Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 41571-PG

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

INTERNATIONAL FINANCE CORPORATION

COUNTRY ASSISTANCE STRATEGY

FOR

PAPUA NEW GUINEA

FOR THE PERIOD FYOS-FY 11

November 20,2007

Papua New Guinea, Pacific Islands and Timor-Leste Country Management Unit East Asia and Pacific Region, E A P

East Asia and The Pacific International Finance Corporation, IFC

This document has a restricted distribution and may be used by recipients only in the performance of their official Duties. I t s contents mav not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange rate effective as of November 20, 2007)

Currency Unit: Papua New Guinea Kina (K) K 1 = US$0.3540 U S $ 1 = K 2.8249

WEIGHTS AND MEASURES: Metric System

FISCAL YEAR: January 1 - December 3 1

Acknowledgements This CAS was produced by a multi-sectoral team that included: Esme Abedin, Cynthia Abidin, Benson Ateng, Natasha Beschorner, Oliver Braedt, David Chandler, Peter Cusack, Gaurav Datt, Antonie de Wilde, Sanjay Dhar, Dodi Doiwa, Adriana Eftimie, Melinda Good, Amanda Green, Marianne Grosclaude, Graeme Hancock, Bruce Harris, Salahuddin Khwaja, Jerry Lebo, Luc Lecuit, Richard Messick, Russell Muir, Ivan Anton Nimac, Cristiano Nunes, Oala Oala-Rarua, Andrew Parker, Muhammad Ali Pate, Thakoor Persaud, Neeraj Prasad, Richard Ranken, Idah Pswarayi-Riddihough, Hugh Riddell, Nigel Roberts, Robert James Simms, Susan Spencer, Andriy Storozhuk, John Strongman, Jerry Strudwick, Helen Sutch, Stoyan Tenev, Dwain Tomavoko, and Sonya Woo. Other members of the Bank Group’s Papua New Guinea country team also made valuable contributions throughout the process.

The World Bank Group greatly appreciates the close collaboration wi th the Government of Papua New Guinea in the preparation of this CAS, as well as valuable feedback from members o f c iv i l society and development partners.

IDADBRD IFC Vice President: James W. Adams Farida Khambata

Task Team: Benson Ateng Peter Cusack Amanda Green Stoyan Tenev

Country Director: Nigel Roberts Richard Ranken

A A A ABG ADB ASM ASTAE AusAID CAS CAE CBO CDD CEM CGAP CPAR CPI DM DME DSA DSDLG EAP EC ECP EIT I

ES W FCP FCPF FIAS FTI GDLN GDP GEF

GEF-P AS GoPNG GTL HIV/AIDS

IBRD

I D A IFC IMF

FOR OFFICIAL USE ONLY

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities Autonomous Bougainville Government Asian Development Bank Artisanal and Small-scale Mining Asia Alternative Energy Program Australian Agency for International Development Country Assistance Strategy Country Assistance Evaluation Community-Based Organization Community-Driven Development Country Economic Memorandum Consultative Group to Assist the Poor Country Procurement Assessment Report Consumer Price Index Development Marketplace Di-methyl Ether Debt Sustainability Analysis District Service Delivery and Local Governance East Asia and Pacific European Commission Enhanced Cooperation Program Extractive Industries Transparency Initiative

Economic and Sector Work Forestry and Conservation Project Forest Carbon Partnership Facility Foreign Investment Advisory Service Fast Track Initiative Global Development Learning Network Gross Domestic Product Global Environment Facility

GEF Pacific Alliance for Sustainability Government of Papua New Guinea Gas-to-Liquids Human Immunodeficiency VirudAcquired Immunodeficiency Syndrome International Bank for Reconstruction and Development International Development Association International Finance Corporation International Monetary Fund

I T IRC ISN JCS JSDF LICUS LNG M D G MSME MTDS NGL NGO NPV NZAID PAC PEP-Pacific PERR PESD PETS PFR PNG PNGSDP

PNGSEL PPP PTF RDP REDD RMRP SADP SIOA

SWG T A TSLP UN

UNAIDS

UNDP WB WHO

Information Technology Internal Revenue Commission Interim Strategy Note Joint Country Strategy Japan Social Development Fund Low Income Countries Under Stress Liquefied Natural Gas Millennium Development Goal Micro, Small, and Medium Enterprises Medium Term Development Strategy Natural Gas Liquids Non-Governmental Organization Net Present Value New Zealand Agency for International Development Public Accounts Committee Private Enterprise Partnership for the Pacific Public Expenditure Review and Rationalization Public Expenditure and Service Delivery Public Expenditure Tracking Survey Public Finance Review Papua New Guinea Papua New Guinea Sustainable Development Program, Ltd. Papua New Guinea Sustainable Energy, Ltd. Public-Private Partnership Partnership for Transparency Fund Rural Development Program Reduced Emissions from Deforestation & Degradation Road Maintenance and Rehabilitation Project Smallholder Agriculture Development Project Strengthening Institutions of Oversight and Accountability Sector Working Group Technical Assistance Teacher’s Solar Lighting Project United Nations

Joint United Nations Programme on HIV/AIDS

United Nations Development Programme World Bank World Health Organization

a restricted distribution and may be used by recipients only in the performance o f their of f ic ia l duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

TABLE OF CONTENTS

EXECUTIVE SUMMARY.. ........................................................................................................................ i I . INTRODUCTION ................................................................................................................................ 1 I1 . COUNTRY CONTEXT ........................................................................................................................ 1

