A Policy Choice for the Solomon Islands Government: Revenue-sharing or a Provinces Wealth Fund?

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By Mose Saitala

The failure of the Government for National Unity and Transformation (GNUT) to secure the Constitutional (Amendment) (Constituent Assembly Sitting) Bill in December 2024 would have motivated the government to take steps to reaffirm its commitment to the development of provincial economies and increase the ability of provincial governments to make decisions about their own development priorities like never before. Those increased autonomy objectives have been, of course, the driving force behind the long-drawn-out federalism process, and that Constitutional amendment bill is a vital step in the progress of the country towards federalism.

Following the sine-die-motion in the December sitting, the SIG appears compunctious over the defeat of the Constitution amendment bill and felt the government should devolve more powers, including the option of pumping more public funds to provincial governments, empowering them to allocate the funds according to their own development priorities. In the debate on the same motion, the Prime Minister and other Ministers supported the injection of more funding to provincial governments and suggested factoring this matter into the reform of the Provincial Government Act 1997. Revenue-sharing was mooted by Ministers as a viable option and a Cabinet paper is expected to be developed on the revenue-sharing formula(s).

This article takes an independent look into the three broad options open to SIG to increase its public funding to provincial governments.

The first of these options is to continue the practice of providing direct budgetary support to the nine provincial governments’ recurrent and development budgets but at an enhanced level. Any policy option to increase public resources for appropriation by provincial governments is indeed welcomed and a good policy; after all, their ‘ears’ are closer to the 80% of the people in the Solomon Islands living in rural areas. This policy option, however, may not necessarily be the best option given its shortcomings.  The history of the SIG annual grants to provincial governments lacks impeccability.

There have been oscillations in the level of that grant, which makes fiscal planning difficult and ties the level of direct budgetary support to what SIG can possibly afford in any year, given other competing priorities. While there might be an increase in the grant level in the next two years, there is no guarantee that this increased direct budget support will continue. Like its history, the fluctuation in the grant level may continue and could be perceived as SIG withering in its commitment when that fluctuation persists.

The second option possible for SIG to consider is revenue-sharing between SIG and provincial governments. This is undoubtedly an improved policy option compared to the annual grant option. On the bright side of things there is optimism that the SIG and provincial governments will find an amicably agreed formula to share revenues currently collected by SIG. While the level of revenue collected might be tied to the economic performance of the domestic and international economies, the fluctuation in the level of revenue collected by both the SIG and provincial governments should be tolerable and absent of antagonism due to the transparency in factors affecting revenue collection. It is only with elements of bad faith that this arrangement can collapse.

There are, however, future challenges to this option that may render it suboptimal. The main challenge comes from the determination of the percentages or divisions in the sharing of revenues generated from different sectors in the economy. Provinces are not endowed with the same level of resources, and that will be the point of discontent in the future under this option. The process to determine the percentage sharing will be political, and there is no ‘silver bullet’ formula that will appease all the nine provinces. There will only be compromises that any future government will have the prerogative to change as it sees fit. Even if it is made difficult to change the percentage sharing formula, especially when it is legislated, there is still ground for instability to creep in as it is the prerogative of the Executive to allocate and appropriate public funds annually.

There is a third option the SIG may want to consider seriously. This option relates to the establishment of the Provinces Wealth Fund (PWF). There is a draft paper on the establishment of the PWF commissioned by the Premier of Guadalcanal, and it has been widely discussed informally by premiers in late 2024. The ultimate objective of the PWF was to have a predictable and steady stream of revenue for the nine provinces to help them achieve autonomy in the formulation and balancing of their recurrent Budgets, meet their long-term needs of maintaining economic infrastructure and services, and help SIG to develop the provincial economies.

There is merit in seriously considering the PWF. It has all the hallmarks of being a Fund that will provide a sustainable source of revenue infinitely for provincial governments in the future; it will generate foreign currency because it is prudently and professionally invested in high-yielding investment instruments in the international financial market globally; it is not only sustainable, it is also a Fund that will grow on its own as it adjusted annually to maintain its real value before distributing the proceeds from the Fund’s annual performance; it will fast track provincial governments’ learning of the ropes of fiscal discipline motivated by the knowledge that the province will have higher level of entitlement from the proceeds of the Fund if the province is able to continuously increase its shareholding in the PWF principal capital.

The success of the PWF is dependent on several things. It must be an independent operation, perhaps overseen at arm’s length by the Governor of the Reserve Bank, but under the management of a Board of Directors chaired by the Minister of Finance and Treasury with the Minister MPGIS as Alternate Director. Other Board Directors would have to be the nine Premiers (or their nominees) and international contributors to the PWF capital. The principal capital of the PWF will be locked, and only its proceeds will be subject to appropriation by provincial governments. The PWF will have its own governance structure, its fund managers, a fund custodian, a fund monitor/adviser, a fund auditor, and a host of advisers representing contributors to the PWF principal capital, all reporting to the Board of Directors through the PWF Secretariat.

The PWF, as an external source of revenue to provincial governments, does not have the kind of constraints that Options 1 and 2 face. It is foreign exchange earnings, and it is not a substitute for SIG’s responsibility for provincial governments. Better still, with the potential for revenue from the PWF to increase with time, there will be an opportunity for the SIG to reorganise its direct budgetary support to provincial governments, for example, by lessening its support towards the recurrent budget and simultaneously increasing its grants toward infrastructure development critical to the implementation of national and provincial development priorities.

Will the PWF work for the Solomon Islands? I say yes. We do not have to look far to learn from the success of other sovereign wealth funds in the Pacific if the PWF is correctly set up and mandated with a suitable investment strategy concomitant with its objectives. The PWF is a work in progress, but it is worth considering it.

Mose Saitala, a former senior adviser in the Office of the Prime Minister and Cabinet (2013-2018) on SIG fundamental reform programmes, SIEC Chief Electoral Officer (2018-2020), and a co-author of the Falepili Union Report leading to the Falepili Union Treaty between Australia and Tuvalu (2023).