include: (i) preparation of an integrated spatial (physical) and services master plan for Port Vila; (ii) refinement of draft legislation for urban planning for approval by the Parliament; (iii) updating of the Building Code for approval by the Government; (iv) preparation of the National Sanitation Policy; (v) preparation of a prioritized and costed integrated storm water drainage and sanitation master plan, including identification of a suitable institutional framework and mechanisms for sustainable operations and maintenance of Port Vila's drainage and sanitation systems; and (vi) institutional strengthening and capacity development for sustainable drainage and sanitation planning and management, along with provision of high priority drainage and sanitation infrastructure identified in the integrated storm water drainage and sanitation master plan. Each of these initiatives, in coordination with activities such as the AusAID supported Land Program, JICA’s support for landfill rehabilitation at Bouffa, and NZAID’s support for water and health programs, would add substantially to the institutional capacity of Vanuatu to plan and implement urban infrastructure projects, while also supporting priority programs such as those for sanitation and drainage. 7.2.5 Urban Infrastructure Planning with a Focus on Port Vila Port Vila has clearly outgrown its original urban boundaries, is unable to satisfactorily house an expanding population, cater for additional commercial development, or provide the urban infrastructure services required. The municipality has a PPA, but no urban growth strategy, while planning is carried out on an ad hoc basis. The results of poor planning in Port Vila area are illustrated by the poor design of the sanitation and drainage system, increasing degradation of the environment, lack of plans for solid waste collection and disposal, and lack of road maintenance, particularly to the informal settlements. Urban infrastructure planning should be given high priority Planning for increased urban infrastructure in Port Vila for water, sanitation, solid waste services, drainage, and road maintenance should be given high priority by all levels of government. This will require, amongst other things, a focused effort on improving coordination amongst the national, provincial and municipal governments. The development of a national urbanization policy and planning guidelines was recommended under the CRP. This recommendation was reinforced in a study on urban informal settlements commissioned by the Pacific Islands Forum Secretariat and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).156 This 2002 study recommended the appointment of a national task group by the Government to oversee the development of a national urban growth and housing strategy, with a focus on addressing the problem of affordable, adequately serviced housing. Little appears to have happened in the last seven years to follow up on these recommendations. In the meantime, the shortage of low-cost housing has continued to grow, directly contributing to a worsening of the severely overcrowded, inadequate and unsanitary conditions prevalent in many informal settlements around Port Vila. It is, therefore, recommended that: 156 Chung, Margaret and Hill, D., 2002. Urban Informal Settlements in Vanuatu: Challenge for equitable development, report prepared for Pacific Islands Forum Secretariat and UN Economic and Social Commission for Asia and the Pacific, Pacific Operations Centre. Vanuatu Economic Report 2009 130 A study of urban areas and infrastructure needs is required  A comprehensive study is undertaken of Vanuatu’s urban centers, focusing on the causes and consequences of rural-urban migration, the growth of informal and squatter settlements, and the incidence of poverty. Based on both empirical research and secondary data, the study should assess the current and future capacity of existing urban infrastructure to adequately provide basic social services. It should also include recommendations for specific improvements in priority areas which would then be subject to stakeholder consultation and endorsement A multi-stakeholder urban task force, led by the Ministry of Internal Affairs and appointed by the Government, prepares a National Urban Strategy. The Strategy should be developed with extensive public consultations and supported by up-todate research findings from the urban study outlined above The urban task force has responsibility for coordinating and overseeing all donor activity, as well as policies and laws, in the urban development sector and for providing strategic advice and direction to the Government, donors and the private sector. As is a National Urban Strategy   6.3 Development Policies and Strategies Based on its “Planning Long and Acting Short” planning