Economic Recovery Support Program

CURRENCY EQUIVALENTS

(as of 10 August 2009)

Currency Unit

–

New Zealand dollar (NZ$)

NZ$1.00

= $0.6712

$1.00

= NZ$1.4899

ABBREVIATIONS

ADB

–

Asian Development Bank

CIIC

–

Cook Islands Investment Corporation

CIWSSB

–

Cook Islands Water Supply and Sanitation Board (proposed)

ERSP

–

Economic Recovery Support Program

GDP

–

gross domestic product

IGF

–

infrastructure governance framework

IMP

–

infrastructure master plan

LIBOR

–

London interbank offered rate

MFEM

–

Ministry of Finance and Economic Management

MOIP

–

Ministry of Infrastructure and Planning

MOW

–

Ministry of Works

NSDC

–

National Sustainable Development Commission

NSDP

–

National Sustainable Development Plan

PERCA

–

Public Expenditure Review Committee and Audit

–

technical

assistance

NOTES

(i)

The fiscal year (FY) of the Government and its agencies ends on 30 June. “FY”
before a calendar year denotes the year in which the fiscal year ends, e.g.,
FY2009 ends on 30 June 2009.

(ii)

In this report, “$” refers to US dollars unless otherwise stated.

Vice-President

C. Lawrence Greenwood, Jr., Operations 2

Director General

S. Hafeez Rahman, Pacific Department (PARD)

Country Director

R. Keith Leonard, South Pacific Subregional Office, PARD

Sector Director

S. Ra, Pacific Strategy and Special Operations, PARD

Team leaders

E. Ferguson, Senior Country Specialist, PARD
C. Sugden, Senior Economist, PARD

Team members

R. O’Sullivan, Senior Counsel, Office of the General Counsel

R. Phelps, Senior Infrastructure Specialist, PARD

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

LOAN AND PROGRAM SUMMARY

MAP

THE PROPOSAL

II.

THE GLOBAL ECONOMIC CRISIS

The Cook Islands Economy before the Global Economic Crisis

Impact of the Crisis on the Cook Islands

The Government’s Response

III.

THE PROPOSED PROGRAM

Impact and Outcome

Policy Framework and Actions

Triggers for Subprogram 2

Lessons 15

Special Features

Financing Plan

Implementation Arrangements

IV.

PROGRAM BENEFITS, IMPACT, AND RISKS

Benefits and Impact

Risks

ASSURANCES 21

Specific Assurances

Conditions for Loan Effectiveness

VI.

RECOMMENDATION 23

APPENDIXES

1. Design and Monitoring Framework

2. Development Policy Letter and Policy Matrix

3. Economic

Analysis

4. Fiscal

Analysis

5. Managing for Development Results

6. Analysis of the Infrastructure Sector

7. Governance Framework of the Infrastructure Sector

8. Social and Gender Analysis

9. List of Ineligible Items

10. Development Coordination Matrix

11. Summary Poverty Reduction and Social Strategy

SUPPLEMENTARY APPENDIXES (available on request)

A. Status of Response to the Global Economic Crisis
B. Environmental

Assessment

LOAN AND PROGRAM SUMMARY

Borrower

Cook Islands

Proposal

The proposed Economic Recovery Support Program (ERSP) is a
program cluster of loans for two subprograms totaling $16.0 million. The
budget support through the ERSP will give a short-term boost to
economic activity in response to the global economic crisis. It will be
complemented by structural and governance measures that will aid in
economic recovery, and by measures that will help protect the vulnerable
and safeguard the fiscal position of the Cook Islands.

Classification

Targeting classification: General intervention
Sector (subsectors): Multisector (public sector management; transport,

and information and communication technology; heath and social
protection; energy; water supply and other municipal infrastructure and
services)

Themes (subthemes): Economic growth (promoting economic efficiency

and enabling business environment, widening access to markets and
economic opportunities); governance (economic and financial
governance)

Climate change: Climate change adaptation
Location impact: National

Environment
Assessment

Category C. No significant adverse environmental impact has been
identified.

Social Safeguards
Assessment

Involuntary resettlement: Category C
Impact on indigenous people: Category C
No involuntary resettlement or impact on indigenous people is expected.

Rationale and
Description

The global economic crisis led to a contraction in the Cook Islands
economy in 2008, mainly because of a drop in tourism attributable to the
slowdown in key source economies. One-off events in the second half of
2009 should prevent a further fall in visitor arrivals during the year, but
underlying conditions are weak. Without a response from the
Government, further economic contraction, or at best low growth, is
expected until the global economy recovers and tourism demand revives.

The slowdown in growth is affecting government revenue: tax collections
fell by 8.2% in real terms in FY2009, and the ratio of tax collections to
gross domestic product declined from 28.3% to 25.7%. The weak
revenue performance is putting pressure on government expenditure
programs. The vulnerable, and particularly women with lower-paid jobs in
the tourism industry, are at increasing risk.

The economic downturn is worsening the decline in economic
performance since 2004, a result in part of low infrastructure investment
and the end of the growth dividend from economic reforms in the
mid-1990s.

Subprogram 1 will provide budget support to help the Government
stimulate the economy and respond to the economic downturn. Loan
financing will enable higher capital expenditure to reduce the backlog of
priority infrastructure and other building investment. The increased
construction activity will lift aggregate demand and economic activity.
Government will implement stronger infrastructure investment processes
and infrastructure governance to ensure the quality of the increased
capital expenditure. Targeted actions will support the vulnerable
members of the community. Fiscal safeguards will be reinforced to
preserve fiscal sustainability.

Subprogram 2 will support the transition to higher, more-inclusive, and
sustainable economic growth. Loan financing will help meet the
Government’s overall financing needs for priority infrastructure.
Concerted action to raise the standard of governance in the infrastructure
sector will be supported. Efforts will center on implementing an
infrastructure master plan and an infrastructure governance framework
(both developed with support from the Asian Development Bank [ADB]).
Infrastructure will be rebuilt amid constant efforts to preserve prudent
fiscal management and sustain the expansion in capital expenditure,
while paying special attention to the needs of the vulnerable members of
the community.

Impact and
Outcome

The ERSP will achieve higher and more inclusive economic growth
(program impact), and will initiate economic recovery with protection of
the vulnerable and the country’s fiscal position (outcome).

Special Features

The design of the ERSP incorporates lessons from ADB’s experience in
program lending in the Pacific and elsewhere. To maximize country
ownership, the ERSP is anchored in the National Sustainable
Development Plan 2007–2010 and is designed to assist the Government
in carrying out its budget strategy for FY2010. The ERSP is fortified by
solid diagnostics, communication and awareness-raising initiatives, and a
commitment to a longer-term engagement through a flexible and feasible
approach.

Support for the vulnerable is a feature of the program, in recognition of
the extra hardship imposed by the global economic crisis and the
preceding period of high international commodity prices. The real value of
social welfare payments to the vulnerable will be preserved, and
government programs will be explicitly reoriented toward the vulnerable.
The ERSP will also link with other activities in support of the vulnerable.

The Cook Islands is not a member of the International Monetary Fund or
the World Bank Group, and therefore has limited access to financial
support to reduce the impact of the global economic crisis. A
comprehensive support package from ADB is needed.

Period and
Tranching

The program cluster period will be from 1 January 2008 to
30 December 2011. A single-tranche loan of $10.0 million is to be
disbursed under subprogram 1 when the Government has met the

iii

conditions for effectiveness. Subprogram 2, a single-tranche loan of
$6.0 million, will be presented for consideration and approval by ADB’s
Board of Directors depending on the progress achieved in implementing
subprogram 1, including compliance with the proposed policy actions,
and the readiness of the Government to undertake the succeeding policy
reform measures. Subprogram 2 is expected to be considered by the
Board about 24 months after the subprogram 1 loan takes effect.

Financing Plan

The program cluster amounts to $16.0 million, comprising two
subprograms ($10.0 million and $6.0 million). The loan of $10.0 million
(subprogram 1) from the ordinary capital resources of ADB will be
provided under ADB’s London interbank offered rate (LIBOR)–based
lending facility. The loan will have a term of 15 years including a grace
period of 3 years, an interest rate determined according to ADB’s
LIBOR-based lending facility, a commitment charge of 0.15% yearly, and
other terms and conditions set forth in the loan agreement.

Procurement and
Disbursement

Loan proceeds will be used to pay for items procured in ADB member
countries. Ineligible items and imports financed from other bilateral and
multilateral sources will be excluded.

The loan proceeds will be disbursed to the borrower as provided in ADB’s
Simplification of Disbursement Procedures and Related Requirements for
Program Loans (1998). Loan proceeds disbursed against imports will
require a certificate from the Government stipulating that the value of the
total imports of the Cook Islands, minus its imports from nonmember
countries, ineligible imports, and imports financed under other official
development assistance, is at least equal to the amount of the loans to be
disbursed during a particular year. ADB reserves the right to audit the use
of the loan proceeds to verify the accuracy of the Government’s
certification.

Counterpart
Funds

The Government shall ensure that the local currency generated from the
proceeds of the loans are used to support public expenditure objectives
under the program.

Executing Agency
and
Implementation
Arrangements

The Ministry of Finance and Economic Management (MFEM) will be the
executing agency for the program. The existing National Sustainable
Development Commission (comprising heads of MFEM, the Office of the
Prime Minister, the Office of the Attorney General, and the Ministry of
Foreign Affairs)

will be the program coordinating committee and will meet

at least quarterly to monitor progress and oversee the implementation of
the program, and to guide and direct the activities of the executing
agency.

Benefits

The program will provide broadly distributed benefits by helping to
counter the negative impact of the global economic crisis and setting a
foundation for higher, private

sector–led economic growth over the

medium to long term. The vulnerable will benefit from the improved
targeting of government programs.

Risks and
Assumptions

The key risks are as follows: (i) technical and legal problems delay capital
expenditure; (ii) the Government has insufficient capacity to implement
the program; (iii) a shortfall in government financing precludes optimized
infrastructure and implement policy actions linked to the program;
(iv) there is insufficient community support for the Government’s actions;
and (v) the Government’s commitment to the program wanes in the
lead-up to the 2010 election.

The program is designed to mitigate these risks. Community awareness
and demand for the program will be built as part of the communications
strategy. Explicit cabinet commitments to fiscal responsibility and
improved infrastructure governance will drive the allocation of financial
and human resources to the implementation of the program and ensure
that the higher capital expenditure is sustainable.

The program will also rely on (i) a positive response from the private
sector to a better economy; (ii) continuing improvements in the
performance of government agencies; and (iii) restraint among
government agencies in current expenditure growth given their weak
revenue performance.

I. THE

PROPOSAL

I submit for your approval the following report and recommendation on (i) a proposed

program cluster, and (ii) a proposed loan for subprogram 1, both to the Cook Islands for the
Economic Recovery Support Program (ERSP). The ERSP program cluster was prepared by a
joint team of representatives of the Government of the Cook Islands (the Government) and the
Asian Development Bank (ADB). The design and monitoring framework is in Appendix 1. The
development policy letter and policy matrix for subprogram 1, including triggers for subprogram
2, are in Appendix 2.

II.

THE GLOBAL ECONOMIC CRISIS

The Cook Islands Economy before the Global Economic Crisis

The Cook Islands economy grew for 6 consecutive years until 2004 as it recovered from

the economic crisis of the mid-1990s, the result of an overly ambitious expansion of the public
sector. An unsustainably large public service, a major public investment program, and
government guarantees for a hotel development that failed had raised the ratio of public debt to
gross domestic product (GDP) to 141%. The New Zealand dollar replaced the Cook Islands
dollar as the national currency and more than half of the public service was retrenched. A
broad range of economic and public sector reforms proved to be a catalyst for growth, providing
the foundation for a robust expansion in private sector activity.

The economy is tourism led (Figure 1), with annual visitors of around 100,000 persons,

almost six times the resident population (Appendix 3 gives an overview of key economic
issues). The reform program saw economic growth average 6.0% yearly in the 6 years up to
2004, substantially above the long-run average yearly growth rate of 3.5%. Damage caused by
cyclone Hera in 2005 and the consequent disruption of tourism brought the post-reform
expansion to an end. Almost no growth was recorded in 2005, and only slight growth in real
GDP in 2006 and 2007.

4.

The weakening in growth since 2004 is linked to slow progress in deepening economic

reform. Productivity growth and the buildup of physical and human capital have fallen short of
what is needed to sustain the growth momentum. Notably, public investment has been low, and
tighter restrictions on foreign investment have held back the private sector from accumulating
productive capital. Local labor is close to fully employed; foreign labor is needed to meet the
demand and avoid a rising cost structure. However, concerns regarding the potential dilution of
the country’s identity, with both social and marketing implications, appear to be contributing to
inertia in providing flexible, efficient access to foreign labor.

5.

A deterioration in the underlying economic fundamentals is evident in the pattern of

growth. The reforms had led to a rapid increase in private investment. Foreign direct investment
played a large role at the start, before bank lending gained prominence. Commercial building
investment, particularly in tourism accommodation and other tourism-based activities, expanded

ADB supported the Cook Islands economic reform. ADB’s Economic Restructuring Program has been rated

successful. ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed
Loan and Technical Assistance Grant to the Cook Islands for the Economic Restructuring Program. Manila (Loan
1466-COO); ADB. 2009. Special Evaluation Study: ADB Support for Public Sector Reforms in the Pacific—
Enhance Results through Ownership, Capacity, and Continuity. Manila.

considerably. Then economic activity shifted from the productive sector to residential building
(evident in an upsurge in residential building approvals and personal lending) as both
established and new residents, notably retirees drawing on their offshore savings, increased
their spending.

Figure 1: A Tourism-Led Economy

-20

-10

1983

1986

1989

1992

1995

1998

2001

2004

2007e

2010f

r
s

nua

l c

nge

, %)

-10

-5

nnua

l
c

,
%

Real GDP (rhs)

Visitor arrivals (lhs)

e = estimate, f = forecast, GDP = gross domestic product, lhs = left hand side, rhs = right hand side.
Sources: Cook Islands Statistics Office; ADB estimates.

Impact of the Crisis on the Cook Islands

The global economic crisis has heightened the economic deterioration. The economy,

given its dependence on tourism, is highly exposed to the external slowdown. It contracted in
2008 as visitor arrivals declined by 3.1%. A large decline from high-spending segments of the
market—the key northern hemisphere markets of the United States, Canada, and Europe—
outweighed a rise in tourism from New Zealand. High fuel prices and the resulting high inflation,
plus the loss of one of two international freight-shipping services, also further sapped the
economy in 2008. A weakening in a range of economic indicators points to a generalized
economic slowdown. Preliminary official estimates put the contraction at 1.1%, but the
Government has already indicated that it could be as large as 3.0%.

7.

The latest data point to a continuation of weak economic conditions into 2009.

Commercial bank lending to business was down by 8.3% in June 2009 from a year earlier, and
car and truck registrations in the first quarter of 2009 were both more than 40% below
registrations in the same period in 2008. Tax revenue collections were down by 3.5% in FY2009
in nominal terms and an estimated 8.2% in real terms.

8.

The weak revenue performance and the inflationary environment are placing

considerable pressure on government expenditure programs, and could, in turn, add to pressure
on vulnerable members of the community from a softening in labor demand and an escalation in
the cost of living. Women are particularly vulnerable, as they are overrepresented in lower-paid
jobs in tourism.

9.

The overall weakening is taking place despite a small, recent pickup in visitor arrivals.

Total visitor arrivals were down in the 12 months up to May 2009, but up by 1.3% in the

12 months up to June 2009. Arrivals from Australia and New Zealand have recovered, more
than offsetting a continuing decline in arrivals from the Northern Hemisphere. The rise in arrivals
from Australia and New Zealand appears to be a result of intensive marketing and a substitution
away from the Fiji Islands.

10.

Total visitor arrivals and the economy will receive a temporary boost in the second half

of 2009 from a different kind of tourism, via the World Youth Netball Championships, the South
Pacific Mini Games, and a number of major regional conferences (e.g., the Forum Economic
Ministers’ Meeting). Short-lived once-offs with low yields in most cases, these events will not
reverse the underlying weakness in the economy.

11.

Inflation averaged 7.8% in 2008 and remained high at 11.2% on a year-on-year basis as

of June 2009. The resultant erosion of purchasing power is a source of economic stress.

12.

While a small expansion in the overall economy is possible in 2009, a contraction is

looming in 2010 in the absence of corrective action by the Government. Business investment is
still weak, no major special events are expected, and tourism activity is projected to soften as
the Fiji Islands recovers its tourists.

The Government’s Response

1. Fiscal

Measures

13.

The Government acted early to counter the economic slowdown (Supplementary

Appendix A). The FY2010 budget was framed to carry out the following fiscal strategies:

(i)

implement new initiatives that will stimulate the economy (such as increased
capital expenditure);

(ii)

maintain or increase expenditure on the delivery of public services to the
vulnerable;

(iii)

limit new expenditure initiatives that involve significant recurrent costs or do not
contribute to productivity improvements;

(iv)

ensure that the number of people employed in the public service is justified by
the delivery of the needed outputs and the desired outcomes;

(v)

develop and implement policies that will minimize costs to the Government and
yield savings for use in priority areas, e.g., suspend the payment of 3-year
long-service bonuses, performance bonuses, and, where warranted, other
increments in the public service during this fiscal period; and

(vi)

align government expenditure and revenue with the medium-term goals of Te
Kaveinga Nui, the National Sustainable Development Plan (NSDP) 2007–2010.

14.

The main initiative adopted was a large increase in capital expenditure (Table 1),

bringing forward planned capital expenditure to hasten infrastructure development and give a
short-term boost to the economy. The proposed public investment program can help turn the
economy around, first by countering the downturn, and then by helping to deal with the
underlying economic weaknesses caused by past underinvestment in infrastructure. The
Government has planned road and water supply works on Rarotonga and public buildings, while
public enterprises have projects planned for the main airport and seaport. These major new

Government of the Cook Islands. 2009. The Cook Islands Budget Policy Statement 2009/2010. Rarotonga (March).

projects follow the construction of sports facilities for the Pacific Mini Games in FY2009 and are
in addition to a commitment to build a new headquarters for the Ministry of Education.

15.

The FY2010 budget provides for overall restraint in the growth of operating expenditure,

such that there will be a slight decline in the ratio of operating expenditure to GDP below recent
levels and a small reduction in the real value of wages and salaries and expenditure on goods
and services. Fiscal space will thus be created for higher capital expenditure. However, to
achieve this overall restraint, the same proportional controls are applied to both high priority and
lower priority activities of ministries. A prioritized approach would have helped minimize the
potential adverse effects of the expenditure restraint.

Table 1: Fiscal Aggregates

Item

Unit

FY2005

FY2006

(est)

FY2007

(est)

FY2008

(est)

FY2009

(est)

FY2010

(bud)

Government revenue

Revenue

% of GDP

37.2

39.0

39.8

43.9

37.6

38.7

- tax revenue

% of GDP

25.7

27.1

27.5

28.3

25.7

24.9

- real tax revenue

annual

change, %

3.3

7.0

(0.1)

0.9

(8.2)

(1.4)

Government expenditure

Total expenditure

% of GDP

34.6

36.4

39.7

44.8

48.7

54.8

Capital expenditure

% of GDP

4.1

4.6

6.4

6.6

12.2

20.4

Current expenditure

% of GDP

32.0

33.5

35.0

39.9

38.3

35.9

- personnel costs

% of GDP

13.1

13.8

14.5

14.8

13.6

13.2

- personnel costs

% of current

expenditure

41.0

41.2

41.4

37.0

35.5

36.8

Budget balance

Overall balance

% of GDP

2.6

0.1

(0.8)

(11.0)

(16.1)

Budget financing requirement

$ million

(4.7)

(0.1)

1.8

21.0

35.2

General government net debt

Gross debt

% of GDP

37.9

21.2

21.1

16.8

19.9

34.8

Cash and liquid assets

% of GDP

18.9

15.3

13.9

14.6

9.1

9.5

Net debt

% of GDP

19.0

5.9

7.2

2.2

10.8

25.2

( ) = negative, bud = budget, est = estimate, GDP = gross domestic product.
Note: Fiscal aggregates prepared on a government financial statistics basis. The real value of revenue based on
government expenditure price index prepared as a composite of the consumer price index and an estimate of a
government pay rate index.
Source: ADB estimates based on data supplied by the Ministry of Finance and Economic Management (MFEM);
MFEM. Budget Estimates. Part I, Appropriation Bill, Appropriations and Commentary. Rarotonga. various years;
MFEM. Government Accounts. Rarotonga. various years; Cook Islands Statistics Office.

