A Proposal for Reforming and Upgrading Kiribati’s Coconut Industry September 2024 © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “The World Bank. 2024. Cracking the Nut: A Proposal for Reforming and Upgrading Kiribati’s Coconut Industry © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: World Bank Acknowledgments This report was prepared by Blair Edward Lapres (Economist), Aarre Laakso (Consultant), and Samuel Wills (Economist, Task Team Leader). It benefitted from helpful and insightful comments by Alexandre Laure (Senior Private Sector Specialist), Allan Oliver (Senior Agriculture Specialist), Christopher Miller (Senior Private Sector Specialist), and Stamatis Kotouzas (Senior Land Administration Specialist). We are grateful to the Kiribati Ministry of Finance and Economic Development, the Ministry of Environment, Lands and Agricultural Development, and Kiribati Coconut Development Ltd for inputs and feedback on a draft version of this document. Table of Contents Table of Contents......................................................................................................................... 3 Kiribati: Geographic Factsheet.................................................................................................. 7 Abbreviations................................................................................................................................. 8 Background of the engagement............................................................................................... 9 Executive Summary...................................................................................................................11 1. Kiribati is a small island state with limited resources................................................ 15 2. Kiribati needs to reduce the copra subsidy to lower its fiscal burden and reduce distortions to the economy....................................................................... 19 2.1 The copra subsidy in Kiribati is expensive and distortionary............................ 19 2.1.1  The government heavily subsidizes copra production..........................19 2.1.2  The copra subsidy creates a heavy fiscal burden....................................21 2.1.3  Copra subsidies also create market distortions with a variety of negative effects........................................................................ 23 2.2 Reducing the fiscal burden and distortions requires cutting the copra subsidy and providing alternative social protection programs............ 23 2.2.1  The price for copra should be reduced to reflect global market conditions......................................................................................... 23 2.2.2  Any change to the price paid for copra should be offset by increasingsocial protection payments to the outer islands............27 2.2.3  Fixing the market distortion is necessary but not sufficient to induce growth........................................................................................... 28 3. Challenges in primary production can be met by reforms to land administration and valuation..........................................................................................29 3.1 Agriculture is an important economic activity but is largely non-commercial........................................................................................................29 3.2 The ownership of productive agricultural assets is inefficient......................... 32 3.3 Kiribati needs to adapt land administration and improve valuation infrastructure to attract investors........................................................................... 35 4. Reducing inefficiencies of Kiribati’s SOEs would improve performance............ 37 4.1 Kiribati’s copra value chain is inefficient............................................................... 37 4.1.1  Weigh stations are prone to loss and spoilage........................................37 4.1.2  Shipping to Tarawa for processing is inefficient..................................... 38 4.1.3  Processing facilities are out of date.......................................................... 39 3 4.2 Improving the efficiency of the copra sector will reduce losses and lower the need for subsidies........................................................................... 39 4.2.1  Weigh stations should have their incentives more closely aligned with productivity............................................................................. 39 4.2.2  Inter-island shipping would be more efficient with performance-based contracts................................................................... 40 4.1.3  Copra processing capacity should not be expanded until coconut oil is profitable................................................................................41 5. Copra is now a low-margin commodity, so Kiribati must innovate to move up the value chain and become more profitable.....................43 5.1 Copra was once profitable but has become commoditized...........................43 5.2 To address the commoditization of copra, Kiribati has been focused on VCO but should instead consider wet goods like young coconuts.................................................................................................48 5.2.1  VCO is currently produced for local sale but requires significant reforms to become competitive as an export.................... 48 5.2.2  Wet young coconuts offer a high-value niche but require investment...................................................................................................... 50 5.3 Moving into new coconut segments requires public funds to select the right varietals, invest in water management, and provide “club goods”.........................................................................................56 6. A roadmap for growth, profitability, and prosperity in the copra industry.........59 Annex A: Example Processing Methods................................................................................65 Annex B: Auxiliary Graphs.........................................................................................................66 Bibliography................................................................................................................................ 67 4 List of Boxes Box 1. The Potential of “Mini Mills”......................................................................................... 25 Benchmarking against the Philippines: A Country with Large Box 2.  Industry and Incumbent Actors.................................................................................. 45  okonut Pacific Solomon Islands (KPSI) Limited: A distributed Box 3. K VCO success story......................................................................................................... 49 Thailand is in Transition to a More Competitive Coconut Industry Box 4.  based on Food Innovation........................................................................................... 52 Copra Coconuts: An Alternative Model Where Cold Chain Box 5.  Capabilities Substitute for Scale................................................................................. 54 List of Figures Figure 1: Kiribati’s Demographic and Geographic Features.............................................. 15 Figure 2: Government of Kiribati Copra Subsidy Scheme.................................................20 Figure 3: Benchmarking the Producer Price of Copra (AUD per kg).............................. 21 Figure 4: Copra subsidy spending, actual vs budgeted, AUD million and % GDP........ 22 Figure 5: Cost of Copra Subsidy vs. Export Earnings from Copra/CNO (2021)............ 22 Figure 6: Strategies and Options to Reduce Subsidy Pricing........................................... 24 Figure 7: Households Farming by Crop Type and Purpose...............................................30 Figure 8: Aggregate Coconut Production in Kiribati.......................................................... 31 Figure 9: Copra Production by Island.................................................................................... 31  roductivity of Copra by Island as a Proxy for Efficiency of Landholder Figure 10: P Governance Systems.............................................................................................. 33 Figure 11: Agroecological Productivity by Different Forms of Land Holding................34 Figure 12: Connectivity of Outer Islands Producing Copra to International Hubs......38 Figure 13: Lack of Port Infrastructure Affects the Economics of Shipping.................... 41 Trend and Competition Analysis of Copra and CNO Exports Figure 14:  on the Global Market.............................................................................................. 44 Figure 15: Market Share of CNO Buyers by Company Size...............................................44 Production Scale of Kiribati versus the Philippines in Coconut Figure 16:  and CNO Production in 2021............................................................................... 45  ompetition Analysis of Kiribati’s Copra and CNO Exports Figure 17: C on the Global Market.............................................................................................. 47 Indicative and Simplified Segmentation of the Coconut Industry Figure 18:  uses for Commercial Uses.................................................................................... 50 5 Figure 19. Young Coconuts Packaged for Convenience Markets................................... 51 Figure 20: Select Coconut Product Exports from Two Clusters...................................... 53 Figure 21: Indicative Value Chain and Shelf Stable Processing Schedule......................54 Figure 22: Connectivity of Outer Islands to International Hubs...................................... 55 Figure 23: Expanded Segmentation of Processing Methods . for Food Sector Uses.............................................................................................65 Figure 24: Value Chain Depiction showing different end uses . for coconut products............................................................................................65 Figure 25: Copra Production by Year.....................................................................................66 List of Tables Table 1. Quality Standards for Copra.....................................................................................40  omparison of Total Operating Revenue for Copra Mills Table 2: C in the Philippines and Kiribati................................................................................... 46 Select 2022 Financials from Thai Firms Operating in Wet Table 3:  Segments (USD Thousands)..................................................................................... 52 Table 4: Summary List of Recommendations for Responsible Authorities.................... 61 6 7 Land area (km²) 15 5 10 35 25 0 45 50 30 20 40 *Banaba (Ocean Island) West Source: World Bank Butaritari (Makin) Abaiang Kuria Makin Maiana Tarawa (N/S) Marakei P: 70,090 Aranuka L: 31.9 km Abemama Nonouti Tabiteuea (N/S) Gilbert Islands & Others* Onotoa Tamana Beru Nikunau Land area (km²) Arorae Nikumaroro (Gardner Island) McKean Island Orona (Hull Island) Closer to Tarawa Canton Island Closer to Kiritimati Birnie Island Islands of Kiribati Manra Island (Sydney Island) Phoenix Islands Population (2020) Enderbury Island Kiribati: Geographic Factsheet Rawaki Island (Phoenix Island) Teraina (Washington Island) Tabuaeran (Fanning Island) Kiritimati (Christmas Island) Starbuck Island P: 7,369 Malden Island L: 384.4 km Line Islands Vostok Island Flint Island Millenium Island (Caroline Island) - East 1,000 7,000 5,000 3,000 2,000 6,000 9,000 4,000 8,000 10,000 Population Abbreviations AUD Australian Dollar CAGR Compound Annual Growth Rate CNO Crude Coconut Oil EEZ Exclusive Economic Zone FDI Foreign Direct Investment HPP High-Pressure Processing ITC International Trade Centre KCDL Kiribati Coconut Development Ltd km Kilometer KNSL Kiribati National Shipping Line MCIC Ministry of Commerce, Industry and Cooperatives MELAD Ministry of Environment, Lands and Agriculture Development MFED Ministry of Finance and Economic Development MIA Ministry of Internal Affairs MICT Ministry of Information, Communications and Transport MLPID Ministry of Line and Phoenix Islands Development MSP Minimum Support Price MWYSSA Ministry of Women, Youth, Sports and Social Affairs PBC Performance-Based Contracts RBD Refined, Bleached, and Deodorized SNAP Supplemental Nutrition Assistance Program (US) SOE State-Owned Enterprise USD United States Dollar VCO Virgin Coconut Oil 8 Background of the engagement This policy report studies Kiribati’s coconut sector, and proposes ways to remove distortions, increase efficiency, and encourage diversification. It does this while taking into account the coconut sector’s economic, social, and cultural significance. The report targets Kiribati’s Ministries, World Bank Group management, and other agencies, and is part of a larger World Bank initiative on economic diversification and social protection in Kiribati. What does this report aim to do? The report is a high-level review of potential socio-economic development models and private sector opportunities for Kiribati’s consideration. It offers a rapid assessment of Kiribati’s coconut industry and the fiscal and economic effects that it has on the country. The study was prepared in a short time through desk research, so in-country stakeholder consultations were limited given the preliminary nature of the exercise. It largely utilizes qualitative assessments, which are particularly useful in data-scarce environments, such as Kiribati. It backs them with statistics where available. Owing to its qualitative and rapid nature, it is not a concrete guide for public investment nor a guarantee for securing private sector investment. Its findings are intended as background for discussion with the aim of prioritizing a shared assessment of reform that will be further researched in due course. How is this report organized? The report is organized in sections according to the remits of responsible Ministries and state-owned enterprises (SOEs). Section 1 provides essential background on Kiribati. Each of the following four main body sections (sections 2–5) introduces a challenge for the Kiribati coconut sector and then considers how the challenge could be overcome. Section 2 considers the fiscal cost of Kiribati’s coconut subsidy which motivates the need for change, and offers proposals for reducing the subsidy in a socially acceptable manner. It will be relevant for MFED. Second 3 identifies the binding constraints on primary production and explores how they can be relaxed to improve yields, which is relevant for MELAD. Section 4 assesses the inefficiencies that are created by the SOEs in the coconut value chain and explores how they can be improved, which will be relevant for both the SOEs and their overseeing Ministries. Section 5 considers the challenge that copra has become a low-margin commodity. It proposes a vision to boost growth by diversifying the coconut industry away from crude coconut oil into other products where private investors may be better able to compete. This will be particularly relevant to KCDL. Finally, section 6 draws conclusions and summarizes recommendations. Who is this report aimed at informing? This report is intended for use by both external and internal stakeholders. The direct clients for this work are the various ministries and agencies noted in the report. The findings are intended to help them identify potential development paths and reform needs. A secondary audience for this work is the World Bank Group management, including the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), International Finance Corporation (IFC), and Multilateral Investment Guarantee Association (MIGA), where this is intended to inform the design of technical assistance and investment programs across the various products that the organizations have to offer. Finally, this report may also help align other multilateral or donor agencies that wish to complement economic and social development efforts in Kiribati. 9 What is the broader context of this report? This report was prepared by the World Bank’s Finance, Competitiveness and Innovation (FCI) and the Macro, Trade and Investment (MTI) practice as part of a broader engagement in Kiribati. It will be accompanied by two companion papers. The first studies how the copra subsidy affects poverty, and investigates alternative social protection schemes (The World Bank, 2024a). The second studies how the copra subsidy affects Kiribati’s broader agricultural sector, and investigates ways to diversify it (The World Bank, 2024b). The MTI practice is leading the project and coordinating project outputs and engagements. Executive Summary 1. As a Pacific atoll country, Kiribati has many geodemographic challenges that limit its development. With GDP per capita just above USD 1,700, the country is both one of the least developed countries in the world and one of the most at risk of climate threats. Such risks are especially threatening to the productive capacity of the land. About 16 percent of the population is employed in agriculture; however, up to 40 percent of households rely on agricultural income through some channel. 2. Despite infertile sandy soils, coconut farming has historically sustained the cash economy on Kiribati’s outer islands. Households on Kiribati’s outer islands tend to rely on subsistence agriculture and fishing for their livelihoods. Selling copra at the government-subsidized price of $4/kg provides many with their sole source of cash income. It is a form of social protection, a way to redistribute fishing rents, and an incentive to live on the outer islands. The coconut industry is almost entirely organized around the production of copra (dried coconut meat produced by households), and ultimately crude coconut oil (CNO), a shelf-stable intermediate product made by industry for export. Yet even with these subsidies, copra production has been falling since 2016 when it peaked at 17,000 tonnes. The government has stated its desire to diversify the agricultural sector and make it more resilient to climate change, but distortions from the copra subsidy make this difficult. 3. The government heavily subsidizes copra, which creates wide-reaching distortions and weighs on the fiscal budget. The system of state intervention in the coconut sector is two- tiered, involving both a direct production subsidy to farmers, and supporting state-owned enterprises (SOEs). Government involvement is heavy and fragmented throughout the value chain. MELAD is responsible for seeds and replanting. Island Councils operate weigh stations that buy copra using government funds. Kiribati National Shipping Line Ltd collects and transports the copra to Tarawa. There it is provided for free to Kiribati Coconut Development Ltd (KCDL), who process it for export. This leads to a variety of principal-agent problems, inefficient scale, and productive, dynamic, and allocative inefficiencies. It distorts the entire agricultural sector, crowding out fresh fruits and vegetables which leads to poor nutrition and food insecurity. In rough terms, copra from one coconut is purchased at AUD 0.65-0.80, turned into coconut oil (CNO), and sold for AUD 0.20. The subsidy by itself is a heavy fiscal burden, costing 12 percent of GDP in 2022, and creates fiscal imbalances because it is financed by volatile fishing revenues. The true cost is much higher when support to SOEs and lost tax revenues from fiscal distortions are accounted for. 4. To improve the performance of the copra sector and stabilize the budget, Kiribati needs to reduce the copra price and allow it to vary with the global market. In 2023 the copra subsidy was around 8 times the farmgate price for copra in competitor countries like the Philippines, and double the price of coconut oil. To improve efficiency and reduce the fiscal burden the farmgate price needs to be gradually lowered. It should also be re-set at least annually, to reflect global market conditions. It would be best if KCDL were made responsible for copra purchases, and had incentives to vary the copra price with quality. 