Economic and Financial Analysis

Greater Port Vila Urban Resilience Project (RRP VAN 52031-001)

ECONOMIC AND FINANCIAL ANALYSIS

1. Economic and financial analyses were carried out to determine the economic viability and financial sustainability of the project. The analyses were undertaken following the Asian Development Bank (ADB) Guidelines for the Economic Analysis of Projects, Financial Management and Analysis of Projects, and Financial Due Diligence: A Methodology Note.1

A. Macroeconomic Context

2. Most of Vanuatu's population lives in rural areas where subsistence farming, fishing, and production of cash crops such as kava, coconut, and cocoa are the main sources of livelihood. Goods exports are dominated by agricultural products, particularly kava, coconut products, beef, and cocoa. Since 2010, Vanuatu's economic growth has been driven largely by tourism and construction. Tourism and related services sectors (wholesale and retail trade, hotels and restaurants, and transport and communication) account for about 40% of gross domestic product (GDP) and about 30% of formal employment.2 Construction is driven by private sector retail, residential development, and some development partner-funded construction projects mostly on the island of Efate, particularly in Port Vila.

3. GDP grew by 2.8% in 2018 and in 2019. Financed by higher spending, growth in public administration helped to sustain economic growth in 2019 despite weaknesses in other sectors. Agriculture production declined by more than 10%. Low international prices and a coconut rhinoceros beetle infestation caused copra output to drop. While tourist arrivals by air reached their highest ever level in 2019, tourism growth decelerated from 6% in 2018 to 4%. Construction slowed as government capital expenditure fell along with imports of cement, machinery, and transport equipment as several infrastructure projects reached completion. Recurrent public growth expenditure jumped from 3% in 2018 to almost 15% in 2019 because of increases for goods and services, and for the public wage bill. This was financed mainly by higher revenue from honorary citizenship programs and value-added tax.3

4. With expenditure growth outpacing revenue, the fiscal surplus narrowed slightly to equal 6.7% of GDP. Some of the budget surplus was used to repay debt, including early repayment. Despite this, loan drawdowns drove external debt up to the equivalent of 39.5% of GDP in 2019. The Council of Ministers approved a revised debt-management strategy in 2019 that caps the ratio of nominal external debt to GDP at 40% (footnote 3).

5. Inflation was almost unchanged from 2018. The index for food and nonalcoholic beverages, which account for 40% of the basket, rose by 4.8% in 2019, but indexes were substantially lower for transport; alcohol and tobacco; and home utilities, including water, electricity, and gas. The current account surplus fell from the equivalent of 3.5% of GDP in 2018 to 2.7% in 2019 as agriculture exports weakened, although revenue from honorary citizenships remained strong. Increases in the export value of cocoa, beef, and especially kava were insufficient to offset large drops for copra and coconut oil (footnote 3).

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila; ADB. 2005. Financial Management and Analysis of Projects. Manila; and ADB. 2009. Financial Due Diligence: A Methodology Note. Manila. 2 Department of Foreign Affairs and Trade, Australia website. 3 ADB. 2020. Asian Development Outlook: What Drives Innovation in Asia? Manila.

B. Urban Sector Context

6. Several agencies are involved in the urban sector in Vanuatu. The Prime Minister’s Office is responsible for medium- and long-term national development plans. The Department of Strategic Policy, Planning and Aid Coordination in the Prime Minister’s Office is responsible for monitoring and guiding infrastructure project development, following national objectives in the National Sustainable Development Plan 2016–2030 (Vanuatu 2030).4 The Vanuatu Project Management Unit in the Prime Minister’s Office is responsible for implementing major projects. The Ministry of Finance and Economic Management sets the macro-fiscal framework to guide development partner investments. The Ministry of Internal Affairs (MOIA) coordinates provinces and municipal governments,5 performs a crosscutting policy function for all infrastructure subsectors, and is responsible for implementing essential policies for the internal administration of Vanuatu. The National Disaster Management Office coordinates Vanuatu’s resilience program across different ministries through a cluster system and provincial, municipal, and community disaster and climate change committees. Nongovernment organizations also help communities prepare for and respond to disasters.

7. The Ministry of Infrastructure and Public Utilities is responsible for land, air, and maritime transport infrastructure. It is also the lead government agency for the shelters cluster, which is part of the National Disaster Management Office’s cluster system. The Department of Environmental Protection and Conservation regulates sanitation and solid waste management. Formal collection of rubbish and establishment of dumpsites is limited to urban areas and larger towns, and is managed by the municipalities and local authorities. The department is responsible for approving environmental planning and management documents.