A . Sociopolitical Landscape ................................................................................................................. - 2 B . Recent Economic Developments ...................................................................................................... 3

D . Public Financial Management and Governance ............................................................................... -5 E . Poverty, Livelihoods, and Service Delivery ..................................................................................... -7 F . Social Inclusion ............................................................................................................................... 11

A . Country Priorities and Agenda ........................................................................................................ 12 B . Medium-Term Economic Outlook .................................................................................................. 13 C . Papua New Guinea’s Development Challenges and Opportunities ................................................ 14

IV . ROLE OF DEVELOPMENT PARTNERS ...................................................................................... 15 A . Development Partner Activities ...................................................................................................... 15 B . Donor Coordination and Aid Effectiveness .................................................................................... 16

V . BANK GROUP ASSISTANCE STRATEGY .................................................................................. 17 A . Lessons o f Experience .................................................................................................................... 17 B . Proposed Bank Group Assistance Strategy ..................................................................................... 20

VI . RISKS AND MITIGATION MEASURES ....................................................................................... 29

C . Natural Resource Management ........................................................................................................ -4

I11 . PNG’S DEVELOPMENT PROGRAM, PROSPECTS, AND CHALLENGES .......................... -12

Figures

Figure 1 : Strong Macroeconomic Performance since 2003 ......................................................................... 3 Figure 2: Governance and Corruption in Papua New Guinea ..................................................................... -6 Figure 3: A Strategy for Engagement in PNG ........................................................................................... 21

Tables

Table 2: Health System Performance in Decline ....................................................................................... 10 Table 3: Medium-Term Economic Projections .......................................................................................... 13 Table 4: Promoting and Maintaining Sound Economic and Natural Resource Management .................... 23 Table 5: Improving Livelihoods and Service Delivery, Especially for the Rural Poor .............................. 25 Table 6: Proposed CAS Program for FY08 to FY 1 1 ................................................................................ -28

Table 1: Human Development Indicators in Comparison .......................................................................... 10

Text Boxes Box 1 : Principles o f Engagement in PNG .................................................................................................. 22

Attachments Attachment A: The Role of Extractive Industries in PNG .......................................................................... 31 Attachment B: Progress Toward Achieving the MDGs ............................................................................. 41 Attachment C: Debt Sustainability Analysis .............................................................................................. 42 Attachment D: Key Development Partner Programs ................................................................................. 50 Attachment E: Aid Effectiveness in Papua New Guinea ........................................................................... 54 Attachment F: The Bank’s Recent Experience Under the Interim Strategy Note ...................................... 56 Attachment G: Governance and Anticorruption Strategy .......................................................................... 65

Annexes

Annex A2: Papua New Guinea at a Glance ................................................................................................. 69 Annex B2: Papua New Guinea Selected Indicators of Bank Portfolio Performance and Management ..... 72 Annex B3: IBRD/IDA Program Summary Papua New Guinea .................................................................. 73

Annex B4: Summary of Nonlending Services . Papua New Guinea .......................................................... 75

Annex B6: Papua New Guinea - Key Economic Indicators ........................................................................ 77 Annex B7: Papua New Guinea - Key Exposure Indicators ......................................................................... 79

Annex B9: Papua New Guinea 2008-201 1 CAS Results Matrix ................................................................ 82

Annex B3: Papua New Guinea: IFC Investment Operations Program ....................................................... 74

Annex B5: Papua New Guinea . Social Indicators ..................................................................................... 76

Annex B8: Papua New Guinea Operations Portfolio (IBRDADA and Grants) .......................................... 80 Annex B8: IFC for Papua New Guinea ....................................................................................................... 81

EXECUTIVE SUMMARY

i. Following a period of political stabilization and economic recovery, Papua New Guinea (PNG) has emerged from the climate of uncertainty that precipitated the 2005 Interim Strategy Note (ISN). Positive developments include the passage o f legislation to strengthen continuity in government, record-high prices for the country’s export commodities, sound macroeconomic policies, improved fiscal discipline, and a more positive aid environment. Though the Bank Group and Government o f Papua New Guinea (GoPNG) have faced difficulties in the past, the relationship has improved and both parties are committed to working together and with other development partners to achieve the country’s development objectives, as expressed in the Medium-Term Development Strategy (MTDS) for 2005-20 10 and the national Mil lennium Development Goals (MDGs).

ii. Despite these achievements, important challenges remain in fostering inclusive, sustainable development in PNG. Though the economy has grown in recent years, this growth has been concentrated in the formal sector with l i t t le impact on the lives o f poor people, most o f whom l ive in rural areas and depend on agriculture and informal activities for their livelihoods. I t i s estimated that more people are living in poverty now than a decade ago, and the creation of jobs and other income-earning opportunities i s not keeping up with the needs o f a growing population. Women and young people are particularly disadvantaged by unequal access to jobs and services. The availability and quality o f basic infrastructure and social services have declined, holding back business growth and human development outcomes. The rapid spread o f HIVIAIDS poses a serious threat to future productivity unless the epidemic i s brought under control through decisive, coordinated action. Yet systems for distributing resources and coordinating across levels o f government are weak, and political leaders face incentives to place the interests o f their local group above those o f the nation as a whole. Within the country’s r ich cultural diversity, there i s a potential for social fragmentation and exclusion, and a lack o f security in some areas o f the country deters private investment and freedom o f movement.