5. Any change to the copra price must be accompanied by higher social protection payments, so that no household that uses copra to meet its basic needs is worse off. The copra subsidy was introduced to support livelihoods on the outer islands, and is relied on by many families to meet their basic needs. As such, any changes to the copra subsidy must be replaced with another social protection scheme. A companion paper investigates cutting the subsidy to AUD 2/kg and replacing it with direct cash transfers that are targeted to the poor nationwide (The World Bank, 2024a). It finds this would halve the poverty rate, at half the cost of lifting 11 the subsidy from AUD 2/kg to AUD 4/kg. However, targeted cash transfers take time to set up. The paper also suggests an interim measure, of capping the subsidy at the poverty line per household. This would achieve the same poverty rate, but save the government around 3.7% of GDP (approximately AUD 13 million). 6. Agriculture is an important economic activity in Kiribati, but it is largely non-commercial and hampered by inefficient land tenure and governance. Copra is the main cash crop, with 30-40% of households farming it, and up to 85% on some outer islands. Beyond copra, over 70% of households growing crops only do so for home consumption. A major constraint on commercializing agriculture is the system of land title, where around 60% is government-owned and 40% is held under collective customary title. Government land is largely under-utilized due to inadequate zoning and leasing arrangements. Customary land is collectively governed, which leads to complex negotiations with investors and reduces the incentive to invest. The lack of long-term leases on appropriately sized plots is a major deterrent to local and foreign investors. So is the process of registering a property which takes over 500 days on average. 7. Secure and enforceable land title through freehold or long-term leases is needed to attract private investors. To boost agricultural investment, including in the copra sector, the government needs to create zoning plans that provide for long-term leases, especially on Kiritimati. These plans should consult investors on characteristics like plot size and lease duration, especially for long-term crops like coconut palms. To streamline decision-making and ease the negotiating process for leases, customary landholders should be supported to adopt best-practice governance structures. This could include establishing incorporated landholder groups with inclusive representation and the power to make decisions. The government must also ensure that titles and leases can be easily transferred and used as collateral. 8. Kiribati’s SOEs, particularly in the copra sector, are plagued by inefficiencies across the value chain, including replanting, weigh stations, shipping, and processing. Heavy government involvement has led to a lack of market incentives and accountability and resulted in poor balance sheet discipline. Replanting coconut palms is the responsibility of MELAD and is not happening fast enough to renew the aging stock of trees. Weigh stations are operated by agents on behalf of the government, and face issues such as spoilage, inventory loss, and security concerns. They have no incentive to maintain the quality of copra or upgrade storage facilities. Shipping hampered by KNSL’s monopolistic practices, infrequent and irregular connectivity, and economically unviable routes. Processing facilities are operated by KCDL and are outdated, approaching capacity, and focused on producing low-margin goods. 9. To improve efficiency and accountability, KCDL should consolidate control and responsibility throughout its value chain. MELAD should cede responsibility for seeds and replanting to the private sector, and focus on creating a regulatory and biosecurity environment that supports it. KCDL should take on responsibility for purchasing copra and running weigh stations, to reduce principal-agent problems and encourage balance sheet discipline. Efficiency could be further encouraged by delivering the subsidy to KCDL as a CSO based on the volume of copra processed in Tarawa. This would incentivize KCDL to pay closer attention to inventory and quality control during purchasing, shipping and processing. 10. To improve the frequency and reliability of shipping to the outer islands, the government should encourage more private participation through fixed-term performance-based contracts. PBCs involve private companies (and possibly KNSL) bidding to service particular shipping routes for the lowest government subsidy. Each route comes with specific benchmarks 12 for frequency and reliability that need to be met for the contract to continue. At the end of each fixed term companies are required to bid again, encouraging competition amongst suppliers. PBCs have been used successfully in the Solomon Islands and other Pacific countries, with better services at lower cost than provided by the government. 11. While copra and CNO were once profitable in Kiribati, they have become low-margin products due to global commoditization and market volatility. Historically, the production of copra and its derivative coconut oils have allowed Kiribati to overcome geographic barriers to participating in world markets. While the global market has evolved into a highly commoditized, low-margin business, Kiribati’s industry model has stayed unchanged. This has meant that the government has had to increasingly subsidize the industry to keep it afloat. 12. There is potential for Kiribati to expand production of higher-margin goods like virgin coconut oil (VCO), but it will require significant reforms. VCO is currently produced in low volume for domestic consumption in Tabiteuea and Butaritari. However, the high copra subsidy makes it difficult for VCO mills to acquire wet coconuts and reduces their profitability. Lowering the copra subsidy would make VCO more profitable, and more competitive as an export. However, to succeed internationally Kiribati will not just need to cut the copra subsidy. It will also need to invest in replanting coconut palms, expanding processing capacity, while consistently meeting international quality standards. 13. There is also a potential for Kiribati to enter the high-value niche of wet young coconuts, but it also requires investment and innovation. Part of the global coconut market’s evolution includes a shift towards convenience products like packaged fresh coconuts, and indulgence products like luxury smoothies. These “wet” goods are more profitable because they are perishable, which limits geographic competition and favors local and regional markets. Wet goods are easier for small firms to compete in because they are more differentiated, less concentrated, and so can command higher prices. This has successfully been exploited in Thailand, which has transitioned from dry to wet coconut products through innovation and investment in small to medium-sized plantations and mills. However, to successfully compete in this niche Kiribati would need to reform the copra subsidy, develop palm varieties suited to wet goods and Kiribati’s climate, and invest in cold-chain storage. 14. To encourage investment, the Government will need to provide a range of public and club goods that address a number of market failures, particularly on Kiritimati. The government’s focus on developing Kiritimati Island is an opportunity to build an environment where wet segments can thrive. Work must be done to keep saltwater out, freshwater in, and wastewater managed. Public research into new coconut palm varieties would help farmers move into new products. Government-owned club goods that offer services for a toll, like VCO processing centers, CNO mini-mills, and HPP machines, would help small operators enter the market and overcome financing constraints. This may mean that KCDL plays more of a role in facilitating the private sector, rather than doing everything themselves. 15. The opportunities provided by other segments of the market provide hope, but these opportunities will be foregone until Kiribati reforms the subsidy for dried copra. The current subsidy exceeds the market price of higher value coconut products, which reduces the incentive to produce anything other than copra. Only when the price of copra approaches the market price will producers be motivated to move into higher-value products. Even then, moving into new segments will require investment and come with risks. Competing in the virgin coconut oil (VCO) segment, for example, would require investment to reach sufficient scale to become competitive. And competing in wet segments from Kiritimati would require both investment in researching and planting dwarf varieties, cold chain infrastructure, and improved connectivity. 13 Copra being stored in the Kiritimati Island copra sheds (June, 2024). Section 1 1. Kiribati is a small island state with limited resources 16. This section provides essential background information on Kiribati. It covers relevant aspects of geography, demography, economy, government, and climate change. 17. Kiribati’s small population and land mass are spread over 33 island atolls, covering 4,500 km2 of the Pacific Ocean, which leads to many geodemographic challenges. The country boasts a population of about 119,000 people, with about 60 percent of the population located in Tarawa, the country’s capital (Figure 1). Tarawa has grown rapidly as a population center in recent years in tandem with the depopulation of the outer islands.1 The country has only about 810 km2 of land mass, with some islands being considerably larger than others. Kiritimati, an island in the eastern Line Islands archipelago, is by far the largest with approximately 385 km2 of dry land. As such, Kiritimati and Tarawa serve as the major hubs for international transport. All other islands have between 1 km2 and 40 km2 of real estate, reflecting the limits in productive natural capital, at least on land. The country’s greatest natural asset is a 3.55 million km2 exclusive economic zone (EEZ) provided by the seas surrounding these islands. However, the country’s dispersed geography remains a challenge for development. FIGURE 1. Kiribati’s Demographic and Geographic Features Population (2020) Population Growth in Kiribati 80,000 70,000 70,090 60,000 50,000 Population All Other Islands Tarawa 40,000 30,000 Land area (km²) 20,000 10,000 384.4 0 1985 1990 1995 2000 2005 2010 2015 2020 All Other Islands Kiritimati (Christmas Island) Tarawa All other islands 1 Depopulation of remote atolls may lead to loss of an EEZ under international maritime law. An EEZ has substantial economic value due to the fishing license revenues that its waters afford. 15 18. As a result of these geodemographic challenges, Kiribati has one of the lowest GDPs per capita in the world and has suffered from low economic growth in recent years. Aggregate GDP was just USD 222 million in 2022 with GDP per capita standing at about USD 1,702. About 22 percent of the population fell under the country’s poverty line in 2019, while about 40 percent experienced food insecurity. Kiribati has experienced modest economic expansion in recent years—averaging just 2.3 percent over the last decade.2 This is driven by factors such as aid inflows, remittances, and improvements in fishing license fees (Webb, 2020). However, the nation faces persistent structural challenges, including limited access to markets, land governance issues, and the impact of climate change on its low-lying atolls. 19. Kiribati’s government earned about USD 100 million in fishing access and license fees in 2022 from its EEZ (accounting for about 36 percent of GDP), which sustains the country’s social protection programs. In 2013, Kiribati joined the Vessel Day Scheme (VDS), a regional tuna management scheme where members limit the annual number of purse seine fishing days allowed in their EEZs and impose minimum prices for each day. The VDS both strengthened regional marine conservation and caused a dramatic structural increase in Kiribati’s fishing license revenues, from an average of AUD  36 million over 2007–2012 to AUD  172 million between 2018 and 2022. However, the revenue is volatile: in 2022, fishing license fees were 36 percent of GDP, down from 57 percent in 2020 due to adverse climate conditions. Although this industry is a lifeline to the country for generating government revenue, it does little to generate employment for the population. Instead, Kiribati’s fishing license fees sustain high recurrent government spending on social protection and the copra subsidy. 20. The country operates under a democratic republic government structure, characterized by a separation of powers among the legislative, executive, and judicial branches. Kiribati’s legal system draws from both traditional customary law and modern legal frameworks. The country’s unicameral Parliament, known as the Maneaba ni Maungatabu, consists of members elected by the citizens under a voting structure that gives representation by islands. As a result, the outer islands have less than half the population but 85 percent of Parliamentary seats. The President, elected by the Parliament, serves as both the head of state and government. The government is further supported by a number of ministries,3 most relevantly including the (i) Ministry of Finance and Economic Development (MFED); (ii) Ministry of Environment, Lands and Agriculture Development (MELAD); (iii) Ministry of Commerce, Industry and Cooperatives (MCIC); (iv) Ministry of Information, Communications and Transport (MICT); (v) Ministry of Women, Youth, Sports and Social Affairs (MWYSSA), (vi) Ministry of Line and Phoenix Islands Development (MLPID); and (vii) the Ministry of Internal Affairs (MIA) among others. Fiscal deficits and climate adaptation have been some of the most pressing challenges for the government in recent years. 2 However, during this time, growth of GDP per capita has often been negative. 3 https://www.president.gov.ki/government-of-kiribati/ministries.html 16 21. With most of the atolls rising less than 3 meters above sea level, Kiribati faces severe and imminent threats from climate change. Rising sea levels, more intense and frequent cyclones, and changing weather patterns pose significant challenges to the country’s existence. Its highest point is only a few meters above sea level, making it particularly vulnerable to rising ocean waters. Saltwater intrusion into freshwater resources, increased coastal erosion, and the potential displacement of communities are among the pressing concerns. Changes in precipitation patterns also affect agriculture, with altered rainfall impacting food security and freshwater availability, especially considering the recent La Niña-induced drought (OCHA, 2022). 22. The government of Kiribati has recognized the urgency of addressing climate change impacts and has formulated adaptation strategies to safeguard the nation and its people. One key aspect of their approach involves sustainable water management strategies to counter saltwater intrusion and ensure a secure supply of freshwater for the population (UNICEF, 2023). Additionally, the government is focusing on enhancing coastal resilience through infrastructure projects— such as the construction of sea walls and protective barriers—to mitigate the effects of rising sea levels and storm surges. 23. However, given the scale and global nature of climate change, the Government of Kiribati is also making contingency plans for evacuating to higher-lying islands. Discussions around climate-induced migration involve considerations for planned relocation to either Kiritimati or a 20 km2 tract of land that the previous government procured in Fiji in 2014 (Caramel, 2014). The current government’s policy is to proceed with developing the first option, which involves massive investments from multilaterals and donors in the development of Kiritimati. Planning for public investments in the island is ongoing and is likely to be expensive.4 As such it will be crucial to reevaluate the fiscal position to prioritize efficiency, growth, and social protection. 4 https://projects.worldbank.org/en/projects-operations/project-detail/P181387 17 Section 2 2. Kiribati needs to reduce the copra subsidy to lower its fiscal burden and reduce distortions to the economy 24. This section considers the fiscal implications of Kiribati’s copra subsidy, which will be relevant for MFED. The challenge addressed in this section is the heavy cost of Kiribati’s coconut subsidy, which motivates the need for change and is documented in subsection 2.1. Subsection 2.2 argues that it is possible to improve Kiribati’s fiscal position by reducing government subsidies for copra, but it must be replaced by alternative sources of cash on the outer islands. 2.1 The copra subsidy in Kiribati is expensive and distortionary 25. Kiribati’s copra subsidy is popular, but it has created a heavy fiscal burden and a host of market distortions that stifle innovation in the agricultural sector. The government of Kiribati has a long-held policy of purchasing dried copra on outer island weigh stations at a fixed price. The price has been raised repeatedly over the last decade and is now over 8 times the farmgate price in other countries. The subsidy exists for a number of reasons. It provides social protection for people living on the outer islands. It also provides an incentive for people to stay on the outer islands, where the subsidy is paid, rather than migrate to the overcrowded capital on South Tarawa, where it is not. Maintaining populations on outer islands is also important to Kiribati’s claim to a large EEZ. The subsidy is popular because it supports a national industry, redistributes fishing rents, and supplements social protection. However, it has created a heavy fiscal burden and contributes to a fiscal deficit that has exceeded 10% of GDP in recent years. The subsidy also distorts the market, stifling efficiency and innovation in the coconut industry by pricing-out other coconut-based products. 2.1.1 The government heavily subsidizes copra production 26. Copra is a dried coconut product that can be processed into CNO for export. First, the meat of the coconut is collected, sorted, and crushed into smaller pieces. The crushed meat is then dried, either by sun or mechanically, to reduce its moisture content. Once dried, the copra is pressed to extract CNO, which itself is an intermediate product that is sold to global commodity purchasers. These global commodity purchasers import the CNO for further processing into other shelf-stable consumer goods like refined, bleached, and deodorized (RBD) coconut oil5 or industrial products. Copra-based value chains are relatively simple to operate because they do not require sophisticated processing capabilities. 27. Since the mid-1990s, the government has subsidized copra farming to provide social protection for those in the coconut industry and encourage people to live on outer islands. The subsidy provides a source of cash income for households with limited employment options. As a subsidy, it avoids the social stigma associated with handouts. It helps maintain the population on the outer islands, is popular for its economic and social benefits, and redistributes income from fishing license fees, like Alaska’s oil dividend. Although it helps reduce poverty, the subsidy’s targeting could be improved. 