16.

The revenue projections are conservative and realistic. Low growth in internal revenue is

projected for FY2010, with most of the increase resulting from a higher rate of departure tax.
Without that increase, revenue collections would be flat (in nominal terms).

17.

The planned budget deficit is affordable, given current low debt levels, but it is large by

the Cook Islands’ own standards and those of other countries. Public debt will nonetheless
remain below reasonable thresholds (Appendix 4). For fiscal sustainability, planned capital
expenditure must be directed to sound capital projects, particularly those that directly or
indirectly bring in the funds to service the new debt. The growth in operating expenditure must
be restrained to allow future budgets to meet rising maintenance and debt service costs.

18.

The Government has acknowledged the uncertain outlook for revenue in the global

economic downturn, and recognizes that it must contain operating expenditure if it is to continue
to fund priority capital expenditure. Exercising restraint on staffing costs will be particularly
important, as these costs already account for a high share of operating expenditure and the
wage bill is high by regional standards (as a ratio to GDP).

19.

The subsidies to private businesses also warrant attention. The total cost of subsidies to

Air New Zealand alone is of the order of 4% of operating expenditure, and interest rate
subsidies took up a further 2.7% of operating expenditure in the FY2009 budget. Allocating
subsidies via competitive tender would (where practical) help minimize their cost while ensuring
the use of funds to best effect.

20.

The domestic banking sector is already partially dependent on funds secured offshore to

meet domestic needs. The sizable fiscal expansion now planned must also be financed from
offshore sources. As the Cook Islands currency is the New Zealand dollar, such borrowing can
have no adverse effects on the balance of payments or exchange rate.

21.

The FY2010 budget deficit is to be financed from ongoing loans from ADB, and

additional loans from the People’s Republic of China are being negotiated (Table 2). New ADB
financing will take the form of the first disbursement from the proposed ERSP, which provides
for a cluster of loans comprising two subprograms totaling $16.0 million. The first subprogram of
$10.0 million is planned for disbursement in October 2009, and the second subprogram of
$6.0 million in October 2011 (indicative timing).

Table 2: Major Recent and Proposed Loans

Timing of Investment

Loan Amount

Use Lender

Start

Completion
(preliminary)

NZ$

million

US$

million

(% of

GDP)

General government sector

Construction of sports facilities and

new headquarters for the Ministry
of Education

PRC FY2009

FY2011

15.7

10.5 4.8

Economic Recovery Support Program

ADB

FY2010

FY2012

23.8

16.0

7.3

Rehabilitation and upgrade of

Rarotonga main roads and water
supply ring main

PRC FY2010

FY2014

37.5

25.2

11.5

Subtotal

77.0

51.7

23.6

Public enterprises

Upgrade of Rarotonga Airport

Terminal

Local bank

FY2009

FY2010

6.5

4.4

2.0

Upgrade of Avatiu Harbor

ADB

FY2010

FY2012

20.4

13.7

6.3

Subtotal

26.9

18.1

8.2

Total

103.9

69.8

31.9

Based on an exchange rate of NZ$1 = $0.6712 as of 10 August 2009.

ADB = Asian Development Bank, GDP = gross domestic product, PRC = People’s Republic of China.
Source: ADB estimates based on data supplied by MFEM.

22.

The capital expenditure to be funded through the loans in support of the FY2010 budget

will be implemented over 3–4-years.

The ratio of government capital expenditure to GDP is

expected to be 3%–9% of GDP over the period (Figure 2).

23.

Even with the large increase in capital expenditure budgeted for FY2010, only low

economic growth is expected in 2010. Without the planned increase in public investment, the
economic contraction is likely to be sizable.

Figure 2: Projected Expenditure of New Loan Funds

FY2009e

FY2011p

FY2013p

Rati

o to

GDP

)

Avatiu Harbor

Rarotonga Airport

Rarotonga roads
and water

Economic Recovery
Support Program

Sports facilities

e = estimate, p = projection
Source: ADB estimates based on project details provided by MFEM.

2. Complementary

Structural

Initiatives

24.

The Cook Islands achieved the fiscal consolidation that led to its near-debt-free status in

part by deferring infrastructure investment. The current infrastructure lacks the capacity and
quality to meet existing demand, and inadequate services in water and sanitation services pose
direct risks to the natural environment and public health. The inadequacy of infrastructure is an
increasingly tighter constraint on new development, especially on Rarotonga and Aitutaki, where
tourism is concentrated. There is a growing risk that pollution in the lagoons of these islands,
with associated impact on health, would impair the country’s reputation as a clean and safe
tourism destination. Increased investment is also needed to help climate-proof the Cook Islands,
notably the outer islands.

25.

The need to increase public investment to sustain economic growth and service

standards, while achieving a pattern of commercial activity that is ecologically sustainable, will
test the fiscal position of the country as well as the maintenance of governance standards.
Strengthened infrastructure is (i) at the core of an extensive policy dialogue between ADB and
the Government, (ii) the priority area of technical assistance (TA), and the strategic focus of the
current country partnership strategy.

26.

An infrastructure master plan (IMP), developed with ADB support in 2006–2007, was

launched in 2007 (see box).

At an estimated total capital cost of $175 million over 20 years

Cook Islands’ financial management legislation allows appropriations for a given year to be spent in future years

without reappropriation. Hence, the large fiscal expansion in the FY2009 and FY2010 budgets provide for both a
short-term fiscal stimulus and a medium-term expansion in public investment.

(around 90% of annual GDP), the IMP presents a major challenge to the fiscal and institutional
capacity of the public sector and the local construction industry. But such an ambitious plan is
affordable if investments are carefully selected to contribute to sustainable economic growth
and development partners provide concessional funding.

27.

The IMP acknowledges that the infrastructure sector suffers from governance and

institutional capacity constraints affecting operations, cost recovery, and hence the supply and
quality of basic infrastructure services. Institutional arrangements are fragmented, overlapping,
and uncoordinated. These weaknesses have resulted in ineffective management and a lack of
clear ownership of policies, planning, and regulatory responsibility (Appendixes 5 and 6).

The Infrastructure Master Plan Priority Investments

The physical infrastructure in the Cook Islands is in need of substantial investment. Shortcomings in
infrastructure increase business costs and constrain development by falling short of users’ needs.

The road network in the tourism-intensive Rarotonga and Aitutaki is a priority. Upgrades are needed to
meet the demand from rising vehicle ownership and tourism, to lessen congestion and the incidence of
serious crashes (including fatalities), and to climate-proof the roads from possible coastal erosion as a
consequence of the rise in sea levels induced by climate change. Health problems from pollution in
Rarotonga’s lagoon provide early warning of the potential cost of not addressing the environmental
stresses created by expansion in tourism. Such episodes may become more frequent if solid and liquid
waste management infrastructure is not upgraded. Tourism development in some parts of Rarotonga and
in Aitutaki has been curtailed by insufficient water supplies, and both islands are susceptible to water
shortages during dry periods because there is little storage capacity.

In the transport sector, the main international wharf on Rarotonga has reached the end of its useful life
and is in urgent need of major investment. The wharf must be realigned to allow the berthing of larger
vessels (including cruise ships). Harbor facilities in most outer islands are inadequate or nonexistent. The
terminal building at the international airport is being upgraded to comply with international civil aviation
regulations, and aging navigation equipment requires replacement. While telecommunications coverage
is good, the quality of the service is poor and prices are relatively high. Energy costs are among the
highest in the Pacific; energy efficiency must improve to reduce costs.

The infrastructure master plan (IMP) was conceived as a response to the five damaging cyclones in 2005.
At first, therefore, it emphasized the need for resilience by minimizing the harmful effects of disasters, and
was weighted toward the outer islands, while excluding government buildings and investments prioritized
by the state-owned enterprises. That first IMP identified a prioritized and sequenced set of investments
for the next 20 years at an estimated total cost of $175 million.

The IMP was adopted through the NSDP 2007–2010, Te Kaveinga Nui, and is at the core of the fifth of
the NSDP’s eight strategic goals: “A strong basic infrastructure base to support national development.”
The Cook Islands vision “To enjoy the highest quality of life consistent with the aspirations of our people,
and in harmony with our culture and environment” can be met only with environmentally sensitive
improvements in infrastructure.

The coverage of the IMP has since been extended to all sectors and national needs. The IMP is now
viewed as a living plan that will evolve to meet emerging needs and be responsive to changing
community and economic priorities. Capital expenditure projects currently prioritized include wharves and
harbors ($33.2 million), government buildings ($20.8 million), airports ($9.5 million), roads ($8.5 million),
sewerage and waste management ($5.6 million), and cyclone management centers ($5.4 million).

Sources: Ministry of Finance and Economic Management; Ministry of Infrastructure and Planning; MPC Group
International. 2007. Strengthening Disaster Management and Mitigation (Component 2: Preventive Infrastructure
Master Plan). Rarotonga (March).

MPC Group International. 2007. Strengthening Disaster Management and Mitigation (Component 2: Preventive

Infrastructure Master Plan). Rarotonga (March).

28.

Effective infrastructure development and results-focused service delivery and asset

management required a comprehensive review and modernization of institutional arrangements,
capacities, and policies, including greater use of cost recovery. The review indicated that, for
high-quality capital spending, government agencies must follow a transparent and robust
process of identifying, evaluating, prioritizing, funding, and implementing investment projects,
and the projects must have clear social and economic benefits and achieve a satisfactory rate of
return.

29.

An infrastructure governance framework (IGF) was therefore developed with ADB

support.

The IGF is a set of government-initiated policy principles and actions designed to

achieve sound governance, investment decisions, and operational management in the
infrastructure sector (Appendix 7). The components of the IGF are

(i)

institutional arrangements to support good governance, sound investment
decisions, and the efficient and responsive operation of publicly provided
infrastructure;

(ii)

capacity development within the sector institutions to enable them to perform
their designated functions efficiently;

(iii)

clear and consistent regulatory policies for the sector and subsectors that carry
out the NSDP, including service standards, user charges and cost recovery,
financial return on public assets, and environmental and social responsibilities
such as community service obligations;

(iv)

an agreed process of infrastructure investment planning and implementation that
applies consistent analysis, ranking, prioritization, approval, and procurement
methods; and

(v)

arrangements for sustainable asset management, including asset inventory and
valuation, assessment of condition, and provisions for routine, periodic, and
emergency maintenance, repair, and renewal.

30.

The IGF prioritizes improvements in the governance arrangements for infrastructure as a

sound base for moving forward with environmentally sustainable infrastructure investment.

The

Government now looks forward to implementing this broad governance framework quickly for
vetting infrastructure proposals and optimizing asset management, cost recovery possibilities,
asset performance, and private sector participation. Elements of the IGF were endorsed by key
government agencies in 2007.

In 2008, the cabinet took key decisions that established

high-level committees to oversee its development and implementation: (i) the National

ADB. 2007. Technical Assistance to the Cook Islands for Preparing the Infrastructure Development Project. Manila

(TA 7022-COO).

The IMP initially prioritized projects on the basis of six criteria: (i) Will the project contribute to national economic

development and growth? (ii) Will the project contribute to national revenue? (iii) Will the project lead to improved
living standards? (iv) Will the project contribute to a better environment? (v) Will the project provide an enabling
environment for private sector involvement? and (vi) Will the project promote community support and involvement?
The prioritization process has since become less structured. An objective and transparent process of prioritization
is now needed that draws on prioritization criteria aligned with current expectations and backed by checks on
economic and financial viability.

Sustainable Development Commission (NSDC) reporting directly to the cabinet, and (ii) the
Infrastructure Committee attached to the Cook Islands Investment Corporation (CIIC).

31.

The Cook Islands also needs to catch up with improvements made elsewhere in the

region (e.g., in telecommunications and in the enabling environment for investors) to become
more competitive internationally. A range of structural initiatives has been identified for this
purpose. Renewed effort in these areas will support the economic recovery.

Protection for the Vulnerable

32.

Beyond a general pattern of disadvantage to the outer islands, the vulnerable in the

Cook Islands are those who are least able to help themselves, whose issues go unheard, and
who often have special needs and require extra help (Appendix 8). The reasons given for the
vulnerability include a breakdown in traditional family support systems, the emigration of family
income earners, the rising cost of living, and social and community obligations. The vulnerable
are identified as the elderly, the unemployed, single parents, children, the disabled, squatters,
and victims of crime.

The last two categories are by far the smallest.

33.

There is no formal system in the Cook Islands for targeting the vulnerable other than

fairly loosely, through the distribution of sizable social security payments (the equivalent of
around 3.5% of GDP). There is almost no systematic method of identifying the disadvantaged,
their needs, and the best means of addressing these needs. Because of the widely heldʊbut
not necessarily correctʊperception that good health, education, and living standards are well
distributed in the Cook Islands and there is therefore little poverty, poverty reduction does not
figure prominently in government plans and policies. While there has long been an emphasis on
equity in public policy, especially in access to basic services such as health and education, and
in outer-island development, more could be done to increase the focus on the disadvantaged.

34.

There is little hard evidence of the impact of the high inflation triggered by high

international commodity prices and the concurrent economic downturn. However, it is
reasonable to expect the needs of the vulnerable to be on the rise. Women with lower-paid jobs
in the tourism industry are potentially the most affected. This raises the imperative to rebalance
government programs in favor of targeted support for the vulnerable. Such measures are,
however, not explicit in the FY2010 budget (in contrast to the stated intention of the budget
strategy).

III.

THE PROPOSED PROGRAM

Impact and Outcome

35.

The program is expected to achieve higher and more-inclusive economic growth

(program impact). The focus will be on strengthening priority elements of the governance and
institutional framework, and improving opportunities for the vulnerable. ADB financing will be
used to help meet the Government’s overall budget financing needs, which have increased as a
result of its greater need for infrastructure and building investment. The program is thus

The NSDC comprises the heads of the Ministry of Finance and Economic Management (MFEM), the Office of the
Prime Minister, the Office of the Attorney General, and the Ministry of Foreign Affairs.

expected to initiate economic recovery with protection of the vulnerable and the country’s fiscal
position (program outcome).

36.

The process of stimulating inclusive economic growth in the Cook Islands is presented in

Figure 3. It suggests that economic growth can be stimulated through a program that addresses
the governance and institutional environment, along with financing to allow faster accumulation
of more-productive human and physical capital. These actions must be in harmony with the
conservation of the natural environment and adaptation to climate change, in part because the
domestic tourism industry rests on the natural environment, and require better management to
increase the carrying capacity of the natural environment. Removing the bottlenecks that inhibit
private sector development will promote business investment, the key to sustaining economic
growth. These actions, which will address binding constraints on the domestic economy, form
the substance of the ERSP. The focus will be on strengthening the governance and institutional
framework, while providing needed external financing and support for targeted policy and
government expenditure in favor of the vulnerable.

37.

The actions will provide the Cook Islands with a growth dividend as the currently

depressed external demand turns around. The economy would thus recover faster than would
otherwise be the case, and begin to return to at least the long-run growth rate. Extra effort will
be needed through this transition to provide opportunities for the vulnerable to benefit from a
higher share in economic growth.

Figure 3: The Economic Recovery Process

Inclusive

and

sustainable

economic

growth

Inclusive

and

sustainable

economic

growth

Stronger

governance

and

institutional

framework

and financing

Current situation

Target situation

Human

capital

Public
infrastruc-
ture

Business

investment

Natural

environ-

ment

Human

capital

Public
infrastruc-
ture

Business

investment

Natural

environ-

ment

Human

capital

Business

investment

Public
infrastructure

Natural

environment

Human

capital

Business

investment

Public
infrastructure

Natural

environment

Enhanced

opportunity for

the most

vulnerable

Favorable external

conditions (e.g.

rising tourism

demand)

Source: Asian Development Bank.

38.

The ERSP is a cluster program of two subprograms (the design of the second being

dependent on the outcome of the first and the Government’s emerging priorities). This report

deals mainly with subprogram 1, but some indicative components of subprogram 2 are also
covered.

39.

Subprogram 1 is a single-tranche operation with a well-defined framework aligned with

the Government’s NSDP. The policy reform agenda is supported by ongoing advisory TA to
implement and deepen reforms over the ERSP period.

Consideration of subprogram 2 will

depend on satisfactory progress toward its policy triggers. Subprogram 2 is expected to be
submitted to the ADB Board of Directors for consideration in 2011 after the key triggers are
completed.

Policy Framework and Actions

40.

The ERSP will provide an immediate response to the global economic crisis and support

for continued economy recovery. Subprogram 1 will enable the Government to ease its fiscal
stance in the immediate to short term to avoid further economic contraction. Targeted actions
support the vulnerable. A strengthened governance and institutional framework and loan
financing will improve the quality of capital expenditure, and allow the backlog of priority
infrastructure and other building investment to be reduced. Increased construction activity will lift
aggregate demand and economic activity. The Government is committed to strengthening
infrastructure investment processes and infrastructure governance to promote sustained growth
in the medium term.

41.

Subprogram 1 will have five outputs: (i) higher capital expenditure by the Government to

boost economic activity, (ii) structural and governance improvements, (iii) support for the
vulnerable, (iv) fiscal responsibility, and (v) program communication and ownership. All policy
measures under subprogram 1 have been completed. The five outputs will be implemented
concurrently. Subprogram 2 will be structured across the same outputs as subprogram 1 and,
again, all areas will be implemented concurrently.

42.

The development of the program placed priority on promoting country ownership and

keeping the program manageable, given the capacity limitations, to ensure sustainable
outcomes.

43.

Output 1: Short-term economic boost from higher capital expenditure by the

Government. The FY2010 budget provides for a large increase in capital expenditure above
the FY2009 budget outcome estimate—NZ$57.6 million as opposed to NZ$31.0 million. This is
a key component of the Government’s response to the economic downturn arising from the
global economic crisis. Subprogram 1 will provide budget support to enable the Government to
meet this expenditure plan, bringing forward planned capital expenditure into the current budget
year to stimulate the economy. The increased construction activity will lift aggregate demand
and economic activity.

44.

The FY2010 budget does not specify the new investments that will be made, although

projects are being readied for the main airport, roads, and water supply on Rarotonga and key
public buildings. In view of the urgency of some projects, a range of funding options is being
considered, and the Government is in discussions with the People’s Republic of China for the
funding of the Rarotonga main road and water main upgrade, and with commercial lenders for

Notably, ADB. 2009. Technical Assistance to the Cook Islands for Infrastructure Services Delivery Improvement.

Manila (TA 7287-COO); ADB. 2009. Technical Assistance for Pacific Economic Management. Manila (TA 7280-
REG, subprogram 1).

stage 2 of the Rarotonga airport terminal. ADB budget support will provide the Government with
an alternative funding option for speeding up the start of either of these projects, or for
launching another priority investment. Rather than earmarking funds for particular infrastructure
investments, the cabinet will decide whether or not to fund particular projects from the budget,
according to the recommendations of the NSDC, which will follow an agreed set of criteria for
prioritizing investments.

