Pacific Liaison and Coordination Office

What is PSDI? The Pacific Private Sector Development Initiative Phase III Cofinanced by the Government of Australia and the Government of New Zealand August 2016

I.

BUSINESS ENVIRONMENT REFORM

To realize its potential, the private sector requires a business climate that is conducive to investment and entrepreneurship. Successful business environment reforms result in: • More firms entering the formal economy, leading to increased productivity as a result of better access to the financial system, contracts to supply other, larger companies, and improved access to government services. •

Greater investment by firms as a result of an improved legal and regulatory environment. Changes in firm behavior as a result of investment in new technologies lead to greater productivity, which, in turn, increases profitability. Profitable businesses employ more people.

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Increased profits for firms through, for example, the removal of trade barriers or savings from more efficient licensing and inspections processes. In turn, high profits lead to more investment.

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Improvements in firm productivity as well as firm turnover and profit, which contribute to aggregate economic growth. • Inclusive growth through more and better-paying jobs, and economic opportunities for women in the formal sector. II.

THE PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

It is difficult to do business in the Pacific. Firms have to deal with isolation, small market size, and poor communications. In addition, they face high costs of doing business. As a result, both prosperity and productivity—on which Pacific countries depend for their long-term growth—is low. To address this need, the Pacific Private Sector Development Initiative (PSDI) was formed. PSDI is a regional technical assistance facility financed by the Asian Development Bank (ADB), the Government of Australia, and the Government of New Zealand. PSDI works with ADB’s 14 Pacific developing member countries (DMCs). It helps to reform the business environment, remove constraints to doing business, foster entrepreneurship and new business models, remove barriers to women’s participation in business, and formalize and grow businesses—enabling them to create jobs, pay taxes, and lift people out of poverty. PSDI advances ADB’s strategic focus on private sector development by providing a broad foundation of analytical work and an extensive demand- driven reform program to improve the enabling environment for business in Pacific DMCs. 1

In operation since 2007, PSDI entered its third funding phase in 2013. PSDI Phase III 2 is building upon the successes and strengths of PSDI Phase I and II. . The first two phases of PSDI focused on three core areas: business law reform, improving access to financial services, and state-owned enterprise (SOE) reform and public– private partnerships (PPPs). The results of PSDI initiatives in these areas have led to a growing demand for assistance and an expansion of focus into the areas of competition law and policy and the economic empowerment of women. The pace of demand for PSDI assistance 1

2

ADB. 2013. Regional Technical Assistance for Pacific Private Sector Development Initiative, Phase III. Manila (TA 8378–REG, for $38.58 million, approved on 6 June, cofinanced by the Government of Australia and the Government of New Zealand) and ADB. 2015. Major Change in Technical Assistance for Pacific Private Sector Development Initiative, Phase III. Manila. ADB. 2006. Regional Technical Assistance for the Private Sector Development Initiative. Manila (TA 6353–REG, for $9.81 million, approved on 21 November, cofinanced by the Government of Australia) and ADB. 2009. Regional Technical Assistance for Pacific Private Sector Development Initiative, Phase II. Manila (TA 7430–REG, for $12 million, approved on 11 December, cofinanced by the Government of Australia).

exceeded expectations and, to be effective, phase III was provided with significant additional funding. III.

WHAT ARE PSDI’S FOCUS AREAS?

Focus areas identified by PSDI as central to promoting private sector development are: • Improving access to finance. Unless investors, entrepreneurs, and viable businesses can be financed, opportunities go to waste and growth potential is unrealized. Pacific island economies all have underdeveloped financial markets because of weak institutions. • Reforming

outdated business laws and removing regulations that are compromising investment and business growth. In many cases, business laws are unsuited to the needs of modern commerce. In many countries, starting a business involves high costs and long delays, which have an especially adverse effect on smaller businesses. In addition, overly burdensome regulations impose significant costs on business. The result is small formal sectors and large informal ones, which incurs the double cost of low productivity and less tax revenue for essential services, such as health and education.

• Enhancing the efficiency of SOEs through legal, governance, and regulatory reforms and, where feasible, privatization. SOEs, which in many countries provide essential services such as power generation, water, sewage, and, in some cases, telecommunications, are inefficient and often increase the costs of doing business. Where they are monopoly service providers, they crowd out potential investment from the private sector. • Promoting PPPs to increase investment and improve service delivery. • Ensuring that Pacific island economies have well-functioning competition laws and regulatory frameworks. The small size of countries in the region means there is often a conflict between promoting competition and obtaining efficiency gains through economies of scale. • Promoting the economic empowerment of women. Many systemic barriers and

cultural attitudes hold women back from realizing their full potential in the formal sector of economies and contributing to economic growth. IV.

WHERE DOES PSDI WORK?

V.

WHAT IS PSDI’S APPROACH?

PSDI experts conduct in-depth analysis of the Pacific business environment, identify business constraints and opportunities, and publish independent multi-country and country-level private sector assessments. This evidence-based approach feeds into a policy dialogue with both Pacific governments and the private sector, resulting in policies that improve the business climate and support inclusive economic growth. A key feature of PSDI is rapid response to reform opportunities when they arise. Committed to country-led development, PSDI’s flexible program design allows it to quickly mobilize expertise in response to requests for assistance—and to demobilize should political commitment wane. PSDI’s core team of qualified, experienced experts has earned the trust and confidence of stakeholders, a pre-condition to a successful partnership in undertaking reform. VI.