iii. The World Bank Group’s Country Assistance Strategy (CAS) seeks to address these challenges through a long-term partnership with the government, people, and development partners of Papua New Guinea. The CAS for 2008-2011 i s designed as the first in a series covering the next 15 to 20 years, which w i l l allow the Bank Group and GoPNG to take action on challenges that can be addressed in the short term, while starting to work on issues that require a long-term approach. In an effort to support country ownership, the CAS i s aligned to the Government’s MTDS, which seeks to alleviate poverty through economic growth and social development. The CAS emphasizes close coordination with development partners, including programmatic support in specific sectors, to maximize aid effectiveness within each donor’s comparative advantage and available resources. Partnerships with c iv i l society and the private sector w i l l also be strengthened to enhance program relevance and sustainability. The strategy i s a results-based CAS, defining expected outcomes over the next four years as well as the Bank Group’s proposed contribution to longer-term national development goals.

iv. The CAS has been prepared jointly by the World Bank and Znternational Finance Corporation (IFC). The first joint strategy for PNG, this CAS recognizes the critical importance o f private sector development in PNG and the substantial scope for collaboration on this agenda. The Bank and IFC w i l l work to integrate their country programs, from upstream analysis to complementary investment and advisory activities in areas such as forestry, fisheries, extractive industries development, agriculture, infrastructure, and the overall business environment.

i

Executive Summary 11

v. The overarching goal of the CAS is to support poverty reduction in PNG. The Bank Group w i l l focus i t s interventions on two strategic pillars: (I) Promoting and maintaining sound economic and natural resource management, and (11) Improving livelihoods and service delivery, especially for the rural poor. This dual focus w i l l allow the CAS to support continued growth under the current natural resource-based economy, while putting in place the conditions for a more diversified, sustainable growth path in the future. Within Pillar I, activities w i l l focus on strengthening governance, maintaining sound management o f the extractive industries, and promoting effective and sustainable management o f natural resources. Pillar II wi l l include targeted interventions to support private sector development, enhance rural livelihoods, improve local service delivery, expand access to infrastructure, and support multi-donor approaches in health and education. Efforts to improve governance and empower women and youth w i l l be mainstreamed across both pillars. The CAS i s designed to be delivered on two platforms, supporting policy and institutional development at the national level while working to improve planning and service delivery at the local level. The Bank Group’s engagement in PNG w i l l be guided by the principles o f long-term partnership, Government leadership, country ownership, results focus, and openness and transparency.

vi. The CAS aims to leverage the Bank Group’s modest financial resources for PNG by supplementing a focused country program with regional and global resources. The annual IDA allocation i s tentatively estimated at US$ 45 mi l l ion for FY08 and US$ 30-32 mi l l ion thereafter, depending on PNG’s performance relative to other IDA borrowers. Given these resource limitations, the CAS aims to restrict new IDA operations to a maximum o f three in a typical year; “core” analytical pieces w i l l be limited to two per year. Country program interventions w i l l focus on areas where the Bank Group has performed well in the past or where i t can draw on global knowledge and experience to complement the work o f other development partners. In addition, the CAS w i l l draw upon regional and global funds such as the Global Environment Facility, Infrastructure for Growth Facility, and Forest Carbon Partnership Facility.

vii. The program presented in Table 6 (page 28) is ambitious in relation to the Bank Group’s budgetary and lending resources. I t should be understood more as a menu o f valid assistance activities than a literal roadmap, and w i l l allow flexibility to focus on issues and areas where Bank Group assistance appears to hold the most promise. Each year a formal CAS progress review and programming meeting w i l l be held with GoPNG, with a view to solidifying the coming year’s lending and AAA.

vi i i . The lending program for FY08 includes three IDA credits: the Second Mining Development TA, the Smallholder Agriculture Development Project, and a Rural Electrification Project. Thereafter, depending on country conditions, Government preferences, emerging opportunities, and available resources, possible areas o f IDA support may include provincial reconstruction and development, rural telecommunications, oversight and accountability institutions, district service delivery and local governance, rural development and livelihoods, road maintenance and rehabilitation, youth integration, and programmatic support to the health and education sectors. In addition, regional and global resources may be called upon to provide assistance on climate change mitigation and adaptation, and avoided deforestation. In addition to supporting microfinance, the IFC w i l l consider investing in gas field development, mining, telecommunications, agribusiness, financial markets, and renewable energy.

iii Executive Summary

ix. The Bank Group’s non-lending program will consist of advisory assistance in support of MTDS objectives, as well as analytical work to examine development challenges and underpin the design of lending activities. The CAS w i l l support continued and strengthened dialogue on public expenditure and procurement reforms under the multi-donor Public Expenditure Review and Rationalization process. In addition, core analytical work may include assessments o f the state o f the economy and policy-based work on public finances, national infrastructure, and local service delivery models; strategies for youth integration and for rural growth and livelihoods development; and the strengthening o f baseline data on poverty and public expenditure flows. Other analytical activities could include work on natural resource management and environmental issues, supporting the Fast Track Initiative for basic education, and a national bio- behavioral HIV/AIDS survey. IFC’s analytical and policy work w i l l focus on strengthening the business enabling environment, niche industries, and public-private partnerships in infrastructure. The Bank and IFC are seeking opportunities to collaborate on forestry, fisheries, gas development, rural telecommunications, and airport and aviation development. The Bank’s current program o f successful community outreach activities w i l l also be continued.

x. The eflectiveness of the proposed program and attainment of CAS objectives is subject to a number of risks. Political conflict could lead to a deterioration in the governance environment, and a steep drop in commodity prices would l ikely trigger a rapid decline in economic performance. Economic and social disruptions could also arise as a result o f growing unemployment, especially among youth, or in the event o f a natural disaster. The r isks to program implementation include a lack o f ownership o f reform, weaknesses in public fiduciary systems, ineffective donor coordination, and an insufficiently large-scale or long-term engagement on the part o f the Bank Group to achieve traction on difficult development issues. The CAS i s designed to mitigate these r isks to the extent possible, taking a long-term approach to governance and j o b creation while working to improve livelihoods and service delivery, and build constituencies for change.

xi,

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0

The following issues are proposed for Board discussion:

Does the proposed CAS adequately address Papua New Guinea’s unique circumstances and provide a sound basis for rebuilding the Bank-country relationship after the difficulties o f recent years?