19 28. The system of state intervention in the coconut sector is two tiered, one involving a direct production subsidy to farmers, and another involving the operation of SOEs, especially KCDL. Under the direct subsidy scheme the government acts as the sole purchaser of copra from farmers, which eliminates alternative markets for it (Figure 2). Farmers harvest mature coconuts and sun-dry them into copra. At this point, farmers bring them to warehouses managed by the Island Councils, where the product is weighed, and the farmers are paid AUD 4/kg (approximately USD 2.67), a price set by the government rather than through any market-based mechanism. The Island Councils then store the product until the government organizes shipping to KCDL facilities in Tarawa. KCDL receives the inventory without having to compensate the government for the inputs. KCDL then refines the dried copra into crude coconut oil (CNO) for export, and produces limited quantities of copra meal for sale as pig feed. Ultimately, this subsidy scheme effectively prevents other purchasers of coconut products from entering the market5, and leaves KCDL as the country’s only commercial offtaker. FIGURE 2. Government of Kiribati Copra Subsidy Scheme Government of Kiribati GoK funds Island Markets ExportMarkets Export Councils Coconuts grown on outer islands • Crude coconut oil Island Councils GoK funds (95% of total) KCDL • Other (virgin coconut oil, soap body oil) Island Councils pay weigh stations Kiribati Coconut Dried into copra Weigh Station Markets LocalMarkets Local Development Ltd (KCDL) and stored locally A$4/kg Collects copra (w/out • Crude coconut oil payment), processes (5% of total) and exports. • Copra meal (pig feed) Everyone in this supply chain receives a guaranteed price. No e ciency incentive. Goods Funds Source: (Webb, 2020) 5 There are also small-scale local plants for producing Virgin Coconut Oil (VCO) at Tabiteuea and Butaritari, and there are plans to establish more plants at Teraina and Tabuaeran. This provides an alternative market for the wet coconuts (not copra) that are refined into VCO. 20 29. Kiribati pays an exorbitant price for copra, which has grown dramatically in recent years. The current government in Kiribati made the copra subsidy a core election commitment in both 2016 and 2020. As a result, it increased the price paid to copra farmers to AUD 2/kg in 2016, and again to AUD 4/kg in 2022. The subsidy is now approximately 8 times the farmgate market price in the Philippines, which fluctuates with global demand. It is also double the market price of crude coconut oil, a derivative of copra, which KCDL exports. This makes it impossible for the copra industry to be profitable when input costs are taken into account. However, under the existing arrangements KCDL does not account for the input costs of raw copra, which is granted to it by the government. 30. In rough numbers, the copra subsidy purchases coconuts at AUD 0.65-0.8 each, and sells them as coconut oil at AUD 0.2 each. This assumes that it takes 5-6 coconuts to produce a kilogram of dried copra, which the government buys for $4. This also assumes that it takes around 8000 coconuts to produce 1 metric tonne of coconut oil, which sells for USD1100. FIGURE 3. Benchmarking the Producer Price of Copra (AUD per kg) 5 4 3 AUD/kg 2 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Coconut Oil [1] Philippines Copra [2] Gok Copra Subsidy [3] Source: [1] (The World Bank, 2024); [2] (Philippine Coconut Authority, 2024); [3] (Webb, 2020). 2.1.2 The copra subsidy creates a heavy fiscal burden 31. Fiscal expenditures on the subsidy are now a heavy burden on the government’s budget. These direct subsidies cost the government approximately 12 percent of GDP in 2022 despite a severe drought that limited output, as the price doubled to AUD 4/kg (Figure 4). This is expected to increase in future years as 2022’s drought conditions return to normal. The subsidy therefore accounts for a large (and increasing) proportion of the fiscal deficit, which was 18 percent of GDP in 2022. The scale of the inefficiencies is further emphasized by the difference between costs and revenues of the industry; whereas the government provides nearly AUD  16 million in copra subsidies, the country only makes about AUD 4 million in export earnings from its CNO products (Figure 5). Given that the government also covers the product shipping costs from the outer islands to Tarawa, this underestimates the fiscal costs to keep the industry afloat. Most importantly, the implicit opportunity costs are likely to further slow broader economic growth in Kiribati. 21 45 14% FIGURE 4. Copra subsidy spending, actual vs budgeted, AUD million and % GDP 40 12% million A$ million 45 14% 35 10% 40 30 % GDP 12% spending. 35 8% 25 %spending, 10% budgetedA$ 30 GDP spending. 20 6% 8% Actual 25 Actual spending, 15 Actual & Actual & budgeted 4% 20 6% 10 15 2% 5 4% 10 0 0% 07 9 1 3 5 7 9 1 3 2% 5 20 200 201 201 201 201 201 202 202 Budgeted (previous year) Budgeted Actual, A$m Actual, % GDP 0 0% 7 9 1 3 5 7 9 1 3 200 200 201 201 201 201 201 202 202 Budgeted (previous year) Budgeted Actual, A$m Actual, % GDP FIGURE 5. Cost of Copra Subsidy vs. Export Earnings from Copra/CNO (2021) 18 16 18 14 16 12 14 AUD, millions 10 12 8 AUD, millions 10 6 8 4 6 2 4 0 2 Cost of copra subsidy Export earnings from copra/CNO 0 Cost of copra subsidy Export earnings from copra/CNO 22 32. The combination of high recurrent spending on the copra subsidy and volatile income from fishing license revenues means that Kiribati’s fiscal position requires consolidation. In 2022, Kiribati’s overall fiscal deficit (including grants but excluding the RERF) was 18 percent of GDP, down from a surplus of 4 percent in 2020. The latest joint World Bank-IMF Debt Sustainability Analysis (DSA) (March 2024) expects that, without consolidation, Kiribati’s deficit is expected to stabilize at around 15 percent of GDP in the medium term. This is likely to be financed by additional donor aid, or by depleting their substantial cash reserves, which were worth 60 percent of GDP in 2022 (7.3 months of spending). Kiribati’s Revenue Equalization Reserve Fund (RERF)—a large sovereign wealth fund, worth 380 percent of GDP in 2022—could be used to offset this volatility. However, the current withdrawal rule allows any nominal returns exceeding 2% per annum to be spent, which exacerbates the volatility from fishing revenues. In the medium term, Kiribati’s deficits may jeopardize its fiscal responsibility ratio, of holding cash reserves worth at least 3 months of government spending. As a result, the DSA recommends that “Fiscal consolidation will be necessary to reduce fiscal risks by scaling back recurrent spending and mobilizing higher revenue.” 2.1.3 Copra subsidies also create market distortions with a variety of negative effects 33. Aside from the fiscal burden placed on government coffers, copra subsidies also create market distortions that result in productive, dynamic, and allocative inefficiencies to varying degrees. There is evidence that doubling the subsidy led to spikes in production (Figure 4), as copra was harvested early. Early harvesting reduces the quality of the copra and the health of the trees, leading to longer term inefficiencies. Prior to the 2016 doubling of the copra subsidy, production tended to exceed expectations. So, actual spending on the subsidy exceeded the budget. Since then, production and actual spending has consistently been below expectations. More broadly, guaranteed pricing programs like this create productive inefficiencies, negate incentives to improve quality, and prevent any market signals from reaching producers. With a limited stock of coconuts in the short run, any coconut that is dried into copra prohibits its entry into wet segments. In this way, innovation in Kiribati’s coconut industry is stunted by the artificially high unit price of copra and the rigidity in its subsidy systems. The subsidy also prevents entrepreneurs entering other agricultural markets, which leads to a shortage of fresh fruit and vegetables for the local market (The World Bank, 2024b). This contributes to widespread food insecurity, poor nutrition, and suboptimal growth for Kiribati’s entire economy. 2.2 Reducing the fiscal burden and distortions requires cutting the copra subsidy and providing alternative social protection programs 34. The Government of Kiribati can address the fiscal and market challenges posed by its copra subsidy by reducing the subsidy and introducing alternative social protection measures. Before Kiribati can diversify its agriculture sector and move into higher value-added goods it needs to cut the copra subsidy and establish a market-driven price that reflects quality and global conditions. This would alter the incentives of suppliers and middlemen, and allow other markets to develop. However, many households on the outer islands currently rely on cash income from the subsidy. So, it will be necessary to provide alternative social protection programs at the same time the subsidy is reduced. The pace of implementing these changes will involve balancing between market efficiency and providing stability for farmers. 2.2.1 The price for copra should be reduced to reflect global market conditions 35. The copra subsidy needs to be cut so that the farmgate price better reflects quality and global market conditions. The primary reforms that are needed to make the copra industry more efficient and profitable are to (i) reduce the overall price paid for copra, (ii) vary the average price based on global market conditions, and (iii) establish a local price discovery mechanism. Judiciously introduced “mini mills” can create competition and help set the local price. 23 36. In order for resources to be efficiently reallocated to their most productive means, it will first and foremost be important to instill better pricing discipline on producers. As a first measure, the government will have to reduce of the copra subsidy to bring it more in line with the global market price. Currently, the best mechanism for the government to establish a market-based price for copra is to benchmark it to international prices. Thus, ultimately, the producer price for copra at the island weigh stations should approach the benchmarks of other regional countries, like the Philippines, Fiji, and Samoa. This will provide an incentive for the industry to become more efficient. 37. However, there is an important tradeoff between providing an efficient market signal and offering stability to farmers, which can be managed by adjusting the price on a schedule. This can be achieved by reducing the unit price of copra through some organized schedule (Figure 6). A stepwise or gradual drop approach to reducing the subsidy would allow more time for producers to adjust, while a drastic reduction would more quickly achieve the desired effects6. However some islands depend more on the subsidy than others. Therefore, the government could adjust the price differently on each island, using the islands that rely less on the subsidy as pilots. FIGURE 6. Strategies and Options to Reduce Subsidy Pricing Undi erentiated Subsidy Subnationally Di erentiated Subsidy Type 1 Islands (Islands >100km from Hub) Stepwise Reduction of National Subsidy Type 2 Islands (Islands <100km from Hub) Immediate / Drastic Reduction of National Subsidy Type 3 Islands (Tarawa/Kiritimati) Subsidy Price ($) Subsidy Price ($) Time Period Time Period 38. Most importantly, the long-term pricing mechanism should be designed to vary with local and global market conditions. A possible approach would be to set a different price on a yearly basis, driven by historical data and expectations of future market developments. Figure 3 (above) shows that the global market price for copra has varied by more than 3× over the past 10 years, from AUD 0.30 to AUD 1.03 per kilogram. Offering copra farmers a price that varies with the international market will provide a useful signal as to how much effort should be expended on copra farming versus other activities. Nonetheless, it will be difficult to recreate a true local market-based price discovery mechanism. 39. Whereas global benchmarks from may serve as a guide for what subsidy price should be targeted, they are likely not the true farmgate value for similar products in Kiribati. Benchmarking global producers could be a first step, but these prices will remain disconnected from the factor inputs of Kiribati in particular. As a low-income country, with roughly half the GDP per capita of Fiji (USD 4,646), Samoa (USD 3,857), and the Philippines (USD 3,460), the wage bills for similar farmgate products are likely to be less, even if overall the cost structures will be very different (due to the extraordinary transport cost and high overheads in Kiribati). 6 A stepwise approach may leave room for political opponents of reform to scuttle efforts at further cuts or reverse progress. 24 40 The biggest challenge for achieving a price discovery mechanism for copra is the fact that no true market for coconuts or copra exists in Kiribati. Aside from KCDL, there are very few (if any) other buyers or industries that utilize coconut inputs in Kiribati. Yet, true markets—with floating prices that respond to supply and demand—cannot be easily established in circumstances where there is a single buyer and the price of that buyer is determined by the government’s minimum support price (MSP). Such MSPs should be set no higher than the market price, but the market price is unknown.7 41. In order to create a true price discovery mechanism for copra locally, it will be necessary to enable other buyers of copra or related products to enter the market. New buyers for copra would reduce the market share of KCDL and so allow the government to benchmark a true local market price for it. One option is to attract private (and likely foreign) investors through broad- based policy reforms that encourage investment. Another is for the government to finance technologies such as “mini mills” (Box 1), and lease access to local operators. These provide small-scale production of coconut oil for local use and consumption. Mini mills are not likely to create an internationally competitive industry, or even to capture significant local market share for copra from KCDL. However, they may divert some small share of production to alternative buyers and (at least notionally) make KCDL compete for raw materials. In so doing, they would create a price discovery mechanism that can inform the government’s MSP thresholds. Successively lower thresholds for the MSP can be wound down over time until mini mills are able to capture about 5–10  percent of the market share for copra. The process can also be gradual so as to monitor the elasticity of supply, which is assumed to be low and yield-driven. BOX 1. The Potential of "Mini Mills" 42 Case studies from other Pacific Island states promote the use of small-scale copra milling operations (“mini mills”). In recent years, an Indian company called Tinytech has used new (albeit basic) technology to create its mill products. At USD 8,500 (plus shipping and installation), the 2.5 tonne-per-day plant is a relatively low investment, is somewhat movable, and can be used to produce CNO or VCO for various uses, including for food or biofuels. Two operators can produce 1,300 liters of coconut oil daily. This mill has been promoted through government livelihoods programs in India and in certain Pacific contexts, too. For instance, the Guadalcanal-based Chottu Coconut Products has utilized this technology in the Solomon Islands (McGregor & Pelomo, The Solomon Islands Quality Copra Oil Value Chain for the Domestic Market: The Chottu Coconut Products Case Study, 2018; ADB, 2016). In Vanuatu, small scale producers use similar mills to refine coconut oil that is used to supplement diesel in vehicles and generators. Recent research finds that the oil is a “good and inexpensive substitute fuel… that can help the country meet the UN’s sustainable development goals” (Sisi, 2020). Although the unit economics of such models need further study, there may be value in limited public investments to lessen market concentration and enable price discovery on Kiribati’s outer islands. 7 One might suppose that readily available imported cooking oil would be a good proxy for the domestic market pricing of the final product of copra. However, the farmgate price for copra (where the subsidy is paid) will be less than the final product price, leaving uncertainty in the true price for copra inputs. 25 43 In the medium term, distributed production could also address other inefficiencies in the copra supply chain. The use of “mini mills” would reduce spoilage from copra being held for too long at weigh stations until it is collected by infrequent and unreliable shipping connections. The processed coconut oil can last for years, compared to a few months for dried copra. Coconut oil also has a relatively higher value-to-volume ratio, and so would reduce shipping costs and may permit shipping on smaller boats. 44 Distributing copra processing to the outer islands may also help reduce diesel imports. The processed coconut oil could potentially be used locally—particularly to supplement expensive imported diesel in generators. If such technology can be used to complement production of biofuels on outer islands, it may reduce the substantial cost (and subsidies) for imported diesel that powers outer island generators. CNO of an adequate grade can be used as a complement to diesel fuel in generators, if blended with traditional fuels at a ratio not to exceed 20 percent (ADB, 2016). Kiribati currently spends large amounts of government budget as subsidies to maintain low fuel costs (Pacific Center for Renewable Energy and Energy Efficiency, 2017). However, ultimately the minimum efficient scale of operation needed for such mills to operate commercially is unknown and dependent on a multitude of factors (Schumacher & Gustafson, 2024). 45 However, a viable business model for mini mills will only be possible after the government has reduced its price support for copra in line with or below international benchmarks. Before making further investments in processing capacity, it is advised that the copra price be lowered to restore positive gross margins on each unit of coconut oil. A back of the envelope calculation suggests that if diesel costs USD 2 per liter, then copra would need to be purchased at USD 0.5/kg or below to make this alternative market a competitive option. Otherwise, independent firms using such models will still not be able to compete for raw materials. Thus, only after the copra price is reduced should KCDL consider using “mini mills” to distribute processing capacity to the outer islands. 46 In addition, the way technologies such as “mini mills” are introduced to Kiribati needs to be carefully considered. Often governments will simply grant such machinery or capital to private firms. This typically leads to further distortions, elite capture, or even resale. Alternatively, a government agency like MCIC could purchase the machinery and lease it competitively to the highest local bidder (disqualifying KCDL to prevent further concentration). Leasing the machinery reduces the risk to the entrepreneur by minimizing their capital investment, while enabling them to test a new business model. The asset would be maintained by the leasee but owned by the government, who can sell it once the original lease expires. Any attempt to do this should initially be limited to a small number of pilot programs, that are carefully evaluated before substantial investments are made. 26 2.2.2 Any change to the price paid for copra should be offset by increasing social protection payments to the outer islands 47. Reducing the price paid for copra without replacing it with another social safety net would significantly increase monetary poverty in Kiribati. The copra subsidy was established in part to redistribute wealth within the economy. It has become the main source of cash income on the outer islands. Alongside the Support Fund for the Unemployed, it is the largest social protection scheme in the country. While the subsidy does target the poor, it does so inefficiently and at high cost (The World Bank, 2024a). The subsidy therefore needs to be rethought. 48. Any change to the price paid for copra should be offset by an increase in social protection payments targeted to poor people, particularly on outer islands. Alternative social protection payments can be funded by fiscal savings made from cutting the subsidy. This would also address some of the political economy constraints around reforming the subsidy, as the outer islands have half the nation’s population but 85% of Parliamentary seats. 49. Alternative social protection systems, such as a direct cash transfer to individuals, are relatively efficient at reducing poverty but require some investment to effectively target the poor. In general, subsidizing agricultural inputs or outputs is an expensive form of social protection that significantly distorts the economy. Consumption subsidies are more efficient than input or output subsidies, but less fiscally efficient than cash transfers. Consumption subsidies for fresh produce—consumables that are not often subject to import pressures in Kiribati—may also help stimulate local production of agricultural goods, while improving nutrition.8 Targeted cash transfers to the poor are usually the most efficient option, but require costly registration and payment infrastructure to ensure the payments reach the right people. 