The
Development Planning Unit
Government of the British Virgin Islands

 
1. Overview

The purpose of this report is to review the Public Sector Investment Programme (PSIP) of the Government of the British Virgin Islands (GOBVI) for the years 1993-1996 within the context of stated GOBVI development objectives. It has been prepared following field consultations with the Ministries of Finance (MOF), the Development Planning Unit (DPU), key line ministries and donors.

Data contained in reports of the National Investment Priorities Symposium (NIPS) held in March 1993 and in the 1993 Capital Estimates, were used to prepare a provisional PSIP prior to the field mission. This PSIP was discussed with the MOF, DPU, and line ministries and amendments made, where necessary, in line with revised and updated projected expenditure proposals. The resultant PSIP for the period 1993 - 1996 proposes capital expenditure totalling $109. 1 million (mn). The greatest proportion of funds is expected to be spent during 1994-1995 when total expenditure of $35.4 mn and $36.7 mn, respectively, is scheduled. This primarily reflects the implementation of two large loan-funded projects: the Caribbean Development Bank (CDB)-funded $6.3 mn Road Improvement and Maintenance Project (RIMP), and the $14 mn Beef Island Airport Terminal Project funded by the European Investment Bank (EIB) and European Development Fund (EDF). In addition, the British Government is providing a grant for the construction of a $4.2 mn prison to begin in 1994, while GOBVI is projected to raise its own spending, particularly in the areas of Health, Education and Community Affairs.

By sectors, investment in economic infrastructure is programmed to account for 52.9% of the total proposed PSIP for 1993-1996, compared with 26.5% for social services, 15.3% for general public services and 5.3% for economic services. This distribution reflects the substantial investments being made in the transport, energy and water sectors as well GOBVI's plans to invest $13.6 mn in the education sector, the majority of which (80.9%) will be funded from domestic sources.

Finance for the proposed PSIP is expected to come primarily from external sources. Loans and grants are programmed to account for 48% and 17.4% of total financing, respectively, with domestic sources making up the remaining 34.6%. The significant proportion of total grant funding principally reflects the provision of grants associated with the Beef Island Airport Terminal project and Prison construction to be implemented during 1994-1-995. These projects are expected to raise the proportion of grant funding from 7.1% of the total PSIP in 1993 to an average of 23.3% during 1994-1995. However, this proportion is projected to fall back to 4.2% in 1996, reflecting the increasing difficulty GOBVI faces in obtaining such funding as a result of its recorded high per capita income status and the increased competition globally for such funds.


2. GOBVI Development Objectives

GOBVI is currently in the process of articulating a National Integrated Development Plan (NIDP). Sectoral objectives and strategies are currently being assessed and a draft plan is being prepared. In the meantime, GOBVI's medium term development goals and objectives continue to be articulated in the Budget Estimates and can be summarised as follows:

1. broadening and diversifying the economic base;
   
2. maximising the revenue potential of the territory;
   
3. improving and enhancing the quality of service products offered from within or from the British Virgin Islands (BVI);
   
4. building and/or facilitating the establishment of the basic economic foundation and physical infrastructure necessary for the attainment of sustainable growth; and
   
5. raising the standard of living with a more equitable distribution of economic gains, and enhancing belonger's skills.

GOBVI's strategy is principally to play a facilitating role by providing basic infrastructure and a conducive economic environment. The main impetus for economic growth is expected to come from private sector activities, and in particular, from the key tourism and offshore sectors which dominate BVI's economy. Although not yet formally articulated, GOBVI officials have indicated that the most critical infrastructural project in its entire development strategy is the expansion of the Beef Island Airport. The project, which is included in the 1993-1996 PSIP, is directly linked with GOBVI's aim of expanding the vital tourism sector and is intended to improve visitor access to BVI from Europe and, in particular, from the main North American market.

GOBVI recognises that for such a strategy to succeed, there needs to be a significant expansion in BVI's existing tourism capacity in order to generate a large enough through flow at the airport to make the project viable. Consequently, efforts are being pursued concurrently to encourage investment in new hotels and to promote BVI as a tourist destination both in Europe and North America. However, GOBVI still needs to formulate a coherent policy for the expansion of the tourism sector and to articulate it clearly, having given due consideration to various options available. The rapid completion of the NIDP, indicating clearly GOBVI objectives and strategies for developing the key tourism sector should thus be considered a priority.