45.

The use of an improved process of prioritizing infrastructure investments, committed to

by the cabinet under output 2, will ensure the quality of this increased capital expenditure
(paras. 46–49). Better-quality infrastructure investments will yield longer-term benefits beyond
the short-term economic stimulus, by dealing, at least in part, with the backlog of priority
infrastructure and other building investment, thereby providing a sound base for greater private
sector growth.

46.

Output 2: Structural and governance improvements. The ERSP will support the

implementation of structural reforms and governance improvements across the infrastructure
sectors. These improvements are vital to medium-term growth prospects, as weak infrastructure
and poor management of infrastructure assets have held back private sector development and
placed at risk the natural environment on which the domestic tourism industry rests. The
improvements have been the subject of ongoing dialogue with the Government of the Cook
Islands over a number of years, and include significant actions and commitments on the part of
the Government that demonstrate its recognition of the importance of sound infrastructure
development to economic growth.

47.

Subprogram 1 will provide for cabinet endorsement of the IMP and its incorporation into

the NSDP. These actions will elevate the development role accorded to infrastructure. The
subprogram will elicit explicit cabinet commitment to a transparent and objective two-step
process of prioritizing capital expenditure by the NSDC. The first step will require projects to be
prioritized from the IMP on the basis of a multi-criteria analysis, taking into account economic,
financial, social, and environmental factors. In the second step, the highest-priority projects will
be subjected to a socioeconomic cost–benefit analysis to verify their viability and ensure a
positive net present value before funding is confirmed. This will ensure the quality of the
increased capital expenditure under output 1 of the subprogram.

48.

The management of the strengthened infrastructure investment pipeline is supported by

the cabinet endorsement of the IGF. The IGF will be implemented across all infrastructure
sectors (roads, airports, ports and harbors, government buildings, energy, water supply,
sanitation and waste management). The IGF, when implemented, will provide for sector policy
statements (inclusive of provisions for user charges, cost recovery, and community service
obligations); investment criteria and plans; asset management; and forward budgeting
frameworks. It will also promote common approval and implementation procedures across all
capital expenditure in the public infrastructure sector. In addition, legislative changes will be
supported to provide for institutional improvements and reforms, agency responsibilities and
powers for public infrastructure provision, ongoing asset maintenance management, internal
and external audit, user charges and cost recovery, and multiyear budgeting.

49.

Organizational and management elements of the IGF will also be implemented as part of

subprogram 1. The Ministry of Works has been merged with the Office of the Minister of Island
Administration to form the Ministry of Infrastructure and Planning.

The new ministry focuses on

This was formally adopted by the Government in October 2008.

infrastructure policy, planning, and maintenance, including asset management for both
Rarotonga and the outer islands. Two key committees were created in May 2008; these are the
NSDC, reporting directly to the cabinet, and the Infrastructure Committee

attached to the CIIC.

The NSDC reviews all development projects and aligns them with NSDP priorities. Prioritized
infrastructure projects are then passed on to the Infrastructure Committee, which approves
allocations for government- and aid-funded investment. The Infrastructure Committee and
NSDC take on performance monitoring roles, thus effectively providing external oversight to the
implementation of development projects by line ministries. The creation of the NSDC and the
Infrastructure Committee puts in place a process that keeps approved infrastructure
investments in line with the broad infrastructure development needs of the Cook Islands.

50.

Output 3: Support for the vulnerable through targeted actions. The vulnerable

within the community are more exposed to the negative impact of the global financial crisis and
have fewer reserves with which to meet their needs.

51.

A review is to be undertaken of the Cook Islands' social welfare system, with an issue

paper for public consideration to be completed by end December 2009 and the final review to
be completed by end of FY2010. This is to allow for inclusion of responsive actions in the
FY2011 budget, where inflation adjustment of allowances for the vulnerable are expected to
figure prominently. This is potentially an important step in the current high inflationary
environment, given that social welfare payments are often the main source of cash income for
the vulnerable.

52.

Provision is also made for the pilot-testing of the performance monitoring of services

used by the vulnerable. The pilot-testing will be conducted on the geriatrics key result area of
the Ministry of Health. This key result area supports the geriatric ward at the Rarotonga
Hospital, which serves as a de facto old people’s home for infirm elderly people who have no
family to care for them. There is no other residential facility for the elderly in the Cook Islands.

53.

In the medium term, subprogram 2 will broaden the use of performance monitoring of

services for the vulnerable, besides assisting in the review of the adequacy of benefits and the
identification of savings to be redirected to the vulnerable.

54.

Output 4: Maintenance of fiscal responsibility. Cook Islands demonstrated a strong

sense of fiscal responsibility following the mid-1990s reform, guided by the Ministry of Finance
and Economic Management (MFEM) Act of 1995–1996 and the Manila Agreement

financial

ratios, which set targets for debt as a proportion of GDP, government personnel costs as a
proportion of GDP, and other (non-personnel) operating costs as a proportion of GDP. The
MFEM Act (Section 23[2][a]) sets out principles of fiscal responsibility (and a process for
reporting on compliance with these):

The Infrastructure Committee appointed by the cabinet (decision CM [08] 311) comprises two private sector civil

engineers (one of whom is appointed chair), one private sector architect, and representatives of the Ministry of
Infrastructure and Planning, MFEM, the Aid Management Department, and the Cook Islands Investment
Corporation, as well as a member of Parliament.

The Cook Islands has adopted a performance-based budget, with ministry outputs identified in the budget papers

and tied to the performance-based contracts of the heads of ministries. However, the system is yet to be operated
as designed. A key missing link is the regular conduct of performance assessments by the Public Service
Commission (MFEM’s responsibilities for the budget covers only financial matters).

The Manila Agreement of 1998, supported by ADB as “honest broker,” facilitated debt rescheduling and a

significant write-down of Cook Islands debt to official creditors.

(i)

managing total Crown debt at prudent levels to provide a buffer against factors
that may adversely affect the level of total Crown debt in the future, by ensuring
that, unless such levels have been achieved, the total operating expenses of the
Crown in each financial year are less than its total operating revenues in the
same financial year;

(ii)

achieving and maintaining levels of Crown net worth that provide a buffer against
factors that may adversely affect the Crown’s net worth in the future;

(iii)

managing prudently the fiscal risks facing the Crown; and

(iv)

pursuing policies that are consistent with a reasonable degree of predictability
about the level and stability of tax rates in future years.

55.

The Government is committed to continuing to meet throughout the program period the

principles of fiscal responsibility stated in the MFEM Act.

56.

Although the term of the Manila Agreement has now ended, the Government sees

benefit in continuing to use the concept of operating parameters. The ERSP provides for a
cabinet commitment to update and refine these as a practical management tool for fiscal
responsibility. The use of these ratios will complement the principles of fiscal responsibility in the
MFEM Act. ADB will assist the Cook Islands in refining and updating these ratios through the
Pacific Economic Management TA (footnote 8).

57.

The Government has taken a number of steps to improve the budget process and

presentation, including ongoing efforts to adopt medium-term budgeting (for full implementation
in FY2011) and to present the budget in an internationally comparable format. The Government
commits to provide a statement of government operation in the FY2010 budget in accordance
with the International Monetary Fund’s government finance statistics standards.

58.

Under the program, the Government is committed to maintaining the financial

contribution needed to remain under Standard & Poor’s Ratings Services through FY2010. This
opens the Cook Islands to external scrutiny and comparison, but also provides the Government
with an important benchmark by which to measure its progress and performance in economic
management.

59.

Output 5: Communication and ownership of economic and fiscal management

initiatives. Lessons from ADB’s experience in the implementation of program loans call for
attention to the development of local awareness, understanding, and ownership of programs to
promote their success. The program commits the Government to the development of a
communications strategy that will explain

(i)

the Government’s response to the global economic crisis, including actions to
address the needs of the vulnerable;

(ii)

the transparent and objective process of prioritizing and implementing the IMP;
and

(iii)

the role of infrastructure development and governance in supporting growth.

60.

The Government already places considerable public finance information in the public

domain by publishing this on the MFEM website in a timely and comprehensive manner. There
is also a track record of public consultation and participation in key development issues—such
as in the development of the NSDC. The communication and engagement strategy committed
to, and subsequently implemented as part of this program, will build on this strong base.

Triggers for Subprogram 2

61.

The development policy letter (Appendix 2) sets out the Government’s reform agenda for

the next 2 years, building on the reform momentum from subprogram 1. Triggers for
subprogram 2 are described in the policy matrix attached to the development policy letter. The
indicative milestones for subprogram 2 that can be monitored are listed in the design and
monitoring framework (Appendix 1).

62.

Building on reforms under subprogram 1, subprogram 2 is expected to be implemented

in 2011, and, subject to Board approval, will be financed by ADB. Subprogram 2 will continue to
focus on fiscal consolidation, but there will be a stronger focus on improvements in
infrastructure investment and governance to sustain higher growth, and on progress in other
areas that may emerge from policy dialogue and engagement with the Government in 2010 and
2011. The expected time frame for the processing of subprogram 2 is only indicative and is not
limited to a specific time frame in the event of a delay.

63.

While subprogram 2 contains targeted policy actions, the program cluster approach

allows an appropriate policy response to unanticipated changes in the external environment.
The conditions for the release of the subprogram 2 tranche will not be specified at the outset of
the ERSP, but will be determined in consultation with the Government on the basis of lessons
from subprogram 1. These conditions are likely to be in the policy areas set out in the
subprogram 2 triggers. This approach will ensure that the ERSP is synchronized with the
Government’s policy agenda and is responsive to external environmental factors.

D. Lessons

64.

The design of the ERSP incorporates the lessons from ADB’s experience in program

lending in the Pacific and elsewhere.

Country ownership is maximized by anchoring the ERSP

in Te Kaveinga Nui, the NSDP 2007

–2010, and the use of government systems and processes.

Further, the ERSP is designed to assist the Government in achieving the strategy set out for the
FY2010 budget.

65.

The ERSP is backed by solid diagnostics, communication and awareness-raising

initiatives, and a commitment to a longer-term engagement through a flexible approach aimed at
maximizing country ownership.

The focus is on a systematic approach to improving policy and

planning capacity, in contrast to the firefighting role adopted under ADB program loans in the
mid-1990s.

66.

The cluster approach responds to the lesson that program lending has not always been

firmly based on an assessment of achievable rates of change, and has been too inflexible,
contributing to program delays. In this case, risk is heightened by the imperative to make the
initial disbursement early as a short-term boost to the economy. The time allowed for program
preparation would therefore be too brief. The cluster approach gives the ERSP the flexibility to
tailor the specific nature and timing of policy actions to the Cook Islands’ circumstances at the

Key sources of lessons are: ADB. 2009. Special Evaluation Study: ADB’s Support for Public Sector Reforms in

the Pacific: Enhance Results through Ownership, Capacity, and Continuity. Manila; ADB. 2001. Special
Evaluation Study on Program Lending. Manila; and ADB. 1999. Reforms in the Pacific: An Assessment of the
Asian Development Bank’s Assistance for Reform Programs in the Pacific. Manila.

Program design is built on: broad-ranging diagnostic analysis by ADB; the policy framework presented in ADB’s

Taking the Helm: A Policy Brief on a Response to the Global Crisis; and ongoing policy dialogue between the
Government, development partners, and private sector and civil society representatives.

time subprogram 2 is formulated. The cluster approach minimizes the risk of jeopardizing
technical quality by having to compress the timetable. Government and development partner
resources can focus on the most immediate policy actions, and have more time to consider
follow-on actions.

67.

The cluster approach also allows extra time to build the demand-driven approach

through firm country ownership. In this case, the impact of the global economic crisis is already
apparent to the community (through the economic contraction of 2008), as is the downside of
too-little attention to infrastructure, and there is awareness of the need for action (evaluation
studies have pointed to the importance of such awareness). New structures and processes can
erode country ownership and have therefore been avoided. Instead, the preparation of the
ERSP has emphasized the use of existing institutional structures and the strengthening of
existing systems and processes. The extension of the program period beyond the 2010 general
election will provide the flexibility to align the policy actions with the agenda of any new
government.

This will also facilitate the reassessment of political commitment to the ERSP,

which is considered critical given the long-term nature of the policy actions to be pursued.

68.

Country ownership and endorsement is facilitated by a program that is relatively simple

in scope, unlike the overly complex programs developed for the Pacific in the 1990s (in
comparison, the Cook Islands program in the mid-1990s identified 124 policy actions and
44 tranche conditions). The simple scope will increase the likelihood of sustaining the program
impact by keeping the program realistic and firmly within the capacity of the Cook Islands. The
sequencing of actions has helped keep the scope simple. The relatively simple scope will also
facilitate the process of communicating and encouraging broad endorsement of the program.

69.

Program lending evaluations support the basic rule that broad participation, in particular

from affected groups and sectors, is critical to the success of public policy reform. The ERSP
applies this principle by (i) being anchored in the NSDP, which was prepared with the benefit of
a broad-based engagement with the community; (ii) drawing on the diagnostic work of the latest
Pacific Island Economic Report

and the formulation of the IMP, both of which incorporated the

findings of extensive consultation in the main centers and the outer islands and with a range of
community groups; and (iii) including as one of five output areas, the promotion of public
communication and ownership of economic and fiscal management initiatives.

70.

The need for a long-term perspective and commitment identified by evaluation studies is

imbedded in the ERSP. The program is seen as the next step in a long-term, sequenced reform
process. Most policy actions, particularly those in the areas of infrastructure, and economic and
fiscal management, build on earlier support from ADB. Many actions can be seen as follow-ons
of a reform process begun with ADB support in the mid-1990s (e.g., commitments to the
principles of fiscal responsibility in the MFEM Act and to the updating of the Manila Agreement
financial ratios).

ADB support continues through the provision of the specialist skills needed to

To reduce the risk that the political commitment will wane, a broad range of political interests was actively

engaged in the preparation of the IMP and the IGF and the various groups have been kept abreast of
developments.

ADB’s 1999 evaluation of the program loans of the 1990s (ADB. 1999. Reforms in the Pacific: An Assessment of

the Asian Development Bank’s Assistance for Reform Programs in the Pacific. Manila, p.167) found that “the most
significant success factor of Bank assistance for reforms in the Pacific is also the most obvious: political
commitment to and ownership of the reform program is essential. Externally imposed reform measures
(conditionalities) that have little government ownership are doomed to certain failure.”

ADB. 2008. Cook Islands 2008 Social and Economic Report: Equity in Development. Manila.

ADB supported the Economic Reconstruction Program, which was aimed at improving public sector institutional
capacity and creating a more competitive economy under the leadership of a growth-oriented, productive private

advance the policy agenda. The policy matrix identifies medium-term program directions as
guideposts for support that could follow the ERSP.

E. Special

Features

71.

The Cook Islands is not a member of the International Monetary Fund or the World Bank

Group and therefore has limited access to financial support to address the impact of the global
economic crisis. This requires ADB to provide a comprehensive support package to the country.

72.

Support for the vulnerable is a feature of the program, in recognition of the extra

hardship imposed by the global economic crisis and the preceding episode of high international
commodity prices. This support will involve maintaining expenditure on selected essential
services used by the vulnerable, maintaining the real value of social security payments to the
vulnerable, and explicitly reorienting government programs to the vulnerable. In addition, a
linked project—Supporting and Building Resilience of the Vulnerable—is proposed for financing
from the Japan Fund for Poverty Reduction. As proposed, the linked project will provide (i) a
short-term response to the vulnerable (including unemployed youth, women, low-income
households, and people with disabilities) to increase their economic status through
cash-for-work and cash transfer programs; (ii) a pilot social welfare and social protection
program, along with assessments of target groups and the feasibility of program types, and
policy recommendations as long-term measures to strengthen the social safety net; (iii) support
for nongovernment organizations and civil society activities for the vulnerable; and
(iv) socioeconomic monitoring and evaluation of the situation of the vulnerable.

F. Financing

Plan

73.

The Government has requested assistance in financing the program in the form of a

program cluster amounting to $16.0 million, comprising two subprograms ($10.0 million and
$6.0 million), from ADB’s ordinary capital resources. The loan of $10.0 million (subprogram 1)
will have a term of 15 years including a grace period of 3 years, an interest rate determined
according to ADB’s London interbank offered rate (LIBOR)–based lending facility, a commitment
charge of 0.15% per year, and other terms and conditions set forth in the draft loan agreement.
The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s
LIBOR-based lending facility on the basis of these terms and conditions,

and (ii) an undertaking

that these choices were its own independent decision and not made in reliance on any
communication or advice from ADB. The remaining cost to the budget of the actions included in
the policy matrix will be met by the Government.

G. Implementation

Arrangements

74.

Program Management. MFEM will be the executing agency and will oversee policy,

legal, and regulatory actions and ensure that the reforms agreed to by the Government and
ADB are duly carried out on time. TA resources will be provided to help the Government meet
the tranche conditions. MFEM will also be responsible for the overall implementation of
subprogram 1, including all policy actions, program administration, disbursements, and
maintenance of all program records. The NSDC, the program coordinating committee, will meet
at least quarterly to monitor progress and oversee the implementation of the program, and guide

sector. The program was broadly successful. It laid the foundation for the relatively high rates of economic growth
achieved from 1998 to 2004 (Appendix 3).

and direct the activities of the executing agency. The NSDC will invite implementing agencies to
participate in meetings to discuss program implementation issues as appropriate.

75.

Implementation Period. The program cluster period will be from 1 January 2008 to

30 December 2011. The policy, legislative, organizational, and operational changes agreed to
with the Government and set out in the policy matrix will be put in place during this period.

76.

Disbursement. The proceeds of the loan will be disbursed to the Cook Islands as the

recipient according to ADB’s simplified disbursement procedures and related requirements for
program loans.

The proceeds will be used to finance items produced and procured in ADB

member countries; items in the list of ineligible items (Appendix 9) and imports financed by other
bilateral and multilateral sources are excluded. Loan proceeds disbursed against imports will
require a certificate from the Government stipulating that the value of the total imports of the
Cook Islands, minus its imports from nonmember countries, ineligible imports, and imports
financed under other official development assistance, is at least equal to the amount of the loan
to be disbursed during a particular year.

77.

In accordance with the simplified disbursement procedures and related requirements for

program loans, all goods and services produced and originating in ADB member countries will
be procured, with due consideration to economy and efficiency, and in compliance with the
Government’s standard public procedures and normal private sector commercial practices
acceptable to ADB. Goods commonly traded on the international commodity market will be
procured according to procedures appropriate to the trade and acceptable to ADB. Before
withdrawal, the Government will open or nominate a deposit account with the Bank of Cook
Islands or a commercial bank acceptable to ADB to receive the loan proceeds. The account will
be managed, operated, and liquidated according to terms satisfactory to ADB. Subprogram 1
will provide for retroactive financing for eligible expenditures incurred by the Government up to
180 days before loan effectiveness. ADB will have the right to audit the use of the loan
proceeds, and to verify the accuracy of the Government’s certification.

78.

Tranches. The program will be provided as a cluster loan comprising two single-tranche

subprograms.

79.

Counterpart Funds. Local currency generated from the proceeds of the loans will be

used to support public expenditure objectives under the program.

80.

Program Performance Monitoring and Evaluation. MFEM will (i) within 3 months of

loan effectiveness, establish and maintain a performance evaluation system for the program,
which will be derived from the design and monitoring framework, policy letter, and policy matrix,
and directly reflect indicators contained in the IGF; and (ii) monitor and report to ADB, every
6 months during the term of the program, the implementation of policy actions and their impact
on budget outcomes and public enterprise performance (including financial and performance
indicators), in line with the program impact and outcome indicators agreed on with the
Government. As the outcomes and impact of the program will be felt most clearly beyond the
period of its implementation, these will continue to be monitored by MFEM. The monitoring of
outcomes and impact will be useful to the Government’s own processes and decision making
and, hence, is not an onerous requirement.

