Nauru is a tiny island country northeast of Australia. In recent years, it had received substantial unanticipated windfall income following the reopening of the Regional Processing Center and a significant increase in fisheries revenue and high levels of development assistance. Annual gross domestic product thus grew by about 17.3% between 2012 and 2016, and domestic revenues more than quadrupled. Nevertheless, because of its dependence on a narrow set of uncertain revenue streams, Nauru continues to face large risks that could undo this progress. Furthermore, acute infrastructure bottlenecks, including inadequate and damaged port facilities and unreliable power supply, are critical constraints.
To help sustain fiscal improvements, the Asian Development Bank (ADB) approved in March 2016 a single-tranche policy-based grant for the Nauru Fiscal Sustainability Reform Program. The $3.8 million grant comprises $2 million from ADB and $1.8 million equivalent from an ADB-administered Government of Australia facility.
The program built on earlier reforms supported by ADB and other development partners. It aimed to improve public financial management and the performance of state-owned enterprises and establish the Nauru Intergenerational Trust Fund (NTF) to save unexpected public revenue gains or windfalls. It had 3 planned outputs: (i) improved public financial management, (ii) efficient service delivery by the Nauru Utilities Corporation (NUC), and (iii) an improved funding mechanism for future services delivery.
To accomplish output 1, the Financial Management Information System (FMIS) was operationalized, aggregate revenue and expenditure projections were developed, and the Nonresident Employment and Services Tax Bill was implemented. FMIS operationalization enabled the preparation of the first government financial statement since 1995, a promising improvement in Nauru’s financial transparency. Tax bill implementation generated revenues of A$6.6 million in September 2014−June 2015 and A$12.6 million in 2016.
For output 2, previous NUC reforms were strengthened through the development and adoption of a strategic plan that enhanced the commercialization of NUC operations and a strategic assets maintenance plan that improved NUC’s financial and operational efficiency.
For output 3, the NTF was established through a memorandum of understanding between the Australia and Nauru governments. The NTF is envisaged to provide a stream of public revenues to meet future investment needs in education, health, the environment, and public infrastructure. At program completion, NTF contributions from the governments of Australia, Nauru, and Taipei, China totaled A$33.4 million. An ADB technical assistance grant supported the development of the NTF guidelines.
Successful delivery of the planned outputs led to the attainment of the program’s intended outcome of improving Nauru’s fiscal sustainability. For instance, by 2016, it had helped enable government to contribute A$32.4 million to the NTF, against a target of A$20 million. Increased revenues from tariffs and sales together with efficiency-related savings that resulted from reforms at the NUC had allowed it to meet most of its operations costs. Consequently, government budgetary contribution to the NUC declined by A$4.9 million for FY2018−FY2019.
ADB’s Pacific Department rated the project successful. The Department of Finance served as the executing agency, while several of its departments acted as implementing agencies.