8. Port Vila is the capital city and economic hub of Vanuatu, with a population of about 41,326 in 2019 (an increase from 38,714 people in 2016). Located on Efate Island in Shefa Province, the capital occupies about 12 square kilometers (km2) and has a population density of 3,444 people per km2. Port Vila is Vanuatu’s most important harbor and the center of the country’s imports. The other major urban center is Luganville in Sanma Province.

9. Greater Port Vila (GPV) comprises Port Vila, which is administered by Port Vila Municipal Council (PVMC), and the surrounding 277 km2 peri-urban areas in southwest of Efate Island, Shefa Province, managed by the Shefa Provincial Government Council. The population of GPV is projected to increase to 112,140 by 2030 from 81,712 in 2016, driven mainly by rapid internal migration from the outer islands.6

10. The main concern for urbanization in GPV is rapid population growth in the peri-urban areas, often in areas that are physically exposed to hazard risks. The population increase and growing informal settlements in GPV have created pressures on infrastructure and services, adversely impacted Port Vila’s environment, and placed a large percentage of the population at risks from the natural and geophysical hazards.

4 Government of Vanuatu, Department of Strategic Policy, Planning and Aid Coordination. 2016. Vanuatu 2030: People’s Plan. National Sustainable Development Plan 2016–2030. Port Vila. 5 The first-tier towns are those three for which a formal municipal council has been established. They are Lenake, Luganville, and Port Vila. 6 Government of Vanuatu, National Statistics Office. 2011. 2009 National Population and Housing Census. Analytical Report Volume 2. Port Vila. Population projections to 2030 are based on estimated annual average growth rates of 2.2% for PVMC and 2.6% for Shefa Provincial Government Council.

C. Economic Rationale for Government Intervention

11. Vanuatu ranks first globally as the economy most exposed to natural hazards based on vulnerability, and is highly exposed to geophysical hazards including volcanic eruptions and earthquakes.7 The economic impact of disasters in Vanuatu can be significant. Tropical Cyclone Pam in 2015 caused an estimated total loss of about $450 million—equivalent to 64% of the country’s GDP. In 2020, Vanuatu has experienced significant impacts as a result of the coronavirus disease (COVID-19) and Tropical Cyclone Harold, which hit the island of Espiritu Santo in April. Vanuatu has been in a state of emergency since 26 March 2020. While the Ministry of Health reports that there have been no confirmed cases of COVID-19, travel restrictions associated with the state of emergency are still in place and have affected tourism, disaster recovery operations, and trade.8

12. Vanuatu’s economy is expected to contract by 9.8% in 2020 and grow by 1.0% in 2021 on the back of a gradual reopening to tourism.9 Inflation is expected to be 3.0% in 2020 and 2.2.% in 2021, reflecting supply chain disruption. COVID-19 has also undermined the tourism industry, a key generator of employment, income, and foreign exchange. Restrictions on the movement of labor and imported capital equipment has also delayed critical infrastructure projects and undermined the stimulus from construction.

13. The combined impact of COVID-19 and frequent tropical cyclones also contributes to deepening inequality by increasing the number of “new poor,” defined by the World Bank as “those who were expected to be non-poor in 2020 prior to the COVID-19 outbreak but are now expected to be poor in 2020.”10 Using the international poverty line of $3.20 in 2011 purchasing power parity for lower middle-income countries, 39.2% of Vanuatu’s population were living in poverty in 2010. The World Bank predicts that globally, COVID-19 could generate 176 million more poor people below the $3.20 poverty line, about 10.8% of them in East Asia and the Pacific.11

14. While Vanuatu is not classified as a fragile and conflict-affected situation, as a small island developing state, it displays many of the characteristics associated with a fragile state, including weak governance and low capacity, geographic isolation, high cost of doing business, frequent government changes, and vulnerability to climate change and disaster-related shocks.12

15. The Urban Risk Management Strategy identifies most of GPV as being at risk from earthquake and cyclonic winds.13 At the 100-year mean return period, about 85% of the buildings and population are exposed to moderate levels and 15% to high levels of potential risk of

