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Governance and Public Sector Managemen

Future-Proofing Nauru through Fiscal Sustainability

  • Project Name: Fiscal Sustainability Reform Program
  • Region/Country: Pacific/Nauru
  • Sector and Themes: Governance and Public Sector Management
  • Year: 2015-2017
  • Project Leaders: Hayden Everett, Liliana Warid, and He Rong
Future-Proofing Nauru through Fiscal Sustainability
Nauru’s economy depends primarily on phosphate deposits and the oceanic resources of its exclusive economic zone.

A stronger funding mechanism for future service delivery through the Nauru Intergenerational Trust Fund is one of the program’s latest major achievements.

—David Adeang, former minister of finance, Nauru

Development challenge

Nauru is ADB’s smallest member country with a population of approximately 10,800 people. Most of its economy depends primarily on phosphate deposits and the oceanic resources of its exclusive economic zone. The public sector dominates the economy. The civil service and state-owned enterprises (SOEs), particularly the Nauru Utilities Corporation (NUC), accounted for 82% of total employment in 2010.

However, Nauru’s public sector has weak institutional capacity and faces many infrastructure bottlenecks. This dependence on a narrow set of uncertain revenue streams, coupled with weak infrastructure and institutions, raises crucial questions on Nauru’s long-term financial and macroeconomic stability.

Solution

With cofinancing from Australia, ADB worked closely with Nauru’s Ministry of Finance and NUC to promote fiscal sustainability. The program improved Nauru’s public financial management capabilities by establishing expenditure controls, cash management practices, and designing and implementing a financial management information system. To increase revenues, an Employment and Services Tax bill was drafted and implemented. Future revenues and expenditures were also projected for the first time in Nauru. Apart from public financial management improvements, the project actively sought to resolve infrastructure bottlenecks by strengthening NUC’s performance and service delivery. A business strategy plan for the corporation and a maintenance plan for its assets were key in further commercialization of the SOE.

ADB
The project actively sought to resolve infrastructure bottlenecks by strengthening NUC’s performance and service delivery.

One of the most important components for future fiscal sustainability was the program’s support in establishing a trust fund to efficiently save windfall revenues and fiscally future-proof Nauru.

Knowledge products and services delivered

A financial management information system, rolled out for the entire government, incorporated projecting future revenues and expenditure. From September 2014, when the Employment and Services Tax bill was passed, to June 2015, the tax generated A$6.6 million ($5.1 million) in revenue, while A$12.6 million ($9.8 million) was generated in the 2016 financial year. A business strategy plan and an asset maintenance plan were designed and implemented to improve NUC’s performance and service. This included a performance management system for all employees, financial accounting software, and an asset rehabilitation plan to upgrade the power network. The Nauru Intergenerational Trust Fund was also established between Nauru and Australia to fund Nauru’s future financial requirements.

Impact and results

The financial management information system produced the first financial statement of the government since 1995. In 2015, aggregate revenue and expenditure projections for the 2016–2018 financial years enabled the government to forecast budgets and improve investment strategies. The NUC’s asset maintenance plan has significantly improved operating efficiency, and an informed approach to setting tariffs. The Nauru Intergenerational Trust Fund has succeeded in pulling together A$33.4 million ($25.9 million), including A$20.4 million ($15.8 million) from the government, and the remainder from Australia and Taipei, China.

ADB
The program will help the Government of Nauru deliver improved social services.

Lessons for Replication

This project provides valuable insights on developing and implementing successful financial management software. Projects concerned with SOE reforms could look at how the NUC was commercialized and how its financial and operating performance was improved through a comprehensive business strategy and asset management strategy. Other countries that are fiscally constrained with limited and volatile sources of revenue could study how an intergenerational fund can be set up with international partners to financially future-proof their countries.

This [project] reformed our work culture and improved our processes… It was one of the ways we were able to put the Nauru Utilities Corporation on a path toward financial sustainability.

—Abraham Simpson, chief executive officer, Nauru Utilities Corporation

Life has changed for the better… There are far fewer power cuts now.

—Beniana Foilape, resident, Boe district