I s the proposed two-pillared, two-platform strategic approach appropriate?

I s the m i x o f instruments and activities consistent wi th the strategic approach and feasible within the resource envelope?

I. INTRODUCTION

1. This Country Assistance Strategy (CAS) describes the World Bank Group’s proposed program in Papua New Guinea (PNG) for the four-year period 2008-2011. I t i s the first full CAS for PNG since 1999, and the first to be prepared joint ly b y the Bank and the International Finance Corporation (FC). In the early part of this decade, a combination o f factors including political instability, economic and fiscal decline, and differences o f opinion between the Bank and the Government o f Papua New Guinea (GoPNG), led the Bank in 2005 to prepare an Interim Strategy Note (ISN). Positive developments now warrant the preparation o f a full CAS. First, legislative reforms have improved continuity in government, wi th the last Government serving a full five-year term for the first time in PNG’s history. Second, economic decline has been reversed through a combination o f high global commodity prices, sound macroeconomic policies, and improved fiscal discipline. Third, the relationship between the Bank Group and the Government has improved due to persistent efforts b y both parties to find areas o f consensus and productive cooperation. In addition, the international assistance environment i s now more positive: GoPNG has produced a credible Medium Term Development Strategy (MTDS) for 2005 to 2010, and all key development partners have committed themselves to aligning their programs behind it.

2. The World Bank Group is committed to launching a long-term partnership with PNG. The CAS for 2008-2011 i s envisioned as the first in a series that w i l l cover the next 15 to 20 years. A long-term perspective allows the current CAS to better distinguish the outcomes that can be achieved in four years, and those complex, vital issues that require a long-term involvement and greater patience (such as central-provincial relations, and transparency and accountability in government).

3. The CAS demonstrates the Bank Group’s intention to align its programs with the Government’s MTDS. The M T D S seeks to alleviate poverty through sound economic and natural resource management and through the direct delivery o f services to the poor. Given IDA’S relatively modest resource envelope for PNG, the CAS places emphasis on working with other donor partners and using the Bank’s global experience and sk i l l s to leverage the policy and programmatic outcomes articulated in the MTDS. In preparing the CAS, the Bank Group has paid careful attention to building trust with GoPNG, and partnership wi th citizens and other development partners at both national and local levels.

11. COUNTRY CONTEXT

4. Papua New Guinea enjoys substantial natural wealth and has recently experienced an economic recovery, but the fruits of growth have not led to poverty reduction. PNG’s economy i s highly dualistic, consisting o f an enclave-based formal sector focused mainly on the large- scale export o f natural resources, and an informal sector dominated by the subsistence and semi- subsistence activities o f the majority rural population. Recent growth i s the result o f improved performance in the formal economy, and has so far had little impact on the livelihoods o f the rural poor. Basic services and infrastructure have deteriorated, moreover, while formal systems for distributing public resources and implementing public service programs remain weak and susceptible to political capture. PNG’s rich cultural diversity embodies a potential for fragmentation, and pervasive insecurity in some areas acts as a severe deterrent to private investment.

Country Context 2

5. The country’s main development challenge i s to ensure that i t s natural wealth i s exploited responsibly, and that the revenues derived from it are used responsibly and efficiently to improve service delivery and, above all, to create the foundations for employment and broad-based growth.

A. Sociopolitical Landscape

6. National political institutions and processes are beginning to stabilize after decades of volatility and uncertainty. Legislation passed in 2001 restricts post-election changes in party allegiance, which has helped strengthen political continuity. In 2007, parliamentary elections were conducted successfully under the new l imited preferential voting system, in which candidates need to attract a greater percentage o f votes to be elected. The Government o f Prime Minister Michael Somare was the first since independence in 1975 to serve a full five-year term and was re-elected in 2007. I t is, however, early to tell whether this stability w i l l result in greater predictability, efficiency, and accountability in national politics.

7. Concepts of national identity, legitimacy, and authority are rooted in the country’s distinct social and cultural fabric, with profound implications for politics, governance, and the distribution of economic benefits across the country. PNG i s home to a highly diverse population, organized in small, fragmented social groups and speaking over 800 distinct languages. Unlike many countries in which independence struggles served to forge a national identity, PNG has experienced no such galvanizing event, and most people today see themselves primarily as members o f local, clan-based groups rather than as citizens o f Papua New Guinea. This perspective i s reflected in a style o f national politics in which political leaders tend to focus on securing benefits for their local allegiance groups, regarding national considerations as secondary in importance. This clearly complicates the pursuit o f a clear national vision and o f policies and practices supporting the same.