matrix, the Government has developed six key strategies for increasing the reliability, accessibility and overall quality of infrastructure services: Six proposed strategies support infrastructure services policy 1. Strengthen the institutional capacity of the MIPU through a capacity building program 2. Rehabilitate and better maintain the national road network; the Government has indicated a commitment to providing more resources for road maintenance 3. Continue to improve communications access and lower costs through private sector competition 4. Ensure that power is increasingly available, at affordable prices, through exploration and expansion of renewable energy sources 5. Improve shipping, wharf, and storage facilities and their maintenance 6. Possibly expand or construct a new international airport, and undertake a feasibility study on possible civil works improvement to facilities such as parking aprons and the upgrading and expansion at the Bauerfield terminal. Maritime sector reform and urban planning for Port Vila are the highest priorities The Government’s strategies are generally consistent with the existing needs and demands in relation to infrastructure. Based on the Government’s priorities, donor interest and ongoing development activities, the highest priority should be given to: (i) reforming the maritime sector, with an emphasis on interisland shipping, and with the possible provision of additional rural wharves; and (ii) addressing the urgent need for urban planning, management and development of Port Vila and its surrounding areas. 131 Vanuatu Economic Report 2009 6.4 Conclusions and Recommendations The state of infrastructure and associated services provision in Vanuatu is mixed. In some sectors, infrastructure is adequately planned and implemented to meet growing demand. In other sectors infrastructure is poor, and in some cases deteriorating, impeding economic growth and the delivery of and social services. Policy reform, private sector participation and competition have been key to improved performance Policy reform and private sector participation in infrastructure services has reduced the capital investment required from public funds, while reducing costs and increasing efficiency through competition. Importantly, the Government has increasingly moved to focus on its core roles in regulation and to promote private sector provision of services, with significant positive outcomes in sectors such as telecommunications and air services. Port and harbor development, inter-island shipping, and rural wharves are a top priority Maritime sector The shipping transport sector is in need of considerable support. Infrastructure at the domestic wharves of the nation’s two principle ports is in need of major rehabilitation, Port Vila needs a new master plan for port and harbor development, and the institutional arrangements for sector management require review and reform. Private sector operators provide inter-island shipping services, but many areas receive few services. A strategy for improved services is required, with the potential to subsidize uneconomic routes analyzed; subsidies should, however, be subject to a transparent, competitive tendering process. The rural wharf network should also be assessed and priorities established for a rehabilitation program. Urban development Urban development policy and planning, including service provision to informal and peri-urban settlements, is an area that has received little attention. There is an urgent need for urban planning in Port Vila to support improved services provision to all of its residents. The principal matter to address initially, however, is that of jurisdictions— the institutional relationships and responsibilities between national, provincial and municipal agencies currently precludes effective planning and management in Port Vila for water, sanitation, solid waste services, building standards, drainage, and road maintenance. A national task force with representatives of each level of government, the private sector and other stakeholders should be established as a first step towards improved urban planning and management. Findings from the previous ADB funded Sanitation Master Plan should be reviewed in concert with any proposed new urban master plan initiative. Water quality standards and waste disposal regulations are needed. Electricity The electricity sector is functioning well in the urban and peri-urban areas, but coverage in rural areas is poor. The performance of UNELCO should be monitored by the URA and any cost savings passed on to consumers. Implementation of the rural electrification plan is a priority. Air transport Significant, positive reforms in the air services sector have been realized through the open skies policy and reform of the institutional arrangements for