ADB.

1998.

Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

81.

Program Review. In cooperation with the NSDC and in conjunction with the review

made under the associated TA,

ADB will periodically review the progress of implementation,

and assess the impact of the ERSP. The Government will keep ADB informed of the outcome of
policy discussions with other multilateral and bilateral agencies that have implications for ERSP
implementation, and will provide ADB with the opportunity to comment on any resulting policy
proposals. ADB, in collaboration with the NSDC and other multilateral and bilateral agencies,
will review program performance 12 months after loan effectiveness to review the outcome of
subprogram 1 and begin preparing subprogram 2. This review will (i)

evaluate the

implementation of the policy reform measures under subprogram 1; (ii) assess the impact on
each sector; (iii) describe lessons identified during the program period; and (iv) outline reforms
and assistance needed for sustained economic recovery, to enable the processing of
subprogram 2.

82.

The Government and ADB have agreed on a range of outcome and output indicators for

monitoring ERSP implementation and evaluating its impact, within the overall ERSP design and
monitoring framework (Appendix 1).

83.

A program completion report will be prepared for each subprogram, with an overall

report to be prepared within 1 year following the end of the program to evaluate its overall
success. The Government will continue to monitor and evaluate the program at least until the
program completion report is prepared.

84.

Anticorruption Policy. ADB’s Anticorruption Policy (1998, as amended to date) has

been explained to and discussed with the Government and the executing agency. Consistent
with its commitment to good governance, accountability, and transparency, ADB reserves the
right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or
coercive practices relating to the program. To support these efforts, relevant provisions of ADB’s
Anticorruption Policy are included in the loan agreement. In particular, all contracts financed by
ADB in connection with the program will include provisions specifying the right of ADB to audit
and examine the records and accounts of the executing agency and all contractors, suppliers,
consultants, and other service providers as they relate to the program. These actions will
complement the relatively high standard of financial accountability and anticorruption measures
already in place (Appendix 5).

85.

Technical Assistance. Subproject 1 of the ADB TA for Pacific Economic Management:

Response to the Global Economic Crisis is supporting economic monitoring, analysis, and
policy advice by Pacific developing member countries in a joint effort with development
partners.

The TA supports the strengthening of economic monitoring systems and using this

information to provide higher-quality economic advice. The TA is focused on assisting in the
formulation and implementation of country-specific actions in response to the global economic
crisis. The preparation of action plans by the Cook Islands, with support from the TA, will inform
the preparation of subprogram 2 of the program loan.

ADB. 2009. Technical Assistance to Cook Islands for Infrastructure Services Delivery Improvement. Manila. (TA

7287-COO approved on 19 May for $600,000). This TA will support implementation of the IGF.

In the 2007 country performance assessment (the latest to include the Cook Islands), the Cook Islands ranked

highest among ADB’s developing member countries (accessing the Asian Development Fund) for budgetary and
financial management; (with Samoa) for transparency, accountability, and anticorruption efforts; and for public
administration. ADB. 2008. Annual Report on the 2007 Country Performance Exercise. Manila (April).

ADB. 2009. Technical Assistance for Pacific Economic Management, Manila. (TA 7280-REG approved on 13 May

for $3.5 million).

86.

The ADB TA for Infrastructure Services Delivery Improvement is assisting the

Government in implementing the IGF (footnote 20). The TA is expected to result in the effective
delivery of environmentally sustainable infrastructure and infrastructure services (TA impact).

will establish a governance framework in support of infrastructure management and
development (TA outcome), characterized by common processes for developing infrastructure
investment plans, effective and efficient financial and operational management of assets, and
appropriate opportunities for community service obligations. This TA will provide capacity
support to the Government in achieving the program objectives in the areas of structural reform
and improved governance. It will be implemented over a 2-year period and will be followed by
further TA to help sustain the implementation of the IGF beyond the period of the program loan.

87.

Details of other development assistance to the Cook Islands are in Appendix 10.

IV.

PROGRAM BENEFITS, IMPACT, AND RISKS

Benefits and Impact

88.

Economic. The program will provide budget support to enable the Government to

stimulate the economy and thereby respond to the economic downturn caused by the global
economic crisis. It will then support the recovery of the economy and the transition to higher and
more-inclusive economic growth. Investment in priority infrastructure projects will deliver the
higher-quality and lower-cost services needed for economic growth and provide opportunities
for local businesses to participate in service delivery.

89.

Social. The program will help the Government reduce poverty incidence and bring back

the economy onto its long-run growth path. An analysis of social and gender issues is in
Appendix 8. Benefits will be accrued in the short term through the mitigation of the negative
effects of the global economic crisis, and in the medium to long term through the implementation
of the IGF, which will allow improved basic infrastructure service delivery (water, sanitation,
telecommunications, transport, roads, and power). Improved water and sanitation will deliver
health benefits through lower risk of infection from contaminated water supplies and untreated
or poorly managed waste. The transport improvements will provide social benefits of improved
accessibility and transport safety. In the medium term, the IGF will also generate benefits
through introduction of an equitable system of user charges for infrastructure that protects the
vulnerable. This will avoid costs being unfairly borne by those who do not benefit from the
services while providing safeguards for the vulnerable users. The summary poverty reduction
and social strategy is in Appendix 11.

90.

Environmental. Environmental benefits will arise from implementation of the IGF in the

medium term as this will allow the Government to optimize the contribution of infrastructure to
environmentally sustainable growth. Infrastructure investment projects will incorporate improved
pollution management, mitigation of the effects of climate change, energy efficiency, and
substitution of petroleum fuels with renewable energy. User charges will lead to more efficient
and less wasteful resource use. An environmental assessment is in Supplementary Appendix B.

91.

Financial. The program will encourage improved fiscal management and budgeting

focus on priority expenditures. A progressive increase in user charges for infrastructure services
and preventative maintenance will remove unnecessary costs from the Government budget.

Improved cost efficiency in the provision of infrastructure services will give more fiscal space for
the Government’s other social and development spending.

B. Risks

92.

The risks are as follows: (i) unforeseen technical and legal problems could delay capital

expenditure; (ii) the Government may have insufficient capacity to implement the program; (iii) a
shortfall in financing may prevent the Government from optimizing infrastructure and
implementing policy actions linked to the program; (iv) community support for the Government’s
actions may be insufficient; and (v) the Government’s commitment to the program could wane in
the lead-up to the 2010 election.

93.

The first two risks are to be monitored and reduced through the provision of TA

(footnotes 20 and 22). It is recognized that although there is commitment at a political and
institutional level to continuing the implementation of reforms in infrastructure services delivery,
technical and managerial resources are in short supply. The TA for infrastructure services
delivery improvement will assist in supplementing the expertise to implement the IGF over the
first 4 years of implementation (footnote 20). However, there is still a risk that not enough skilled
staff will be retained or recruited by the line ministries and public enterprises to ensure the
sustainability of the changes. To offset this risk, the design of the TA will include (in the second
stage) the development of a program for human resource development in infrastructure
operations and management.

94.

The risk of a shortfall in government financing will be managed through the provision of

TA for improved economic management (footnote 22). The operation of effective
communication programs is to be imbedded within the program to encourage broad-based
community support for the Government’s response to the global economic crisis, and actions to
revitalize the economy. The Government’s commitment is to be reevaluated after the late-2010
election as part of the formulation of subprogram 2.

95.

The ERSP relies on (i) a positive response by the private sector to improved economic

conditions; (ii) government agencies’ commitment to improved performance; and (iii) restraint by
government agencies in increasing current expenditure, given their weak revenue performance.

96.

Overall, the potential benefits from reducing the impact of the global economic crisis and

providing improved basic infrastructure services with supporting structural and governance
initiatives are considered to outweigh the risks. Indeed, the costs of no action could be
substantial. They would be reflected in a continued decline in basic infrastructure services with
resultant negative effects on health and the environment, and constraints on the private sector.

V. ASSURANCES

A. Specific

Assurances

97.

In addition to the standard assurances, the Government has given the following

assurances, which will be incorporated in the legal documents:

(i)

The Government will (a) ensure that the policies already adopted and actions
already taken as described in the development policy letter, including the policy
matrix, continue in effect for the duration of the program period and

subsequently; and (b) promptly adopt all other policies and take all other actions
indicated in the development policy letter, including the policy matrix, and ensure
that such policies and actions continue in effect for the duration of the program
period and subsequently.

(ii)

The Government will keep ADB informed of policy discussions with other
multilateral or bilateral aid partners that have implications for the implementation
of the program, keep ADB informed of the progress made in carrying out the
policies and actions set out in the development policy letter and the policy matrix,
and provide ADB with an opportunity to comment on any resulting policy
proposals. The Government will continue policy dialogue with ADB on problems
and constraints encountered during the implementation of the program and on
desirable changes to overcome or mitigate such problems and constraints.

(iii)

Throughout the implementation of the program, the Government will ensure that
adequate resources are allocated and released in a timely manner in order to
ensure the proper implementation of the ERSP as described in the development
policy letter.

(iv)

The Government will undertake necessary measures to create and sustain a
corruption-free environment; ensure that its anticorruption law and regulations
and ADB’s Anticorruption Policy (1998, as amended to date) are strictly enforced
and complied with during the program implementation; and facilitate ADB’s
exercise of its right to investigate, directly or through its agents, any alleged
corrupt, fraudulent, collusive, or coercive practices relating to the program.

(v)

The Government will ensure that (a) within 3 months of loan effectiveness, a
performance evaluation system acceptable to ADB will be established and
maintained; and (b) MFEM monitors and reports to ADB, semiannually over the
term of the program, the implementation of policy actions and their impact on
budget outcomes and public enterprise performance (including financial and
performance indicators), as aligned with the program impact and outcome
indicators agreed on with the Government.

(vi)

The Government will ensure that (a) its monitoring and evaluation of the program
remains in effect for at least 1 year after the completion of the program; and
(b) within 1 year of program completion, the Government will prepare a program
completion report for the purposes of evaluating the program’s overall success.

Conditions for Loan Effectiveness

98.

The Government has satisfactorily fulfilled all conditions for the release of the first

tranche.

Appendix

DESIGN AND MONITORING FRAMEWORK

Design
Summary

Performance Targets and

Indicators

Data Sources and

Reporting

Mechanisms

Assumptions and Risks

Impact
Higher and
more-inclusive
economic
growth

Real GDP growth progressively
raised toward the Government’s
target long-run growth rate of 3.5%
yearly by 2014

Relative standard of living of the
vulnerable groups of the community
improved, as measured by a rising
expenditure share of the poorest 20%
of households between 2008 and the
next household income and
expenditure survey

National accounts,
budget papers
including the
Budget Policy
Statement, and
economic and fiscal
updates from the
Ministry of Finance
and Economic
Management
(MFEM)

Household income
and expenditure
surveys, monitoring
reports for the
National
Sustainable
Development
Strategy (NSDP)

Assumptions

The global economy will
begin to recover from the
downturn in 2010

The private sector will
respond to the improved
economic conditions

Risks
The Government will face
a shortfall in financing
needed to optimize
infrastructure

Cyclones or other
adverse weather events
will damage the economy

Higher crude oil prices
will damage the economy

Outcome
Economic
recovery,
combined with
protection of the
vulnerable and
the country’s
fiscal position

Economic contraction avoided in both
FY2010 and FY2011

Growth of construction value-added
exceeds the medium-term average
growth rate of 5.5% in FY2012

Progressive implementation of the
IMP (in line with the medium-term
plans presented in the FY2010
budget)

Infrastructure governance framework
(IGF) implemented on schedule for
complete implementation

Stability, or upgrade, in the
Government’s sovereign credit rating
(BB equivalent in August 2009) to the
end of FY2011

National accounts,
budget papers
including Budget
Policy Statement,
MFEM economic
and fiscal updates

Monitoring reports
for the NSDP and
supporting sector
plans and
strategies

International rating
agency monitoring
of Cook Islands

Assumptions

Government agencies
continue to be committed
to improved performance

Government agencies
restrain low-priority
current expenditure

Other development
partners provide
adequate and timely
support for the IMP

Risks

Parliamentary and
community support for
the Government’s actions
is insufficient

The 2010 election results
in a reduction in political
commitment

Unforeseen technical
problems and difficulties
in land access delay
capital expenditure

Appendix 1

Design
Summary

Performance Targets and

Indicators

Data Sources and

Reporting

Mechanisms

Assumptions and Risks

Outputs
1. Short-term

boost to
economic
activity from
higher capital
expenditure
by the
Government

FY2010 budget provides an allocation
for infrastructure and building work
priorities as stated in the
infrastructure master plan

FY2010 budget funds a higher level of
capital expenditure (ratio of capital
expenditure to GDP higher than
12.2%)

2. Structural and

governance
improvements

IGF endorsed by the cabinet by
October 2009 and key elements
implemented by 2011

Transparent and objective process of
prioritizing projects and verifying their
viability endorsed by the cabinet and
used

FY2010 budget provides for
implementation of IMP work priorities
at a higher level than FY2009 budget

FY2011 and FY2012 budgets provide
for continued implementation of IMP
work priorities

Review of arrangements for economic
regulation of monopolies and other
forms of anticompetitive behavior
completed by 2011

Competitive tendering of access to
monopoly public assets and economic
development subsidies, where
feasible and in the public interest,
completed by 2011

3. Support for

the vulnerable
through
targeted
actions

Real per head value of welfare
payments provided to the vulnerable
maintained at FY2009 levels

Cabinet commitment to pilot
performance monitoring of services
used by the vulnerable by
October 2011

Performance monitoring of services
used by the vulnerable from 2009 to
2011

Review of social welfare benefits, to
identify and redirect savings to the
vulnerable completed by end FY2010

National accounts,
government
financial statistics
and other releases
of the Statistics
Bureau

Monitoring reports
for the NSDP

Budget papers
including Budget
Policy Statement

Ministry of Finance
economic and fiscal
updates

Public accounts

Infrastructure
agency documents

Assumptions

Government prioritizes
capital expenditure on the
basis of economic returns

Cost of targeting support
to the vulnerable is
affordable and practical

Risks

There will be insufficient
suitably qualified and
experienced personnel
and funding to manage
the expansion in capital
expenditure, structural
initiatives, and support for
the vulnerable

Unforeseen legal barriers
prevent structural reforms

Appendix

Design
Summary

Performance Targets and

Indicators

Data Sources and

Reporting

Mechanisms

Assumptions and Risks

and responsive actions included in
the FY2011 budget

4. Maintenance

of fiscal
responsibility

FY2010 to FY2012 budgets comply
with principles of fiscal responsibility
stated in the MFEM Act

Manila Agreement financial ratios
updated by December 2009 and met
in FY2011 and FY2012

Medium-term budget framework
adopted in FY2011

Aid-funded activities of ministries
subjected to similar performance
review as government-funded
functions

5. Communica-

tion and
ownership of
economic and
fiscal
management
initiatives

Cabinet endorsement of
communications strategy and
implementation of the same

Survey of stakeholder and community
understanding of actions undertaken
by Government by 2011

Activities with Milestones

Subprogram 1 (October 2009)

1.1 Provision in the FY2010 budget for increased IMP-prioritized

infrastructure and building investment

1.2 Adoption of the IMP

1.3 Incorporation of the IMP into NSDP 2007–2010

1.4 Merger of the Ministry of Works with the Office of the Minister of Island

Administration to form the Ministry of Infrastructure and Planning

1.5 Formation of the National Sustainable Development Commission

1.6 Formation of the Infrastructure Committee

1.7 Formulation of transparent criteria for infrastructure investment

prioritization

1.8 Cabinet endorsement of the IGF

1.9 Maintenance of the real value of social security payments to the

vulnerable

1.10 Pilot performance monitoring of services used by vulnerable members of

the community

1.11 Principles of fiscal responsibility in the MFEM Act met in FY2010

1.12 Cabinet agreement to develop updated Manila Agreement financial ratios

1.13 Statement of government operations in GFS format in FY2010 budget

Inputs

ADB
OCR loan of $16.0 million
(subprogram 1 of
$10.0 million [2009] and
subprogram 2 of
$6.0 million [indicative
timeline of October 2011])

TA 7287-COO:
Infrastructure
Governance Reform and
TA 7280-REG: Pacific
Economic Management
(Subprogram 1:
Response to the Global
Economic Crisis)

Government

Meeting of tranche
conditions

Counterpart support for
TA

Appendix 1

Design
Summary

Performance Targets and

Indicators

Data Sources and

Reporting

Mechanisms

Assumptions and Risks

Activities with Milestones

1.14 Continuation of the Government under Standard & Poor’s Ratings

Services through FY2010

1.15 Cabinet endorsement of a communications strategy

Subprogram 2 (indicative timing of October 2011)

2.1 Budget provision for continued implementation of IMP

2.2 Review of government monopolies undertaken and initial steps taken to

remove those not deemed to be in the public interest

2.3 Implementation of key elements of IGF

2.4 Review of arrangements for the economic regulation of monopolies and

other forms of anticompetitive behavior

2.5 Competitive tendering of access to monopoly public assets and economic

development subsidies

2.6 Maintenance (at least) of real value of social security payments to the

vulnerable

2.7 Maintenance of expenditure on identified essential public services used

by the vulnerable in FY2011 and FY2012

2.8 Performance monitoring of services used by the vulnerable members of

the community

2.9 Compliance with principles of fiscal responsibility in the MFEM Act in

FY2011 and FY2012

2.10 Inclusion of aid-funded activities in ministry outputs

2.11 Achievement of updated Manila Agreement financial ratios in FY2011 and

FY2012

2.12 Adoption of a medium-term budget framework for FY2012

2.13 Statement of government operations in GFS format in FY2011 and

FY2012 budgets

2.14 Continuation of the Government under Standard & Poor’s Ratings

Services through FY2011 and FY2012

2.15 Review of payments on behalf of the Crown

2.16 Implementation of a communications strategy

ADB = Asian Development Bank, ERSP = economic recovery support program, GDP = gross domestic product, GFS =
government financial statistics, IGF = infrastructure governance framework, IMP = infrastructure master plan, MFEM =
Ministry of Finance and Economic Management, NSDP = National Sustainable Development Plan, OCR = ordinary capital
resources, TA = technical assistance.
Source: ADB.

Appendix 3

ECONOMIC ANALYSIS

The Recovery from the Mid-1990s Economic Crisis

The Cook Islands’ economy achieved 6 consecutive years of growth to 2004 as it

recovered from the economic crisis of the mid-1990s. Economic reforms adopted in response to
the crisis provided the catalyst to growth by setting the foundation for a robust expansion in
private sector activity. Real gross domestic product (GDP) increased by 6.0% yearly on average
from the turnaround in economic performance to 2004, above the long-run yearly growth rate of
3.5%.

2.

The Asian Development Bank (ADB)–supported Economic Reconstruction Program in

the mid-1990s was aimed at improving public sector institutional capacity and creating a more
competitive economy under the leadership of a growth-oriented, productive private sector.

The

program was largely successful. This is evident in the good rates of private sector–led economic
growth, a large fall in unemployment to low rates, and the business community’s reasonably
favorable assessments of the operating environment. Key achievements were the (i) reduction
in excess employment in the public service and an associated correction of public servant pay
rates, (ii) reduced involvement of the public sector in business activities, (iii) adoption of a
modern tax system centered on the value-added tax and the reform of import duties,
(iv) strengthening of the financial system through reform of the state bank and improved
supervision, and (v) a more open stance toward foreign investment and workers.

3.