7 Bündnis Entwicklung Hilft and Ruhr University Bochum – Institute for International Law of Peace and Armed Conflict. 2019. The WorldRiskReport 2019. Berlin. 8 Ministry of Health daily update https://covid19.gov.vu. 9 ADB. 2020. Asian Development Outlook Update: Wellness in Worrying Times—September 2020. Manila. 10 M. Nguyen, N. Yoshida, H. Wu, and A. Narayan, 2020. Profiles of the New Poor because of the COVID-19 Pandemic. Washington, DC. https://www.worldbank.org/en/topic/poverty/brief/Profiles-of-the-new-poor-due-to-the-COVID-19- pandemic. 11 M. Nguyen, N. Yoshida, H. Wu ,and A. Narayan, 2020. Profiles of the New Poor because of the COVID-19 Pandemic. Washington, DC.; D. Mahler, C. Lakner, R. Aguilar, and H. Wu. 2020. Updated Estimates of the Impact of COVID- 19 on Global Poverty. Washington, DC; and World Bank. 2020. Projected Poverty Impacts of COVID-19 (Coronavirus). Washington, DC. 12 Based on ADB’s 2018 country performance assessment, Vanuatu received a rating of 3.19, while the harmonized list of 2019 operations rated it 3.28—marginally above the cut-off rating (3.20). (ADB. 2019. Annual Report on the 2018 Country Performance Assessment Exercise. Manila.) 13 Beca International Consultants Ltd. GNS Science, and National Institute of Water and Atmospheric Research. 2016. Urban Risk Management Strategy: Risk Mapping and Planning for Urban Preparedness. Port Vila.

4 earthquakes and winds. Some 6% of the buildings and population are exposed to moderate to very high levels of potential risk from coastal inundation.

16. The Greater Port Vila Urban Resilience Project will improve urban resilience in GPV through capacity building, institutional strengthening, and the construction of two multipurpose emergency shelters.14 The project has four outputs: (i) resilience in urban planning and management strengthened; (ii) urban resilience enhanced through local partnerships; (iii) resilient urban infrastructure constructed in GPV; and (iv) asset management and institutional capacity strengthened.

D. Economic Evaluation

17. With- and without-project situations. Vanuatu’s traditional evacuation centers have often been temporary facilities located in churches, schools, health centers, and community halls. This has presented challenges including (i) the high cost of cleanup and restoration of these facilities after their use as evacuation shelters with limited or no funds; (ii) the need for churches and schools to revert to their normal purposes once the emergency phase has passed, requiring affected people to leave before recovery can be completed; (iii) the need for health facilities to be able continue to deliver emergency care, especially during a pandemic; and (iv) limited space and access in the centers, as they fill to capacity quickly or because of social or cultural differences.

18. Under the project, multipurpose emergency shelters, including ward offices, will be constructed in strategic and safe locations. The shelters can provide a haven for about 905 potential evacuees to avoid death or disability during disasters. They will also include a communal space or area that can be used for community meetings and gender-sensitive post-disaster response. The shelters can also be used to sustain economic activity (e.g., as a marketplace) for use outside emergency situations. This is to ensure the shelters have a daily function and a regular source of revenue to cover the costs for operation and maintenance (O&M). The two shelters will also provide employment opportunities to about 339 people through the development of improved market areas. The shelters will be inclusive, as they are designed to reflect community priorities and characteristics.

19. The project will serve about 15,500 people at different times and in various capacities (e.g., as an emergency shelter, marketplace and/or community center), of which about half will be women. Additional beneficiaries may include people who work or study in Port Vila from within GPV.

20. Least-cost analysis. Standard demand analysis for calculating the benefits of the two multipurpose emergency shelters is not applicable for this project. Quantifiable benefits in the form of avoided deaths and disabilities of residents (measured in disability-adjusted life-years because of disasters caused by natural hazards15) resulting from the establishment of emergency shelters would yield disproportionately low benefits relative to investment costs. The shelters can help a segment of the population who would be potential evacuees avoid death and disability during disasters. Instead, the two shelters were evaluated from an economic perspective using least-cost analysis to identify cost-effective solutions to the problem of providing a basic level of service adapted to local needs.

14 The shelters will be built at Seaside Showground and Freshwota Market. 15 The approach was developed by Harvard University for the World Bank in 1990 for a study that provided a comprehensive assessment of mortality and disability from diseases, injuries, disasters caused by natural hazards, and risk factors. The World Health Organization adopted the method in 1996 and continually revises the determination of disability-adjusted life years.