A second major supporting development strategy that GOBVI is pursuing is that of human resource development. This is reflected in the significant amount of investment programmed for education, health and public administration in the 1993-1996 PSIP. Such activities are aimed at supporting growth of the tourism and offshore sectors by providing trained and skilled labour. They are also intended to strengthen the civil service, developing an efficient and trained public administration able to adapt and react quickly to the changing international environment and so help sustain BVI's main economic activities. A key development in this respect is the recent formation of the Financial Services Directorate which oversees and promotes the development of the offshore business sector. Assisted by the British Government, it also performs the vital function of safeguarding BVI's reputation as a scandal-free offshore location.

3. Review of PSIP: 1993-1996
    Sectoral Composition

The proposed PSIP reveals a heavy concentration on economic infrastructure projects. Of the total $109.1 mn in scheduled expenditure for 1993-1996, economic infrastructure has been allocated 52.9%, compared with 26.5% for social services, 15.3% of general public services and 5.3% for economic services.

At 33.3%, the transport and communication sector accounts for the largest single component of total planned PSIP expenditure. Improvements in this sector are seen as essential in order to provide supporting infrastructure for private sector activities, particularly in the tourism industry. Road projects and the airport expansion scheme dominate planned expenditure in the sector. The largest single project to be implemented during the PSIP period is the $14 mn expansion of the Beef Island Airport Terminal which is due to be completed in 1995. The associated $35 mn project to extend the runway is not expected to be implemented until 1996, but expenditure will be incurred in the interim on design and feasibility studies. Ongoing and new road projects account for $11.3 mn of scheduled expenditure in the sector, and include the $6.3 mn CDB-funded Road Improvement and Maintenance Programme and a $5 mn Road Improvement Project to be funded by GOBVI with a loan secured from the Social Security Board of the British Virgin Islands (SSB). Expenditure on completion of CDB-funded Sea Defence works and the Port Project accounts for the remainder of scheduled expenditure in the sector.

A number of small water and sewerage projects account for 5.9% of total proposed expenditure, while just one single new project in the energy sector accounts for 13.7% of the total PSIP. This is the British Virgin Islands Electricity Corporation's (BVIEC) $15 mn expansion programme. The programme is intended to improve BVIEC's operational capability and to meet the projected demand for electricity to the year 1998. The programme is considered a development priority since BVI's two key sectors, tourism and offshore business; require assured supplies of electricity to enable them to expand. The major elements of the programme are the purchase and installation of additional generating capacity and the construction of transmission lines to transfer bulk power to eastern Tortola. Implementation of these two components is scheduled to begin in 1994.

The 1993-1996 PSIP provides for $28.9 mn in funds for social services, equivalent to 26.5% of total expenditure. The majority of this expenditure concerns investments in the education sector which account for 12.4% of the total PSIP. The construction of the Community College is now almost complete, but a further $3.1 mn is required to build the College Library. Further investment is also proposed in Primary School infrastructure, while the ongoing High School projects account for another $5'mn. Significant expenditure on health and community affairs, including $3.5 mn for the construction of a Psychiatric Wing and Mortuary at the Peebles Hospital, is also envisaged.

In keeping with GOBVI's intention to strengthen its own administrative capacity, proposed investments of $16.7 mn in the area of public administration account for the second largest component of total expenditure after the transport and communications sector. Much of this expenditure is associated with projects intended to enhance the territory's ability to uphold law and order, including the construction of a new prison, and is funded by the British Government. During the PSIP period, another $6 mn is also expected to be spent on the Central Administration complex, $5 mn in 1993 and $1 mn in 1994. Part of this expenditure represents an additional $2.5 mn loan from one of the local commercial banks for furniture and fixtures. This brings the total amount GOBVI has borrowed from commercial banks for this project to $11.4 mn. A further $2.5 mn was borrowed from SSB.