50. Major changes to the social protection system should proceed gradually through pilot programs, due to the high stakes at play. The timeline for the rollout of the social protection schemes as a short-term alternative to lowering the copra subsidy deserves careful consideration. The copra subsidy does not necessarily need to be the same on every island, and could first be lowered on less-remote islands with more opportunities for other crops. Slowly replacing the subsidy with cash transfers would allow time to develop the registration and verification processes needed to ensure the payments are properly targeted. Kiribati should consider whether the shift should be conditional for people so that they remain engaged in the coconut value chain. It might also be necessary to attach conditions to the social protection schemes to mitigate the adverse impact of disengaged inhabitants. The copra subsidy could also be re- directed to meaningful livelihoods and conservation efforts such as vegetable farming, seaweed, coral replanting, etc. More details are available in the companion report to this study that looks at the copra subsidy as a form of social protection (The World Bank, 2024a). 8 Such demand creation subsidies have been used as a lighter form of industrial policy in many countries. Evaluations of similar food consumption subsidies—like SNAP in the US—have shown positive but limited multiplier effects for GDP, jobs, and incomes. However, it is likely that such multiplier benefits will be higher in Kiribati because the economy is naturally more closed than larger countries, which tend to import many of their foodstuffs (Canning & Stacy, 2019). 9 It is still likely that Kiribati has a strong underlying comparative advantage in growing coconuts, given geographical features and natural assets. Countries often make use of their most abundant natural assets to drive economic activity. 27 2.2.3 Fixing the market distortion is necessary but not sufficient to induce growth 51. Although the copra subsidy undoubtedly prevents resources being allocated efficiently, the allocative distortion in Kiribati may be less than elsewhere due to other binding constraints. Similar subsidies heavily distort the markets for land, labour and capital in other countries. However, in Kiribati the distortion is probably smaller because there are other constraints. Some coconut production is therefore likely even in the absence of the subsidy.9 Detailed labour force data from the 2019/20 HIES shows that, even with a $2/kg copra subsidy, the outer islands were not at full employment of labor. At the time the rural labour force participation rate was only 27% percent, and the unemployment rate was 7.5 percent (Kiribati National Statistics Office, 2022).10 Similarly, KCDL has not invested significant capital in decades, nor have landowners or MELAD invested in planting new coconut palms. It is therefore unlikely that significant labour, capital or land resources have been diverted in recent years, though the extent is difficult to quantify. In the meantime, Kiribati’s agriculture sector remains unproductive and undiversified. Improving agricultural productivity will require addressing these other constraints (The World Bank, 2024b). 10 Nor is the income at the point where labor supply should be backward bending; GDP per capita was just USD 1,702 in 2022. 28 Section 3 3. Challenges in primary production can be met by reforms to land administration and valuation 52. Section 3 identifies land rights as a binding constraint on primary production and explores how they can be relaxed to improve yields, which is relevant for MELAD. It begins, in subsection 3.1, by describing the challenge that coconut farming faces in Kiribati as a largely non- commercial, unproductive economic activity. Subsection 3.2 diagnoses the challenge and argues that land rights contribute to low productivity in the copra sector. Subsection 3.3 suggests as a response that Kiribati needs to adapt land administration and valuation to attract investors to the sector. 3.1 Agriculture is an important economic activity but is largely non-commercial 53. Agriculture is a traditionally significant economic activity that employs many of the country’s poorest people. About 16.9 percent of the population is employed in agriculture, forestry and fishery activities (Pacific Community, 2022). Government statistics show a relatively undiversified pattern of production with most output concentrated in just ten crops (Figure 7, Panel a). At a national level, 12 percent of households produce vegetables (mainly coconut, pumpkin, spinach and cabbage), and 8 percent produce root crops (mainly taro and sweet potato). A companion paper investigates possibilities for diversifying Kiribati’s agriculture sector and commercializing other crops (The World Bank, 2024b). 54. Patterns of crop production reflect both agronomic attributes of the soil and the post-harvest capabilities of the value chain actors. Although each of these crops has different agronomic features, they are similar in that each of them can grow in nutrient-poor sandy soils, and each of them has a relatively low respiration rate, a natural characteristic of crops which effects the speed of perishability (UC Davis, n.d.; Lapres, 2018).11 In agricultural economies without sufficient cold storage, crops with low respiration rates have tended to predominate. Coconuts in particular, have a low respiration rate, which may be why households in Kiribati have historically tended towards their cultivation. 55. Aside from coconuts, most of the fruit and vegetable production in Kiribati is not commercial. Figure 7 shows that over 70% of households in the 2020 census reported that their crops were grown only for home consumption. By comparison, coconuts are farmed by approximately 30–40 percent of households nationally – including over 85 percent in some of the Gilbert Islands – but evidence suggests they are largely for commercial use (Government of Kiribati, 2022; Government of Kiribati, 2020). 11 The perishability of horticultural products is a function of the biological characteristics of the individual crop, as well as the manner in which the crop is controlled after harvest; including temperature and atmosphere control. Each product has a different temperature range that is suitable for their storage, transport, and ripening. Beyond temperature, the atmospheric conditions surrounding the crops also affect the respiration rate and so many cold chain solutions now regulate the levels of oxygen, nitrogen, or carbon that fruits and vegetables are exposed to in order to halt respiration until just before it is brought to market. However, each individual crop—and indeed individual species or breed of the same crop—has different functions for these variables. As such, different crops necessitate different levels of care at harvest in order to regulate their rate of respiration and therefore perishability. 29 FIGURE 7. Households Farming by Crop Type and Purpose a) Number of Households Farming by Crop Type 18,000 2010 2015 2020 16,000 Number of Households 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - it .. . r nt er es ru in an a p. t.. e ag sav a be at o on paw es aro ach nu s an s g re f pk ee la el lli on th tt ad n am b s m m p w hi T pi n da Be g K O u e Pu m Ba (S w ab Ca c u o g g r m a C n on Br Sw C u T E at e P S Pa n i( al a C Ka oc ab a m W C B Ku Source: Kiribati Census. b) Percent of Households that Grow Crops by Purpose Only for home consumption 71 Mainly home consumption, but some sale 21 Mainly sale, but some home consumption 5 Only for sale 1 Customary practices 2 Other purposes 1 0 10 20 30 40 50 60 70 80 Percent of Households that Grow Crops by Purpose Source: (Government of Kiribati, 2022) 56. With limited alternative means of employment, Kiribati has historically relied on coconut farming to sustain commercial activity on its outer islands, although yields have fallen since 2016. Increasing the copra subsidy supported rising production up until about 2016 (Figure 8). This happened despite shrinking harvest areas, as people migrated from the outer islands to South Tarawa and those remaining focused on the most productive land. At its height in 2016, Kiribati harvested approximately 240,000 tonnes of coconut (by weight in shell) and 17,000 tonnes of copra (Figure 8, Panel a). Since the copra subsidy was doubled to $2/kg in 2016 the area harvested increased while volumes and yields fell. This is consistent with over-harvesting in response to the government subsidy. In terms of geographic distribution of production, copra production volumes remain especially high on some of the most isolated islands, like Teraina (Figure 9). 30 57. The Ministry of Environment, Lands, and Agricultural Development is responsible for replanting. Saplings are provided from MELAD-run nurseries on each island. However, they do not have sufficient capacity to replace rapidly aging palms, which is worsened by overproduction. Government-run nurseries may also crowd out private operators, and lack the same incentives to meet demand. Typically, replanting is considered a private good (and thus the responsibility of individual farmers), but in Kiribati coconut trees are only exploited as a common good resource. Private investment in plantations (as in other countries) is conspicuously absent. FIGURE 8. Aggregate Coconut Production in Kiribati a ) Production of coconuts, copra, and coconut oil b ) Area harvested and yield a ) Production of coconuts, copra, and coconut oil b ) Area harvested and yield 250,000 20,000 120,000 250,000 20,000 120,000 18,000 18,000 100,000 200,000 16,000 100,000 200,000 16,000 OilOil 14,000 80,000 & Coconut 14,000 80,000 150,000 12,000 Coconuts & Coconut 150,000 12,000 Coconuts 10,000 60,000 10,000 60,000 100,000 8,000 Copra 100,000 8,000 40,000 Copra 6,000 40,000 6,000 50,000 4,000 20,000 50,000 4,000 2,000 20,000 2,000 - 0 0 2000 2008 2004 2006 2002 2020 0 2000 2008 2004 2006 2010 2018 2002 2020 2014 2016 2012 - 0 2022 2010 2018 2014 2016 2012 2000 2008 2004 2006 2002 2020 2000 2008 2004 2006 2010 2018 2002 2020 2014 2016 2012 2022 2010 2018 2014 2016 2012 Coconuts, in shell (Tonnes) Yield (100 g/ha) Coconuts, Copra in shell (Tonnes) (Tonnes) (100 g/ha)(ha) Yield harvested Area Copra (Tonnes) Coconut oil (Tonnes) Area harvested (ha) Coconut oil (Tonnes) Source: FAOSTAT & KCDL FIGURE 9. Copra Production by Island 900 0% 900 800 0% -10% 800 700 -10% -20% 700 600 -20% -30% % Change Tonnes 600 500 -30% -40% % Change Tonnes 500 400 -40% -50% 400 300 -50% -60% 300 200 -60% -70% 200 100 -70% -80% 100 0 -80% -90% 0 -90% Island) (Makin) Abaiang Kuria Makin Maiana (N/S) Marakei Aranuka Abemama Nonouti (N/S) Onotoa Tamana Beru Nikunau Arorae Island) Island Island) Island Island Island) Island Island) Island) Island) Island) Island Island Island Island Island) Island) (Makin) Abaiang Kuria Makin Maiana (N/S) Marakei Aranuka Abemama Nonouti (N/S) Onotoa Tamana Beru Nikunau Arorae Island) Island Island) Island Island Island) Island Island) Island) Island) Island) Island Island Island Island Island) Tarawa Tabiteuea McKean Canton Birnie Starbuck Malden Flint Enderbury Vostok (Sydney (Fanning (Phoenix (Caroline (Washington (Christmas (Ocean (Hull (Gardner Butaritari Tarawa Tabiteuea McKean Canton Birnie Starbuck Malden Flint Enderbury Vostok (Sydney (Fanning (Phoenix (Caroline (Washington (Christmas (Ocean (Hull (Gardner Butaritari Orona Orona *Banaba Island Tabuaeran Island Nikumaroro Island *Banaba Island Kiritimati Tabuaeran Island Nikumaroro Island Teraina Kiritimati Manra Rawaki Teraina Millenium Manra Rawaki Millenium Gilbert Islands & Others* Phoenix Islands Line Islands Gilbert Islands & Others* Phoenix Islands Line Islands Copra Production (2022) Copra Shipment (2022) % Change in Copra Production (2016-2022) Copra Production (2022) Copra Shipment (2022) % Change in Copra Production (2016-2022) Source: KCDL. 31 3.2 The ownership of productive agricultural assets is inefficient 58. Land rights in Kiribati may contribute to low productivity in the copra sector. Functional land markets are needed to stimulate agricultural investment for multiple reasons. They efficiently allow land to go to its most productive use, including coconut palms, by signaling the value of the land, reducing transaction costs, and allowing it to be accessed by a wide range of users. They are also a step towards functioning credit markets, where land can be used as collateral for investment loans. However, functional land markets are not present across much of the Pacific as they are difficult to reconcile with customary land arrangements. Almost 60 percent of land in Kiribati—including all land in Kiritimati and the other Line and Phoenix islands—is owned by the government. About 40 percent of all land in the country is owned under collective customary land title by traditional communities governed by localized legal frameworks or customs (AusAID, 2008a; AusAID, 2008b; Government of Kiribati, 1977; Farran, 2005). Freehold land—which is privately owned and offers investors the stability of ownership over the land—comprises less than 1 percent of land in the country, and ownership is reserved for citizens only.12 59. Registering a property is extremely slow and onerous in Kiribati. The country’s land administration is based on a title registration system, which establishes ownership of real property through an official certificate. The historical Doing Business report assessed that it takes over 500 days to register a property, compared to a benchmark of 70 days for the entire East Asia and Pacific region and just 23 days in OECD economies. In Kiribati, the Land Management Division of MELAD is responsible for managing institutional processes. These processes are mostly paper-based. The cadaster is managed by MELAD’s Survey and Mapping Technical Department (although there is not comprehensive coverage of all islands). Property registration is administered by the Land Planning Department. When changes are recorded to leases of government or customary land the applicant must lodge an application with MELAD’s Land Planning Department. From submission, the Sublease Allocation Advisory Committee (SAAC) will have to decide on the application, which is then submitted for the Cabinet’s final approval and returned to the Land Management Division for final actions. An extended period of review is then needed for the Magistrate Court to endorse the transfer of land (The World Bank, 2020). 60. The process for registering property is likely to deter most foreign investors. The slow performance is mostly rooted in legal processes laid forth in the Native Lands Ordinance (Government of Kiribati, 1977). The Ordinance reflects the customary legal framework of each island. However, it does not provide for a robust title registration system that clearly assigns property rights and easily allows owners to use land as collateral for loans. Customary land can only be leased, and foreigners cannot own land. Boundary disputes are common. As a result there is only a very limited mortgage market in Kiribati that is restricted to South Tarawa. 61. Government-owned land on Kiritimati is particularly unproductive under current arrangements. Figure 10 shows copra productivity by island, which can be taken as a proxy – however imperfect – for the efficiency of landholder systems across Kiribati more generally13. Land on Teraina, Tabuuaeran, and the Gilbert islands (marked in orange) is mostly under customary title. Kiritimati is wholly government-owned, and an outlier in terms of its limited productivity. In general, government land offers potential but is largely underutilized due to inadequate zoning and leasing arrangements. With a population of just over 7,000 people, but with 47 percent of the country’s land area, Kiritimati remains one of the most underutilized assets in the country. Most 12 Foreigners can lease land in Kiribati for up to 99 years, following a process laid out in local legislation (The World Bank, 2020). 13 Copra productivity is an imperfect proxy for the efficiency of landholder systems in Kiribati. Yet in the absence of other data or in-country fieldwork, this can be used to inform some conclusions on the relative efficiency of landholder systems. 32 of the land on the island is not cultivated or leased to private interests for any purpose. The government is in the process of developing a sustainable development plan for Kiritimati and investing heavily in the island’s infrastructure. As Kiritimati’s land is all under state ownership, the easiest first step for reforming land administration is likely to be on this island.  roductivity of Copra by Island as a Proxy for Efficiency of Landholder Governance FIGURE 10. P 900 800 700 y = 8.2775x + 217.95 Copra Production (2022) 600 R² = 0.2113 Trendline without Kiritimati 500 400 300 y = 0.0244x + 367.03 Kiritimati R² = 0.0002 200 Trendline with Kiritimati 100 0 0 50 100 150 200 250 300 350 400 450 Land area (km²) 62. Customary land, which accounts for a vast majority of the country’s current coconut production, is more productive than government land, but leasing remains difficult. Customary title in Kiribati varies by island and is recognized in legislation (Government of Kiribati, 1977). In some islands, land is owned by an absolute ruler. However, in most others, ownership is by extended family groups with inheritance based on need, rather than being strictly patri- or matrilineal (Farran, 2005). The sale or transfer of customary land is prohibited outside of the customary landowning group, except to the state or community organizations. However, within a customary group, land rights can be exchanged. Leasing is possible to people outside the customary group, though it requires extensive court and ministerial approval to avoid landowners being exploited. In practice, very few leases of customary land are approved. Although the government has the power to forcibly acquire customary land, it is rarely used, and the government typically leases land from customary owners. 63. Customary lands are governed collectively and provide little incentive to invest. Customary land tends to be the most productive asset in the least developed countries (LDCs). Other assets tend to suffer from low levels of financial market intermediation, foreign direct investment (FDI), and human capital. However, the productivity of land in Kiribati remains low due to a host of governance and management issues, on top of agro-ecological constraints. Customary land is owned by a community where decisions over the use of the asset must be made with unanimous consent. In practice, decisions tend to be led by senior men in the community, who are regarded as the supervisors of the land. The community can be considered as an informal corporate entity but its governance requires a level of stakeholder agreement that is too high to reach in most situations. Ultimately, customary land is a common good, and so does not provide 33 a sufficient incentive to invest in capital due to the low appropriability of returns. As a result, plantation-style investment in Kiribati is not observed and productivity is lower than comparable privately held estates in more commercially oriented locations like Thailand (Figure 11). FIGURE 11. Agroecological Productivity by Different Forms of Land Holding Source: Google Maps 64. Disputes over leased customary lands tend to spend a long time in arbitration because all owners must agree to the leasehold transfer. Such land disputes are common in customary owned land. The nature of the land disputes is varied, but in general most fall into one of several main categories. These include: (i) registering land, (ii) claiming an interest in the land from an ancestor (ownership), or (iii) a boundary determination dispute. However, even when these proceedings have been finalized and a judgment given, the dispute may be reopened for a secondary judgment. This happens if (a) a party was not summoned to the original proceedings but was entitled to, (b) a party argues that there was no entitlement for another party to have the land registered in their name, or (c) the boundary outlined by the Magistrate was inconsistent with the original boundary (The World Bank, 2020).14 The ability to reopen settled disputes make customary land leases particularly challenging to establish. 