21. The National Disaster Management Office of Vanuatu has a checklist of minimum planning and design standards for evacuation centers that covers the location16 and accessibility; structural and architectural minimum requirements; occupancy capacity; cooking facilities; water, sanitation, and hygiene; electrical installations and emergency power supplies; and safety and protection.

22. The technical team identified two technically viable design options for the construction of the superstructure of the shelters that adhere to the established government planning and design standards. Option A involves the use of concrete block walls with reinforced concrete columns and horizontal bond beams. This design, which is widely in use in Port Vila, is suitable for constructing resilient buildings capable of withstanding very high winds. The system of columns and beams links all structural members together as one whole solid structure, capable of attaining the wind resistance through the application of the prescribed building standard (AS/NZS 1170:2). These standards were applied to buildings constructed under the ADB-supported Port Vila Urban Development Project.17

23. Option B involves the use of high-tensile, light-gauge galvanized structural steel, usually a proprietary product. The main attributes of the product are strength, durability, and flexibility in design. Buildings constructed in light-gauge steel are amenable to modification. The use of light gauge steel can simplify the construction process as components can be carried and put in place by hand in most circumstances.

24. Under options A and B, the superstructure of the shelters is of the same size and can accommodate the same number of evacuees. Table 1 compares the costs of the shelters in the selected sites under the two options.

Table 1: Cost Comparison of Design Options Seaside Showground Freshwota Market Item Option A Option B Option A Option B Shelter size (square meters) 432 432 1,165 1,165 Population served (number) 5,908 5,908 9,892 9,892 Evacuees (number) 235 235 670 670 Financial price ($'000) Capital costa 1,686 2,055 4,253 4,680 Annual O&M costb 15 15 29 29 Economic price ($'000) Capital costa 1,419 1,730 3,580 3,939 Annual O&M costb 12 12 23 23 NPV discounted at 9% ($'000) Capital costa 1,200 1,463 3,027 3,330 Annual O&M costb 118 118 229 229 Total cost 1,319 1,581 3,255 3,559 Cost per evacuee ($) 5,611 6,729 4,859 5,312 NPV = net present value, O&M = operation and maintenance. a In June 2020 constant prices, including 10% physical contingency. b In June 2020 constant prices. Note: Numbers may not sum precisely because of rounding. Source: Consultant’s estimates.

16 Schools, churches, sites in hazardous areas, and sites outside PVMC are excluded. 17 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grants to the Republic of Vanuatu for the Port Vila Urban Development Project. Manila.

25. Based on the cost comparison in Table 1, option A is the preferred option and is the least- cost, more cost-effective solution for providing emergency shelters.

E. Port Vila Municipal Council Financial Performance and Sustainability

26. The council had a cash operating surplus of Vt49 million in 2016 and Vt54 million in 2017. Property tax, the council’s major source of revenue, accounts for 55% of total revenues for 2016 and 2017. The property valuation was last revised in 2003. The second major source is building permits, which account for 12% of total revenue. The third major source, accounting for 7% of total revenue, is the revenue from landfill fees and the sale of plastic bags.18 Administration expenses account for the biggest share of recurrent expenditures, at 54% in 2016 and 2017. Wages and salaries are the second-largest component, at 33% for the same period. Mayorship and ward council expenses account for the balance of recurrent expenditures.

27. Table 2 provides the historical and projected financial performance of PVMC from 2016 to 2030. The projected financial performance, which incorporates the operations of the two multipurpose emergency shelters, shows an annual cash operating surplus, indicating financial sustainability.

28. PVMC is the owner of the centers and the agency responsible for implementation of the Asset Management Strategy and the operation and maintenance of these facilities. Maintenance requirements must be identified during the detailed design of the project. Maintenance plans will need to include details on what tasks need to be undertaken and how often, for example, annual cleaning of gutters before the onset of the wet season, checking of roof ties and fastenings before and after the cyclone season, and annual desludging of septic tanks. The centers’ O&M staff will need to be trained in these tasks; and a checklist of items and basic tools, such as hammers, screw drivers, and ladders, will be included in the equipment to be provided for the centers.