8. Internal stability has improved with peace in Bougainville, but law and order is a serious national issue. Following a nine-year secessionist conflict, the Bougainville Peace Agreement was signed in August 2001, and elections for the first Autonomous Bougainville Government (ABG) were conducted successfully in 2005. The ABG has since focused on developing the capacity to take over administrative functions from the National Government and to generate internal revenues f rom agriculture and mining. Despite peace in Bougainville, internal stability remains a concern in some areas (e.g. Port Moresby, Lae, Southern Highlands). The causes o f this vary-in Port Moresby, urban drift and unemployment have led to crime that the police have failed to keep in check; in the Southern Highlands, tribal fighting and lawlessness have been sparked b y conflict over o i l and gas reserves. A reputation for insecurity has damaged PNG’s potential as a tourist destination and a home for investment.

9. External relations are relatively stable. Papua New Guinea’s relationship with Australia i s an important determinant o f i t s foreign policy and security arrangements. While Australia i s by far PNG’s most significant trading partner, bilateral political relations are complex. At the same time, PNG is pursuing expanded trade links with East Asia. As a member o f the Asian Pacific Economic Cooperation Forum, and the largest developing country member o f the Pacific Islands Forum, PNG has the potential to explore growing regional markets.

3 Country Context

B. Recent Economic Developments

10. Papua New Guinea’s economic recovery has accelerated over the last four years, buoyed by booming commodity prices, sound macroeconomic policies, and improved fiscal discipline. Following a prolonged period o f contraction, real GDP growth rebounded in 2003 and reached 2.6 percent in 2006 (Figure 1). Growth i s expected to rise above 5 percent in 2007 as new mines begin production and increased public spending stimulates the non-mineral sector. Inflation fe l l sharply from 14.7 percent in 2003 to 1.7 percent in 2005, but i s projected to exceed 3 percent in 2007 as a result o f higher fuel prices, foreign exchange reserve accumulation, and

Figure 1: Strong Macroeconomic Performance since 2003

-Real GDP growth

12

10

E 8 F a 6

4

2

0

-1

-4 1998 1999 3000 Mol uH)2 2003 2004 2005 2 0 6 uH)7P

expanding private sector credit.’ Interest rates remain low at just over 3 percent. The kina has strengthened against the US dollar, appreciating b y 6 percent on a real effective basis in 2006.

1 1. High international prices for key export commodities have created signijkant surpluses on the external account. PNG has one o f the least restrictive trade regimes in the region, fol lowing a program o f tariff reductions and the abolition o f exclusive agricultural commodity export arrangements. Despite the continued expansion o f imports, the merchandise trade surplus widened to nearly US$ 1.5 bi l l ion in 2006 as exports o f both mineral and non-mineral goods grew to US$4.3 billion. The current account surplus expanded from 3.9 percent o f GDP in 2005 to 5.3 percent in 2006, but i s expected to narrow in the medium term as commodity prices soften. International reserves have continued to accumulate on a net basis, rising to about US$ 1.9 bi l l ion in 2006 (the equivalent o f about 8 months o f non-mineral merchandise imports). Given the PNG economy’s vulnerability to shifts in international commodity prices, i t i s prudent to maintain a higher level o f foreign exchange reserves than in many other countries.

12. I n 2007, the Government is expected to maintain an overall fiscal surplus for the third consecutive year, but the non-mineral deficit is increasing. The expected rise in non-mineral fiscal imbalances, from 4.7 percent o f GDP in 2005 to 8.2 percent in 2007, reflects growth in development spending financed by the record inf low of mineral revenues. These windfall revenues, combined with improved expenditure controls and lower domestic interest rates, have driven recent budget surpluses. The Government has utilized this surplus well, reducing a backlog o f domestic payments arrears to suppliers, scaling back future liabilities by funding the public sector pension plan, and restructuring domestic debt. Total public sector debt fe l l f rom 67 percent o f GDP in 2003 to an estimated 39 percent in 2006, and public and publicly-guaranteed

Inflation projections fall within the Bank of Papua New Guinea’s target range of 2.5-4.5 percent over the medium term.

Country Context 4

external debt declined from 46 percent of GDP to about 21 percent over the same period. In addition, the Government has boosted budget allocations in line with MTDS priorities, focusing on needed infrastructure rehabilitation and one-off development projects (in recognition o f the unpredictable nature o f these inflows). This reorientation of Government expenditures i s sound, but the desired results w i l l require the creation o f adequate operating capacity and consistent allocation o f recurrent funds for implementation and maintenance.

C. Natural Resource Management

13. As in many other resource-rich nations, PNG remains highly dependent on the extractive industries. PNG i s endowed with substantial deposits of minerals (mainly gold and copper), oil, and gas. Minerals and petroleum alone account for over 20 percent o f GDP and nearly 80 percent o f exports, and this trend i s l ikely to continue in the near to medium tern. Once considered a sector in decline, the mining industry in PNG has experienced a resurgence in exploration and investment in response to rising mineral prices, improvements in the availability o f geological data, and tax adjustments enhancing PNG’s competitiveness. New mineral exploration and investment w i l l be critical in the years ahead since the country w i l l l ikely face the closure o f the O k Tedi mine, i t s biggest mining operation, as early as 2013. The export o f o i l has also contributed significantly to PNG’s economy, though it i s expected that current o i l fields w i l l be largely depleted b y 2015. Recoverable natural gas resources are estimated to be substantial, and are l ikely to be an important source o f economic growth and commercial development in the years ahead. (See Attachment A for a review o f the extractive industries in PNG.)