65. These features of land governance are a binding constraint for businesses that need to lease land to invest in plantation-style farms. Negotiating with multiple stakeholders for long-term leases often creates substantial frictions for investors. Negotiating with communities to access or lease land goes through the government. In practice, this may require settlements above the market value of comparable privately owned land (Customary Land Solutions, n.d.). This can lead the investor to either be required pay a ‘customary land premium’ or consider another deal with fewer transactions and more predictable outcomes. This is evident through the lack of foreign investment in Kiribati’s land assets. 3.3 Kiribati needs to adapt land administration and improve valuation infrastructure to attract investors 66. The key to productivity is secure and enforceable tenure, whether by freehold or long-term lease. Although freehold land is rare, it typically offers secure title that can support investment. In other economies, this privately held freehold land is often the most productive, given that the asset owners have the incentive to invest. However, long-term leases can also be productive if the necessary leasehold structure and registration are provided. 14 Given the multitude of parties with a claim, and the absent systems for registration of those individuals, situations described in a and b above are common. 34 67. Facilitating investment through customary land arrangements is needed to increase agricultural productivity and ensure that customary landholders benefit from it. The friction created by negotiations over customary land will inevitably hamper Kiribati’s efforts to promote investment in profitable industries. To improve this the Government will need to reform and simplify the process for leasing land and investing in physical assets. Local communities may consider incorporating landholder groups as a form of corporation with inclusive representation. MCIC’s investment promotion agents can help to coordinate negotiations with customary stakeholders. In rare cases, the government may also need to consider investment incentives to resolve frictions with customary land. However, these issues with land governance are only one constraint. 68. Kiritimati island needs more effective land planning to facilitate investment and development. Land on Kiritimati is currently owned by the Government. To facilitate development, MELAD15 will need to create a zoning plan for the island to differentiate between residential, commercial, industrial, recreational, ecological and agricultural uses of various areas. Although such plans can be drawn up quickly, it will be more difficult to develop the means and methods of putting the land to productive use. To enable this, the government will need to improve leasing options for state-owned land, in consultation with private investors. Other reforms may also be needed to help facilitate the assignment of property rights. For example, private certifications for producers (e.g., the global Good Agricultural Practices standard) or water use (e.g., the Alliance for Water Stewardship standard) may require a community approach to managing land. 69. Land policies will have to account for the requirements of investors. For agricultural land this will include choosing the contiguous size of land plots, and the length of their leases. These decisions will affect the viability of different industries. For example, tall coconut palms (suitable for dry segments as discussed in section 5.2) can start producing fruit in 6–10 years but will not reach peak production until about 15–20 years after planting. Conversely, dwarf coconut palms (suitable for wet segments) have a faster lifecycle and can start producing fruit in just 3 years (Tetra Pak, n.d.; Jagdish, 2019). Farmers investing in longer-term tree crops will naturally take longer to realize a profit, and will therefore require longer leases.16 The government must also take measures to ensure that titles and leases can be easily transferred (to enable property flexible markets) and listed as collateral (to enable mortgage markets so farmers can invest in land). This is not just a matter of land administration and registration but also land valuation. In many countries, it is not the land but assets on the land (typically these assets are buildings, but trees are also an asset) that are put up for collateral because the absence of a land market makes valuations difficult. 15 https://www.melad.gov.ki/ 16 It is important to understand other financing requirements for crops with different terms on their yield. In this respect the cost structures for produce that take longer to fruit tend to be a bit higher than crops which require a shorter turnover. For example, tree crops can take up to 9 years to yield fruit, while tomato plants can yield within a single season. The term of such first yields can necessitate that farming operations have adequate (and sometimes specialized) access to long term financing for their operations. Examples from other crops, like asparagus, can show how a cost and return schedule for growing asparagus, a plant which takes three years before it yields significant quantities. Interest during this period should be built into cost structures, more so than crops that can yield fruit over a single season (Talley & Werling, 2016). 35 36 Section 4 4. Reducing inefficiencies of Kiribati’s SOEs would improve performance 70. Section 4 assesses the inefficiencies that are created by the SOEs in the coconut value chain and how they can be improved, which will be relevant for both the SOEs and their overseeing Ministries. Although reforming the copra subsidy will help improve the fiscal balance, it will not necessarily increase the efficiency of the current value chain. This section identifies the challenge that the public sector’s convoluted involvement in the copra industry is creating inefficiencies in the way KCDL operates. Subsection 4.1 describes the inefficiencies that constitute the challenge, and subsection 4.2 describes by way of response several means by which they could be addressed. 71. Overall, in this section, we emphasize the need for SOEs to be efficient. The private sector is often absent from the remote communities where coconuts are grown because it makes no business sense for them to be present. It is therefore understandable that the government needs to provide certain services as public goods. However, offering the price subsidy only addresses one end of the value chain. Addressing the efficiency of the whole value chain requires ensuring that the SOEs operations are viable. If these SOEs are the only mediums, then the government must ensure that their operations are viable through diversified coconut product options to demonstrate that they can be profitable as an added revenue to GDP. In this section, we address ensuring that the SOEs are efficient. The possibility of diversifying Kiribati’s coconut product options is discussed in section 5. 4.1 Kiribati’s copra value chain is inefficient 72. Fragmentation and heavy government involvement is creating inefficiencies throughout the copra value chain. The value chain is fragmented across a disparate and loosely related set of government agencies, which instills poor balance sheet discipline and accountability. This includes MELAD, who is responsible for planting; Island Councils, who run the weigh stations on each island; KNSL, which coordinates shipping; and KCDL, who is responsible for processing and export. As such, the government dominates the copra sector, with complicated lines of responsibility and few market incentives. 4.1.1 Weigh stations are prone to loss and spoilage 73. The weigh stations operate under heavy government involvement, with responsibilities spread across a range of Ministries, Island Councils and SOEs. Agents buy copra at Island Council-owned weigh stations on each outer island, using government funds provided directly from the Development Fund. The agents are appointed jointly by the Island Council and KCDL, but are paid by KCDL, and operate on behalf of the government. They are not responsible for the balance sheets and profit/loss of the weigh station, which creates a principal-agent problem. Moreover, because they purchase copra directly using government funds, there is no incentive to vary the price according to quality or reject low-quality copra. The agents hold the copra in trust at the weigh stations and then remove it from storage and transfer it to KNSL (for free) 37 when KNSL boats arrive for shipping. This means that weigh stations have no incentive to ensure the copra does not spoil during storage. Furthermore, the lack of a local balance sheet means that the weigh stations do not generate profits locally that could be used to upgrade storage facilities. 74. There are widespread reports of inadequate security and storage at weigh stations. For instance, there are many examples of purchased copra being stored in open-air maneabas. Often, the copra will spoil in these facilities due to weather exposure, rodent infestations, water incursion, and long delays between purchase and eventual collection by KNSL for shipping to Tarawa. Other reports from the islands note instances of previously purchased copra “growing legs and coming back again” to be re-purchased by the Island Councils for a second time. These reports are evidenced by an approximate 30 percent loss in inventory between the weigh station and the export market. 4.1.2 Shipping to Tarawa for processing is inefficient 75. Copra must be shipped to Tarawa before it is processed, but connections are typically infrequent and unreliable. Kiribati’s islands are spread over 3.5 million km2, with some closer to the international ports in Tarawa and others closer to the one in Kiritimati (Figure 12). Inbound and outbound logistics are infrequent and unreliable for many islands, because the routes are economically unviable. Some islands (e.g., Teraina) are serviced rarely, if at all, due to their remote geographies and dangerous conditions. FIGURE 12. Connectivity of Outer Islands Producing Copra to International Hubs Source: Google Earth 76. The Government supports intra-island shipping on economically unviable routes, but does so inefficiently. The state-owned logistics provider, KNSL, currently operates a near-monopoly on domestic shipping. They service all outer islands, but are inefficient and do not run to a reliable timetable. There is some private shipping, but service is limited to specific islands with commercially viable routes. KNSL receives freight and handling costs from KCDL and subsidies from the government for unviable routes. The government pays AUD 33.5/tonne in stevedoring costs for the shipping of coconuts, which is small relative to the cost of operating the routes. As a result, it is difficult to motivate KNSL or other shipping companies to arrive for timely 38 shipments. For copra this leads to long storage times and spoiled product at the island weigh stations. Ultimately, many of these routes are not economically viable to maintain on a regular basis with the current levels of demand for their service. KCDL is considering buying its own ship to get around these issues. 4.1.3 Processing facilities are out of date 77. Kiribati’s copra mill and CNO processing facilities are aging. The facilities are located in South Tarawa and are operating at capacity. The mill relies on old machinery, some of which dates from before independence nearly 50 years ago. No processing is currently being done on Kiritimati, but a new plant is being built there, worth approximately $2 million with funding provided by MCIC and MFED. 4.2 Improving the efficiency of the copra sector will reduce losses and lower the need for subsidies 78. Improving the efficiency of the copra sector requires addressing challenges along the value chain, including in weighing, storage, and shipping. These factors are addressed in the following section. 4.2.1 Weigh stations should have their incentives more closely aligned with productivity 79. Efficiency and discipline could be improved by changing the way subsidies are delivered, and giving KCDL responsibility for farmgate purchases. Value chain discipline can be improved by changing the way subsidies are delivered. For instance, KCDL could be made responsible for purchasing copra, and then be reimbursed by the government at the MSP for the volume of copra milled in Tarawa.17 This would require transferring the ownership of weigh stations to KCDL. Doing so would give KCDL the incentive to carefully evaluate the quality of copra, and ensure it is stored safely. 80. By giving KCDL responsibility for procurement at the weigh stations, it can better manage for (and reward) quality. The quality of copra directly affects the yield and quality of the final coconut oil and other coconut-based products. This is because high-quality copra has a higher oil content and is less prone to contamination or spoilage. Quality standards for copra can be adopted from international standards (Bureau of Indian Standards, 1989; Nathanael, 1966). Table 1 shows how the oil content and other properties vary by International Coconut Community grades. If there is to be a quality premium, a price discovery mechanism for that premium is needed. If there is a business case for production of high-quality copra, the best way to do that is to have KCDL pay the quality premium out of its own pocket (without any additional government subsidy). KCDL would also implicitly then be accountable for inbound/outbound logistics, and so transport subsidies would also need to be redesigned, as discussed below. Alternative methods for subsidizing copra could also be taken from examples in other global contexts.18 81. Subtle improvements can also be made in the way weigh stations are managed to ensure no inventory is lost in storage. A range of relatively inexpensive investments in lockable, ventilated, weather- and rodent-proof storage sheds could address some of the spoilage and loss issues. Training should also be provided to weigh-station staff to share best practice in securing stocks and preventing spoilage. 17 KCDL would also have to have an external audit of receipts to suppliers to ensure the subsidy has made its way to the intended beneficiaries. 18 A global review of how MSP schemes are maintained in other countries—e.g., cotton/cashew subsidies in West Africa, dairy in France, corn/soy in the US—can further shed light on alternative models and the least inefficient way to deliver subsidies. 39 TABLE 1. Quality Standards for Copra Parameter Grade A Grade B Grade C Moisture (%) Max 6 Max 8 Max 13.90 Oil (%) Min 60 Min 58 Min 55 Free Fatty Acid (%) Max 1 Max 4 Max 5 Clean, white to Brown to dark Brown to dark Color of Meat pale yellow brown brown Aflatoxin related Mould (ppb) 0 Max 10 Max 15 Foreign Matters (%) Max 0.5 Max 1 Max 2 Wrinkled/Inferior Kernel (%) 0 Max 10 Max 15 Source: International Coconut Community. 82. More broadly, there is also scope to align all of Kiribati’s SOEs with global best practice on corporate governance. Recent work has defined protocols for proper legal and regulatory frameworks for SOEs. These cover how ownership should be structured, performance monitored, and boards composed (Wong, 2018; IFC, 2019; The World Bank, 2014). A key recommendation is that state ownership of SOEs should be vested under the control of the Ministry of Finance, rather than line ministries. This is because Ministries of Finance are mandated to ensure fiscal discipline, and are more likely to operate the organization as a business rather than as a political actor. In Kiribati the SOE Monitoring and Advisory Unit has been established in MFED, but SOEs are still controlled by line ministries. To better align with global best practice, Kiribati can draw on the World Bank’s toolkit for Corporate Governance of SOEs. 4.2.2 Inter-island shipping would be more efficient with performance-based contracts 83. Kiribati needs to improve the efficiency of shipping to connect the outer islands to markets. Efficient shipping to Kiribati’s main islands and to international hubs is essential for improving the economic prospects of the outer islands, and the country as a whole. Providing efficient connections between the islands is necessary for enabling access to markets. Although many of these routes are not economically viable to service on a regular basis, other small island countries in the Pacific have utilized franchising schemes to leverage public funds in a way that efficiently ensures connectivity service (ADB, 2007). 84. Fixed-term Performance-Based Contracts (PBC)s for private shipping would promote competition and improve service quality. An example is the ADB-supported Solomon Islands Shipping Franchise Scheme. Here, private companies compete to provide passenger and cargo services for remote communities that would otherwise be economically unviable to service. The companies range from large shipping organizations that provide international and domestic services to small single-vessel operators that service a limited number of routes. The government provides PBCs to subsidize shipping on unprofitable routes. These PBCs are allocated by tender, to the operator who can fulfill the service requirements with the lowest subsidy. In the Solomon Islands, this approach allowed the government to provide shipping services at less than half the cost of running its own fleet (ADB, 2017). The value of the subsidy also fell over time, as the existence of reliable shipping routes induced new demand. For the shipping companies, the routes were also profitable (after the subsidy), with profits ranging from 6 percent to 58 percent of total voyage costs. Similar schemes have been successfully employed in Fiji and other Pacific 40 Island Countries. Following these examples, the domestic shipping market in Kiribati should encourage competition between suppliers, with Government Community Service Obligations paid to ensure all islands are serviced. In theory, such franchising schemes can also be used for air transportation services in lieu of sea connections. 85. Many of the outer islands also suffer from poor port infrastructure, which makes servicing them difficult. Kiritimati and Tarawa serve as international hubs and have workable connectivity infrastructure (such as ports and airports), although investment is needed for improved terminals and co-located cold storage facilities. However, many of the outer islands lack both the storage facilities at the weigh stations and proper port infrastructure (Figure 13). The lack of port infrastructure can limit the ability of ships of certain sizes (and therefore cargo carrying capacity) to service those islands. These constraints on ship size can limit the frequency or scope of transportation service to those islands. This may affect the efficiency of sourcing coconut products from those locations.  ack of Port Infrastructure Affects the Economics of Shipping FIGURE 13. L Source: Google Maps (https://maps.app.goo.gl/K3jruNvxo4ZUQRKE9) 86. Although improvements in the frequency and quality of service and connectivity can be achieved through franchising and investment in infrastructure, connectivity will still limit access to markets. Even with improvements, the most outer islands will still have severe challenges in connectivity, at least in the medium term. 4.2.3 Copra processing capacity should not be expanded until coconut oil is profitable 87. Each kilogram of copra that is purchased by the government currently loses money, so it is not advisable to expand centralized, high-volume production. KCDL is in process of planning a new USD 2 million mill for Kiritimati Island that will be able to process up to 30 tonnes of raw copra and/or 10-15 tonnes of VCO per day. This will be sufficient to address most of Kiritimati’s processing needs and relieve some of the capacity constraints in Tarawa. However, any attempt to expand production without simultaneous improvements in efficiency will worsen the fiscal deficit. For the same reason, it is not currently advised for KCDL to invest in additional processing capacity in Tarawa beyond regular ongoing maintenance. This is because each unit of copra that is processed actually leads to a loss, due to the high price that is paid for copra at weigh stations. 