Tourism now leads the Cook Islands economy and the structural transformation to a

service-oriented economy is largely complete. Visitor arrivals have grown from less than 50,000
people in the mid-1990s to almost 100,000, compared with a resident population of around
15,000. Tourism growth has led a more general expansion encompassing the wholesale and
retail trade, restaurants and accommodation, and transport and communications. However, this
lack of economic diversification carries significant risks.

4.

The risk was highlighted in 2005. Damage from cyclone Hera and the disruption it

caused to tourism saw the economic recovery end in 2005. Real GDP grew by an estimated
1.1% in 2008, following growth of 1.4% in 2007 and only 0.7% in 2006. The weaker growth
performance appears to be linked as well to insufficient progress in deepening economic
reforms. Productivity growth and the accumulation of physical and human capital appear to
have fallen short of that needed to sustain the growth momentum. The accumulation of
productive capital appears to have been slowed by tighter restrictions on foreign investment,
largely implemented through indirect means that lack transparency and certainty. The local
labor supply is close to fully employed, and imported labor is required to meet demand and
avoid a rising cost structure. However, concerns regarding the potential dilution of the Cook

The sector diagnostics presented in this appendix draw heavily on ADB. 2008. Cook Islands 2008 Social and

Economic Report: Equity in Development. Manila.

ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grants to the Cook Islands for the Economic Restructuring Program. Manila (Loan 1466-
COO, and TA 2650/2651-COO, approved in September for $5 million); ADB. 1995. Technical Assistance to the
Cook Islands for Strengthening Institutional Capacity for Financial and Economic Management. Manila (TA 2424-
COO approved in October for $892,000); ADB. 1996. Technical Assistance to the Cook Islands for Management of
the Cook Islands Development Bank and Business Ventures Development. Manila (TA 2650-COO approved in
September for $740,000); ADB. 1996. Technical Assistance to the Cook Islands for Institutional Support to the
Development Investment Board. Manila (TA 2651-COO approved in September for $251,000); ADB. 1997.
Technical Assistance to the Cook Islands for Strengthening Institutional Capacity for Financial and Economic
Management (Phase II). Manila (TA 2750-COO approved in January for $600,000).

Appendix

Islands identity, with both social and marketing implications, appear to be contributing to inertia
in providing flexible, efficient access to foreign labor.

The Financial Sector

Commercial bank lending has provided a key source of funding for the surge in

investment in recent years, complementing high levels of foreign investment. Business lending
has been concentrated in hotels and motels. Commercial bank lending to hotels and motels was
5% of GDP in 1996, had risen to 9% by 2000, and was 23% by 2005.

6.

Two branches of major Australian banks, Westpac and ANZ, account for over 90% of

loans (Westpac is by far the largest). The third bank, the state-owned Bank of Cook Islands, has
improved operations but continues to struggle with very-limited access to deposits and loan
funds.

7.

Both Australian branches have borrowed overseas to supplement domestic funds to

meet credit demand. Interest rate spreads are notably higher than Australian levels (of around
3%–4%). Commercial loans, especially in tourism and related services, represent a major share
of both branches’ loan books, as do housing loans, the main area of recent growth. Commercial
loans are short term (below 10 years) and usually secured against land (lease) collateral. The
collateral and legal foreclosure processes appear to work satisfactorily and have not hampered
bank lending. The share of nonperforming loans held by banks is less than 5%.

8.

Banking soundness is enhanced by having the two foreign branches prudentially

supervised by the Australian Prudential Regulatory Authority and also by the Cook Islands’
Financial Supervisory Commission, which also supervises the Bank of Cook Islands. Banks,
including foreign branches, must be licensed by the Financial Supervisory Commission to
operate in the Cook Islands to ensure prudential soundness in accordance with the Basel core
principles on banking supervision. The number of licenses is not fixed, and entry to banking is
open to any applicant that meets the prudential requirements.

9.

The Bank of Cook Islands began operations on July 2001 through a restructured merger

of the Cook Islands Savings Bank and the Cook Islands Development Bank, which had suffered
large losses on development loans to the pearling industry. The Bank of Cook Islands currently
operates as a retail commercial bank, focusing on smaller domestic investors. It is free from
government interference in its operations, and a good level of transparency and accountability is
in place. Nevertheless, the bank is struggling to make a profit.

10.

It is uncertain whether the banking market is large enough to sustain three commercial

banks in the long term, and the small market share of the Bank of Cook Islands means it is
unlikely to provide any additional competitive pressures for the two major banks. Government
involvement in such a commercial activity carries risk, including the potential for state favoritism
and a breakdown in corporate governance. Thus, although not a high priority, the Government
could consider divesting its ownership of Bank of Cook Islands, and using the funds to finance
alternative public investments that would contribute more to national welfare.

11.

As the Cook Islands currency is the New Zealand dollar, there is no potential for an

independent monetary policy.

Appendix 3

Measures to Sustain Economic Growth

12.

Tourism is likely to remain the driver of economic growth, concentrated on Rarotonga

and Aitutaki. Land suitable for agriculture exists on Rarotonga and the southern group of outer
islands, but experience suggests that the economy’s strengths are elsewhere and agricultural
activity will be limited to the sale of fresh fruit and vegetables to Rarotonga and Aitutaki and
small niche-market opportunities (e.g., sales to Honolulu of maire, from whose leaves are
fashioned garlands, and coffee exports from Atiu). A key factor is the regionally high cost of
labor and the availability of more-attractive employment alternatives (e.g., in tourism or the
public sector).

13.

Pearl farming on Manihiki will continue to be the main private sector activity in the

remote northern group of outer islands, provided that farm management issues are addressed
and world prices are favorable. Other potential contributors to private sector activity in the
northern group include offshore fishing and fish processing, and handicrafts. But the scale of
these activities is likely to stay relatively small. Public sector employment will remain the
dominant source of income and jobs in the northern group, and in the southern group (excluding
Aitutaki).

14.

Raising the productivity of infrastructure is an important step toward sustaining overall

economic growth. The tight fiscal management necessary to correct the Cook Islands’ very high
debt levels and the absence of a clear planning framework for infrastructure have contributed to
a backlog of investment. Roads, water, sewerage, electricity, and harbors and ports on
Rarotonga and Aitutaki are potential constraints on growth over the medium term. Existing
infrastructure tends to impose unnecessarily high costs on users and in some cases is unable to
meet new demands at a reasonable cost or standard (e.g., water on Aitutaki or liquid waste
disposal on Rarotonga).

15.

A number of structural barriers in the economy have the potential to become significant

constraints on growth. Most import duties were removed with the fiscal year FY2007 budget, but
some were retained. Protective import tariffs were retained on most goods that are also
produced locally in an attempt to reduce the competitiveness of imports and hence support local
producers, especially in agriculture and drink manufacture. The difficulty is that these protective
tariffs feed into the cost structure of the tourism industry and reduce its competitiveness.
Furthermore, they tend to lock scarce local labor and capital into areas of the economy with low
productivity and questionable long-term prospects. It would be better for the country if such
protective tariffs were removed or at least phased out to allow resources to move to their most
productive use. Some tariffs on inputs to production, such as those on vehicles, have been kept
to boost revenue and they also tend to reduce the economy’s competitiveness.

16.

An extensive regime of price controls covers most basic food items and fuel. The intent

is to keep key items affordable. These controls can, however, force overall prices up (and
indications exist that they do), and they tend to shift profit margins from one item to another
rather than actually reducing the overall cost of consumer items. From a public policy
perspective, price controls can be justified only when effective competition is lacking. Few if any
of the items currently controlled meet this criterion, at least on Rarotonga and probably also on
the outer islands. A better way to keep goods affordable is to provide for a competitive business
environment. Effective competition can be relied on to minimize costs to society, but the current

Appendix

administrative mechanisms inevitably impose additional burdens on society through market
distortions and administrative costs.

17.

The tendency to overregulate prices notwithstanding, one key area of the economy

genuinely needs better price supervision. Telecom Cook Islands has a monopoly and for many
years has earned very high profits by overcharging. Such monopolistic behavior reduces the
economy’s competitiveness and has adverse social effects, not least worsening the country’s
remoteness. An agreement with the Government providing key monopoly rights to Telecom
Cook Islands has recently expired, but remains in place via legislative restrictions. While prices
for certain international services have been reduced in recent years, it remains important that
regulatory changes be pursued to facilitate the entry of new suppliers so as to remove any
remaining overcharging. Similar changes are warranted in electricity supply, though the
potential benefits are not as great as in telecommunications.

18.

The education and training sector has an important role to play in maintaining growth.

Local labor is in short supply, and this imposes a potential constraint on growth. Adult education
and further improvements in educational standards have the potential to lift labor productivity
and underpin a move to higher-valued activities (e.g., in tourism). Better education and training
can also contribute to growth by helping to keep residents in the Cook Islands so they are
available to meet the needs of the labor market. Education is particularly important for ensuring
the mobility of outer islanders and their ability to gain access to the better services and
opportunities offered by the main centers.

19.

Other efforts are required if economic growth is to return to moderate levels. The initial

priorities for the economy are to follow through on plans to contract out the operation of the fuel
tank farms that the Government is planning to buy and to make government subsidies open to
competitive bidding from alternative service providers, so as to maximize the value for money
they generate. Over time, it will be important to reduce the size of the public service and the
overall cost of government, to privatize state enterprises, and to improve tourism infrastructure
on Rarotonga and Aitutaki.

Links to the Sustainability of Communities

20.

Perhaps the biggest current development challenge is a long-term decline in the

population of indigenous Cook Islanders, from around 21,000 in 1971 to the current estimate of
around 15,000. Those holding Cook Island residency also hold New Zealand citizenship and
have free access to the New Zealand and Australian job markets and the New Zealand health,
education, and social security systems. More than three times as many Cook Islanders live
overseas than in the Cook Islands. The predominant migration flows have been from the outer
islands to Rarotonga, and from Rarotonga to New Zealand and beyond. Standards of social
services, notably education, are generally believed to be important determinants of migration,
and migration has also responded to variations in the economic fortunes of the Cook Islands.
Economic management and social service delivery therefore have important contributions to
make in sustaining the population and identity of Cook Islanders.

21. Despite its overall success, economic reform has succeeded in generating
private sector–led growth only on Rarotonga and Aitutaki. Elsewhere the private sector has not
responded or, perhaps more correctly, has been unable to respond to the new business
environment. In general, the main impact of the mid-1990s reform on the outer islands was an
exodus of people. There was no offsetting gain in economic sustainability, as the public sector

Appendix 3

continues to dominate island economies and crowds out prospects of sustainable private sector
activity. This crowding-out effect has grown since the reform, not eased. Public sector and
social security payments funded by the Government are now the predominant source of
economic activity in most outer islands. Some outer islands will soon face the prospect of an
intractable economic dependency, while others appear to have already reached such a state.

Finding Balance in Foreign Involvement in the Economy

22.

The makeup of the country is changing as the number of foreign workers and investors

rise, people of Cook Islands descent continue to depart, and fertility rates decline. The foreign,
non-tourist population was estimated at 1,000 through the 1990s. Official estimates now put this
population at 7,000, or around 30% of the total population. While these estimates probably
overstate the foreign presence (it is difficult to distinguish returning Cook Islanders from other
arrivals, and many returnees are probably included in the official estimates of foreigners), the
foreign presence is clearly significant and rising.

23.

Some community members are concerned about the follow-on effects of a rising foreign

presence, including the potential erosion of the Cook Islands identity. This has a social
dimension, as the culture is seen to be at risk. It is also seen to have a commercial dimension,
reflecting concerns that the tourism industry may suffer if the easygoing lifestyle and
Cook Islands face of the industry is lost. Some foresee that Rarotonga and Aitutaki may evolve
into high-density tourism destinations with little involvement with, or connection to, Cook Island
Maoris other than by way of rental payments on leased land.

24.

Public policy could respond to these issues in a range of ways. At one extreme is a ban

on further foreign involvement, and at the other extreme is the free flow of foreign labor and
investment. The first extreme would probably see economic growth stall, as there would be no
additional labor to meet growing demand. It would also carry the risk of the Cook Islands
economy losing its competitiveness and actually contracting if local labor were too forceful in
taking advantage of the opportunity created to push up pay rates. The opposite extreme would
minimize the economy’s cost structure by tending to keep wages down. That would probably
maximize economic growth but could also bring very large changes in the nature of the Cook
Islands as the foreign presence grows, especially if Cook Islanders continue to leave for better
wages overseas.

25.

The Government’s current approach is a middle path. Foreign workers are allowed

where local skills are not available, and foreign investment is allowed outside reserve activity
areas (and also within them under certain conditions). Foreign workers and investors both pay
fees, which lightly control entry. The guiding policy framework however lacks clarity and
coordination, and this can give rise to uncertainty and inconsistencies.

26.

Efficiency, accountability, and transparency would be improved by a more open and

clearly defined system. Support for local labor and business owners to upgrade their skills so
they can play a more prominent role in the economy is probably also important in finding
balance on this issue. Tightening current controls on foreign involvement (a proposal that is
already well advanced) could be achieved through a variety of means. Higher fees are one
option for limiting access. Quotas could be set for foreign labor, or partial bans could be applied
(e.g., for certain skills, industries, or islands). Some options are better than others, so potential
impact should be analyzed and discussed openly.

Appendix

FISCAL ANALYSIS

The Overall Fiscal Stance

Good economic growth combined with improved tax administration provided for

substantial growth in the real (absolute) value of revenue following the reform of the mid-1990s.
The ratio of internal revenue to gross domestic product (GDP) has been relatively steady at
slightly above 30%. Foreign aid has been relatively high, ranging from 5% to 10% of GDP. Total
revenue collections have thus typically been around 40% of GDP, giving rise to a relatively large
government by international standards.

2.

Expenditure has nonetheless been kept within the revenue envelope. Operating

surpluses of up to 5% of GDP were achieved until FY2008. This provided the Government with
good financial capacity to either fund investment or run overall budget surpluses. In the event,
capital expenditure was restrained and the overall budget was in surplus until FY2006 and in
near balance in FY2007, and there was only a small overall deficit in FY2008.

3.

Government debt had reached extraordinarily high levels over the 1990s because of

poor management of the Government’s involvement in commercial activities and high budget
deficits. Debt peaked at 141% of GDP before a debt restructuring facilitated by the Asian
Development Bank (ADB), known as the Manila Agreement, cut debt by around half. The
budget surpluses, the appreciation of the New Zealand dollar, and a further write-down in the
debt in 2004 (by the Government of France) and in 2006 (by the Government of Italy) reduced
gross general government debt to 16.8% of GDP by FY2008. Once government cash reserves
built up to cover future loan obligations were taken into account, the net outstanding debt was
only 2.2% of GDP.

4.

The gross debt ratios are based on the book value of debt. Nearly all of the current debt

is external debt secured on concessionary terms from ADB. Moreover, the net present value of
the gross debt, which determines the effective value of the debt, is much lower than the gross
debt. Hence, prudent fiscal management had transformed the general government sector from a
position of extreme debt to one of being close to debt free.

5.

The tight fiscal position required post-reform was, however, at the expense of the

country’s physical infrastructure. A backlog of investment has accumulated in the area of roads,
ports and harbors, electricity, water, liquid and solid waste management, telecommunications,
and government buildings. Nonfinancial factors have also contributed to the backlog of
investment. The Government’s strong financial position means it is now well placed to address
the backlog of investment. The improved financial capacity is timely, as the economic expansion
has led to bottlenecks in the infrastructure network, and these place growth and public safety at
risk.

6.

The FY2009 budget signaled a move to a more expansionary fiscal stance. Although the

fiscal expansion was primarily due to rising capital expenditure, there was also some relaxation
in current expenditure. Notably, subsidies to business were increased and the hosting of the
Pacific Mini-Games in late 2009 carried with it a substantial operating expense, which
collectively saw the operating balance move to deficit in FY2009.

The sector diagnostics presented in this appendix draw heavily on ADB. 2008. Cook Islands 2008 Social and

Economic Report: Equity in Development. Manila.

Appendix 4

The Quality of the Revenue System

Good progress was made on the revenue side of the budget, with the tax and customs

system modernized during the economic reform. The tax system is centered on a progressive
income tax and flat-rate value-added tax. Tax rates have been kept reasonable and stable, and
attention has been paid to maintaining the simplicity of the system. The improved design
corrected for many inefficiencies and inequities in the revenue system. Further, over time
administration and compliance have been improved to lift the performance of the tax and
customs system.

8.

There are nevertheless some areas where the performance of the revenue system could

be improved, notably through the following:

(i)

The (phased) removal of the remaining protective tariffs, mainly because of the
inefficiencies they impose on the economy.

(ii)

The early removal of the high tax rates that apply to second jobs. The high tax
rates are inequitable, as people on the same income can pay different levels of
tax depending on whether they have one or more jobs (an equitable outcome
would be one where they pay equal taxes). The high tax rates are also inefficient,
as they adversely affect the incentive to work.

(iii)

The adoption over the medium term of a capital gains tax and a fringe benefits
tax. Better-performing tax systems include all sources of income in the definition
of taxable income.

(iv)

Greater reliance on user charges, subject to equity concerns being addressed
(e.g., through concessions for the disadvantaged). There is very little user
charging for government services (e.g., public health and education are provided
free of charge), and where charges are levied (e.g., most infrastructure services)
they tend to be less than operating costs.

(vii)

Increased returns from some underperforming public enterprises.

The Quality of Public Expenditure

Important progress has also been made in improving the efficiency and effectiveness of

public expenditure. The annual budget process requires ministries to prepare budget
submissions that are scrutinized for potential improvements by the cabinet and the Ministry of
Finance and Economic Management (MFEM), and efforts are being made to raise the
sophistication of the process as the capacity of agencies allows. This capacity has been built
through the modernization of the financial management system, improvements in corporate
planning overseen by the Public Service Commission, and attention to staff training.

10.

The formation of a Budget Committee of outside parties to engage in the budget process

has emerged as an important initiative. The reports of the committee are notable for their
vigorous analysis of agency budgets and performance, and they have considerable standing in
the process and the cabinet’s final consideration of the proposed budget. Efficiency and
effectiveness is also assisted by the practice of conducting publicly available, special-purpose
reviews of key issues, recent examples being of outer-island funding, health management, and
the funding and operations of the police force.

11.

The budget process is greatly strengthened by the activities of the Public Expenditure

Review Committee and Audit, which has a solid record of providing forthright, detailed
assessments of the use of public funds, and has been prepared to identify publicly inappropriate

Appendix

practices at the most senior levels of the Government and the community. Areas subject to its
review include the actions of ministers, the accounts of ministries, the sale and attempted sale
of government assets, and development partner projects. The key limitations of the audit
process have been the 2- to 3-year gap in the complete submission of public accounts for audit,
as this can delay the Public Expenditure Review Committee and Audit’s work until well after
events have taken place, and the discretion provided to Parliament as to when the Public
Expenditure Review Committee and Audit’s reports are tabled or responded to. Actions to
improve financial management systems are scheduled to reduce the gap in submission of public
accounts to less than 1 year soon. The volume and standard of public disclosure achieved
through the Cook Islands’ audit function is probably now the highest among the Pacific island
countries and approaching that achievable by the country’s larger neighbors.

12.

The need to now increase public investment to sustain growth and achieve ecologically

sustainable development poses a new challenge. Ensuring high quality in capital spending
remains an issue and requires that government agencies follow a transparent and robust
process of identifying, evaluating, prioritizing, funding, and implementing investment projects. It
is essential that projects have clear social and economic benefits and achieve a satisfactory rate
of return, particularly where financed from loan funds. Projects that are self-funding from a
revenue stream or that result in savings in maintenance and operating cost that outweigh the
cost of the capital investment are preferred from a fiscal perspective.

13.

