The World Bank First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

Public Disclosure Authorized

Public Disclosure Authorized Program Information Document

(PID)

Appraisal Stage | Date Prepared/Updated: 05-Nov-2019 | Report No: PIDA27820

Public Disclosure Authorized

Public Disclosure Authorized

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

BASIC INFORMATION

A. Basic Project Data OPS TABLE

Country Project ID Project Name Parent Project ID (if any) Tuvalu First Resilience Development Policy Operation with a Tuvalu P170558 Catastrophe-Deferred Drawdown Option (P170558) Region Estimated Board Date Practice Area (Lead) Financing Instrument Macroeconomics, Trade Development Policy EAST ASIA AND PACIFIC 12-Dec-2019 and Investment Financing Borrower(s) Implementing Agency

Tuvalu Ministry of Finance

Proposed Development Objective(s)

The Development Objective of the First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option is to support the government’s efforts to: (i) strengthen public financial management; (ii) enhance infrastructure management, and disaster- and climate-resilience; and (iii) improve social protection and inclusion in education.

FinancingFIN_SUMM_PUB_TBL (in US$, Millions ) SUMMARY

Total Financing 13.50

DETAILS-NewFin3

Total World Bank Group Financing 13.50 World Bank Lending 13.50

Decision The review did authorize the team to appraise and negotiate

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

B. Introduction and Context

Country Context

The proposed operation aims to support the Government of Tuvalu (GoT) in its efforts to manage some of the key risks threatening the country’s sustainable growth and development. The proposed development policy operation (DPO) is the first in a programmatic series of two DPOs and will provide grant financing equivalent to US$7.5 million. The proposed DPO is combined with a Disaster Risk Management (DRM) Catastrophe-Deferred Drawdown Option (Cat-DDO) of US$6 million equivalent, which will support the GoT’s efforts to increase the country’s resilience to natural hazards and the impacts of climate change, not only by supporting policy reforms, but also by provision of substantial quick-disbursing financing in the aftermath of a natural disaster. The Program Development Objective of the proposed operation is to support the Recipient’s effort to: (i) strengthen public financial management; (ii) enhance infrastructure management, and disaster- and climate-resilience; and (iii) improve social protection and inclusion in education. The areas on which the proposed operation is focused are central to the GoT’s National Strategy for Sustainable Development (NSSD) or Te Kakeega III (TK III), and to the Regional Partnership Framework (RPF) for nine small Pacific Island Countries, including Tuvalu. The proposed operation builds on the achievements under the previous DPO series, which focused on the delivery of education and health services and improving macroeconomic stability. Under the leadership of the GoT, the World Bank’s development policy engagement in Tuvalu takes place jointly with other major development partners.

Tuvalu is one of the smallest, most remote, and climate change-vulnerable countries in the world, and categorized as a fragile state. The country comprises nine small islands, with a total land area of only 26 square kilometers, scattered over 0.5 million square kilometers of the western Pacific Ocean. Six of the islands (Nukulaelae, Funafuti, Nukufetau, Vaitupu, Nui, and Nanumea) are low-lying atolls made up of islets (motus) with infertile, sandy or gravel coralline soils. The other three islands (Nanumaga, Niutao and Niulakita) are raised limestone reef islands with poor soil quality and limited flora. The average elevation in Tuvalu is one meter above sea level (MASL), while the highest point in the country is 4.5 MASL. The majority of Tuvalu’s population of 11,000 live on land less than one meter above sea level. The atolls also have extremely narrow land masses; for example, Funafuti, where more than half of the population is concentrated, is less than 100 meters wide on average.

The very small size of the domestic economy and Tuvalu’s extreme remoteness from major markets, near total dependence on imports, particularly of food and fuel, and vulnerability to external shocks, climate change and rising sea levels pose significant challenges to macroeconomic performance. The public sector dominates economic activity. Tuvalu has few natural resources, except for its fisheries and earning from fish exports and fish licenses for Tuvalu’s territorial waters are a significant source of government revenue. International aid, including support from the World Bank, and the (TTF), an international trust fund established in 1987 by development partners, are an important cushion for meeting shortfalls in the government’s budget. Private sector development opportunities are highly constrained by the lack of economies of scale in such a small and fragmented domestic market and by severe infrastructure deficits in utilities, transport and communications. Limited economic opportunities are reflected in the fact that 26 percent of the population living below the national poverty line. Tuvalu’s narrowly-based economy and vulnerability to external shocks exposes it to volatility in macro-economic performance and this is exacerbated by the financial impact of climate change and the cost of climate-related adaptation projects. In common with other Pacific Island countries, Tuvalu also confronts economic and escalating fiscal costs associated with meeting the health care needs of an aging population and epidemic of non-communicable diseases.