41 42 Section 5 5. Copra is now a low-margin commodity, so Kiribati must innovate to move up the value chain and become more profitable 88. Section 5 proposes boosting growth by diversifying the industry away from its traditional focus on crude coconut oil into other product segments where private investors may be better able to compete. This will be particularly relevant to KCDL. The challenge, which is identified in subsection 5.1, is that copra is produced in an increasingly commoditized global market. Subsection 5.2 suggests as a response that Kiribati might consider transitioning to the wet young coconuts market. Subsection 5.3 documents that the response requires public funds to select the right varietals, invest in water management, and provide “club goods.” 89. Successfully reforming the copra subsidy and KCDL’s business model could position Kiribati to move into higher-value segments where it can better compete on the world market. Now that copra is a low-margin commodity, Kiribati needs to innovate to move up the value chain and become more profitable. VCO is feasible for local consumption but is not likely to be a promising export for a small player like Kiribati. New fresh coconut segments, however, are better suited to small players. Entering this market will require cutting the copra subsidy and investing in a number of vertical public and club goods. 5.1 Copra was once profitable but has become commoditized 90. Historically, the production of copra and CNO allowed Kiribati to overcome geographic challenges and participate in world markets. Foreign trading vessels have passed through the islands since 1850 seeking copra and coconut oil for trade (US Department of State, 1996). Initially there were no government subsidies for copra production, so the exchange was market-based. The copra and coconut oil markets at the time were geographically fragmented and dominated by small-holder farmers, which gave Kiribati scope to compete. Fragmented markets also meant that copra producers had a stronger bargaining power, and so were able to capture more economic rents from their sale. 91. More recently the highly tradeable, shelf-stable characteristics of CNO have made the market commoditized, globally competitive, highly efficient, and difficult for Kiribati to compete in. In recent decades copra has become a low-value commodity that is globally-traded in bulk, and subject to swings in price (Figure 14). While such highly competitive markets are good for global consumers, they are challenging for exporters because it makes the industry less profitable. Coconut oil products are also highly substitutable with other vegetable oil-based commodities,19 which places further downward pressure on prices. In this setting Kiribati’s coconut industry has found it increasingly difficult to compete. Ultimately this has prompted the government to successively raise the subsidy for copra, to support an increasingly unprofitable but historically and culturally important industry. 19 On global markets, coconut oil is part of the so-called vegoil complex comprising around 20 oil seeds. These include grains (soya bean, sunflower, and canola or rape seed), ground nuts (peanuts), and tree crops (oil palm and coconuts). Coconut oil only accounts for around 3 percent of vegoil consumption, both for food and for industrial uses. Palm kernel oil, which is a small component of palm oil, coconut oil’s closest substitute, accounts for about 1 percent of vegoil food use and 6 percent of vegoil industrial use. Coconut oil and palm kernel oil together make up the “lauric oil” sub-complex. Lauric acids are medium chain fatty acids regarded by some as having health benefits. 43 FIGURE 14. Trend and Competition Analysis of Copra and CNO Exports on the Global Market Kiribati Coconut Product Exports $7,000 $2,000 $1,800 $6,000 Exports (USD Thousands) $1,600 USD per Metric Ton $5,000 $1,400 $1,200 $4,000 $1,000 $3,000 $800 $2,000 $600 $400 $1,000 $200 $0 $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Kiribati Coconut Oil Exports (LHS) Kiribati Copra Exports (LHS) GGlobal CNO Price per Metric Ton (RHS) Source: ITC & United States Department of Agriculture. 92. However, the most important evolution in this industry is that commodity buyers have become extremely concentrated in just a few global firms (Mooney, 2017; Markets and Markets, 2022). In fact, 45 percent of the market is now controlled by firms that have revenues in excess of USD 500 million (e.g., Archer-Daniels-Midland and Cargill) (Figure 15). In comparison Kiribati’s entire GDP in 2021 was only USD 207 million. Such market concentration gives these buyers high bargaining power, which can force suppliers of CNO to sell at (or even below) cost of production. Without scale, suppliers of CNO cannot negotiate effectively with global buyers for improved prices. Ultimately, such large buyers use their power to extract rents from smaller upstream value chain actors (like KCDL). With such a market structure in place, the benefit of the copra subsidy is ultimately being transferred to multinational buyers through various procurement exchanges. In this way, the government ends up implicitly financing foreign multinationals. FIGURE 15. Market Share of CNO Buyers by Company Size 25 Tier 1: Revenue > USD 500M 45 Tier 2: USD 100M < Revenue < USD 500M Tier 3: Revenue < USD 100M 30 Source: (Markets and Markets, 2022) 44 93. Ultimately, these pressures will ensure that only large producers, which have achieved some extremely high scale of operation (often indicated by millions of dollars in investment), will be competitive globally. Given Kiribati’s land mass, it is unlikely that it will be able to meet global benchmarks for production efficiency (see Box 2). For instance, globally competitive players such as the Philippines exported 657,705 tons in 2021, whereas Kiribati exported just 480 tons of coconut oil in the same year (ITC, 2024). To match this efficiency, KCDL would have to significantly enhance the scale of their output through large investments. However, such strategies are not necessarily desirable, given the low margins that exist in the industry. Nor are they feasible, given natural limitations in Kiribati’s productive capacity. The shifting unit economics of the vegetable oil market would typically force smaller producers, like KCDL, out of the global market. A possibility is that small-scale CNO producers like KCDL instead re-scale to focus on the domestic market, as Chottu Coconut Products have done in the Solomon Islands (McGregor & Pelomo, The Solomon Islands Quality Copra Oil Value Chain for the Domestic Market: The Chottu Coconut Products Case Study, 2018). BOX 2.  Benchmarking against the Filipino Coconut Sector 94 The Philippines is one of the global leaders in the production of coconut-based products, where their industry has consolidated its position for trade in dry products like copra and CNO. The Philippines produced nearly 15 million tonnes of coconut in 2021 with centers of production located in the Southern Tagalog and Bicol regions of Luzon and the Eastern Visayas. This is in comparison to just 174 thousand tonnes of coconut harvested across all of Kiribati (Figure 16). As such, there is a considerable difference in the scale of production between the two countries. At the farm level, commercial production of coconuts in the Philippines occurs on plots averaging 2.4 ha per farm20, which have the potential to produce about 36,000 nuts per year (AsiaFarming, 2023; Dy & Reyes).  iribati versus the Philippines Coconut and CNO Production, 2021 FIGURE 16. K 16,000,000 14,717,294 Tonnes of production 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 997,000 2,000,000 174,300 3,555 - Kiribati Philippines Kiribati Philippines Coconuts, in shell Coconut oil Source: FAOSTAT 20 The median size of all inhabited islands in Kiribati is just 14.7km2. 45 95 Downstream processing activities in the Philippines are also significantly larger than in Kiribati. The Philippines produced nearly 1 million tonnes of coconut oil in 2021, whereas Kiribati produced just 3.5 thousand tonnes. Philippine companies participating in coconut oil production often have considerable investments in large mills that can sustain substantial turnover. For instance, copra milling companies like Davao Bay Coconut Oil Mills Inc. (USD 295 million total operating revenue), Wilmar Edible Oils Philippines, Inc. (USD 273 million), and Cargill Oil Mills Philippines, Inc. (USD 321 million)21 contrasts with KCDL (USD  4.5 million) which has less than 2  percent of the scale of the Philippine benchmarks in terms of turnover (Table 2). Rough estimates suggest that the average investment of Philippine copra mills may be more than USD 100 million.  otal Operating Revenue for Copra Mills in Kiribati versus the Philippines TABLE 2. T Total operating 2020 (USD ‘000) 2021 (USD ‘000) 2022 (USD ‘000) revenue Davao Bay Coconut 210,334 295,116 293,239 Oil Mills Inc. (Phil) Wilmar Edible Oils 179,709 273,140 393,115 Philippines, Inc. Cargill Oil Mills 163,188 189,438 320,980 Philippines, Inc. Kiribati Coconut 3,724 7,152 -- Development Ltd. Source: EMIS, Kiribati Recurrent Budget Note: Phil = Philippines 96 Since 2020 KCDL’s exports have been earning a better price. KCDL’s exports have historically been shipped to RBD coconut oil production facilities in Malaysia, which paid USD 1,572 per ton (ITC, 2024). However, since 2020, the majority of CNO exports are shipped to New Caledonia, which pays on average USD 2,459 per ton for imports22 (ITC, 2024). This is spurred by industrial uses for CNO in New Caledonia as a subsidized biomass energy source (MFAT, 2022). More limited production volumes of VCO, copra meal, and other products are also undertaken on an exceptional basis. 97 However, the recent improvement in price masks the fact that Kiribati losing its market share and competitive advantage despite growth in the global market, due to its inefficient scale. Today Kiribati is only the 48th largest exporter of coconut oil in the world, representing less than 0.1 percent of export market share globally. In 2021, coconut oil was the third most exported product from Kiribati, accounting for USD  4.4 million in foreign exchange. However, a trade analysis shows that these trade outcomes reflect a declining competitive position in the global 21 https://www.emis.com/php/companies/index?pc=PH&cmpy=13852480 22 New Caledonia imports CNO from different countries at different prices—ranging from USD 2,167 to $3,500 per ton—which varies with the grade/quality/purity of the product supplied. 46 market (Figure 17). Whereas the global trade in copra (+6 percent) and coconut oil (+18 percent) had been increasing between 2018 and 2022, Kiribati’s global share in exports for copra (-1  percent) and coconut oil (-15  percent) has declined, even as absolute export values have stayed moderately constant. This shows that while Kiribati has a comparative advantage in growing coconuts, this does not translate into a competitive advantage in its copra products.  ompetition Analysis of Kiribati’s Copra and CNO Exports on the Global Market FIGURE 17. C Growth of national supply and international demand for products exported by kiribati in 2022 Annual increase of Kiribati share in world exports between 2018-2022, % 47 5.2 To address the commoditization of copra, Kiribati has been focused on VCO but should instead consider wet goods like young coconuts 98 Given the wide variety of coconut products, Kiribati does not need to limit itself to producing copra and CNO. Two possible alternative market segments are those for VCO and wet goods like young coconuts. 5.2.1 VCO is currently produced for local sale but requires significant reforms to become competitive as an export 99 VCO is the purest form of coconut oil. It is derived directly from fresh mature coconut kernel and thus bypasses the first stage of making copra before producing CNO. There are two types of technology for producing VCO: (i) fresh-wet fermentation processing and (ii) fresh dry processing. RBD coconut oil and VCO have the same chemical characteristics but have different sensory attributes (smell, taste and feel). Export buyers use VCO as a component of hair and skin conditioners, as an oil base for cosmetic and skin-care products, as a carrier oil for aromatherapy and massage oils, and to market as a nutritious food. 100 Kiribati has begun to invest in facilities to produce VCO in small quantities to serve the local market. Kiribati has already established small-scale VCO plants at Tabiteuea (UNDP, 2023) and Butaritari (IBSA, 2020). It is also planning to establish additional small-scale VCO plants at Teraina and Tabuaeran. Current production is primarily sold locally, with some supply shipped to Tarawa. None is currently exported. Current end uses include as a nutritional supplement and natural medicine, hair and body conditioner, and as cooking oil. 101 VCO could displace copra in the local market if left to market forces. The market value of VCO is higher than that of CNO and has been increasing in recent years (Atkinson & McGregor, 2022). VCO also deteriorates less quickly than copra, which makes it more suitable in Kiribati’s outer islands where shipping is intermittent and unreliable. If left to market forces, then, suppliers would be likely to substitute into VCO production as capacity comes online. This would reduce the quantities of CNO produced at the copra mill on Kiritimati. As a result, the current operational expelling machinery for producing CNO will gradually become inoperable. To offset the loss of production capacity for copra and other relatively low-value products such as CNO, Kiribati anticipates establishing high-scale VCO plants in the high-coconut-producing islands. A recent market assessment by the Pacific Community has recommended expanding VCO production for the domestic market (McGregor & Sheehey, 2017). This approach is likely to make more sense for PICs with larger and less dispersed domestic markets. Case studies on VCO for domestic production include Banaban VCO from Rabi Island in Fiji (Kaumaitotoya & Sheehy, 2018), Kokonas Indastri Koporesen in Papua New Guinea (Omuru, 2018), and Kokonut Pacific in the Solomon Islands (Box 3). 102 However, the copra subsidy heavily distorts the domestic market for coconut products, and significantly reduces the incentive to move into higher value-added VCO. The copra subsidy of $4/kg works out to approximately AUD 0.65–0.8 per coconut, which is over 4× the global market price. It takes around 15 coconuts to produce 1L of VCO. On Butaritari, VCO is sold at $6 per 350mL, leading to a gross margin of approximately $6 per litre sold (35 percent). If, however, the copra subsidy were reduced to $2/kg, the gross margin on VCO would increase to approximately 70 percent. Cutting the copra subsidy would significantly increase the returns to investing in VCO capacity. 48 103 For Kiribati to develop a viable export market in VCO, it would need to cut the copra subsidy, make output consistent, replant coconut palms, and expand processing capacity. Currently the gross margins for VCO would not be large enough to cover the operating costs associated with export, including maintaining mills and transport costs. As noted above, cutting the copra subsidy would make VCO significantly more profitable and give it a better chance to succeed as an export. A major challenge for village-scale VCO producers like those in Kiribati is to consistently produce high-quality oil that meets international standards—in particular, minimum moisture levels (Bawalan & Chapman, 2006). Investing in better testing facilities locally would help with this. Kiribati’s stock of coconut palms is old and becoming increasingly senile. It requires replanting, particularly with higher yielding varieties. Currently this is managed directly by MELAD, though it would be better for the government to provide access to financing to landowners. Finally, countries that successfully export VCO (for example, Samoa, the Solomon Islands, and Fiji) tend to do so in quantities that would be large for Kiribati. VCO operations must be large to be economically viable. Thus, to succeed in the global market for VCO Kiribati would need to invest in more processing capacity, once the other constraints have been addressed. BOX 3.  Kokonut Pacific Solomon Islands (KPSI) Limited: A distributed VCO success story 104 Kokonut Pacific Australia (KPA, www.kokonutpacific.com.au) was established in 1994 to manufacture and sell Direct Micro Expelling (DME) machines for producing VCO at a village level. This approach is “direct” as oil can be produced from a coconut within an hour of it being opened. It is also “micro” as it only requires 4-6 adults to operate the machinery for expelling the oil. The technology was designed to capitalize on the low cost of labour and input coconuts at a village level, particularly in comparison to imported fuel and oil (Kad & Weir, 2008). The DME process involves grating the flesh of fresh mature coconuts, drying it on purpose-built driers fueled by coconut shells and husks, and then manually pressing out the oil. DME units regularly produce 30-50 liters of VCO each day. 105 KPSI was established in 2004 as a joint venture between Kokonut Pacific Australia (KPA) and a local company, Pro Solutions Ltd. KPA provides the DME technology, back- up services and export marketing, while the local partner provides local information, knowledge and management experience. KSPI operates a distributed model where small groups purchase the DME equipment from KPSI and operate local processing plants as a business. Smallholder farmers then supply coconuts to the plants, creating a network of small businesses. 106 KPSI now receives certified organic VCO from 40 direct micro expellers throughout the Solomon Islands, and has expanded into soap, cosmetics and tuna in coconut oil. KPSI employs around 25 people directly but supports a network of over 1000 workers. Around 70%-80% of its coconut oil is exported to New Zealand, Australia, North America and Europe. KPSI also operates in local markets, often through Facebook pages. Several DME sites use VCO as fuel, in particular for the small diesel generator that powers the grater in the DME system. Each DME can generate up to US$3,000 a month of income for local communities. 49 5.2.2 Wet young coconuts offer a high-value niche but require investment 107 A more comprehensive review of the global market for coconut-based products suggests opportunities in coconut water that are foregone by subsidizing dried copra. Kiribati and KCDL operate under a very rigid production model that has not evolved much since the 1850s. Alternative and more innovative segments of the coconut product market—and indeed other industries altogether—exist outside of this traditional approach. Currently, the basic production model focuses on extracting oils from copra, which are dry goods that are shelf-stable and commoditizable. This contrasts with coconut products that are made from coconut water. The moisture in such coconut products makes them somewhat perishable and inherently less tradeable. 108 Competing in wet coconut segments relies on delivery capacity, which leads to more appropriable margins for sellers. Participating in wet coconut export markets is only possible for farmers or firms that can deliver such products to market, or transform them into a shelf stable condition, before they expire. This means that the scope of geographic competition for the market becomes less intense, less globalized, and more localized. Exporting such products commonly requires either proximity to more advanced processing facilities or cold chain capabilities in their logistic operations.23 This leads to more appropriable margins for sellers of products derived from coconut water than those derived from oil. 109 Segmenting the coconut market reveals different feasible scales and profit margins for different products. A simplistic segmentation of the coconut-product market differentiates between wet and dry goods (Figure 18). This segmentation is only approximate, because the exact type of processing for wet or dry goods can also cater to different sources of demand (see Annex A: Example Processing Methods). Distinguishing between different types of demand—as depicted in the horizontal axis of Figure 18—is also useful in identifying markets that are structurally different. ndicative and Simplified Segmentation of the Coconut Industry uses for FIGURE 18. I Commercial Uses n.b. The above are indicative and relative measures of scale and profit determined by qualitative analysis. The existence of profit in a segment does not mean that this profit is equitably distributed amongst all actors in the value chain. Key: = low, = medium, = high, ? = unknown, x = Not Applicable. n.b. The above are indicative and relative measures of scale and profit determined by qualitative analysis. The existence of profit in a segment does not mean that this profit is equitably distributed amongst all actors in the value chain. Key: = low, = medium, = high, ? = unknown, x = Not Applicable 23 Cold chains are moderately energy intensive and will require sufficient grid or non-grid energy provision. Fortunately, a number of off-grid renewable energy sources and technologies—such as solar and biofuels—are now available to complement cold chain storage requirements. 