14. Papua New Guinea’s rich environmental resources ofSer the potential to support rural livelihoods and tourism development. PNG i s home to one o f the world’s four remaining significant tropical rainforests, covering over three-quarters o f the country’s total land area. Fisheries resources are large and relatively unexploited compared to other parts o f East Asia and the Pacific, and artisanal and small-scale mining provides substantial income to rural families. Land constitutes a livelihoods safety net for the vast majority o f Papua New Guineans. The country’s rugged physical beauty, r ich biodiversity, and diverse cultural landscape also hold great untapped tourism potential.

15. Yet PNG’s natural resources - and their role in economic growth - remain vulnerable to institutional and management weaknesses, unsustainable practices, and natural disasters. The policy and legal framework for natural resource management i s unclear and incomplete. Management agencies are under-resourced, and the data needed for effective planning and decision making are absent. Shortcomings in governance and accountability have led to overexploitation o f resources and environmental pollution. PNG i s also highly susceptible to natural disasters, including volcanic eruptions, earthquakes, and tsunamis. Global climate change has increased the occurrence o f extreme weather events, such as droughts and floods, threatening the food security and economic base o f rural populations. GoPNG has launched a number o f initiatives aimed at mitigating environmental degradation and natural disasters- including the Millennium Development Goal (MDG) 7 Initiative on forestry and energy, and work on the Clean Development Mechanism for emissions trading under the Kyoto Protocol- but they are only at an embryonic stage.

5 Country Context

D. Public Financial Management and Governance

16. Public financial management in PNG is based on a sound legislative and procedural framework, but weaknesses in implementation undermine accountability and budget credibility. A 2005 Public Expenditure and Financial Accountability assessment found that PNG has established adequate systems and processes for public financial management, but that they are not always followed and that breaches o f procedure are not effectively penalized. A lack o f transparency in budget execution makes i t difficult to track expenditures. Considerable diversion o f budgeted resources and reliance on non-transparent extra-budgetary trust funds often translate into insufficient resources and staff for important services. Conversely, the Government’s ability to direct resources to priority areas i s constrained b y weak integration between development and recurrent budgets together with compression o f recurrent spending, resulting in insufficient recurrent funds to deliver services and development budget programs. The alignment o f the budget with broad M T D S priorities has improved in recent years, but there i s a continued need to develop specific, costed priorities so as to strengthen links between national and sector strategies, available resources, and budget planning.

17. Procurement processes have improved considerably on paper, but improvements in practice wil l depend on strong leadership, capacity building, and the consistent use of standardized documentation and procedures. In 2006, a Country Procurement Assessment Report (CPAR) concluded that the legal and regulatory framework for public procurement improved substantially following amendments to the Public Financial Management Act in 2003, but that waivers o f competitive processes remain widespread. This lack o f transparency contributes to perceptions o f corruption in procurement. Use of the appropriate manuals i s constrained by insufficient dissemination and training, while standard bidding documents consistent with the amended legislation need to be developed, and clear tender evaluation processes introduced.

18. Flaws in the decentralization framework further impede service delivery and accountability. The system o f fiscal transfers to the provinces has never worked well, and grants mandated under the 1995 Organic Law on Provincial and Local-Level Governments have not been fully implemented as intended. Though local-level governments are formally responsible for critical services (such as the construction and maintenance o f schools, health posts, and housing for teachers and health workers), they have little real control over their budgets and thus little accountability for delivering services. Planning and budgeting practices are not wel l aligned, and communication between levels o f government, and between government and non- state actors, i s poor. In practice, local government budgets are largely influenced by Members o f Parliament, who are strongly motivated to favor constituents in their own clan or ethnic group, and who have effective control over significant local-level funds using District Support Grants. Highly unequal access to resources relative to needs across provinces exacerbates this situation.2

19. Controlling corruption should be a much higher priority in PNG. Corruption i s widely acknowledged to be a serious issue at a l l levels of government, and particularly in the areas o f

Valuable research by the National Economic and Fiscal Commission has demonstrated that only five provinces have sufficient resources to carry out their basic responsibilities for service delivery and infrastructure maintenance, and four o f those five have access to large royalty transfers that are not available to other provinces.

Country Context 6

budget management, procurement, and natural resource management. In 2007, Papua New Guinea ranked 162”d out of 179 countries in Transparency International’s Corruption Perceptions Index, as compared to 118th out o f 133 countries in 2003,3 and there i s evidence that control of corruption has worsened over the last decade (Figure 2). The causes o f corruption in PNG include insufficient capacity among oversight, audit, and enforcement agencies; a lack of transparency and rule respect in the use o f public funds and natural resources; politicization o f bureaucratic processes; and the redirection o f public resources to meet personal or social demands, such as wantok obligation^.^ In the MTDS, GoPNG has highlighted the costs o f corruption in terms o f economic growth, private investment, and service delivery. Royalties and revenues from mineral resources are managed in a non-transparent way, and although substantial funds are distributed to provincial governments and to landowner representatives as compensation for use o f communal lands, studies undertaken by the Department o f Mines indicate that they are often not transparently used or equitably shared and rarely result in sustainable investments or other public gains. GoPNG has expressed interest in participating in the Extractive Industries Transparency Initiative (EITI), which encourages independent verification and full publication o f company payments and government receipts from oil, gas, and mining activities. The MTDS also aims to support oversight institutions and “watchdog” bodies in order to improve efforts to detect and prosecute fraud and corruption, and GoPNG i s workmg to develop an anticorruption strategy.