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

Relationship to CPF

The proposed operation is aligned with the priorities identified in the Regional Partnership Framework FY2017-FY21 (RPF) covering nine Pacific Island countries (Report #120479).1 The first pillar of the PDO program: strengthening public financial management is aligned with focus area 4 of the RPF (strengthening the enablers of growth opportunities – specifically, the development and maintenance of frameworks to improve fiscal management). The second and third pillars of the PDO are aligned with Focus Area 3: Protecting incomes and livelihoods, through its contribution to achievement of Objective 3.1: Strengthened resilience to natural disasters and climate change.

C. Proposed Development Objective(s)

The Development Objective of the First Resilience Development Policy Financing with a CAT-DDO is to support the government’s efforts to: (i) strengthen public financial management; (ii) enhance infrastructure management, and disaster- and climate-resilience; and (iii) improve social protection and inclusion in education.

Key Results

The reforms under the first pillar are expected to: (i) reduce spending on overseas medical treatment as a percentage of GDP; and (ii) increase the level of competition - average percentage of major procurement (value) through competition. The expected results under the second pillar are: (i) development of asset investment plans (based on disaster and climate vulnerability) and use for selected asset classes; (ii) compliance of a percent of public buildings and dwellings with Building Regulations and Code; (iii) Quantity of recyclable waste exported. The expected results under the third pillar are: (i) an increase in the number of employed teachers who are trained in inclusive and special education; (ii) all community disaster plans and all school evacuation plans are aligned to include PWDs, in accordance with the National Strategic Action Plan for Climate Change and Disaster Risk Management.

D. Project Description

The proposed program supports policy reforms under three pillars, namely to: (i) strengthen public financial management; (ii) enhance infrastructure management, and disaster- and climate-resilience; and (iii) improve social protection and inclusion in education.

The first pillar on strengthening public financial management is closely aligned with three goals of Te Kakeega III: (i) Goal 3: The Economy Growth and Stability (ii) Goal 2: Good Governance and (iii) Goal 4: Health and Social Development. Goal 3.2 of TK III supports prudent management of the macroeconomic status of the economy. TK III Goal 2.2 emphasizes that public sector expenditure needs to be contained at a manageable level and within the Parliament-appropriated level. TKIII Goal 4 Health and Social Development program supports the government’s review of the policy related to its overseas referral programme.

The second pillar on enhancing infrastructure management and resilience is directly linked to Goal 9 of Te Kakeega III: to provide efficient, high quality infrastructure and support services. This Goal recognizes that new infrastructure and better management of existing infrastructure will play a central role in disaster risk reduction (DRR) and climate change adaptation (CCA). TK III commits to aggressive DRR and CCA measures that include: (i) enacting and enforcing appropriate

1 Kiribati, the Republic of the , Federated States of Micronesia, Republic of , Republic of Palau, Independent State of Samoa, Kingdom of Tonga, Tuvalu, and Vanuatu

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

building codes, (ii) upgrading existing infrastructure, and (iii) creating new, climate-proofed infrastructure and coastal works that protect foreshores, prevent permanent shoreline loss and prolonged coastal inundation, thereby minimizing damage to life and property. Similarly, Tuvalu’s Climate Change Policy (Te Kaniva) 4th goal is “developing and maintaining Tuvalu’s infrastructure to withstand climate change impacts, climate variability, disaster risks, and climate change projection”. Te Kaniva recognizes that strengthening infrastructure is essential, as it is the lifeline the people of Tuvalu use for transportation, communication, the movement of goods, and the means of accessing economic opportunities and social services. Strengthened buildings can also be used as shelters during disasters or emergencies.

The third pillar on improving social protection and inclusion in education is closely aligned with Goals 4 of Te Kakeega III on Social Development. Specifically, this pillar is closely aligned with Goal 4.9 Social adaptation, 4.12 Poverty, 4.13 Unemployment, 4.14 Community Affairs and 4.16 Gender. Under these goals, the government recognizes the acceleration of social change in the context of Tuvalu and commits to adapt and establish policies to improve identification, coordination and targeting assistance to the poorest and most vulnerable population.