50 110 The segmentation of consumer/user markets on the horizontal axis shows how the industry has recently invented new products in what was previously a static industry. For example, the industry had traditionally focused on producing coconut oils of various forms. CNO is common dry good used as an input to other advanced sustenance products (like RBD coconut oil) sold in global retail markets (e.g., the Philippines model). Wet + advanced sustenance products take the form of tetra pack coconut water, such as those commonly produced by multinationals like Coca-Cola (Vita Coco brand) and Pepsi (O.N.E. brand) (Martinez, 2015).24 All of these markets are highly competitive, and the minimum efficient size for operating in this segment is also quite large. As such, there is little room for new entrants or for obtaining good returns. However, a range of other segments also exist, even if Kiribati has not participated in them previously. For example, ‘convenience markets’ exist where industry is now providing ‘easy to open’ fresh coconuts that are packaged and sold across borders in a retail context (Figure 19).25 Such coconuts will typically have retail sales ranging between A$3.50-5.50 each in Australia and USD $4.00-5.00 each in the United States26. Similarly, indulgence markets exist for those who want to occasionally consume some luxury items, like coconut smoothies which have final retail prices often in excess of USD$10 per drink. Countries like Thailand are at the forefront of product innovations in these newer segments (Box 4). Others, like India and Vanuatu, have adapted copra and CNO as a supplement for diesel in their energy sectors.  oung Coconuts Packaged for Convenience Markets FIGURE 19. Y 24 These tetra pack coconut water products exist in a market segment that competes with other sports drinks (Tetra Pak, n.d.). 25 https://www.melissas.com/products/ez-open-sweet-young-coconuts 26 In 2022, the United States imported $111.2m worth of Fresh coconuts (HS080112 + HS080119). In the same year, Australia imported $6.73m, while New Zealand imported $1.25m. 51 BOX 4.  Thailand is Transitioning to a More Competitive Coconut Industry based on Food Innovation 111 Ratchaburi province in Thailand has recently emerged as the preeminent global cluster for exporting coconut products. Although Thai industry had previously focused on oil production like the Philippines, it is rapidly finding that opportunities for growth are stronger in wet coconut products. Following a 2010 government initiative, the region has facilitated private investment in many small to medium-sized coconut plantations that service a range of medium-sized wet processors (Namory & Bourdeix, 2024). The region has attracted investment from both local and foreign companies like NC Coconut27 (which sells a range of wet coconut-based products), Coconut breeze damnoensaduak28 (which operates under private label license agreement with Dole selling whole young coconuts), and CB Coconuts29 (which is the Thai subsidiary of a US-based startup Copra Coconuts (Box 5)). Table 3 below offers a financial overview of some firms operating in this segment. It highlights how much smaller they are than the Philippine copra mills (Table 2) and the global RBD processors (Figure 15). These Thai firms have maintained positive profit margins with only USD  10–20 million in revenues, while operating with total assets (i.e., investment) between USD 5–10 million. While each company has slightly different products and/or niches, the basic strategy of firms operating in this cluster involves exporting wet coconut products to the global market.  elect 2022 Financials from Thai Firms Operating in Wet Segments TABLE 3. S (USD Thousands) Total Gross Gross Total Total Operating Profit Employees Profit Assets Liabilities Revenue Margin NC $10,228 $1,997 19.71% $5,879 $5,879 200 Coconut30 CB $20,471 $5,761 28.18% $9,603 $8,809 50 Coconuts31 Source: EMIS 112 Competition in wet segments has driven innovation and has landed Thailand as the number one global exporter of fresh coconuts. The presence of many competing farms and processing firms in Ratchaburi province has created an ecosystem of local expertise in wet coconuts. This in turn has led to segment-specific innovations and a competitive cluster. Fresh coconut exports (a wet good) have been growing at a phenomenal 26  percent annualized growth rate since 2018 (Figure 20). Between 2016 and 2018, 27 https://www.nccoconut.com/ 28 https://maps.app.goo.gl/tdYS3W1F2YzKF6yg9 29 www.cbcoconuts.com 30 https://www.emis.com/php/companies/index?pc=TH&cmpy=7083834 31 https://www.emis.com/php/companies/index?pc=TH&cmpy=7137118 52 farmers made between $0.20-$0.55 per coconut, a price which has purportedly made many farmers millionaires (Namory & Bourdeix, 2024). Thus, while Thailand has a mixed production system that was historically rooted in dry goods, it is transitioning quickly to wet segments where there are more opportunities for newer, smaller entrants. This contrasts with a production system in the Philippines which is still almost wholly focused on CNO production. Further study of Thailand’s enabling policies and support structures is needed to understand how it has facilitated such rapid investment and growth, while maintaining mixed production systems.  elect Coconut Product Exports from Two Clusters FIGURE 20. S $2,500,000 30% $2,000,000 25% USD Thousands 20% CAGR $1,500,000 15% $1,000,000 10% $500,000 5% $- 0% Coconut Oil Fresh Coconut in Coconut Oil Fresh Coconut in (HS1513) (HS1513) the inner shell (HS1513) the inner shell (HS080112 + (HS080112 + HS080119) HS080119) Philippines Thailand 2022 Exports 2018-2022 CAGR Source: Data from ITC Note: CAGR = compound annual growth rate. 113 Some of these newer consumer segments have market features that make them more accessible to small players. For example, the size and concentration of buyers in the wet + lifestyle indulgence segment is markedly less than in the dry + advanced sustenance segment (Markets and Markets, 2022; HTF Market Intelligence Consulting Pvt. Ltd., 2018). The scale of private investment required by an individual firm may only be in the range of USD 10-20 million, as compared to the hundreds of millions (or billions) that would be required to compete in CNO markets. Such market structures allow smaller firms to compete, and those that are successful are often able to obtain much better returns (see Box 5). However, participating in these segments often requires more specialized capacities, which are also a barrier to entry for countries like Kiribati. For instance, young green coconuts from dwarf coconut palm varieties are preferred for producing wet products. These must be processed as soon as possible, but no more than 6 days after harvest in non-temperature-controlled conditions (Lopez, 2023). 53 BOX 5.  Copra Coconuts: Where Cold Chain Substitutes for Scale 32 114 Despite the misnomer, Copra Coconuts LLC, is a company founded in New York City that operates in wet segments. After establishing their brand and raising USD 3.4 million in two venture capital rounds, the founders were able to open a subsidiary production facility (CB Coconuts—see Table 3) in Ratchaburi, Thailand. There they grow Thai Nam Hom coconuts33 and manufacture ‘minimally processed’ coconut water for smoothie stores and other lifestyle brands.34 The company prides itself on beginning to process the coconuts within hours of harvest. After primary processing and bottling, the company uses a mixture of advanced high-pressure processing (HPP) technologies and flash freezing to avoid thermal changes to the flavor profile (Figure 21). This preserves the ‘fresh’ taste that is desirable to high value consumers. It contrasts with thermal pasteurization, which is generally used for coconut waters in tetra packs that are sold by multinational soft drink manufacturers (like Pepsi and Coca-Cola). The smallest investment a firm can make in an HPP machine is generally USD 1 million, however investments can scale upwards from there.35 Subsequent flash freezing at their facilities in Ratchaburi then creates a shelf-stable product that is tradeable across vast distances. Although Copra Coconuts’ production facilities are in Thailand, their customers are mostly located in the United States. ndicative Value Chain and Shelf Stable Processing Schedule FIGURE 21. I 115 The company cleverly targets customers in segments where suppliers have more bargaining power, which has allowed it to operate at as a profitable small wholesaler. Copra Coconuts operates in the wet indulgence segment. Although they have many categories of clients, they mostly target smoothie shops, which cater to consumers seeking an occasional luxury consumable. The final retail is often in excess of USD 10/ drink. This clientele is notably different than buyers in the CNO market, given that the market is much less concentrated and is willing to pay for a differentiated product (HTF Market Intelligence Consulting Pvt. Ltd., 2018). This grants them supplier power vis-à-vis their buyers, allowing them to effectively bargain with their customers and retain more of the profit that exists in this segment. Although Copra Coconut’s investment in the Thai subsidiary processing plant is quite new, it is now achieving USD  20 million operating revenue with a 28 percent gross profit margin, and almost $10 million in assets (although the subsidiary is highly leveraged with $8.8 million in debt after their investment cycle started in 2021). The parent company in the US was valued at nearly $25 million in 2021. revenue with a 28 percent gross profit margin, and almost $10 million in assets (although the subsidiary is highly leveraged with $8.8 million in debt after their investment cycle started in 2021). The parent company in the US was valued at nearly $25 million in 2021. 32 https://copracoconuts.com/blogs/blog/takeaways-from-a-food-business-mentor 33 For Thai Nam Hom coconuts, sugar levels can reach up to 7.6-8.0 °Brix at an age of seven months and two weeks. It even goes as high as 9 °Brix at an age of eight months and three weeks (Tetra Pak, n.d.). 34 https://www.cbcoconuts.com/product 35 In advanced food production clusters, these HPP machines will be operated as a tolling facility—essentially a club good operated by a third-party service provider—who will rent out processing capacity to smaller independent food processors. While HPP is branded in its ability to achieve minimal processing (i.e., keeping products’ fresh characteristic unaltered), it is rather advanced machinery that can achieve this without compromising food safety. As such, the technologies take some skill and maintenance to operate. 54 116 In these markets, the connectivity of islands, the speed of the value chain, and its cold chain capabilities are barriers to entry for countries like Kiribati. The ability of Kiribati’s outer islands to participate in wet segments (or any other tradeable goods) will depend on the cost of maintaining domestic and international routes and the frequency of viable connections. This will depend on: (i) the quantity of green coconuts produced each week, (ii) the distance of the outer islands to the processing center, (iii) the frequency of service calls to outer islands, (iv) the size of island demand for transport services, (v) the minimum ship size for servicing islands, and (vi) the quality of service provided (e.g., refrigerated transport). In the end, it may be that only Kiritimati36 will have enough raw produce, low enough costs, and sufficient capabilities to be able to participate in wet segments (Figure 22). Islands further afield may still have to rely on copra and VCO production, albeit under a reformed subsidy and social security scheme. Therefore, a dual industry structure—one based on wet segments near transport hubs, and dry segments further afield—may be the most realistic assessment for how the industry will evolve in the future. However, even Kiritimati’s entry into wet segments is not assured; success will require extensive and sustained reform and investment efforts.  onnectivity of Outer Islands to International Hubs FIGURE 22. C 1000 900 Reference Bubble (10,000 People) 800 Teraina 700 Tabiteuea Tarawa Copra Production (tonnes/year) 600 Beru Marakei 500 Nikunau Tarawa South Hub Abemama Tabuaeran 400 Butaritari Tarawa North Hub 300 Abaiang Nonouti Onotoa 200 Kiritimati Hub Kuria Makin 100 Maiana Aranuka Tamana Arorae Kiritimati 0 - 100 200 300 400 500 600 700 800 Distance to Nearest Main Island (km) Source: KCDL Data 36 Further feasibility study for Tarawa and immediately adjacent islands to Kiritimati and Tarawa is still needed. 55 5.3 Moving into new coconut segments requires public funds to select the right varietals, invest in water management, and provide “club goods” 117 Public support may be needed to lift the constraints preventing Kiribati producing higher value-added coconut goods, such as through extension services and irrigation infrastructure. Extension services will be needed to help farmers test and develop appropriate cross-bred varieties, facilitate their adoption, and modernize their production techniques.37 Public investment in irrigation may also be needed, which accounts for the water intensity of different coconut varieties (Teixeira & et alia, 2019; Azevedo & et alia, 2006). Freshwater is likely to become increasingly scarce across Kiribati. So, the Government, Island Councils and Public Utilities Board will have to establish appropriate governance and pricing mechanisms to balance how water is allocated between residential, industrial, and agricultural uses. Landholders should be encouraged to conserve water and become certified against standards like those provided by the Alliance for Water Stewardship. 118 Dry and wet segments require different coconut varieties that have different factor intensities. Dry segments typically rely on tall coconut varieties, which are more common in Kiribati (Bouckley, 2013). Conversely, dwarf coconut palm varieties (such as those used in Thailand and Brazil) are typically used in wet segments, because they have a high sugar content as indicated by their Brix score (Martinez, 2015). Tall and dwarf coconut trees have several notable agronomic differences that will ultimately affect their economic viability. Tall coconut trees can grow up to 100 feet in height, whereas dwarf coconut trees typically reach a maximum height of 60 feet. Dwarf coconut trees can also be planted closer together and thus require less space compared to tall coconut trees. This is especially important in Kiribati since land is a limited factor. Dwarf trees also take only 3–4 years to start bearing fruit, whereas tall coconut trees may take 6–8 years to fruit (Azevedo & et alia, 2006). However, tall coconut trees generally produce larger coconuts and higher yields compared to dwarf coconut trees. Additionally, tall coconut trees are well adapted to poor soils and more resistant to strong winds compared to dwarf coconut trees. 119 In particular, there are critical differences in the water needs of each type of tree. While both varieties are salt resistant (and can withstand some threshold of brackish water), the dwarf coconut trees used in wet segments are more water-intensive. Things can be done to improve water efficiency, such as planting the trees to shade reservoirs and prevent evaporation. Israel has been a world leader in efficiently watering palm plantations. Their agriculture sector has many of the same challenges as Kiribati, including low freshwater resources, high salt content in soil, and tree crops that use a lot of water. To resolve these challenges, they have invested in reusing waste-water in agriculture, which has created high productivity palm plantations in otherwise arid land (Mandel, Israel’s pioneering use of water ‘to the last drop’, 2023). However, each site needs to weigh the availability of water against its cost and other competing needs (Lima, 2017; Azevedo & et alia, 2006). In some water-scarce islands of Kiribati, this may be a constraint if there are other competing demands for water resources. Overall, Kiribati’s investment strategy should focus on keeping the salt water out (e.g. e.g. seawalls, floodgates, dikes), the fresh water in (e.g. retention ponds, water towers, improved water governance), and the wastewater managed (e.g. water reclamation and irrigation projects). 120 Beyond absolute constraints on water supply, it will also be important to consider the water efficiency in terms of the cost per unit value of production. For example, in the dry goods segment it takes 4,490 liters of water (538 gallons) to produce just 1 kilogram (1 pound) of coconut oil (Marie, 2022; Mekonnen & Hoekstra, 2011). As previously established, the unit 37 Some aspects of coconut production for wet markets can be found through TetraPak’s Coconut Handbook. However, some of the advice is geared towards production of wet + advanced sustenance products rather than for convenience/indulgence markets (Tetra Pak, n.d.). 56 value of the coconut oil is minimal. It takes less water to produce a similar weight output of coconut water—a wet good made from dwarfs, which have higher values in general. Thus, the cost of water inputs relative to the value of outputs will be very different across dry and wet segments, even if dwarfs consume more water per coconut (DeAngelis, 2022). To properly internalize this cost, water tariffs should be levied on coconut producers and enforced for any publicly supplied water. Further assessment of the yields, space requirements, growth rate, and especially water intensity of different varieties, alongside the water availability on each island is needed. 121 Ultimately, the specific variety of coconut palm will determine its potential and its productivity which will require public research and development (R&D). Tall coconut palms are native to Kiribati, though introducing new varieties is also an option.38 Tall and dwarf varieties can be cross bred to adapt them to local agronomic conditions (Tetra Pak, n.d.). However, this may require some degree of trial and error, which is a cost that will be difficult for individual farmers to bear on their own. As such, the government could run field trails to test the viability of different varieties, crossbreeds and cultivation methods. Best practices could be freely shared with outer island farmers through extension programs. In other contexts, such research and development (R&D) investment by the public sector may have positive externalities for the industry and the economy more broadly. 122 Some areas of existing government intervention, like investing in seeds and replanting, might be better privatized. Currently the government, through MELAD, coordinates the investments in seed stock and replanting. However, seeds and fertilizers could instead be produced through a competitive private sector and sold to farmers. Farmers would then be responsible for replanting on their own (customary or government-leased) land. The government currently crowds out the private sector by providing this service for free. Instead, it should create a regulatory environment that allows for multiple private seed wholesalers to operate. This will include reducing the frictions involved with importing foreign seeds, while maintaining sufficient biosecurity controls (see (The World Bank, 2024b) for further details). 