management of the sector. Continued planning for rural airport maintenance is required, while the Urban development policy, planning and infrastructure are also high priority Rural electricity programs should continue to be implemented A master plan for Bauerfield airport should also be given priority Vanuatu Economic Report 2009 132 preparation of a master plan for the upgrading of Bauerfield Airport should be given high priority in overall infrastructure development. Institutional strengthening and the road sector The PWD requires strengthening to better serve the road sector in planning improvements and maintenance, supporting civil works implementation, and managing the procurement of private sector contractors to undertake works. The VTSSP will contribute significantly in these and other areas. The implementation of a nationwide road asset management system should be closely coordinated with the reforms being pursued under VTSSP. The capacity of provincial governments to maintain roads should also be reviewed if the proposed Public Road Act is introduced. Finally, ongoing infrastructure interventions are shown in Map 6.1, with particular emphasis on rural-urban transport links: those sites where further study is warranted into the possible establishment of networked rural roads, wharves, and ancillary infrastructure such as warehouses.157 157 More specifically, these are rural sites where transport infrastructure was either built some time ago, but is in need major rehabilitation, or sites that have been identified for new development by the ADB Outer Island Infrastructure Development (ADB TA 3224-VAN), the MCC Compact original design, or both, but which to date have not been implemented. 133 Vanuatu Economic Report 2009 Map 6.1: Ongoing and Required Infrastructure Projects Vanuatu Economic Report 2009 134 Appendix Table 1: Gross Domestic Product by Industry (Constant 1983 prices) Millions of Vatu 2002 2003 2,894 3,083 1,706 1,745 1,026 1,174 74 74 87 91 1,489 1,542 569 595 414 410 506 537 11,061 11,311 4,849 4,854 890 812 1,459 1,512 1,162 1,266 1,005 1,129 2,131 2,207 157 157 137 143 730 769 15,444 201,222 76,751 15,936 206,454 77,189 2004 3,305 1,784 1,380 71 70 1,625 625 424 576 11,883 4,773 922 1,747 1,346 1,328 2,223 158 149 762 16,813 211,822 79,373 2005 3,161 1,823 1,095 90 153 1,741 663 442 636 13,005 5,316 979 1,988 1,609 1,456 2,263 160 155 922 17,907 217,329 82,396 2006 3,235 1,879 1,165 97 94 1,862 672 454 736 14,139 5,967 1,086 2,157 1,706 1,622 2,274 171 162 1,006 19,236 222,980 86,268 2007 3,308 1,928 1,194 84 102 2,056 701 484 871 15,185 6,417 1,232 2,439 1,746 1,747 2,397 193 169 1,154 20,549 228,777 89,821 Agriculture, Fishing and Forestry 1 Custom/traditional agriculture 2 Export agriculture 3 Other commercial agriculture Forestry and logging Industry Manufacturing Electricity and water Construction Services Wholesale and retail trade Hotels and restaurants Transport and communication Finance and insurance Real estate and business services Government services Personal services Domestic services Less imputed bank service charge GROSS DOMESTIC PRODUCT Resident population (mid-year estimate) GDP per capita Source: National Statistics Office: National Accounts of Vanuatu 2007 . 135 Vanuatu Economic Report 2009 Appendix Table 2: Gross Domestic Product by Industry (Constant 1983 prices) (percentage change) Agriculture, Fishing and Forestry 1 Custom/traditional agriculture 2 Export agriculture 3 Other commercial agriculture Forestry and logging Industry Manufacturing Electricity and water Construction Services Wholesale and retail trade Hotels and restaurants Transport and communication Finance and insurance Real estate and business services Government services Personal services Domestic services Less imputed bank service charge GROSS DOMESTIC PRODUCT Resident population (mid-year estimate) GDP per capita 2002 (3.4) 2.2 (10.0) (14.6) (11.6) (5.8) (13.1) (1.0) (0.2) 2003 6.5 2.3 14.4 (1.1) 3.9 3.5 4.5 (1.0) 6.2 2004 7.2 2.2 17.6 (3.8) (23.1) 5.4 5.0 3.5 7.2 5.1 (1.7) 13.6 15.5 6.3 17.6 0.7 0.7 4.2 (1.0) 5.5 2.6 2.8 2005 (4.4) 2.2 (20.7) 27.7 118.8 7.1 6.1 4.1 10.5 9.4 11.4 6.1 13.8 19.6 9.7 1.8 1.7 4.2 21.0 6.5 2.6 3.8 2006 2.3 3.1 6.4 7.5 (38.7) 7.0 1.4 2.8 15.7 8.7 12.2 11.0 8.5 6.0 11.4 0.5 6.3 4.2 9.1 7.4 2.6 4.7 2007 2.3 2.6 2.4 (13.2) 9.1 10.4 4.2 6.6 18.3 7.4 7.5 13.4 13.1 2.4 7.7 5.4 13.3 4.2 14.7 6.8 2.6 4.1 (8.6) 2.3 (11.7) 0.1 (9.7) (8.8) (15.7) 3.7 (4.1) 9.0 (7.2) 12.2. 0.7 3.6 0.7 (0.4) 4.2 4.2 (9.1) 5.4 (7.4) 2.6 (9.7) 3.2 2.6 0.6 Notes: 1. Includes production of fruit, vegetables, kava and other food items, and of livestock, poultry, fishing and household forestry activities. 2. Includes copra, kava, beef, cocoa and coffee. 