Other key issues to be faced in refining public expenditure are:

(i)

Sector priorities. For the Cook Islands, the economic priorities are likely to lie in
economic infrastructure, education, and health. A backlog of infrastructure needs
to be addressed, there is considerable potential to raise education standards and
doing so is important to satisfying the human capital needs of the economy, and
the health system is facing the challenge of a rising incidence of
noncommunicable diseases.

(ii)

The wage bill. There has been considerable growth in the number of public
sector employees since the cuts of the mid-1990s. There were 3,200 employees
in early 1996. Numbers had been cut to 1,500 by early 1997, but have since
risen to around 2,000. MFEM has recognized that the expenditure on the wage
bill was tending to suppress funding for capital goods and services, and hence
the funding needed for the delivery of government services.

(iii)

Inequities between islands. There is considerable variation across islands in
funding for essential services. For example, in total funding for outer-island staff
costs for education and health, and the island administration (which is largely for
the operation of infrastructure), varied from NZ$1,050 per person on Aitutaki to
NZ$4,600 per person on Rakahanga in FY2007. The average per person for the
outer islands was of the order of double the allocation to Rarotonga. There is no
obvious public policy rationale for these variations in funding.

D. Debt

Sustainability

14.

The achievement of a sustainable debt position has been one of the key results of the

economic reform. The fiscal transformation was guided by the principles of fiscal responsibility
established under the MFEM Act and financial ratios established under the Manila Agreement.
Under the Manila Agreement, the Government made a commitment: (i) not to undertake new
commercial borrowings for 7 years; (ii) that key financial ratios (in relation to debt, wages and

Appendix 4

salaries and recurrent expenditure on goods and services) would not exceed their levels as of
the end of 2001–02; (iii) that the operating budget balance would remain in surplus; and (iv) that
borrowing by state-owned enterprises would be limited to activities that generate enough
additional revenue to service the debt.

15.

Under current expenditure plans, the net public debt of the general government sector

would rise rapidly to the order of 25% of GDP (all of it external). Net debt would, however,
remain within prudent threshold levels. For example, the net debt ratio would be well below the
50% debt-to-GDP threshold set for a well-performing low-income economy. The projected debt
position also compares favorably with debt thresholds based on comparisons with exports and
government revenue.

16.

Debt accumulation can be thought of as sustainable if interest and principal repayments

can be met by a borrower without an unrealistically large future correction in the balance of
income and expenditure.

Judged on this basis, the fiscal position is sustainable. Long-term

revenue prospects are sound, provided prudent public investments are made to relieve the
infrastructure constraint on economic growth. There are also a number of other sensible options
for accommodating the projected rise in debt servicing costs of the general government sector.
Moreover, important safeguards are included in the finance legislation, and there is a good
record of compliance with such safeguards.

17.

This conclusion is reached subject to the proviso that debt is secured for well-planned

and justified capital expenditure, and that public enterprise debt is, as planned, funded
independently of the budget (excepting justified community service obligations).

18.

In interpreting these findings, it is important to keep in mind that the Cook Islands is

vulnerable to natural disaster and adverse economic developments. This vulnerability means
that the Cook Islands should aim for a lower debt level than normal so as to provide a buffer
against shocks (to retain the capacity to borrow in adverse circumstances). This observation,
combined with the need to retain the fiscal capacity to complete the planned infrastructure
upgrade, suggests that the accumulation of public debt now under way should be approached
carefully.

19.

The fiscal improvements saw a progressive upgrade from 1998 in the credit rating

issued by Standard & Poor’s. On 11 August 2009, Standard & Poor’s revised its outlook on the
Cook Islands to negative from stable, while reaffirming its BB/B foreign currency and local
currency credit ratings on the sovereign.

The updated rating took into account the FY2010

budget and projections of an increase in net debt to an estimated 28% of GDP. Standard &
Poor’s noted that the projected increase in debt would be temporary, and reflect the bringing
forward of some port, water, and road infrastructure projects to benefit from concessionary
terms available from development partners and to address infrastructure shortcomings that
impair investment in tourism and allied sectors, which are needed to diversify the economy and
provide employment opportunities for the population.

International Monetary Fund. 2002. Assessing Sustainability. Washington, DC (Prepared by the Policy
Development and Review Department In consultation with the Fiscal Affairs, International Capital Markets,
Monetary and Exchange Affairs, and Research Departments; 28 May; pp. 4–7).

Cook Islands can be benchmarked to Indonesia and the Philippines, which receive similar ratings from Standard &

Poor’s and have similar debt ratios. Both are rated by the International Monetary Fund as having sustainable public
debt positions.

Standard & Poor’s. 2009. Outlook On Cook Islands Revised To Negative Amid Projected Rise In Debt. Ratings

Affirmed. Research Update. August.

Appendix 4

Table A4: Summary

Governmen

t Accounts

(% of GDP,

GFS basis)

1999

2000

2001

2002

2003

2004

200

2006

2007

2008

2009

2010

(est.)

(es

t.)

(es

t.)

(est.)

(es

t.)

(
e

st.)

(
B

udget)

r
ansactio

ns aff

ecting n

t w

rth

Rev

enue

37.6

36.0

40.3

37.2

35.0

34.3

37.2

39.0

39.8

43.9

37.6

38.7

xes

25.0

25.3

26.9

26.7

24.6

24.7

25.7

27.1

27.5

28.3

25.7

24.9

xes

on incom

e, pr

its and c

apital

gains

7.8

8.2

8.6

9.8

8.3

8.1

9.0

10.2

11.2

11.6

10.1

9.5

xes

on international

ade and transac

tions

5.7

6.0

6.5

5.9

5.7

5.8

6.1

5.6

3.9

4.0

4.5

4.9

xes

on goods and s

rvi

11.2

10.8

11.7

11.1

10.6

10.7

10.6

11.2

12.5

12.7

11.1

10.5

Other

taxes

0.3

0.2

0.1

0.0

t
her revenue

5.8

5.3

7.6

6.0

5.3

4.7

4.9

4.5

5.0

4.6

r
ants

6.8

5.5

5.8

4.5

5.1

4.9

6.6

7.4

7.7

10.6

6.9

9.3

pens

34.1

32.3

33.2

33.4

31.6

29.5

32.0

33.5

35.0

39.9

38.3

35.9

Com

pensation of

ploy

ees

15.1

13.7

12.8

13.7

13.3

12.9

13.1

13.8

14.5

14.8

13.6

13.2

Cons

ption of

i
xed c

api

tal

1.0

1.7

1.5

1.4

1.5

1.7

1.8

1.6

e of

goods

and services

7.0

7.5

8.9

9.2

7.3

6.4

7.1

7.8

8.4

9.8

7.6

Interes

1.0

1.1

1.0

0.9

0.5

0.6

0.4

0.3

r
ants

4.6

4.1

3.6

4.1

3.7

4.1

4.0

4.5

5.6

6.4

5.6

t
her expens

4.1

4.7

4.4

4.6

5.7

6.5

6.2

9.0

6.4

7.5

Net oper

ati

ng balanc

3.5

3.8

7.1

3.8

3.4

4.8

5.2

5.5

4.7

4.0

(0.7)

2.7

r
ansactio

ns in n

on-f

inancial asset

Net ac

quisiti

on of non-

ancial

sets

1.0

1.4

3.2

2.9

2.7

2.8

2.6

2.9

4.7

4.8

10.4

18.8

Acquis

i
tion of

i
x

ed assets

2.0

3.1

4.7

4.4

4.2

4.1

4.6

6.4

6.6

12.2

20.4

Cons

ption of

i
xed c

api

tal

1.0

1.7

1.5

1.4

1.5

1.7

1.8

1.6

Net lending/(borr

owing)

2.5

2.4

3.9

0.9

0.6

1.9

2.6

0.1

(
0.8)

(11.0)

(
16.1)

r
ansactio

ns in f

i
nancial asset

s and liabilit

ies

n.a.

3.1

1.2

1.8

2.4

2.5

0.1

(
0.9)

(9.1)

(
14.4)

Statistical disc

repency

/
error

n.a.

(2.1)

(0.6)

0.2

0.1

0.0

(2.0)

(
1.7)

neral gov

ernmen

t debt

r
oss

debt

77.1

64.9

62.8

55.0

46.2

42.4

37.9

21.2

21.1

16.8

19.9

34.8

Cas

h hol

i
ngs

7.2

9.8

16.4

17.6

16.4

17.4

18.9

15.3

13.9

14.6

9.1

9.5

Net debt

69.9

55.1

46.4

37.4

29.8

25.0

19.0

5.9

7.2

2.2

10.8

25.2

( ) = negative, est.= estimate,

GDP = gross domesti

c produc

t, GFS = gover

nment financi

statistics.

Source: ADB

estimates bas

ed on dat

a suppli

ed by

MFEM; MF

EM. Budget Estimates. Part I, Appropriati

on Bil

l, Appr

opriations and C

mmentar

y. va

riou

years; MFEM.

Government Accounts.

Rarot

onga. various

years.

Appendix 5

MANAGING FOR DEVELOPMENT RESULTS

A. The

Foundations

Demands on the public sector are rising, and it must respond by continuing to focus on

results. The community demands higher service standards, higher incomes, and more
opportunities. The aspiration appears to be to reach New Zealand standards, while at the same
time preserving the Cook Islands lifestyle, as modernized on Rarotonga and maintained in more
traditional style on the outer islands. At the same time, a declining share of government revenue
to gross domestic product requires tighter prioritization of government expenditure.

2.

Public sector management rests on four pieces of legislation enacted as part of the

economic reform. These are the Ministry of Finance and Economic Management (MFEM) Act,
1996; the Public Expenditure Review Committee and Audit (PERCA) Act, 1996; the Public
Service Act, 1996; and the Cook Islands Investment Corporation Act, 1998.

3.

The MFEM Act provides for detailed annual statements of the Government’s financial

position and its activities according to modern principles of budgeting, and more frequent
updates of economic and financial conditions. The PERCA Act provides a safeguard against
financial impropriety through its financial audits of government accounts and special-purpose
reviews of the use of public funds. The heads of ministries operate under performance-based
contracts overseen by the public service commissioner, who also has a role in establishing and
overseeing the public service. And the Cook Islands Investment Corporation has been
established with responsibility for the overall management of public enterprises and other public
assets.

4.

The main achievement of the modern management system established under this suite

of legislation has been a substantial improvement in the quality of financial management:
internal management reports are prepared regularly; almost all expenditure is on-budget; all
assets and liabilities (including contingent liabilities) are identified; there is a good public
disclosure of the financial position; audits are timely and most concerns raised are minor; and
expenditure is generally in line with approved funding. The improvements have been achieved
across the public sector, including the public enterprises. In stark contrast to the situation
15 years ago, the Government now has in place one of the foundations required for effective
and efficient management of public resources.

5.

The progress that has been made is most readily evidenced by the substantial

improvement in the Government’s financial position. The fiscal position was unsustainable
10 years ago. By 2008, the Government was almost debt free and there has been a significant
lowering of the tax burden. It is also evident in the increasing alignment and harmonization of
development partner funds, as initiated by the New Zealand and Australian aid programs, which
has resulted in the integration of almost all development partner-funded programs and projects
into the budget process.

The sector diagnostics presented in this appendix draw heavily on ADB. 2008. Cook Islands 2008 Social and

Economic Report: Equity in Development. Manila.

Appendix

B. Priorities

A remaining gap in public sector management is the establishment of a systematic

process for assessing performance. While the budget sets out a work plan with targeted results
and performance measures for the outputs of each ministry, they are not scrutinized in a
systematic manner. The management system established for ministries requires the Public
Service Commission to regularly review progress in delivering these outputs, but no such review
is undertaken. Many performance measures are unrealistic—too high to be of use in the annual
review. Heads of ministries are subject to performance review, but without ministry-level
information the review can be only superficial. This means that the cycle of inputs, activities, and
outputs required to feed back into reformulation in subsequent years is weak at best and, at
worst, completely absent.

7.

Adopting a performance management system would be greatly assisted by the

implementation of the National Sustainable Development Plan 2006–2010 (NSDP). The NSDP
sets out the national vision and goals, as well as the direction to be followed by the lower-level
plans (sector strategies, corporate plans, and the annual budget). The plan presents an
important opportunity to reinvigorate the broader engagement of the community in the use of
public sector resources.

8.

A further gap is in the integration of the substantial payments on behalf of the Crown and

aid activities into ministry outputs. While their use is identified in the budget, at present they are
treated as stand-alone activities and accountability for delivery is not defined. A complete
performance assessment system would build in this accountability link.

9.

Improvements can also be made in the mode of government operation. For example,

key issues to be faced in developing infrastructure include the process of selecting public
investment, management weaknesses within agencies, low-cost recovery on public services,
and problems faced in the devolution of responsibilities to island councils. The competitive
outsourcing of infrastructure to the private sector has the potential to be an important response
to these problems, requiring further rethinking of the division of responsibilities between the
public and private sectors.

10.

All expenditure decisions face the need to establish realistic standards of services

across the country. Improvements in services on the outer islands inevitably come at the
expense of improvements on Rarotonga and Aitutaki, thereby accentuating the gap between
these centers’ standards and those of New Zealand, to which people appear to aspire. The
bigger the gap between Cook Islands and New Zealand standards, the larger the population
outflow, which imposes its own costs on the country.

11.

Other measures that could support accountability and transparency include (i) making

budget documents more readable; (ii) publicly releasing the reports of the independent budget
committee; (iii) reducing the use of payments on behalf of the Crown; (iv) adopting codes of
conduct for members of Parliament, civil servants, and officers of the public enterprises; and
(v) imposing tighter controls on public enterprises and the appointment of ministry heads to curb
a tendency toward politicization.

Appendix 5

Complementary Improvements in Governance

12.

The quality of governance remains one of the main risks to continued development and

an area warranting renewed efforts. A key consideration is the absence of action to advance
constitutional reform. A review of the Constitution was released in 1998, but few
recommendations were implemented. There have been frequent changes of government, and
the associated political instability and uncertainty has probably undermined the quality of
government with follow-on effects on emigration and economic growth. Political patronage
remains an ongoing risk that has been exaggerated by the (i) weaknesses in the parliamentary
system, (ii) the ability of ministers of the Crown to act outside the accountability framework,
(iii) the absence of a clear planning framework to guide the use of public funds, and (iv) gaps in
performance management under the budget process.

13.

A key component of reforms in the mid-1990s was to be the transfer of formal authority

to make and implement decisions from the center to the periphery. At the time, and for several
years thereafter, this transfer was considered critical for the sustainability of the country.
Specifically, the Government was to devolve some key resource management and public
administrative control to island councils, and to provide a fully functional and effective form of
self-government for each island, provided with clear and open lines of responsibility and
communications with the restructured central Government on Rarotonga. The actual extent of
devolution fell short of this intention. Lacking the support of a clear policy framework, devolution
outpaced the development of local capacity from a low base, with the result that the devolution
that did occur has largely been reversed. The balance of power between central and island
governments probably has a significant effect on the quality of island services. Although
devolution is a difficult area for making progress, there is value in revisiting these issues and
seeking a sustainable approach.

D. Anticorruption

Measures

14.

The Cook Islands has extensive legislation in place to prevent or address corruption.

This is backed by supportive institutional arrangements for implementation and oversight. This
system provides an example to other Pacific island countries, showing what can be achieved in
a small economy. Cook Islands expressed its commitment to anticorruption measures by
endorsing the Anti-Corruption Initiative for Asia and the Pacific of ADB and the Organization for
Economic Co-operation and Development in 2001.

15.

At the same time, Transparency International’s 2004 study of national integrity systems

in the Cook Islands

found that, in practice, governance is heavily influenced by the traditional

practice of respect for elders and leaders, which leads to a reluctance to question their actions.
There appeared to be an acceptance that people who misuse, for private benefit, power
entrusted to them would not be punished. The problem is exacerbated by the inadequate
capacity of the police force and Crown Law office, which means a backlog of pending cases
cannot be prosecuted. Transparency International has called for the establishment of an
independent commission on corruption in the Cook Islands to expose and minimize corruption in
the public sector and to educate the community on corruption.

16.

Overall, the judicial system has a reputation for being transparent and competent, with

judges (usually from New Zealand) who are of high caliber and independent, and free from

Transparency International. 2004. National Integrity Systems, Transparency International Country Study Report,
Cook Islands. Canberra.

Appendix

allegations of bribery and political intimidation. Of growing concern, however, is the increasing
use of justices of the peace to sit on criminal and land cases in an effort to reduce costs. This is
of concern because the justices of the peace are purportedly appointed by the Government
without attention to merit and do not necessarily have relevant qualifications or experience.

17.

The PERCA Act was introduced in July 1996 to help ensure financial management

oversight and improve accountability and transparency. As a result of this legislation, the current
Audit Office was established and given responsibility for external audits. The Audit Office
functions as a safeguard to maintain the financial integrity of the country’s parliamentary system
of government. It has effective policies and investigative skills, and the standard of auditing has
improved in recent years.

18.

The Cook Islands’ audits of ministries and statutory authorities are mostly completed

within 12 months of the end of the financial year—some outsourcing their accounting, and thus
advancing the pace of account preparations—and the number of audit qualifications is steadily
reducing. Ministries are also recognized as being responsive to the qualifications. The Crown
consolidation takes longer (around 24 months from the end of the financial year), as it is reliant
on all ministries and statutory authorities’ accounts being audited first. The PERCA Act requires
the use of an audit adviser, a role taken on by Ernst & Young. The strengthening of audit
capacity is an iterative process, with the recent adoption of a new software system showing
productivity gains in the Audit Office’s operations. Issues highlighted by PERCA have resulted in
charges being laid against individuals.

19.

The public service is governed by both the Public Service Act and a code of conduct for

the public service and senior executives. Merit-based selection and promotion and ethical
standards are commonly applied and public servants are generally competent. Some serious
challenges remain, however. For example, management is now supposedly performance
based, but the Public Service Commission lacks the capacity to measure the performance of
any staff other than heads of agencies at line ministries. Corruption and political nepotism exist,
with criminal prosecutions of senior public servants in recent years.

20.

The Cook Islands is increasingly receptive to transparency in information and decision

making. One innovative mechanism used is the budget committee, which involves parties
external to the public sector to analyze agency budgets and performance. The reports of the
budget committee have considerable standing in the cabinet’s final decision making. An Official
Information Act has recently been put in place and is overseen by the ombudsman’s office.

Appendix 6

ANALYSIS OF THE INFRASTRUCTURE SECTOR

Infrastructure in the National Sustainable Development Plan

The Cook Islands Government recognized that the mid-1990s reform process, the need

for fiscal consolidation, and too-frequent changes in government composition resulted in too
little attention being paid to medium- and long-term development goals.

To help refocus, the

Government embarked on the preparation of a policy formation and broad consultative process
aimed at preparing the nation’s second development plan. In 2007, the Government adopted Te
Kaveinga Nui, the National Sustainable Development Plan 2007–2010 (NSDP).

The NSDP established a national vision “to enjoy the highest quality of life consistent

with the aspirations of our people, and in harmony with our culture and environment.”
Infrastructure is prominent in the third of the NSDP’s five strategic outcomes:

Strategic Outcome 3: Sustainable Economic Growth in Harmony with our Social Values,
Culture and Environment

We envisage that by 2020, our largely private sector-led GDP will reach $0.6 billion
based on sustainable development principles.

We envisage that by 2020, all islands will have achieved the minimum standards set
for basic infrastructure, transport and utilities to support their economic development.

We envisage by 2020, there will be a more equitable distribution of the benefits of
economic growth across all islands.

Infrastructure is at the core of the fifth of the NSDP’s eight strategic goals: “a strong

basic infrastructure base to support national development.” Improved infrastructure for water
supply and waste disposal is also recognized by the NSDP as crucial to achievement of the
fourth goal of “sustainable use and management of our environment and natural resources.”