E. Implementation

Institutional and Implementation Arrangements

The implementation of this program’s prior actions will be the responsibility of the GoT in coordination with the Ministry of Finance and Economic Development (MFED). Tuvalu’s reform efforts and progress against this program’s results matrix will be reviewed by the GoT in close coordination with the World Bank team and in the context of the annual review of the policy matrix. The MFED will coordinate and monitor the program and the related indicators, as described in the policy matrix of the Program Document and provide regular reports to the World Bank in accordance with agreed timelines. The MFED has adequate capacity to coordinate and monitor the program related indicators, although data availability may be somewhat limited.

F. Poverty and Social Impacts and Environmental Aspects

Poverty and Social Impacts

The prior actions and results to be supported by this proposed operation are expected to have significant positive effects on poor people and vulnerable groups, particularly in improving their resilience to disaster and climate shocks. As an upper middle-income country based on WB GNI measures, Tuvalu has a low extreme poverty rate of 3 percent based on the US$1.90PPP international poverty line, meaning that the country is largely free from extreme poverty. However, its poverty rate based on the US$5.50PPP line, which represents the average standard of living in upper middle-income countries, sits at 47 percent, indicating a population that is still vulnerable to economic shocks and in need of strong public service delivery. The stability of public service delivery is particularly relevant to Tuvalu, as it is highly vulnerable to disasters and climate change: catastrophe risk modeling conducted in 2011 estimates that Tuvalu is expected to incur, on a long-term annual average, US$0.2 million per year in direct asset losses due to earthquakes and tropical cyclones alone. In the next 50 years, the country has a 50 percent chance of experiencing a loss exceeding US$4 million, and a 10 percent chance of experiencing a loss exceeding US$9 million.2 However, asset losses alone do not show how people’s livelihoods are affected, especially the prospects of the poorest and most vulnerable. For the poor, even small absolute values of asset loss can disproportionately affect livelihoods, reducing income and making it even harder to rebuild lost homes and productive assets. Poverty and vulnerability to natural hazards are strongly inter-related: poverty increases vulnerability

2 Pacific Catastrophe Risk Assessment and Financing Initiative, at note 7.

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

to adverse natural events, and disasters cause capital and human losses, fostering poverty and leading to poverty traps. The poor, having limited assets and savings, are less able to cope with impacts on consumption or disruptions to income. The reforms supported by this operation will improve the quality and stability of public service delivery, with an emphasis on protecting against climate- and disaster-related shocks.

The prior actions supported under Pillar 1 are likely to have both direct and indirect positive impacts on poverty reduction. Reforms in financial management practices lead to greater macroeconomic stability and improved quality of public expenditure. Successful implementation of these reforms would provide a foundation for improved performance in government service delivery, including in sectors that are vital to improving the lives of the poor and vulnerable, such as health and education. This would also be supported by the reforms on procurement implementation, which would increase efficiency and transparency of government expenditures. The health sector PA on the establishment of a task force to review the Tuvalu Medical Treatment Scheme may potentially have negative short-term impacts on the poor, as a reduction of spending on TMTS by capping the budget or number of patients might lead to a limitation of access to high quality medical treatment which is unavailable in-country. In order to mitigate these negative impacts, a successful review process should also lead to a longer-term action plan involving more efficient and better-targeted spending, in order to restore the accessibility and quality of health services, particularly for the poor and vulnerable.

The prior actions supported under Pillar 2 will have a direct and positive impact on the resilience of the poor and vulnerable to climate- and disaster-related shocks. Improving the climate and disaster resilience of public assets (through the Asset Management Framework) and private assets (through Building Code) can protect the poor from both direct losses but also the disruption to public services and access to livelihoods. The PA on the Tuvalu Asset Management Framework will lead to improvements in the climate and disaster resilience of public assets, which is vital for maintaining the stability of public service delivery. The PA on the endorsement of a Building Act to enforce the Building Code will lead to long-term improvement in the quality of private buildings in Tuvalu, including dwellings, and reduce the damage incurred through disasters and climate-related deterioration. These two policies combined could have a substantial positive impact on the well-being of all Tuvaluans, but particularly the poor and vulnerable who are more reliant on public services and more exposed to disaster risks due to a lack of formal safety nets.

The poverty impact of higher bottled water prices from the waste levy is negligible. Based on the 2015-16 Tuvalu HIES, bottled water purchases were only reported by 20 percent of urban households and accounted for 1 percent of household consumption (counting only households with purchases). However, as bottled water purchases are typically underreported in the HIES, other data are needed to corroborate these findings. The trend was found to be consistent with the Marshall Islands HIES, where specific questions were asked about bottled water purchases. In RMI, a country similar to Tuvalu in geography and water availability, bottled water purchases were also exclusively urban and accounted for 1.6 percent of total consumption for poor households and 1.8 percent for non-poor households (counting only households with purchases). As the incidence of poverty in Tuvalu is much higher in rural areas than urban areas, and the levy would only lead to a 5 percent increase in the price of bottled water, the poverty impact of higher bottled water prices is negligible.