3. Includes fishing, poultry, fruit and vegetables. Source: National Statistics Office: National Accounts of Vanuatu 2007 . Vanuatu Economic Report 2009 136 Appendix Table 3: Exchange Rates 2000-2009 (Annual average) (Vatu per unit of foreign currency) 2000 2001 2002 2003 2004 Australian Dollar 80 75.19 75.76 81.3 86.96 US Dollar 136.99 144.93 140.85 126.58 116.28 NZ Dollar 62.89 61.35 62.89 72.99 77.52 Euro n.a. n.a. 131.58 140.85 142.86 UK Pound 208.33 212.77 208.33 204.08 208.33 Japanese Yen 1.270971 1.206709 1.114454 1.087075 1.0819 Notes: 1. Data for January and February 2009 are for the end of the month. Source: National Statistics Office 2005 87.72 113.64 80.65 140.85 204.08 1.046353 2006 87.72 116.28 75.76 142.86 208.33 1.003714 2007 90.09 107.53 79.37 144.93 208.33 0.920471 1 2008 Jan 2009 Feb 2009 90.09 77.58 77.21 104.17 118.03 119.1 76.34 60.58 60.6 151.52 152.87 151.69 192.31 n.a. n.a. 1.002104 1.3114 1.2102 137 Vanuatu Economic Report 2009 Appendix Table 4: Private Sector Credit – Lending by the Commercial Banks (Millions of Vatu) Sector Agriculture Fisheries Mining and Quarrying Manufacturing Tourism Entertainment and Catering Transport Public Utilities Construction Financial Institutions Professional and Other Services Housing and Land Purchases Distribution Personal: Other Miscellaneous Totals * End of the third quarter Source: Reserve Bank of Vanuatu 2003 240.70 30.90 852.40 1,313.70 163.30 588.90 9.90 2,731.30 48.60 917.10 2,260.50 1,780.60 3,423.90 203.80 14,565.60 2004 244.60 26.60 11.20 487.60 1,314.60 205.40 667.00 7.50 2,710.00 138.70 915.70 3,592.70 1,600.60 3,147.30 933.20 16,002.70 2005 304.20 26.90 1,117.40 1,706.80 58.50 625.50 6.60 2,917.60 121.60 916.40 4,386.50 1,862.90 3,736.50 828.40 18,615.80 2006 400.20 23.20 46.40 1,069.30 2,271.70 48.30 842.20 5.70 2,180.10 154.30 953.80 5,453.80 2,179.40 3,377.40 1,602.80 20,608.60 2007 354.80 37.20 48.40 1,387.20 1,576.20 33.90 1,061.00 11.20 2,151.60 128.50 1,147.60 7,599.00 1,069.00 5,350.90 1,377.30 23,333.80 2008* 359.20 81.20 96.80 1,374.20 2,023.00 44.27 1,387.81 11.46 2,749.72 80.58 1,512.18 10,158.01 3,163.90 6,609.30 2,072.28 31,723.91 2007* 305.30 22.50 1,230.30 1,593.40 36.00 1,038.10 6.40 1,995.00 126.70 1,090.80 7,292.90 1,925.00 4,020.10 1,717.40 22,399.90 Vanuatu Economic Report 2009 138 Appendix Table 5: Principal Exports and the Trade Balance (Millions of Vatu) Copra Coconut oil Beef, veal and hides Cocoa Timber Kava Re-exports 1 Other Total exports Total imports (c.i.f.) 2002 174 470 191 141 197 253 661 802 2,889 12,433 2003 282 382 287 295 249 228 652 877 3,252 12,703 2004 446 1026 283 160 247 440 874 696 4,172 14,303 2005 126 732 302 181 203 477 1217 886 4,124 16,314 2006 381 282 117 184 39 273 635 245 2,156 17,746 2007 485 492 180 222 80 443 810 321 3,033 20,582 2008* 962 546 251 183 25 353 524 159 3,003 20,827 (17,824) Trade balance (9,544) (9,451) (10,131) (12,190) (15,590) (17,549) *First three quarters 1. Includes vanilla, coconut meal, root crops, shells, and other domestic products Source: Reserve Bank of Vanuatu 139 Vanuatu Economic Report 2009 Appendix Table 6: International and Regional Environment Agreements Ratified by Vanuatu Name of Agreement or Treaty Regional Agreements and Treaties South Pacific Nuclear Free Zone treaty Convention on the Prohibition of Fishing with Drift Nets in the South Pacific Niue Treaty on Cooperation in Fisheries Surveillance and Law Enforcement in the South Pacific Region Multilateral Agreements United Nations Convention on Biological Diversity United Nations Framework Convention on Climate Change Kyoto Protocol: greenhouse gas reductions Montreal protocol on Substances that Deplete the Ozone Layer Vienna Convention for Protection of the Ozone Layer United Nations Convention on the Law of the Sea Protocol of 1978 Relating to the International Convention for the Prevention of Pollution from Ships Convention on International Trade in Endangered Species of Wild Fauna and Flora International Convention on the Establishment of an International Fund for the Compensation of Oil Pollution Damage International Convention on Civil Liability for Oil Pollution Damage International Convention for the Prevention of Pollution of the Sea by Oil Treaty on the Non-Proliferation of Nuclear Weapons Plant Protection Agreement for South East Asia and the Pacific Agreement on the International Dolphin Conservation Program Millennium Development Goals International Tropical Timber Agreement Stockholm Convention on Persistent Organic Pollutants United Nations Convention to Combat Desertification Source: ADB. Vanuatu Country Environmental Analysis, October 2007. Status Ratified 1995 Ratified 1991 Ratified 1995 Ratified 1993 Ratified 1992 Acceded 2001 Acceded 1994 Acceded 1994 Ratified 1982 Ratified 1989 Ratified 1989 Ratified 1989 Ratified 1983 Ratified 1983 Ratified 1995 Ratified 1997 Ratified 2003 Adopted 2000 Ratified Ratified 2006 Ratified 1998