Figure 2: Governance and Corruption in Papua New Guinea _I

- ”-I-- --- ,__” ”

Voice and Accountability

P o l i t i c a l S t a b i l i t y

Governnent Effectiveness

Regulatory Qual i ty

Rule o f Lau

Control o f Corruption

11 Bottom Bar: 1996

I

I I I I 9 25 59 75 i e e

Worst Country’s Percentile Rank Best

Source: Kaujinann, Kraay, and Mastruzzi. 2007: Governance Matters VI: Governance Indicators for 1996-2006. http://info. worldbank. org/governance/wgi2007

20. PNG has established a full range of formal accountability institutions, but they need signifcant strengthening to become truly effective. The Ombudsman Commission plays a key role in enforcing the Leadership Code and investigating citizen complaints o f administrative malpractice, and the Auditor General i s making strong efforts to erase the backlog o f audits of public accounts. Both institutions, however, are hampered by a lack o f budget and qualified staff

The Corruption Perceptions Index seeks to measure the extent of corruption as perceived by business people and

Wantok (or “one talk”) refers to one’s family or clan. country analysts. 4

7 Country Context

with specialized ski l ls , and delays occur in tabling their reports to Parliament. Parliamentary scrutiny o f the budget i s limited, with few days devoted to budget review and few changes made to budget proposals. The Parliamentary Public Accounts Committee has been reinstated after a four-year hiatus, and it i s hoped that follow-up on the Auditor General’s recommendations w i l l improve as a result. The judiciary functions reasonably well and independently at the national level, but i t s independence i s reportedly under pressure and i t lacks adequate resources and ski l ls . The police force i s widely criticized for corruption and human rights abusesa5 I t also lacks professional staff and funds for operations, and as a result criminal activity has escalated with few constraints, spreading from urban to some rural areas. PNG’s law and order problem makes it difficult to protect women and children from violence and rape, disrupts orderly economic activity, deters private investment, and greatly increases the costs o f doing business.6

21. There is, however, a significant and growing demand for good governance in PNG. The media are well developed and lively, freely reporting on governance issues and allegations o f corruption in the public sector. Several impressive policy and research institutions contribute to the governance debate, and various international and national NGOs are active in promoting awareness and demand for good governance. Nonetheless, there i s considerable room to build consensus among local-level governments, c iv i l society, and other actors, creating communities o f interest that share in the pursuit o f good governance and i t s translation into better service delivery at the local level. GoPNG has recently made important progress in strengthening consultations with the private sector and c iv i l society around the preparation of the budget, but budget information i s s t i l l too limited, and largely inaccessible at the community level.

E. Poverty, Livelihoods, and Service Delivery

22. Zn Papua New Guinea, poverty is defined as a lack of access. Importantly, this includes the inability to take advantage o f basic public services and infrastructure, as well as a lack o f access to income and income-earning opportunities. Viewing poverty through this lens offers valuable insights into the design of effective poverty alleviation programs in PNG.

23. As noted, recent improvements in economic performance have not had a tangible impact on poverty. Although the information from the 1996 National Household Survey i s in urgent need o f updating, poverty today can be estimated b y combining the 1996 survey data with information on the rate and sectoral pattern o f output and employment growth since then. The Bank estimates that the incidence o f poverty has risen sharply in the last decade. In 2006, an estimated 39 percent o f Papua New Guineans l ived on less than US$ 1 per day (using 1993 Purchasing Power Parity), up from 25 percent in 1996. I t i s likewise estimated that over half the population now lives below the national poverty line, rising from 37 percent in 1996 to 53 percent in 2006.7 This increase was concentrated in the period o f economic contraction between

Human Rights Watch. 2006. “Sti l l Making Their Own Rules: Ongoing Impunity for Police Beatings, Rape, and Torture in Papua New Guinea.” HRW Index, Vol. 18, No. 13 (C). In 2004, i t was estimated that costs associated with security and theft amounted to 12-15 percent of business

turnover. Though large (mostly foreign-owned) firms were able to shoulder the burden of this “crime tax,” small- and medium-sized enterprises spent about 12 percent of their gross income on security. See Satish Chand. 2004. “Papua New Guinea Economic Survey: Transforming Good Luck into Policies for Long-Term Growth.” Pacific Economic Bulletin: 19(1): 1-19. ’ The national poverty line allows for 2,200 calories per adult equivalent per day and an allowance for basic non- food expenditure.

5

Country Context 8

1996 and 2002, with recent economic recovery helping to halt the rising trend. However, our estimates do not suggest any significant decline in poverty since 2003, reflecting a l imited growth in real per capita incomes. In comparative terms, PNG’s per capita income (Atlas method) o f about US$770 in 2006 only slightly exceeds the low-income country average o f US$ 650, and i s well below the East Asia and Pacific Region’s (EAP) average o f US$ 1,863.

24. Poverty is an overwhelmingly rural phenomenon. In 1996, two in five rural residents were poor, compared to one in six in urban areas. About 93 percent o f the poor l ived in rural areas. Since then, the incidence o f both rural and urban poverty i s estimated to have increased, with urban poverty growing faster. But even today, the share o f rural poverty i s estimated to be around 85 percent. Income disparities between urban and rural areas, and among regions, remain high, and nearly al l socio-economic indicators are significantly worse in rural areas than in the cities. In 1996, the poorest 20 percent o f the population accounted for only 4.5 percent o f total consumption, while the richest 20 percent accounted for over 56 percent, giving PNG a Gini coefficient o f 0.48 and making i t the country with the most unequal distribution o f consumption in the EAP region,* Inequality i s related to the remoteness and isolation o f the poorest rural areas, which tend to lack access to markets, services, and income-generating opportunities, and where returns on agriculture are often reduced b y low soil fertility, difficult terrain, and higher vulnerability to pests or climatic events.