29. Although the financial analysis indicates financial sustainability, PVMC should undertake the following actions periodically to ensure the project assets are operated and maintained adequately and will be readily available as safe shelters during disasters: (i) before completion of the project assets, set up a major maintenance reserve account (MMRA) in the PVMC balance sheet dedicated to the O&M of project assets; (ii) collect space rent for the use of the centers and keep the space rent revenue in the MMRA for future rehabilitation expenses; (iii) estimate the O&M budget requirement for the centers annually; (iv) identify the source of revenue to finance the annual O&M budget (e.g., PVMC budget, the MOIA, or central government budget transfer); (v) confirm availability of resources to cover annual O&M costs; and (vi) confirm with the Ministry of Finance and Economic Management through the MOIA the transfer of budget from the Emergency Fund (Disaster Risk Management Act No. 23 of 2019) to PVMC MMRA for operations during a disaster; and (vii) confirm with the Ministry of Finance and Economic Management through the MOIA that the government will absorb any shortfalls that arise in the financing of O&M.

18 Residents buy yellow plastic bags from the council for disposal of solid waste, and these are collected by the council’s trucks regularly. Privately owned trucks that dump waste into the PVMC-operated landfill pay landfill fee according to the size and type of their trucks.

Table 2: Port Vila Municipal Council Revenue and Expenditures, 2016–2030 (Vt’000)

Actual Actual Budget Estimate Estimate Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Item Description 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Existing Operations Revenue Property tax 220,796 138,313 166,809 170,479 174,230 178,063 181,980 185,984 190,075 194,257 198,531 202,898 207,362 211,924 216,586 Building permit 19,299 59,179 28,427 60,481 61,811 63,171 64,561 65,981 67,433 68,916 70,432 71,982 73,565 75,184 76,838 Plastic bag sales 14,053 14,751 14,751 15,075 15,407 15,746 16,092 16,446 16,808 17,178 17,556 17,942 18,337 18,740 19,153 Landfill fees 6,330 10,019 10,200 10,424 10,654 10,888 11,128 11,372 11,623 11,878 12,140 12,407 12,680 12,959 13,244 Other income (various) 70,605 94,959 75,006 97,049 99,184 101,366 103,596 105,875 108,204 110,585 113,017 115,504 118,045 120,642 123,296 Total Revenue 331,084 317,221 295,193 353,508 361,285 369,233 377,356 385,658 394,143 402,814 411,676 420,733 429,989 439,449 449,116 Recurrent Expenditures Wages & salaries 89,270 92,060 131,540 134,434 137,392 140,415 143,504 146,661 149,887 153,185 156,555 159,999 163,519 167,116 170,793 Administration expenses 159,485 136,828 130,161 139,838 142,915 146,059 149,272 152,556 155,913 159,343 162,848 166,431 170,092 173,834 177,659 Ward council expenses 4,860 6,091 2,500 6,225 6,362 6,502 6,645 6,791 6,940 7,093 7,249 7,408 7,571 7,738 7,908 Mayorship expenses 27,827 27,956 30,991 31,673 32,370 33,082 33,810 34,553 35,314 36,090 36,884 37,696 38,525 39,373 40,239 Total Recurrent Expenditures 281,442 262,935 295,193 312,170 319,038 326,057 333,230 340,561 348,054 355,711 363,536 371,534 379,708 388,062 396,599 Surplus - Existing Operations 49,642 54,286 0 41,337 42,247 43,176 44,126 45,097 46,089 47,103 48,139 49,198 50,281 51,387 52,517 ADB Shelters Revenue 49,797 50,893 52,013 53,157 54,326 55,522 56,743 O&M expenditures 5,449 5,569 5,691 5,816 5,944 6,075 6,209 Surplus 44,349 45,324 46,322 47,341 48,382 49,447 50,534 Overall Surplus 49,642 54,286 0 41,337 42,247 43,176 44,126 45,097 90,438 92,428 94,461 96,539 98,663 100,834 103,052 ADB = Asian Development Bank, O&M = operations and maintenance. Notes: 1. Port Vila Municipal Council (PVMC) 2016 and 2017 actual and 2018 budget data were provided by PVMC. 2. PVMC 2018 and 2019 actual and 2020 budget data are not available. 3. Estimates for 2019 and 2020 and projections starting 2021 of revenue and expenditures were based on growth rate equivalent to average local inflation of 2.2% per annum. 4. The two multipurpose emergency shelters can be used as a marketplace outside of emergency situations; space and rent are assumed for about 339 stallholders; occupancy rate is conservatively estimated at 75%; and daily rent fee of Vt575 per stallholder is based on the same rate that existing similar facilities would charge. Sources: Port Vila Municipal Council and consultant’s estimates.