WHAT SUCCESS HAS PSDI HAD?

PSDI owes its success to the flexibility of its operating model, its continuity, strong technical expertise, ability to work with all levels of government, its emphasis on research and analysis, and the coherence of its focus on institutions. In almost 10 years of operation, PSDI has a strong track record of achievement. This includes: • Business Law and Registry Reform (regional). Company law and registry reforms have been successfully implemented in Samoa, Solomon Islands, Tonga, and Vanuatu, with support from PSDI. These initiatives, which included accompanying reforms of insolvency and receiverships laws (Solomon Islands, Tonga, and Vanuatu), and complementary reforms on business names and business licensing (Tonga) increased the annual rate of company formation by an average of 114%. Through technology solutions such as online registries, the reforms have reduced the time it takes to form a company from an average of 24 days to a little over a day. By eliminating the need for lawyers and agents as intermediaries, the reforms have substantially reduced the cost of company formation. This has made it cheaper and easier for businesses to formalize and thus reap the benefits of formalization. • Secured Transactions Law and Registry Reform (regional). PSDI has successfully

implemented secured transactions law and registry reforms in seven countries following the recent launch of the Papua New Guinea (PNG) Personal Property Securities Register. In addition, in 2016, PSDI has been supporting the implementation of a new law and registry in PNG and developing a new registry for Samoa. It has also been assisting the governments of Cook Islands, Fiji, and Timor-Leste to establish secured transactions frameworks. The total number of security interests registered in the eight Pacific countries that have completed the reform, which represents the number of secured loans granted as a result of it, has reached 37,000. The new laws have allowed security interests to be created in various forms of moveable property, including equipment, inventory, accounts receivable, contracts, crops, livestock, and shares. In Tonga, farmers are now using their vanilla plants as collateral through a financing facility piloted by Tonga Development Bank. In Solomon Islands, shipping contracts have been used as security for loans. • Restructuring and Privatizations (regional). PSDI has supported the restructuring or privatization of 67 SOEs in the region, improving their financial and operational performance and reducing their burden on state budgets. Average return on equity of the SOE portfolios in eight Pacific countries improved from –5.6% in 2008 to 0.6% in 2014. In Solomon Islands, SOE portfolio profitability improved from an average of –13% in 2002–2009 to 10% in 2010– 2014. Given the size of these countries’ SOE portfolios, which represent 8% – 21% of total fixed assets, improved profitability has a direct impact on overall economic growth.

In Solomon Islands, the privatization of Sasape Marina evolved into a successful PPP in 2010 after PSDI supported the government in holding an open, competitive tender that was won by Silentworld Shipping and Logistics and the National Provident Fund. The PPP created more than 50 new jobs and revitalized economic activity on the island of Tulagi.

• Improved SOE and PPP Legal, Regulatory, and Governance Frameworks (regional). PSDI has supported the preparation and implementation of new or amended SOE legislation in five countries, resulting in substantially improved governance practices and transparency. More than 40 elected officials have stepped down from SOE boards, giving the SOEs greater independence to operate as commercial enterprises. Contracting frameworks for community service obligations are in place in four countries, allowing SOEs to achieve their profitability targets and governments to extract more value for money.

PSDI has supported the development of new PPP laws in PNG and Timor-Leste, and the establishment of a functioning PPP Unit and project development process in Timor-Leste. This unit has successfully concluded the Tibar Bay Port greenfield PPP, and is overseeing the development of several other PPP projects. In PNG, PSDI supported the development of a national PPP Policy in 2008 and a subsequent PPP Act, passed by Parliament in 2014 and currently awaiting gazettal. PSDI analysis of PPP structuring options for Jacksons Airport and Lae Port is currently under consideration by the PNG government. •

Drafting and Enactment of the Competition and Consumer Protection Bill (Samoa). Samoa is the first Pacific country in which PSDI has completed legal, regulatory, and policy reform in the area of competition and consumer protection through the enactment of the Competition and Consumer Protection Act in January 2016. PSDI will be supporting the Government of Samoa with the implementation of the Act in the second half of 2016.

• Improving the Economic Empowerment of Women. Since 2013, PSDI’s analytical outputs have included a specific focus on strategies to empower women. Six private sector assessments have included chapters on harnessing women’s contributions to private sector-led economic growth. In 2014, PSDI conducted an assessment of women’s access to finance in six countries designed to inform strategies to improve financial governance and access to finance for women. These outputs have informed subsequent PSDI programing.

Over 2015–2016, PSDI, in partnership with the Government of Australia, undertook a detailed study of the constraints faced by Pacific businesswomen in seven countries. The study aims to fill a gap in the lack of data on women’s engagement with business across the Pacific and assist development partners in identifying areas for future support. To demonstrate innovative approaches to involving women in business activities, PSDI is implementing four pilot projects in Papua New Guinea, Solomon Islands, and Tonga, three of which are already being replicated. Contact: Pacific Liaison and Coordination Office Asian Development Bank Level 20, 45 Clarence Street Sydney, NSW, 2000, Australia Tel: +61 2 8270 9444 Email: [email protected] Visit us online: www.adbpsdi.org www.adb.org/plco/psdi facebook.com/adbpsdi twitter: @ADB_Sydney_PSDI