4.

Recent Asian Development Bank (ADB) studies have involved comprehensive reviews

of the legislative, institutional, and regulatory frameworks for infrastructure operating within the
Cook Islands.

The studies show, almost without exception, that recommendations of previous

studies aimed at improving the efficiency of project implementation and service delivery have
not been adopted, or have been acted on in a limited manner. In a number of instances,
improvements under the respective project initiatives have faltered through a combination of
inadequate human and financial resources for subsequent operation and maintenance.
Commitments to cost recovery or “user pay” have also faltered and tended to fall by the wayside
for a number of reasons, including inadequate local resources, inadequate technical assistance
(TA) support and continuity, an absence of political conviction, and concerted public opposition
(the latter due in part to limited public awareness and engagement).

ADB. 2008. Country Partnership and Strategy; Cook Islands 2008–2012. Manila.

Government of the Cook Islands. 2007. Te Kaveinga Nui (Pathway for Sustainable Development in the Cook

Islands) Living the Cook Islands Vision: A 2020 Challenge: National Sustainable Development Plan (2007–2010).
Rarotonga (January).

ADB. 2003. Technical Assistance to the Cook Islands for Legal and Institutional Strengthening of Environmental

Management. Manila (TA 4273-COO); and TA attached to ADB. 2005. Report and Recommendation of the
President to the Board of Directors on a Proposed Loan and Technical Grant to the Cook Islands for the Cyclone
Emergency Assistance Project. Manila (TA 4605-COO: Strengthening Disaster Management and Mitigation
[Component 2: Preventative Infrastructure Master Plan]) have provided valuable reference points.

Appendix

These observations convey an important message for the implementation of the NSDP.

There is a need for a renewed legislative, institutional, and regulatory framework that is
(i) attuned to the political environment of the Cook Islands, (ii) culturally acceptable to the
community, and (iii) capable of being implemented with the available human and financial
resources.

B. Agency

Responsibilities

Responsibility for infrastructure planning, provision, and regulation rests with several line

ministries and government agencies. The roles and responsibilities are fragmented and vital
skills are dispersed among the agencies. Responsibilities in some instances are unclear and are
assumed and acted on in default by the agencies with the legal responsibility. A general lack of
accountability for performance coupled with a critical shortage of resources and skills has meant
that planning, the development of policy, and forward budgeting and operational programming
within the agencies has been below that required to implement the NSDP.

7.

The reforms of the mid-1990s included the placement of the financially sustainable

public enterprises under the oversight of the Cook Islands Investment Corporation (CIIC). This
included the provision of electricity to Rarotonga and the operation of international airports and
harbors for Rarotonga and Aitutaki. Significant decentralization of functions to island
administrations occurred alongside the restructuring and downsizing of the public service.
Difficulties with capacity have resulted in the recentralization of education and health services
except for Palmerston Island, for which all government services are fully devolved.

8.

The government reforms of the mid-1990s were also significant in passing responsibility

for the management, operation, and maintenance of all island infrastructure into the hands of
the island administrations. A lack of technical capacity, funding, and regular maintenance
resulted in deteriorating outer-island services, a situation that remains a matter of concern.

The

Office of the Minister of Island Administration has adopted the role of facilitating the devolution
process from the central government to the outer islands. It provides support and advice to the
island administrations on governance, financial management, infrastructure development, and
operation and maintenance.

9.

The Office of the Minister of Island Administration continues to provide facilitation and

support services. Following reform, the office assumed a large measure of responsibility for the
preparation of financial statements for island administrations, but it has now withdrawn from this
involvement. The agency has a full-time architect on its staff, and since August 2007 a full-time
civil engineer; together they provide most technical services within the agency.

10.

The in-house technical capacity allows the Office of the Minister of Island Administration

to be directly involved in advice and assistance for outer-island infrastructure. The office has
also overhauled electrical generators for the island administrations (with the exception of
Aitutaki) at its workshop in the Ministry of Works (MOW) and contracted out the repairs of heavy
equipment. MOW and the Rarotonga power supplier (Te Aponga Uira) have been called upon to
provide support to the island administrations on a fee-for-service basis. The degree of support
provided is not, however, clear and may have been minor. Regulatory inspection of permitted

MPC Group International. 2007. Strengthening Disaster Management and Mitigation (Component 2: Preventive

Infrastructure Master Plan). Rarotonga (March, prepared under component 2 of TA attached to ADB. 2005. Report
and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Grant to the
Cook Islands for the Cyclone Emergency Assistance Project. Manila (TA 4605-COO).

Appendix 6

building construction and electrical works on the outer islands has been spasmodic, if at all in
case of some islands, giving rise to concerns of public and community safety.

Private Sector Participation

11.

Consultations during the preparation of the 2007 Preventive Infrastructure Master Plan

revealed a widely held belief in both government and civil society that private sector involvement
should be maximized. Private sector participation in the construction, operation, and
maintenance of infrastructure would be seen as having the potential to increase efficiency and
lead to more sustainable levels of service. Some services provided by government agencies
were subsequently placed with private contractors. Services such as the collection of household
refuse, trenching for cables, and trenching for water mains on Rarotonga have been contracted
out without noticeable adverse impact. This offers the benefit of allowing the Government to
avoid the need for reinvestment in plant and equipment for these activities.

12.

Consultation showed a rising acceptance of the value of confining the Government’s role

in infrastructure to (i) conducting strategic planning and setting policy; (ii) determining affordable
service levels in consultation with users of the service; (iii) establishing programs for
infrastructure maintenance and operations; and (iv) providing appropriate levels of funding, with
an increased private sector involvement in service delivery and infrastructure construction and
maintenance.

13.

Devolution of service delivery and the provision of infrastructure will require a clear

definition of the role of the government agencies as the managers of the Crown’s infrastructure
assets. It will also require new skills and capacity in asset management and the development of
general conditions of contract, contract documentation, and specifications for the contracting of
the service delivery on an outcome-based approach. Transparent and appropriate competitive
pricing procedures will also be required to run alongside the Government’s procurement and
tendering requirements outlined in its proposed Financial Policies and Procedures Manual.
Local contractors will need assistance and training to develop familiarity with and skills for the
new procurement and bidding processes. Coupled with this will be the need to develop
contractor understanding of contractual obligations, responsibilities, and liabilities for
performance-based contract works.

D. Infrastructure

Ownership

14.

The Cook Islands Act of 1915 and the amendment acts of 1965 and 1966 provide that

any road in the Cook Islands vested before or after the act shall not as such vest in the Crown,
but shall belong in accordance with common law to the adjoining owners, if no public
right-of-way exists. Referring to the formation of the roads, section 609 of the act then states
that all roads in the Cook Islands may be formed, maintained, and repaired by the Crown, and
shall be deemed to be in the possession of the Crown.

15.

MOW was established originally as the Ministry of Supportive Services under the

Supportive Services Act of 1974 and later renamed under the Public Service Identification of
Departments Order of 2000. The Supportive Services Act empowered the ministry to provide,
construct, and maintain roads; and to establish, provide, and maintain an adequate water supply
and reticulation service in all the islands. These roles have been limited to Rarotonga following
the devolution of responsibilities to the outer islands. MOW also has the right to maintain
foreshores (defined as a 30-meter-wide strip of land extending along and abutting the mean

Appendix

high water mark). The Rarotonga Waterworks Ordinance of 1960 and the acts and amendments
to which it relates provide for the establishment, maintenance, and control of waterworks on the
island. It prescribes powers for the minister, subject to the provisions of the ordinance to
construct, extend, improve, and maintain waterworks. In 2008, in accordance with the
Infrastructure Governance Framework, MOW was merged with the Office of the Minister of
Island Administration to form the Ministry of Infrastructure and Planning.

16.

The CIIC, established under the Cook Islands Investment Corporation Act of 1998

administers Crown assets and shareholding interests and supervises the undertakings of
statutory corporations. It has assumed responsibility for the interests of the Cook Islands
Government Property Corporation. CIIC has a board of three members appointed by its minister
with the concurrence of the cabinet, and a chief executive officer appointed by the board. The
CIIC’s responsibilities cover Te Aponga Uira, the Cook Islands Ports Authority, the Cook Islands
Airport Authority, and the Cook Islands Government Property Corporation and its subsidiaries.
The corporation has responsibility for Crown assets, including infrastructure assets.

17.

CIIC is therefore the trustee of the Crown assets with responsibility for protecting the

Crown’s investment in public infrastructure. Asset ownership is relevant to any requirement for
asset management plans, and the responsibility for overseeing the plans prepared by the asset
managers in the infrastructure agencies, and for ensuring the plans remain meaningful and
current.

18.

The CIIC has an office staff of around 12 persons, and a mobile maintenance unit of

around eight staff comprising a foreman and maintenance crew. The organization structure has
four sections: (i) administration, (ii) property management, (iii) finance, and (iv) legal and lands.
The property management section handles maintenance and improvements in all government
property together with the project management of all works and projects. These include the new
indoor sports stadium being built and funded by the People’s Republic of China, which CIIC was
required to have ready for the South Pacific Mini Games of September 2009.

19.

The maintenance of government property appears to be a reaction to observed need.

There is a database for property and buildings collated in 1997, which has been added to by the
property department of CIIC, but the information is now out of date and all information needed
for the development of meaningful maintenance and rehabilitation programs cannot be retrieved
conveniently, although the discussions confirmed steps to rectify this position through the
development of an up-to-date information system for property, most likely in geographic
information system format. The system is being developed in-house as far as the present
workload allows.

Legislation and Regulations

20.

The Cook Islands Parliament is the sole lawmaking authority for the Cook Islands, with

New Zealand continuing as a major source of reference for new enactments. Cook Island
legislators and law draftspersons are now increasingly looking further afield in the region for
precedents more applicable to the Cook Islands conditions and acceptability. Because of the
shortage of legal drafting skills within Crown Law and in government, draft legislation is often
prepared by overseas experts who import ideas and approaches that are sometimes difficult to
implement locally and are not cognizant of local ways, conditions, and regulatory capacity. Many
drafts remain unapproved for long periods of time, or at best require considerable effort locally
and many discussions and new drafts to bring local acceptance.

Appendix 6

21.

The lesson to be taken is that development of legislation and regulations needs to allow

sufficient time for the progressive refinement of drafts and for the considered review of local
stakeholders, which could take considerable time.

F. Land

22.

Land issues are central to the infrastructure sector and are potentially the most costly

constraint. CIIC has cited problems where existing leases for government-occupied buildings in
the Avarua area have expired or are due to expire, and where the landowners have advised that
they are not amenable to extending the leases. Planned improvements and extensions of roads,
water supply and sanitation, airports will depend on the Government reaching mutually
agreeable arrangements with landowners. All water sources, reticulated power and networks,
and the major portion of the road networks are on privately owned land.

User Pay and Cost Recovery

23.

While people accept paying for electricity and telecommunications, there is historical and

cultural resistance in the Cook Islands to the charging of fees for services such as water supply,
sanitation, and solid waste disposal. Projects for improvement in these services will involve
significant capital and operating investment and will require financial and economic justification
for this investment. For water, demand management will assume increasing importance for the
sustainable management of a finite resource in the face of global climate change and the need
for contingency planning.

24.

Direct payment for water will inevitably become part of the demand management

strategies. At present, reference is made to water being “free.” This is far from the case as the
costs are met through government revenues including personal taxation and is “paid” indirectly
by the consumer. Over time, the costs are likely to become too high for the Government to bear
while meeting its broader obligations within budget realities. The risk under these circumstances
is the underfunding of the activity as the Government juggles other priorities and demands.
There are indications of this at the present time.

25.

Transparent costing of water and the direct charging of consumers enables consumers

to identify costs and relate these to the level of service and standards of the supply provided,
thereby empowering the consumer and water user groups with information that will allow them
to advocate directly with the supply agency for service levels matching their expectations and
willingness to pay. The Government needs to develop strategies for the recovery of the costs of
services and show how this will be achieved.

Appendix

GOVERNANCE FRAMEWORK OF THE INFRASTRUCTURE SECTOR

The Need for Improved Governance

Many infrastructure services in the Cook Islands have been corporatized or are provided

by private companies. The exceptions are water supply, solid waste, roads, and electricity
supply in the outer islands, which are provided by divisions of the Ministry of Infrastructure and
Planning (MOIP). Corporatized public enterprises that provide infrastructure services include the
Cook Islands Airport Authority, the Cook Islands Ports Authority, Telecom Cook Islands, and the
Rarotonga power supplier (Te Aponga Uira). MFEM has taken an active role in overseeing
MOIP’s infrastructure line departments, by setting key performance targets in each sector,
making provision for maintenance expenditures, and monitoring performance. MFEM also
administers procurement.

2.

The Cook Islands Investment Corporation (CIIC) provides oversight of the public

enterprises, regulates tariffs, and monitors performance. However, it lacks the staff and budget
needed to effectively fill this function, and often can do little more than rubber-stamp the board
decisions of the respective entities. The CIIC has fewer than 20 staff, most of whom are
involved in repairs and maintenance in the property division, but is responsible for oversight of
aviation, marine transport, telecommunications, and urban electricity in the Cook Islands. The
capacity of the CIIC needs to be expanded through selective recruitment and on-the-job training
and possibly “twinning” arrangements with overseas counterparts.

3.

Responsibility for infrastructure planning, provision, and regulation rests with several line

ministries and public enterprises that suffer from capacity constraints. The institutional
arrangements are fragmented and overlapping, and there has been a lack of coordination. This
has reduced the effectiveness of management regimes and ownership of policies. Most sectors
lacks the clear sector policy statements needed to integrate and harmonize each sector’s
outputs and management with the National Sustainable Development Plan 2007–2010 (NSDP).

4.

The legal framework for infrastructure needs strengthening. Laws are required to

establish the roles and functions of the new agencies that are needed. The draft Islands
Government Bill and the Ministry of Islands Development Bill 2002—both currently stalled—
need to be updated to take account of sector reforms and then enacted to legitimize activities
and expenditure on the outer islands. The Rarotonga Water Supply Ordinance of 1960 needs to
be updated to establish minimum drinking water standards. Economic regulation practices are
outdated and could be tailored to better suit the Cook Islands’ new economic structure and
needs.

5.

The performance of the public enterprises is clouded by their often unwritten, but

nevertheless real obligation, to meet the Government’s social objectives (for example, by
providing services that are not commercially viable or charging less than the cost of supply,
without transparent compensation from the Government). A general statement spelling out the
Government’s policy with regard to community service obligations would help service providers
plan operations and set budgets. Such social obligations should be embodied in a policy
statement that is clear to everyone, costed, and explicitly subsidized by the Government as
community service obligations. This will increase accountability and transparency, and better

The analysis of this appendix draws on ADB. 2007. Technical Assistance to the Cook Islands for Preparing the

Infrastructure Development Project. Manila (TA 7022-COO).

Appendix 7

enable the performance of public enterprises to be gauged from their financial results. The
same considerations apply to those line ministries providing infrastructure services.

6.

Asset performance needs to be optimized through the introduction of proper procedures

and simplified plans for asset management within the capacity and resources available.
Warranted actions include the adoption of monitored asset management plans for all
government assets under consistent criteria, their routine auditing by the Cook Islands Audit
Office, and long-term planning and budgeting for maintenance and rehabilitation as required
with practical performance indicators.

7.

Further issues to be faced in developing infrastructure include the process of selecting

public works and a low rate of cost recovery on public services. The competitive outsourcing of
infrastructure works to the private sector has the potential to be an important response to these
problems, requiring a further rethinking of the division of responsibilities between the public and
private sectors.

Roles and Responsibilities

The Government, acting through the cabinet, has overall responsibility for the

Infrastructure Governance Framework (IGF). The Ministry of Finance and Economic
Management (MFEM) has the role of assessing the financial and economic implications of
policies and programs prepared by line agencies. The aid management division within MFEM
has had an important role in infrastructure development because of the high levels of
international and bilateral assistance to the sector. However, the assumption of an infrastructure
development role by the division and its attempts to direct the line agencies have given rise to
institutional rivalries and resource mismatches, which the IGF is in part designed to correct.

9.

The present arrangement is for the Office of the Prime Minister to have overall

responsibility for approving and putting into effect the infrastructure development program of the
Government, and therefore for implementing the IGF and for advising the Government on
progress and any required supportive or corrective actions. In future, the IGF envisages that
MOIP will report directly to the cabinet through its minister, with the Office of the Prime Minister
providing an external check on its performance. The National Sustainable Development
Commission (NSDC), which reports directly to the cabinet, has responsibility for reviewing all
potential infrastructure projects, including those falling within the IGF, and aligning them with the
priorities in the NSDP. The CIIC infrastructure committee reports to the Office of the Prime
Minister and is responsible for (i) taking the projects reviewed by the NSDC; (ii) initiating and
monitoring their detailed planning, feasibility assessment, and development by the responsible
line agencies and government-owned enterprises; and (iii) agreeing on investment project
prioritization and funding priority for the Government’s endorsement. However, while this
describes the general expectations of how the NSDC and CIIC infrastructure committee should
operate and interact, the functions and responsibilities of each agency are yet to be formally
documented and ratified by the Government. In practice, the CIIC infrastructure committee
currently identifies short-term projects and assesses priorities, while the NSDC operates on a
longer-term horizon.

10.

Below the Office of the Prime Minister and the CIIC infrastructure committee, the newly

formed MOIP is the key line department responsible for the planning, implementation, and

Appendix

management of infrastructure assets held directly by the Government.

The Cook Islands

Investment Corporation has a coordinating role for those infrastructure sector agencies
operating as public enterprises and as government statutory authorities, such as the Cook
Islands Ports Authority, the Cook Islands Airport Authority, and Te Aponga Uira, the
state-owned power supply company for Rarotonga.

Progress on the IGF

11.

The establishment of the NSDC and of the CIIC infrastructure committee were key

initiating actions for the IGF. A third was the creation of MOIP in mid-2008 through the merger of
the functions of the Ministry of Works (MOW) and the Office of the Minister of Island
Administration. While the public enterprises and statutory authorities have organizational and
legal structures that provide for a degree of independence and require a commercial approach
to their areas of responsibility, and these agencies have had some operating experience, the
MOIP is new and only partially integrated from its precursors, operates as a traditional
government department, and will require a greater degree of internal change and capacity
building before it is able to implement the IGF in its sectors of responsibility. This support is an
important element of an ADB TA.

Actions for Implementing the IGF

Institutional Reforms and Capacity Development

12.

Interagency Relationships. The respective functions and relationships between the

cabinet, the Office of the Prime Minister, MFEM, NSDC, the CIIC infrastructure committee,
MOIP, the Audit Office, the Public Services Commission, the proposed Cook Islands Water
Supply and Sanitation Board (CIWSSB), and the existing public enterprises and statutory
authorities have been proposed. These will be confirmed, modified as necessary, and endorsed
by the cabinet to form a firm basis for developing the institutional reforms, particularly the MOIP
and the infrastructure advisory and approval role of the Office of the Prime Minister.

13.

Ministry of Infrastructure and Planning. While MOIP has been created from the MOW

and the Office of the Minister of Island Administration, its internal management and staffing
structure, functional responsibilities and business planning processes require clear definition.
Currently, it has an acting head, and a review of heads of ministry positions is due to take place
in mid-2009. This will require a degree of staff movement, with people leaving the ministry,
changing roles, and new recruitment. Position descriptions and ratification through the PSC will
be required. This change management process is expected to take 2 years, commencing with
preparation of a detailed implementation plan for the future of MOIP, followed by a change
management plan for the staffing structure, positions and associated legal process, then
followed by implementation.

14.