123 There may also be limited scope for further public investment in club goods, that can be used by private operators for a toll. These club goods could include VCO processing centers and CNO mini mills on the outer islands. However, the public sector should only make new investments in commercial activities where there is a case for market failure. Inadequate access to finance may be one, though it is better to address the distortion directly. Investing public funds in new copra mills on Kiritimati is not likely to meet this threshold. Ultimately, it will be private investors—and likely foreign private investors—that are most likely to robustly grow the copra industry. Government investment in public and club goods can attract private capital, but it should be tailored in collaboration with industry. 124 KCDL could also consider providing club goods, such as High-Pressure Processing (HPP) services, after thorough feasibility studies have been conducted. HPP technology involves subjecting food and beverage products to high hydrostatic pressure, which helps in preserving and extending the shelf life of the products without the need for heat or chemical preservatives. This preserves coconut water while fresh, and so would address Kiribati’s challenges with perishability and distance to markets. HPP machinery is generally expensive (requiring USD 1 million investment at minimum) and requires specialized skills to operate and maintain 38 The Government of Thailand has banned the exportation of its Thai Nam Hom seedlings in order to protect its domestic industry. This particular variety, used by many in the wet products industry, was created through a public R&D program in Thailand. 57 (Martinez-Belkin, 2014). This may be beyond the reach of new private sector players. Instead, KCDL could invest in HPP tolling facilities and offer the service to third party food and beverage companies for a fee. In this model, client companies do not own their HPP equipment but instead leverage the services of the tolling facility. Tolling facilities typically invest in state-of- the-art HPP machinery, ensuring efficiency and compliance with regulatory standards. 125 A KCDL-provided HPP service could change clients on a per-unit basis, depending on the volume and type of products processed. This model allows smaller companies to access the benefits of HPP without the upfront capital and maintenance costs from owning the equipment. In this way, the rationale for an HPP tolling facility (possibly owned by KCDL) is similar to the rationale for the ‘tool port’ model used for managing ports in small island states.39 The tolling business model offers flexibility to client companies, allowing them to scale production without the constraints of equipment ownership. It also enables small and medium enterprises (SMEs) to access HPP technology in a way that does not make significant capital a barrier to entry. The tolling facility, in turn, generates revenue by charging fees for its processing services, while also managing the maintenance and operation of the HPP equipment. 126 Overall, the HPP tolling model could encourage investment, but it requires further study and comes with considerable risks. There is significant commercial risk involved with such an investment. Maintenance standards in Kiribati are low and would also need to be improved. It would also require upgrading Kiribati’s regulatory framework to encourage investment. Such an investment is likely to make losses for at least the first several years. Moreover, to make such tolling facilities work, Kiribati would need to attract foreign food processors or induce food entrepreneurship in the local economy. Governments across the world have invested in food incubators as a means of investing in food entrepreneurship. For example, the University of Hawaii has recently established a food innovation center to teach entrepreneurs interested in food manufacturing (University of Hawai’i, 2024). Although government-run programs have mixed success, privately run food accelerators—like Union Kitchen in Washington, DC—have been more successful in generating new startups in food manufacturing (Union Kitchen, 2024). 127 However, even with smartly designed policies and government support mechanisms, there are critical constraints to investment due to the country’s climate risk. Given projections of sea level rise, many of Kiribati’s atolls remain at risk of more frequent natural disasters. Investors in plantation-style farms will likely have to consider the risk of crop loss over the next 30 years. Kiritimati may be the only location in the country that may have land that is resilient to sea level rises. Nonetheless, insurance instruments and multilateral guarantees may be needed to assuage investors of the risks and other related climate risks (such as droughts or cyclone damages). 39 There may be more efficient ways to tender out a concession for the operation of wharfage and stevedoring services in a way that maintains ownership of the facility, while better controlling cost of their services. In markets where there are natural limits to competition for more than one service provider, and where high fixed costs prevent the entry of private players (or any players), management of public ports may take on a mixed public private partnership called “tool port” model (ADB, 2007). In such management models, the port authority (SIPA) could own the port infrastructure and tools (e.g., expensive machines like cranes, forklifts, etc.) required to operate the port, but will lease out the equipment to private stevedores and other port service providers (on equitable terms). While there are challenges in ensuring management of this model (and maintenance of the tools), these leasing structure helps reduce the fixed costs and commercial risk for private service providers, which enables new entry by private firms (ADB, 2007). Ultimately, cleverly designed regimes that allow the importation of foreign transportation services can help reduce costs of merchandise imported into the country (increasing the purchasing power of the population with implications for consumption poverty) and can make merchandise exports more cost competitive. 58 Section 6 6. A roadmap for growth, profitability, and prosperity in the copra industry 128 Section 6 draws conclusions and summarizes recommendations. The conclusions draw out the main challenges and responses from the body of the report. The recommendations distill the responses into detailed actionable items with responsible authority and priority. 129 The ultimate objective of any efforts in this space should be to (i) improve i-Kiribati livelihoods on the outer islands, (ii) improve KCDL’s profitability, and (iii) encourage private sector participation. The path might seem counterintuitive at first. But, these objectives can only be achieved by reducing the copra subsidy, reducing direct government involvement in the sector, and encouraging new private sector entrants into the market. Lowering the subsidy would help restore the sector to profitability, once the input cost of copra is properly accounted for. Reducing direct government involvement in seeds, replanting, price-setting, shipping and processing would create space for a more efficient private sector to emerge. Private seed wholesaling and shipping operators are likely to provide a better service. Private coconut buyers would compete with KCDL, but this would help reveal the market price of copra and stimulate efficiency. Along with reducing direct involvement the government will need to create a regulatory environment that encourages private investment, by making land title and biosecurity more fit-for-purpose. Targeted government support might be needed in some areas to overcome market failures. This is likely to include financing some large investments to provide toll-based services and supporting unprofitable shipping routes through performance-based contracts. Finally, any changes to the copra sector must be accompanied by higher social protection, at least at first, to ensure no households relying on the subsidy to meet their basic needs are left worse off. 130 To improve the performance of the copra sector, and the agricultural sector more broadly, Kiribati will need to make hard but meaningful reforms to lower the copra subsidy. The primary factor that is preventing Kiribati’s copra sector becoming profitable is the level of the subsidy. At AUD 4/kg the subsidy is approximately 8x the farmgate price in the Philippines, and over double the market price per kilogram of coconut oil. In rough terms this means that the subsidy buys coconuts at AUD 0.65-0.8 each, and sells the associated coconut oil at AUD 0.2. The higher the production, the greater the loss. To achieve profitability the copra price will need to be gradually lowered, and vary with market conditions each year. Ideally the price should also vary with quality. To reveal the market price, competition should be encouraged from other buyers, for example from local mini-mills that produce CNO, to supplement diesel in engines. 131 Given the importance of the copra subsidy in social protection, lowering the subsidy will need to come with ramping up more efficient schemes to reduce poverty. New schemes to reduce poverty will need to be working before the subsidy is cut, to avoid people on outer islands falling deeper into monetary poverty. A companion paper shows that direct cash transfers to the poor throughout Kiribati can significantly reduce the poverty rate at substantially lower cost than the copra subsidy – a rare “win-win”. Setting up targeted cash transfers can take time. In the interim, the paper shows that capping the subsidy for each household at the poverty rate would lead to large fiscal savings without increasing poverty. For more details see (The World Bank, 2024a). 59 132 To spur investment and economic growth, the government will need to promote secure and enforceable land tenure through either freehold or long-term leases. Land in Kiribati is almost all under customary title or owned by the government, and the process for registering property is slow and convoluted. Secure and enforceable land tenure is crucial for attracting private investors. To facilitate this, customary landholders should consider incorporating as corporations with inclusive representation. Government land needs to be zoned with appropriately sized plots and long-term leases that attract private investors. This is particularly true for Kiritimati Island, where detailed zoning is planned. 133 To improve the efficiency of Kiribati’s copra SOEs, KCDL should be given more control and responsibility throughout the supply chain. At present the copra value chain is very fragmented, with heavy government involvement and few market incentives throughout. This could be improved by making KCDL responsible for purchasing copra and operating weigh stations. The government could then reimburse KCDL at a set price per unit of copra milled in Tarawa/ Kiritimati. This would mean that KCDL would internalize the cost of copra and give them an incentive to check its quality and store it safely. KCDL would still be subject to a (lower) minimum support price for copra, but they may choose to offer more for higher-quality product. There would be no incentive to increase production until copra becomes profitable. KCDL should also be aligned with global best practice on corporate governance, including that state ownership be vested in the Ministry of Finance rather than line ministries, to ensure fiscal discipline. In the short term, investments in secure, ventilated storage sheds would reduce spoilage and loss. 134 Inter-island shipping should be improved with public investment in ports, and more private- sector participation through performance-based contracts. Inter-island shipping is infrequent, unreliable and dominated by KNSL. A first step is for the government to invest in climate-resilient ports, alongside development partners. Beyond this the government should offer fixed-term performance-based contracts for maintaining commercially unviable shipping routes. This would promote competition and improve the quality and reliability of inter-island transport, which would have many benefits beyond just the copra sector. Private operators (and KNSL) could be invited to bid on specified routes with specific requirements for frequency and reliability. Contracts would go to the bidder requiring the lowest subsidy. Similar schemes have found success in the Solomon Islands, Fiji, and other Pacific countries. 135 A major issue for the copra sector is that copra and CNO were once profitable in Kiribati, but have become low-margin products due to global commoditization and market volatility. Kiribati’s current coconut industry model is outdated and rigid, focusing mainly on dry goods like CNO, which are easily commoditized. Kiribati’s coconut industry thus struggles to compete with large global players who dominate the market and exert significant bargaining power. KCDL has faced declining market share and competitive advantage despite the global market growth. To address these challenges, Kiribati should consider diversifying into higher-value segments like VCO and fresh coconut products. 60 136 VCO production is currently for local consumption, but with significant reforms, it could become competitive for export. The copra subsidy scheme distorts the domestic market and disincentivizes the shift to higher-value products like VCO. Reducing the copra subsidy could increase the profitability of VCO and make it a more viable export product. To succeed in exporting VCO, Kiribati would need to not only cut the copra subsidy but also ensure consistent output, replant coconut palms, and expand processing capacity while meeting international quality standards. 137 There is also a potential for Kiribati to enter the high-value niche of wet young coconuts, but it also requires investment and innovation. The global coconut product market has evolved to include convenience products like packaged fresh coconuts, and indulgence products like luxury smoothies. These “wet” segments are perishable which limits geographic competition, favors local and regional markets, and increases profit margins. Thailand, for example, has successfully transitioned to a competitive coconut industry by focusing on wet coconut products. This has fostered innovation and attracted investment in small to medium-sized plantations and processors. Wet markets are easier for small firms to compete in because they are less concentrated, more differentiated, and so can command higher prices. Kiribati could potentially develop a dual industry structure, with wet segments produced on Kiritimati and dry segments in more remote areas. This would require overcoming challenges related to connectivity, cold chain capabilities, and investing in processing facilities. 138 To provide a conducive investment environment, the Government will need to provide a range of public and club goods that address a number of market failures, particularly on Kiritimati. Public investment in keeping saltwater out, freshwater in, and wastewater managed would have broad spillovers throughout the economy. Public research into coconut palm varieties that are suitable for wet segments, and robust to Kiribati’s climate, would help farmers move into new products. Government-owned club goods that offer services for a toll, like VCO processing centers, CNO mini-mills, and HPP machines, would help small operators enter the market and overcome financing constraints. This may mean that KCDL plays more of a role in facilitating the private sector, rather than doing everything themselves. The government will also need to reduce its involvement in some areas, like seed wholesaling and replanting, which would be better operated as private businesses. Ultimately growth in the copra sector, and the rest of the economy, will come from the private sector. So, broad-based efforts must be made to improve the investment climate, including insurance and guarantees from multilateral organizations to manage climate risk. TABLE 4. Summary List of Recommendations by Responsible Authorities Intervention Section Recommendation Priority Type Reference Ministry of Finance and Economic Development (MFED) 1 Reduce the minimum support price for copra Regulatory High 2.2.1 and revise it annually to reflect market conditions Reform 2 Pay the copra subsidy to KCDL based on the Regulatory volume milled in Tarawa/Kiritimati, and account High 4.2.1 Reform for it as recurrent spending like other CSOs 3 Reform the structure and governance of state Regulatory holdings in commercial enterprises to be based Medium 4.2.1 Reform in MFED, in line with global best practice 61 Ministry of Environment, Lands and Agriculture Development (MELAD) 4 Improve the process and regulations for long- term leasing or selling customary/government Regulatory High 3.3 land in appropriately-sized plots, to encourage Reform investment in physical assets 5 Create a zoning plan for Kiritimati to differentiate between residential, commercial, industrial, Programmatic High 3.3 recreational, ecological and agricultural uses Investment of various areas on Kiritimati40 6 Provide technical assistance to communities on good governance, and encourage them to Regulatory Medium 3.3 incorporate as corporations to facilitate Reform negotiations with investors 7 Promote private sector involvement in seed wholesaling and replanting, by reducing direct Regulatory High 5.3 involvement and making biosecurity regulations Reform fit-for-purpose 8 Conduct research and development into coconut palm varieties that are tailored for wet Programmatic Medium 5.3 segments, like dwarf palms, and suited to the Investment Kiribati environment Ministry of Infrastructure and Sustainable Energy (MISE) 9 Invest in public water infrastructure to ensure Programmatic High 5.3 effective management of freshwater41 Investment 10 Improve water governance by developing Regulatory market pricing mechanisms for water use by Medium 5.3 Reform commercial entities Ministry of Information, Communications and Transport (MICT) 11 Improve service frequency and reliability by tendering fixed-term performance-based Regulatory High 4.2.2 contracts to private shipping providers on Reform unprofitable routes 12 Assess the need for port/wharf infrastructure Programmatic and invest in improved terminals and co-located Medium 4.2.2 Investment cold storage facilities as appropriate 40 To be conducted in tandem with the Ministry of Line and Phoenix Islands Development (MLPID). 41 To be conducted in tandem with the Public Utilities Board. 62 Ministry of Commerce, Industry and Cooperatives (MCIC) 13 Pilot a technology adoption program by procuring and competitively leasing a “mini mill” Programmatic Low 2.2.1 to entrepreneurs to introduce private local Investment competition for copra42 14 Leverage investment promotion agents to Programmatic coordinate negotiations with customary Medium 3.3 Investment stakeholders on the leasing of land 15 Consider investment incentives for FDI to Programmatic compensate for the customary land premium Low 3.3 Investment and to resolve other frictions in the land markets 16 Work with multilaterals to develop insurance Programmatic instruments and guarantees needed to assuage Medium 5.3 Investment investors of climate risks 17 Invest in Food Incubation and Accelerator Programmatic Low 5.3 Programs for local entrepreneurs on Kiritimati Investment Ministry of Women, Sports and Social Welfare (MWSSW) 18 Review, pilot, and launch alternative forms of Regulatory social protection, such as cash transfers that are High 2.2.2 Reform targeted to the poor nation-wide Kiribati Coconut Development Ltd (KCDL) 19 Directly purchase copra, and buy weigh stations from island councils, to reform internal Regulatory High 4.2.1 incentives and account for the cost of inputs Reform on its balance sheet 20 Invest in adequate storage facilities for copra at Programmatic island weigh stations, and train staff in inventory High 4.2.1 Investment management 21 Refrain from expanding processing capacity Regulatory until CNO becomes profitable at the High 4.2.3 Reform government’s minimum support price of copra 22 Conduct feasibility study for alternative business Programmatic models and forms of coconut processing, Medium 5.2 Investment including VCO and young wet coconuts 42 To be introduced only after copra pricing reforms specified (per number 2) have been enacted. 63 64 Annex A: Example Processing Methods  xpanded Segmentation of Processing Methods for Food Sector Uses FIGURE 23. 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