Since GOBVI believes that productive activity is the preserve of the private sector, only a small proportion of expenditure on the PSIP is earmarked for the productive sectors. Proposed investments are mainly in the tourism sector, with most expenditure being related to GOBVI's ongoing payments for the acquisition of Nanny Cay. There are also two environmental projects which are related to the tourism sector: beach restoration and pollution control. The productive sectors of agriculture and manufacturing are essentially marginal to the BVI economy where tourism dominates. However, GOBVI has, since 1988, committed itself to reviving agriculture with some success, and investments of $1.2 mn are scheduled in the 1993-1996 PSIP for the sector, mainly for agricultural infrastructure development. Overall, investments in economic services account for 5.3% of the total 1993-1996 PSIP.

Major New Projects

New projects account for 41.1% of the total proposed PSIP. Of this $44.9 mn, $18.6 mn represents projects for which funding has already been identified. These include the Electricity Expansion Programme which has CDB and CDC backing; Road Improvements for which GOBVI has secured a loan from SSB; the College Library for which an EDF grant has been secured, and Water Systems Improvements for which the British Development Division in the Caribbean (BDD) is providing a grant. The remainder represents proposed expenditure on projects for which financing has yet to be identified. The largest of these projects is the proposed $35 mn Extension of the Beef Island Airport Runway targeted to start in 1996. This project is considered GOBVI's number one priority project, and fundamental to the territory's proposed development strategy. Other major unfinanced projects in the PSIP are a $2.5 mn Coastal Pollution Control Project, a $3 mn Sewerage Project, and $3 mn Primary School Infrastructure project.

MAJOR NEW PROJECTS FOR WHICH FUNDS ARE BEING SOUGHT: ($'000)

 Source: DPU

4. Financing Requirements

The total public sector financing requirement for 1993-1996 is estimated at $123.2 mn, $109.1 mn representing the PSIP and $14.1 mn representing scheduled amortisation payments due on both external and domestically contracted public sector debt. Domestic sources, i.e., primarily recurrent revenues and drawdowns of reserves, are currently projected to provide the largest contribution at $39.3 mn. Externally-financed disbursements for ongoing projects and disbursements from already contracted loans from local commercial banks and the SSB, are projected to provide a further $35.1 mn. A financing gap for the four years of $48.8 mn remains, of which $18.6 mn represents financing for new projects for which sources have been identified, and $30.2 mn represents new projects for which sources of finance have not yet been identified.

TABLE 1: PUBLIC SECTOR FINANCING REQUIREMENTS
1993-1996
($mn)

*Amortisation due on External and Domestic Public Sector Debt

Such figures suggest that BVI may benefit from streamlining the 1993-1996 PSIP, retaining only projects of the highest priority for the further economic development of BVI. Such an exercise would help to contain the projected $39.3 mn financing burden on GOBVI, which averages out at $9.8 mn a year during 1993-1996, and is already relatively high in relation to recurrent budget surpluses which have averaged $3.4 mn a year over the last four years, 1989-1992 (see Appendix 2). It would also reduce the $30.2 mn in unfinanced projects, and thus the pressure to take on additional external or domestic debt. This is an important consideration given the recent rapid growth in total public sector debt, the pace of which cannot be sustained.

As shown in Table 2, total public sector debt has risen steeply over the last five years, reflecting increasing recourse to both external and domestic borrowing to fund the PSIP. As a percentage of Gross Domestic Product (GDP), total public debt has risen from 8.3% in 1988 to 29.3% in 1992. This is projected to rise to 30% by 1995 when total debt is projected at $70 mn; while the debt-servicing burden is projected to rise from an estimated $3.9 mn in 1993 to an average of $7.6 mn per annum during 1994-1996. 

TABLE 2: PUBLIC SECTOR DEBT ($ mn)

Source: MOF and COB estimates

e = Estimate
p = Projection

Assumptions
Debt projections are CDB estimates based on MOF data and disbursement schedules for new projects in the PSIP which have already secured funding.
Scenario 1 assumes that all unfinanced projects identified in the PSIP are financed by either external or domestic loans.

TABLE 3: CENTRAL GOVERNMENT DEBT ($ mn)

Source: MOF and CDB estimates

e = Estimate
p = Projection

Assumptions

Debt projections are CDB estimates based on MOF data and estimated disbursement schedules for new projects in the PSIP for which Central Government has already secured funding,
Scenario 2 assumes that all unfinanced projects identified in the l993-1996 PSIP are financed by loans contracted by the Central Government.