Water Supply and Sanitation. The formation of a self-accounting business unit within

MOIP, responsible for water supply and sanitation (CIWSSB), operating on a “user-pays” cost
recovery basis, subject to meeting community service obligations for which it would be funded

MOIP is responsible for roads, water supply and sanitation, solid waste, government buildings, and outer-island

wharves and airports.

ADB. 2009. Technical Assistance to Cook Islands for Infrastructure Services Delivery Improvement. Manila. (TA

7287-COO, approved on 19 May, $600,000).

Appendix 7

from government appropriation, has been recommended. Developing the institutional structure,
functional responsibilities, accounting arrangements, and business planning processes for the
CIWSSB would be a parallel action.

15.

Capacity Development. Institutional capacity issues have been identified that need to

be addressed as part of the IGF. In part, these are the lack of clear demarcation of
responsibilities and accountability between and within the government central departments and
sector line agencies. This has given rise to overlaps and gaps in infrastructure governance that
have in some cases been a source of friction and wasted effort. Within the agencies, there is a
need to formally define the roles and responsibilities attaching to management and senior
technical positions, the internal lines of responsibility and reporting, performance review
systems, and matching of staff qualifications and experience with the requirements of each
position. This process will identify staff development needs and in some cases, the need to
better match staff with positions. At lower levels, there will be a need to match the size and
composition of the permanent staff to the work flow, and to decide where there is need to
recruit, to retrench, and to reassign staff resources, and where outsourcing is likely to be more
cost-effective in achieving the agency objectives.

16.

A detailed implementation plan for the capacity development for each agency will result,

including individual staff personal development plans, internal and external training schedules
and budgets. Close coordination will be required with the Office of the Public Services
Commission and consideration of industrial relations and social impact. Other aspects of
capacity development will be the appropriate design and functioning of business support
systems, including asset management, financial control, accounting, and information
technology.

Infrastructure Planning and Investment Programming

17.

Sector Policy Statements. A policy statement is required for each subsector (transport,

water and sanitation, solid waste, and energy) that will identify (i) the subsector goals, (ii) the
objectives by which these goals will be met, (iii) the role of the sector stakeholders, and (iv) the
rights of the community, including the community service obligations to be funded by
transparent subsidies from the Government. Subsector objectives will typically be defined as
level of service provision to intermediate and end users in each subsector and target timeframes
for achievement. Line agencies will develop annual statements of intent for the year and report
on achievements linked to the sector policy statements and performance measurements
appropriate to the subsector.

18.

Tariffs, Cost Recovery, and Funding. While these interrelated issues could be

included or summarized within the sector policy statements, they are of fundamental importance
to the IGF, are likely to be controversial, and should be set out, agreed to by the CIIC
infrastructure committee, and endorsed by the cabinet, again to form a firm basis for sector
development. The main issues to be decided for each subsector are (i) the extent of investment
and ongoing operational funding required to meet the service levels set out in the subsector
policy statements; (ii) the future funding envelope that can be identified for each subsector,
including funds from user charges, annual Government appropriation, and development partner
assistance; (iii) the principles for, and levels of charges that can be sustained, by users of the
services based on users’ willingness to pay for service levels and other concerns such as
environmental protection and sustainability; (iv) the extent and on what basis certain individuals

Appendix

or groups in the community should receive subsidized infrastructure services; and (v) the
community service obligations.

19.

Infrastructure Planning and Prioritization. A consistent and common process is

desirable for identifying, evaluating, and prioritizing infrastructure investment across the
infrastructure sector. Ideally, this process should be able to compare investments in different
subsectors using common principles so that investment in water supply can be compared, for
example, with investment in roads. However, planning and prioritization within each subsector
can be an interim objective. This is expected to be a development of the project identification
and multi-criteria weight and rank scoring process developed in the IMP and currently applied
by the CIIC infrastructure committee together with appropriate economic assessment.

20.

Investment Programming and Multi-Period Budgeting. The line agencies are moving

from an annual cycle of funding requests and appropriations to multi-year budgeting with long-
(6 to 10+ years), medium- (3–5 years) and short-term (annual plan) expenditure plans based
upon marrying the prioritized project program with the forecast future funding envelope and with
other resource constraints such as processing and implementation capacity. The line agencies’
processes must be harmonized with those of Government’s central fiscal planning and with
external assistance. The investment cycle will involve (i) setting up rolling work programs,
(ii) integrating the asset management program and the capital works financial forecasts, and
(iii) making due provision for disaster risks.

Asset Management Framework

21.

Each line agency will set up systems for managing the physical assets under its

responsibility. These will be required for transport (roads, ports, airports), water and sanitation,
solid waste management, energy, and government buildings. The main elements of the asset
management systems that will be established are (i) asset registers and inventories; (ii) asset
condition and level of service inspections, ratings and reporting; (iii) market, replacement and
depreciated (book) asset values; (iv) asset maintenance and replacement policies; (v) asset
maintenance work planning, costing, implementation and monitoring; (vi) output and outcome
performance standards, and key performance indicator measurement and feedback.

22.

The asset management plans will conform to standard templates established in

conjunction with the Audit Office, which will conduct the independent annual audits. The asset
management plans will be harmonized to the absorptive capacity of the Cook Islands, and will
be as simple and robust as possible consistent with gathering the minimum information needed
to perform the asset management task and recording the maintenance inputs and costs against
items in the asset register. The monitoring will be rigorous and continuing in the form of regular
monthly review and reporting of program exceptions by the line agencies, annual review and
reporting to the cabinet to assess achievements and to align future programs. An annual
community and user satisfaction survey will form part of the monitoring.

Legislative Review and Amendments

23.

The IGF will need to be supported by legislative change in some areas, and the

development of legal specifications, legal drafting, and passage into law will be integral with a
number of the institutional, policy and financial management changes noted above.

Appendix 8

SOCIAL AND GENDER ANALYSIS

A. Overview

Compared with residents of most developing countries, the people of the Cook Islands

have a high standard of living. Internationally, the Cook Islands is a high-ranking middle-income
country. Life expectancy is high at 71 years, infant mortality is low at 15–20 per 1,000 live births,
immunization rates reach almost 100%, secondary school enrollment rates exceed 90%, adult
literacy is high, and most Millennium Development Goals have already been met or will be met
by 2015. The Cook Islands also performs well regionally regarding gender-based indexes of
development.

2.

These achievements reflect a long history of heavy government investment in health,

education, and welfare buttressed by a good natural resource base and the benefits of close
integration with New Zealand. A substantial improvement in the quality of economic and public
sector management since the financial crisis of the mid-1990s also underpins living standards.
For understandable reasons, the Cook Islands now looks to New Zealand to set its benchmarks
for service standards, opportunities, and incomes.

3.

This level of well-being is nevertheless fragile. Small island developing states like the

Cook Islands are vulnerable to events beyond their control, particularly environmental hazards.
For example, in the mid-1990s the Cook Islands faced a devastating cyclone and an outbreak of
disease that badly affected pearl production, and in the FY2006 cyclone season, Rarotonga and
the southern group experienced five cyclones. Despite good living standards and achievements
in education and health, there is little cash employment outside Rarotonga and Aitutaki. Many
households get much of their livelihood from pensions and other social security payments,
particularly on the outer islands, and the lack of economic dependence is a source of fragility, as
is the high rate of out-migration.

4.

Beyond a general pattern of outer-island disadvantage, the vulnerable are the people

who are least able to help themselves, whose issues go unheard, and who often have special
needs and require extra help. The reasons given for people becoming vulnerable include the
breakdown in traditional family support systems, emigration, a rising cost of living, and ruinous
social and community obligations. The vulnerable are the elderly, the unemployed, single
parents, children, the disabled, squatters, and victims of crime. The last two categories are by
far the smallest. Although there is currently no significantly large group of squatters, the
impending expiration of land leases on Rarotonga affects some outer-island communities
residing there, as uncertain tenure makes repairing or upgrading housing difficult. The Cook
Islands has an effective justice system, and most victims of crime receive some form of
reparation.

The Rarotonga–Outer Island Divide

Throughout the modern history of the Cook Islands, the main line of difference in living

standards and the range of personal opportunities has been drawn between Rarotonga and the
outer islands. While there have been no studies of poverty in the Cook Islands, available
statistics support the perception widely held within the community that the key equity issue
remains the disparity between Rarotonga and other islands.

The sector diagnostics presented in this appendix draw heavily on ADB. 2008. Cook Islands 2008 Social and

Economic Report: Equity in Development. Manila.

Appendix

The statistics report that, compared with the outer islands, fewer people in Rarotonga

have very low cash incomes and considerably more are in the middle-income bracket. The
average cash income on Rarotonga is noticeably higher than the average national income. This
outcome is linked to education standards. Household income and expenditure surveys have
found that the educational level attained by the household head, rather than his or her sex or
age, most influences the amount that a household earns or spends. A higher standard of
education is generally associated with higher income. The concentration of higher household
incomes on Rarotonga is therefore linked to the concentration of more educated people there,
as well as to the more highly paid livelihoods that they have access to. The education and
livelihood disadvantage of outer island populations is compounded by their age and sex
structures with more elderly and more women.

7.

The distribution of well-beingʊviewed subjectively or objectivelyʊis reflected in the

movement of people. For the past several decades, the predominant migration flow has been
from the outer islands to Rarotonga, and from Rarotonga to New Zealand and beyond. This flow
reinforces the community perception of the disadvantage faced by the outer islands.

8.

The economic reform program in the mid-1990s is a key factor behind the Rarotonga–

outer island divide. The reforms carried with them a risk of the accentuating economic
inequalities. The expectation that the reforms would foster economic growth by creating
employment, increasing government spending on basic services, and redistributing
opportunities to poor communities has proved to be overoptimistic for most outer-island
communities. The economies of Rarotonga and Aitutaki did respond well, and there have been
some service improvements. But the large losses of people, skills, and paid jobs appear to have
hastened the decline in outer-island economies. Some communities now stay alive only by
receiving social security payments and taking on responsibility for grandchildren.

9.

The National Sustainable Development Plan 2006–2010 described the Rarotonga–Outer

Island divide in the follow terms: “A fundamental development challenge is to achieve economic
growth and social development that is more evenly spread across all islands and that involves
less reliance on public service jobs and social security benefits as sources of cash income.”

The Significance of Gender

10.

Another general pattern of disadvantage is by gender. By regional standards, Cook

Islands women score highly on the gender development index and gender empowerment
measure. Compared with Cook Islands men, they have substantially longer life expectancy
(74.3 years, or 6.3 years longer than men) and higher secondary school enrollment. Primary
school enrollments and reported adult literacy rates are equal for males and females. The main
disadvantages for Cook Islands women are their relatively restricted opportunities for economic
and political participation, generally lower earning capacity, and remaining subtle forms of
gender bias.

11.

The equality of men and women is recognized by the Constitution and in family law, as

well as by tradition in regard to the inheritance of land and rights of land use. Yet no legislation
explicitly prevents discrimination against women, nor are there affirmative action initiatives to
promote equality between men and women. Despite equal opportunity for women in most

Cook Islands Government. 2006. National Sustainable Development Plan 2006–2010. Office of the Prime Minister.

Rarotonga. p. 27.

Appendix 8

respects, the National Policy on Women (1995) noted: “Subtle elements of discrimination
against women perpetuated by culture, custom and tradition continue to exist in Cook Island
society today. The continued stereotyping and confining of women’s roles and responsibilities to
the domestic arena limits their participation in the development process.”

12.

Census data report higher employment rates for males. These data conventionally play

down women’s work by defining a large part of their domestic activities as “uneconomic,” while
men engaged in similar activities such as village agriculture, or unemployed, are more often
described as being economically active. What is nevertheless clear is the growing participation
of women in wage employment outside of agriculture, which, for example, rose from 38% in
1991 to 44% in 1996 and 46% in 2001.

13.

Alongside this paid work, women spend slightly more time than men caring for children

and other family members and on such domestic chores as preparing food, cleaning house,
shopping, and doing home repairs. Most importantly, census data show that a significant gender
difference remains in earnings for paid employment. More women than men are in the lowest
income bracket, and more men than women are in the highest-earning groups.

14.

The past decade has, however, been a period of great change. Since the mid-1990s,

more job opportunities have opened up for women. Although the public service has contracted,
more women now work at its senior levels. This change has been described as one of the
least-expected outcomes of the mid-1990s reform. Along with their growing share of paid
employment, more women now run small businesses. Areas of business activity that have
attracted women are handicraft production, agricultural and marine products, and tourism.

15.

Not all women are doing well, however. Households headed by women suffer elevated

risk of having low incomes or being socially isolated, and their number is growing. Most of those
who receive allowances from the Social Welfare Department for destitution are single-women
heads of households with children to support but little income. These women generally are too
young for old-age benefits, and their children are too old (over the age of 10, now changed to
12) to receive the child benefit. The destitute allowance is essentially a stopgap between social
security payments, a de facto unemployment benefit.

D. The

Elderly

16.

As traditional family support systems weaken, an especially vulnerable group comprises

elderly people living alone or supporting grandchildren. Because of the pattern of out-migration
and the aging population, these are often elderly women, who suffer a real risk of social
isolation, especially in more-traditional outer-island communities. As these communities have
shrunk and aged, support systems within them have attenuated. Beyond traditional community
ties among cousins, neighbors, and church congregations, the elderly look for their principal
material and emotional support from children and grandchildren, yet increasingly find
themselves on the remote edge of family networks now centered on Rarotonga or in
New Zealand. Social support can come down to finding the money for airfare or a child or
grandchild willing to return. That may not be enough.

17.

The geriatric ward at the Rarotonga Hospital serves as a de facto old people’s home for

infirm elderly people who have no family to care for them. There is no other residential facility in

Department of Women. 1995. National Policy on Women. Ministry of Internal Affairs. Rarotonga

Appendix

the Cook Islands. However a program supported by the Rotary Club and the Ministry of Health
operates a day center for elderly people on Rarotonga.

E. Disabled

People

18.

Disabled people are another vulnerable group, mainly because of their limited access to

education and livelihood opportunities, although they do receive a special security payment. A
survey in 2001 located 641 people with disabilitiesʊat 4.2% of the resident population, around
the expected number in any population. Only 50% of the 119 disabled children of school age
attended school, even though attendance is supposedly compulsory.

The Social Security System

19.

The Cook Islands has no sizable group of very poor people. An important reason for this

is the high level of social security allowances that Cook Islanders receive, whether they reside in
New Zealand or the Cook Islands.

20.

The Cook Islands social security system is modeled on the New Zealand system but has

the important differences of being less comprehensive and providing smaller payments. In the
Cook Islands, payments are made to all children aged up to 12 years (extended from 10 years
in July 2006) and to all people aged 60 years and above. Special payments are made to people
between these ages who are infirm or destitute. One-off grants equivalent to 1 month’s benefit
are made to the families of deceased beneficiaries to help pay funeral costs. Other special
assistance is given for improving the residences of disabled people.

21.

Unlike New Zealand, the Cook Islands offers no unemployment benefits. Cook Islanders

who move to New Zealand are eligible for unemployment and related benefits there and, as
elderly people, can later bring back with them to the Cook Islands the higher-paying
New Zealand old-age pensions. Other payments received by some elderly people include
superannuation, pensions of various kinds, and life insurance payouts.

22.

Almost all payments are made without any means testing (without determining need),

and it is perhaps a misnomer to describe it as a welfare system. For example, in 2007 payments
were made for 1,464 elderly and 4,943 children with the only criteria being age and residency,
while only 227 people receive payments for infirmities and 43 for destitution. And even funding
for these small groups is not according to strict needs-based definitions. For example, tiny but
food-rich Mauke is home to 18% of destitute cases while generally poorer Pukapuka and
Penrhyn account, together with Manihiki, have only 2% of such cases. The infirm are mostly
(though loosely) part of the group of true welfare recipients. The destitute generally are the
worst off among the unemployed, being adults with no other livelihood.

23.

Household income and expenditure surveys have found that social security payments

contribute to the incomes of most households, largely because they are untargeted. As such,
the system could be better described as income supplementation rather than welfare. The
rationale for the payments is largely historical, based on the culture of egalitarian socialism that
existed in New Zealand during the mid-20th century, and is an institution that is politically
difficult to dismantle.

24.

The Cook Islands’ social security system therefore redistributes a lot of money, is

expensive, and is likely to become more so. At the same time, it does not effectively address the
needs of all people who are vulnerable to hardship or poverty during some stage of their life.

Appendix 8

Other Support for the Disadvantaged

25.

The Government’s remaining response to the disadvantaged largely rests on the

provision of services to the outer islands and social security payments. It will be difficult to make
further substantial progress toward addressing the present imbalance in living standards
through funding alone. Funding already favors the outer islands, to the point of overfunding in
some cases, and the additional cost of raising outer-island service standards to those on
Rarotonga is prohibitive.

26.

However, some progress could be made by setting and meeting minimum standards of

services, addressing inequities among islands in funding for key services, and finding a
more-workable approach to decentralization that gives local communities a greater role in
decisions affecting outer islands. Most services are supplied and managed by the central
Government with little community input. Communities are most concerned with the standards of
the services on their island but consider them something that they simply receive. Teachers
often cite community apathy as their principal problem; this suggests that the rift goes in both
directions. Other government services as wellʊwomen’s affairs, youth and sports, and
consumer affairsʊnow have little direct community input.

27.

In 2000, the Ministry of Education adopted its Policy for Special Education to integrate

disabled children into normal classrooms wherever possible. A special education adviser,
appointed in 2000, trains teachers to identify and assist children with special needs, including
those who underperform on proficiency examinations. The only special facilities for disabled
children are on Rarotonga, where the Disabled Persons Center, a nongovernment organization,
runs a special education classroom at Avarua Primary School and the Ministry of Education
pays the salaries of the two teachers. The center provides transport for children but caters
mainly to people in the Avarua area. Transportation to school is difficult for severely disabled
children—another reason why many stay home. Efforts are being made on the outer islands to
provide for disabled children in the schools, but these are nevertheless the children most likely
to miss out on education.

28.

Partly funded by the Ministry of Health and the New Zealand Agency for International

Development, the Creative Center on Rarotonga was established in 2000 to provide services for
disabled adults over the age of 16. Operating part-time, the center gives disabled people an
opportunity to develop creative skills and life skills, to socialize, and to stimulate their learning.
Again, there are no such facilities in the outer islands.

Appendix

LIST OF INELIGIBLE ITEMS

No withdrawals will be made for the following:

(i)

Expenditures for goods included in the following groups or subgroups of the
United Nations Standard International Trade Classification, Revision 3 (SITC,
Rev. 3) or any successor groups or subgroups under future revisions to the
SITC, as designated by ADB by notice to the Borrower:

Table A13: Ineligible Items

Chapter

Heading

Description of Items

112

Alcoholic

beverages

121

Tobacco, unmanufactured; tobacco refuse

122

Tobacco, manufactured (whether or not containing tobacco
substitute

525

Radioactive and associated materials

667

Pearls, precious and semiprecious stones, unworked or worked

718

718.7

Nuclear reactors, and parts thereof, fuel elements (cartridges),
non-irradiated for nuclear reactors

728

728.43

Tobacco processing machinery

897

897.3

Jewelry of gold, silver or platinum-group metals (except watches
and watch cases) and goldsmiths’ or silversmiths’ wares
(including set gems)

971

Gold, nonmonetary (excluding gold ore and concentrates)

Source: United Nations. Standard International Trade Classification, Revision 3.

(ii)

Expenditures for goods supplied under a contract that any national or
international financing institution or agency will have financed or has agreed to
finance, including any contract financed under any loan or grant from ADB;

(iii)

Expenditures for goods intended for a military or paramilitary purpose or for
luxury consumption;

(iv)

Expenditures for narcotics;

(v)

Expenditures for environmentally hazardous