Report and Recommendation of the President to the Board of Directors Project Number: 50110-001 November 2017 Proposed Loan Cook Islands: Improving Internet Connectivity for the South Pacific Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011. CURRENCY EQUIVALENTS (as of 19 October 2017) Currency unit – New Zealand dollar (NZ$) NZ$1.00 = $0.69093 $1.00 = NZ$1.447487 ABBREVIATIONS ADB – Asian Development Bank ARPU – annual revenue per user CMA – construction and maintenance agreement ESMP – environmental and social management plan GDP – gross domestic product MCS – Manatua cable system O3B – Other Three Billion OPT – Office des Postes et Télécommunication (mail and telecommunications office) PAM – project administration manual PMU – project management unit PSG – Project Steering Group SSCC – Samoa Submarine Cable Company TCI – Telecom Cook Islands NOTES (i) The fiscal year (FY) of the Government of the Cook Islands and its agencies ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2016 ends on 30 June 2016. (ii) In this report, “$” refers to United States dollars, unless otherwise stated. Vice-President Stephen Groff, Operations 2 Director General Ma. Carmela D. Locsin, Pacific Department (PARD) Director Emma Veve, Urban, Social Development, and Public Management Division, PARD Team leader Sibesh Bhattacharya, Senior Infrastructure Specialist (Information and Communication Technology), PARD Team members Ninebeth Carandang, Safeguards Specialist, PARD Jesusa Dela Cruz, Operations Assistant, PARD Erick Gagnon, Principal Procurement Specialist (Consulting Services), Operations Services and Financial Management Department Beatrice Olsson, Country Coordination Officer, PARD Cheong Ann Png, Principal Counsel, Office of the General Counsel Rommel Rabanal, Senior Economics Officer, PARD Jean Williams, Senior Environment Specialist, PARD Peer reviewer Arun Ramamurthy, Senior Public Management Specialist (Information and Communication Technology and e-governance), Sustainable Development and Climate Change Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE MAP I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Output 4 D. Summary Cost Estimates and Financing Plan 4 E. Implementation Arrangements 5 III. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty, Social, and Gender 8 E. Safeguards 8 F. Summary of Risk Assessment and Risk Management Plan 9 IV. ASSURANCES AND CONDITIONS 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 13 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 50110-001 Project Name Improving Internet Connectivity for the Department PARD/PAUS South Pacific Project /Division Country Executing Agency Ministry of Finance & Borrower Government of Cook Islands Economic Management 2. Sector Subsector(s) ADB Financing ($ million) Information and ICT infrastructure 15.00 communication technology Total 15.00 3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth Pillar 1: Economic opportunities, Climate Change impact on the Medium (IEG) including jobs, created and expanded Project Regional integration (RCI) Pillar 1: Cross-border infrastructure Pillar 2: Trade and investment 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Client relations, network, and No gender elements (NGE) development (GCD) partnership development to partnership driver of change Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas Pilot-testing innovation and learning Partnerships (PAR) Commercial cofinancing Private Sector Regional organizations Private sector development Public sector goods and services (PSD) essential for private sector development 5. Poverty and SDG Targeting Location Impact Geographic Targeting No Nation-wide High Household Targeting No SDG Targeting Yes SDG Goals SDG8, SDG9, SDG17 6. Risk Categorization: Low . 7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C . 8. Financing Modality and Sources Amount ($ million) ADB 15.00 Sovereign Project (Regular Loan): Ordinary capital resources 15.00 Cofinancing 10.00 Government of New Zealand - Grant (Not ADB Administered) 10.00 Counterpart 2.47 Government 2.47 Total 27.47 Source: Asian Development Bank This document must only be generated in eOps. 12092017135142460109 Generated Date: 24-Nov-2017 11:45:15 AM I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Cook Islands for the Improving Internet Connectivity for the South Pacific Project. 2. The Government of the Cook Islands has requested the Asian Development Bank (ADB) to support the Cook Islands’ share in the Manatua cable system (MCS), a regional submarine internet cable system that will link Samoa and French Polynesia (non-ADB member), with additional spurs and branching units to link Rarotonga and Aitutaki in the Cook Islands, and Niue (non-ADB member). ADB financing will cover (i) the design and construction of the spurs and branching units for Rarotonga and Aitutaki, and (ii) the Cook Islands’ share in the design and construction of the MCS. The Government of New Zealand, represented by the Ministry of Foreign Affairs and Trade, will provide grant cofinancing to the government for the project. II. THE PROJECT A. Rationale 3. The economy. The Cook Islands’ economy is small and open, and has a narrow base, making it vulnerable to all kinds of shocks, including disasters triggered by natural hazards. The size and dispersion of the islands over a remote and wide area of ocean reduce opportunities to achieve economies of scale.1 Though the population has one of the highest per capita incomes in the Pacific ($15,055 in FY2016),2 the free movement of people to New Zealand has led to a declining and aging population. 4. Despite these difficulties, the government has maintained macroeconomic stability. Prices have been relatively stable, goods and services trade has large and persistent surpluses, and the financial system is sound. The government has made significant investments in infrastructure. Even so, long-term average growth hovers at about 1% (footnote 2). This manifests itself in limited job creation and slow growth in government revenue, which can inhibit the provision of essential services and the desired level of social support. 5. Tourism accounts for more than 60% of gross domestic product (GDP). But its growth potential is constrained by shortages in accommodation facilities; issues with the current land leasing framework; inadequate water supply, sanitation, and electricity infrastructure; and high telecommunications costs. The tourism and public sectors are the biggest internet users. 6. Connectivity and growth. Improved access to more affordable telecommunications, especially high-speed broadband internet, may mitigate isolation and other constraints to economic development in the Cook Islands. Based on a World Bank report, every 10-percentage- point increase in broadband penetration in low- and middle-income countries accelerates economic growth by 1.38 percentage points.3 High-speed internet reduces transaction costs for 1 The Cook Islands has Tonga to its west, Kiribati to its north, and French Polynesia to its east. It is surrounded by nearly 2 million square kilometers of ocean and has 15 islands with a total land area of 240 square kilometers. There are two main island groups: the north consists of seven atolls and the south consists of eight volcanic islands. The Cook Islands has a population of 19,000, most of whom live on the largest island, Rarotonga. Many of the smaller islands are sparsely populated. 2 ADB. 2017. Asian Development Outlook 2017: Transcending the Middle-Income Challenge. Manila. 3 World Bank. 2009. Information and Communications for Development 2009: Extending Reach and Increasing Impact. Washington, DC. 2 businesses, governments, and households; opens new business opportunities; and improves public service delivery by harnessing information and communication technology.4 7. A submarine cable would provide higher capacity and quality broadband internet at much lower cost to the Cook Islands than is currently the case, making the internet more accessible and affordable to the broader population. This would help Cook Islanders communicate with their relatives residing abroad. Regional integration would also be supported by increasing the frequency and quality of communications among countries in the Pacific region, thus increasing trade in services (tourism and back-office functions) and allowing the region to form a sizable market for digital products and services. It would also strengthen existing regional public goods and encourage the development of new forms of regional cooperation by allowing countries to better share available knowledge and human resources in the Pacific. 8. Industry structure