However, these figures do not take into account the unfinanced projects in the proposed PSIP. If it is assumed that all this gap is filled through a combination of external and domestic loans (grants being considered difficult to secure), then total debt would rise more steeply, peaking at about $83 mn in 1995, the equivalent of 35.6% of GDP (see Scenario 1 in Table 2). More importantly, such additional debt would have adverse implications for debt servicing.

In terms of central government operations, the debt question is even more critical. An increasing number of loan-financed projects are directly serviceable from the government budget, and the central government's total debt service obligation has risen from $0.3 mn in 1988 to an estimated $1.4 mn in 1992 and is projected to rise to $5.1 mn in 1996 (see Table 3). The steep increase in debt servicing owes much to the fact that many loans have been contracted from local banks on commercial terms. Such requirements are a drain on the recurrent account and serious consideration should be given to minimising the level of new debt that is serviceable from the budget. This, again, reinforces the need to ensure that only new projects of the highest priority are implemented and suggests that the 1993-1996 PSIP will have to be scaled down to a level that accords with the availability of financial resources and GOBVI's debt servicing capacity.

In conjunction with efforts to streamline the PSIP, GOBVI should continue to pursue measures to raise national savings. Such savings are needed to help finance the PSIP as well as reduce the need for borrowing. BVI has the capacity to generate more of its needed PSIP resources from within the domestic economy, and, in particular, there is room to raise tax revenues. In recent years, there has been a worrying decline in the tax effort which fell to below 15% of GDP in 1992 from around 20% in the previous three years. Such a performance suggests that GOBVI's tax net needs to be broadened and tax administration strengthened. Measures to revive tax collection performance have the capacity to enhance GOBVI's revenue and should be considered a priority. In addition, since both of GOBVI's key revenue sources, tourism and the offshore business sector, are vulnerable to external influences beyond GOBVI's control, there is an equally urgent need for fiscal restraint. Recurrent expenditure as a proportion of GDP has risen from 24.4% in 1988 to 30.1% in 1992 (see Appendix 2) and unless measures are adopted to curb this rate of growth, GOBVI's fiscal position may suffer with adverse implications for funding the PSIP.

5. Institutional Framework

Since 1988, preparation of the PSIP has been the responsibility of the DPU in the Chief Minister's Office. To date, no clear procedures to perform this function have been established in the Unit, but this deficiency is being addressed as part of the whole process of formulating an NIDP. In the meantime, two processes exist by which projects enter the PSIP and Capital Estimates. For large foreign financed projects, line ministries identify a project and then approach DPU for assistance in preparing a project profile. This is then submitted to the Project Preparation Review Action Committee (PPRAC), a committee that meets every three weeks and is attended by all ministers, permanent secretaries and the DPU. The purpose of the PPRAC is to review new projects to be proposed for the annual Capital Estimates and to monitor the progress of ongoing projects. In contrast, locally funded projects identified by line ministries tend to by-pass the PPRAC and are directly proposed for inclusion in the Capital Estimates. As a result, a significant number of projects in the PSIP seem to have escaped economic scrutiny by a central agency.

With respect to the link between the PSIP and the Budget Estimates, substantial progress has been made. The DPU works closely with MOF and plays an active role in preparing the Capital Estimates. Once the recurrent budget has been set, the Capital Estimates are proposed based on the projected availability of local funds and information from DPU on the status of the PSIP, particularly the existing and expected availability of external funding for projects. Local projects proposed in the Capital Estimates are then trimmed in order to fit in with expected financing.

As a result of the aforementioned activities, the DPU retains substantial knowledge of the current status of the PSIP. However, procedures need to be implemented to formalise the existing process so that the PSIP information can be made available in an accessible form which allows easy monitoring and analysis, and does not solely reside in the DPU. GOBVI will also need to develop guidelines and procedures to ensure that all projects above a specified limit are subjected to a full analysis and economic assessment with respect to stated development objectives and resource constraints, before they are included in the PSIP. The DPU should also prepare, on an annual basis, a comprehensive PSIP report with clearly stated priorities which assesses targets met, identifies major issues, and indicates the recurrent account implications of the PSIP. The existing PSIP formulation, monitoring and implementation procedure is expected to improve as further progress is made in establishing an NIDP.

Appendices

BRITISH VIRGIN ISLANDS: PUBLIC SECTOR INVESTMENT PROGRAMME: 1993 – 1994 ($’000)