Higher prices of cooking oils, which are also affected by the waste levy, would also have a negligibly small impact. Cooking oils are purchased throughout the distribution and in both urban and rural areas, but are consistently only 0.5 percent of the total household consumption aggregate. A levy of AU$0.10 would represent a 2.5-3.3 percent price increase, which is partially offset by the rebate. As such, the price increases do not substantially affect the ability of poor and vulnerable households to afford cooking oils.

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

Higher prices of soft drinks and alcohol would affect consumption somewhat, but also bring health benefits. Soft drinks and alcohol make up a higher share of total consumption than bottled water and cooking oils (around 5 percent, though the consumption of alcohol is notoriously underreported in household surveys around the world). As such, this may be the main source of pressure on the budgets of poor and vulnerable households. Assuming the consumption of soft drinks and alcohol are price-elastic, increased prices will reduce consumption, which also brings desirable long-term health benefits. If, however, these goods are price-inelastic in Tuvalu, which is the case in some other countries but cannot be measured without dedicated research, then the price increase may lead to the reduced consumption of other goods instead. To mitigate that risk, further public campaigns may be needed to encourage a reduction in soft drink and alcohol consumption.

The cumulative impact from price increases across these goods is likely to be small and easily mitigated. Information campaigns about the waste levy rebates could encourage households to recycle more and offset the price increases. Health campaigns against soft drink and alcohol consumption may encourage people to consume less and insulate them from the price increases. In the long run, improved access to potable water in urban and rural areas would reduce the need for households to access bottled water.

The prior action supported under Pillar 3 has a direct and positive impact on the well-being of persons with disability (PWD), who are more likely to be poor or vulnerable. The National Policy for Persons with Disability promotes social inclusion and economic empowerment for PWD and utilizes a broad and inclusive definition to include physical, mental, intellectual and other sensory impairments. According to the 2018 Tuvalu Study on People with Disability, the majority of PWD are women and most caregivers for PWD are also women; thus, successful implementation of the disability policy is likely to be of particular benefit to women. The policy also covers improvements in education opportunities for children with disabilities, which is a vital and much-needed investment in human capital and future productivity.

Environmental Aspects

The policy reforms supported by this operation are unlikely to have any negative effects on Tuvalu’s environment. Reforms to support macroeconomic sustainability through the strengthening of the investment management of the country’s reserve assets and improving the effectiveness of payroll expenditures are not likely to have any significant environmental impacts. The prior actions supported under this operation are not expected to create negative impacts on Tuvalu’s environment, forests and other natural resources.

The prior actions proposed under the operation are not likely to have any negative effects on Tuvalu’s environment and natural resources, relative to the status quo. A number of actions, including regulations to improve the management of solid waste, and the disaster- and climate-resilience of buildings and infrastructure, are expected to have positive impacts on the environment. Through Pillar 2, the Government is adopting a risk-informed approach to development, by addressing the gaps in the regulatory environment for climate and disaster-resilient infrastructure and reducing risk in the built environment. These include affordable and accessible guidelines for improving the resilience of traditional dwellings and structures.

G. Risks and Mitigation . The overall risk level for the program is rated as substantial. Four risk categories (macroeconomic risks; institutional capacity for implementation and sustainability risks, fiduciary risks and environment and social risks) are rated substantial, while the remaining risk categories are rated moderate. The upfront and disaster-contingent grant financing provided by the proposed operation as budget support serves to mitigate some of the short-term fiscal macroeconomic risks. Medium

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

term risks are mitigated by the revenue and disaster risk management reforms supported by the proposed operation.

CONTACT POINT

World Bank Demet Kaya, Artessa Saldivar-Sali Senior Economist

Borrower/Client/Recipient

Tuvalu Seve Paeniu Minister of Finance [email protected]

Implementing Agencies

Ministry of Finance Niuatui Niuatui Director of Budget, Planning & Aid Coordination [email protected]

Karlos Lee Moresi CEO/Permanent Secretary [email protected]

FOR MORE INFORMATION CONTACT

The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects

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The World Bank Tuvalu First Resilience Development Policy Operation with a Catastrophe-Deferred Drawdown Option (P170558)

APPROVAL

Task Team Leader(s): Demet Kaya, Artessa Saldivar-Sali

Approved By APPROVALTBL Country Director: Mona Sur 02-Oct-2019

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