Inequality i s also high overall.

25. Poverty rates are lowest among the few households who participate in the formal business sector or hold wage-earning jobs. Only about 6 percent o f the working-age population in PNG i s employed in the formal sector (2002).9 In urban areas, unemployment and underemployment are high and l ikely growing, as formal sector employment in the National Capital District declined b y approximately 6 percent between 1996 and 2005. There are indications o f an encouraging revival o f growth in formal sector employment during 2006 (by about 7 percent on a third quarter year-on-year basis), but with the population growing at an estimated 2.7 percent per year the j ob creation challenge i s enormous, and particularly critical because o f the associations between youth, unemployment, and lawlessness. The population o f about 6.2 mi l l ion people i s set to double in 25 years or so, making job creation the Government’s top strategic and political priority.

26. Agriculture, fishing, community forestry, and artisanal and small-scale mining are important sources of subsistence and cash income in rural areas. Nearly two-thirds o f poor people (62 percent in 1996) l ive in a household where agriculture i s the principal source o f cash income for the household head. Subsistence agriculture i s also important, and though most households that grow food for consumption sell a portion o f their food crops at market, these transactions are usually small and opportunistic in nature. A large number o f people, estimated at somewhere between 250,000 and 500,000, participate in coastal subsistence fisheries, and a s im i la r number benefit f rom artisanal and small-scale mining activities. In addition, forests play

The Gini coefficient i s a measure of inequality, ranging from 0 (perfect equality) to 1 (perfect inequality). By comparison, the Gini coefficients for other EAP countries are: Cambodia 0.42 (2004), China 0.46 (2002), Indonesia 0.35 (2006), Laos 0.35 (2002), Philippines 0.45 (2003), Thailand 0.43 (2004), and Vietnam 0.38 (2002). These inequality indices do not take account of spatial price differences within countries.

Selected regional comparators include the Solomon Islands 9% (2002), Vanuatu 15% (2004), Fiji Islands 25% (2003), Samoa 63% (2001), and Tonga 67% (2003). World Bank. 2006. At Home and Away: Expanding Job Opportunities for Pacific Islanders through Labour Mobility. Washington DC: World Bank.

9 Country Context

an important role in the livelihoods and cultural lives of many o f PNG's rural residents. Further development o f these income-earning opportunities faces important challenges, including limited and expensive access to inputs and markets, poor infrastructure, ineffective extension services, l imited access to credit, corruption, safety and security concerns, and insufficient awareness or mitigation of environmental impacts.

27. The creation of income-earning opportunities through micro, small, and medium enterprise development is constrained by a dificult investment environment. Accordin to the 2008 Doing Business indicators compiled by the World Bank and IFC, PNG ranks 84 out o f 178 economies for overall ease o f doing business. Rankings are substantially lower, however, for dealing with licenses, getting credit, and enforcing contracts." Cumbersome administrative processes and l imited access to finance hamper the formation and growth o f small businesses. A lack o f financial market competition and underdeveloped financial infrastructure compound this problem b y increasing the cost o f finance and raising the risk o f becoming trapped in debt. Many o f the thousands o f micro, small, and medium enterprises that are in operation are in the informal sector, and the absence o f effective business services holds back productivity. Business development i s also discouraged by the deterioration o f public infrastructure and the breakdown o f law and order.

ti?

28. The condition of physical infrastructure has deteriorated, with far-reaching consequences for the livelihoods of poor people. Transport networks are in poor condition, limiting access to markets and social services, and imposing high costs on businesses. About 85 percent o f the main roads and nearly al l feeder roads are impassable during at least part o f the year. Though reliable statistics are difficult to obtain, i t i s estimated that 17 percent o f the population has no road access. Shipping and air transport services to isolated communities are in decline, and wharves and airstrips are falling into disrepair." Only 7 percent o f the population has access to electricity, with wide variations across regions, holding back enterprise formation, service quality, and the efficiency o f local adrninistration.l2 Access to information and telecommunications i s among the lowest in the w0r1d.l~

29. There is an emerging consensus that human development outcomes and social service delivery performance have declined in recent years. PNG ranks 139' out o f 177 countries in the latest United Nations Development Programme (UNDP) Human Development Index (2004), falling from 12Efh out o f 175 countries in 1994. Overall, PNG's human development indicators lag behind other EAP and low-income countries (Table 1). Performance in the health and education sectors i s constrained by a lack o f clarity in the decentralization framework, a squeeze on recurrent spending, and inefficiencies in resource allocation; the consequence has been shortages o f funding and qualified staff on the frontlines o f service delivery.

lo PNG i s ranked 118* for Dealing with Licenses, 115" for Getting Credit, and 162"d for Enforcing Contracts. 'I The ports serving Port Moresby, Lae, Madang, Kimbe, and Rabaul carry international and coastal traffic and have reasonable infrastructure, but lesser ports provide only basic services and are often unusable in bad weather. The deteriorating condition o f runways at major and secondary airports often causes services to be diverted or cancelled.

Nearly two-fifths of healthhub-health centers and an even greater proportion o f rural health posts have no electricity to power essential medical equipment, and among the small minority o f schools that have access to electricity, energy costs account for as much as 70 percent o f their budget. l3 Fewer than 3 in 100 Papua New Guineans have access to basic telecommunications. Fixed-line infrastructure reaches only 80 population centers, and mobile service is limited. Internet access i s primarily limited to the capital, largely through slow-speed dial-up connections.

12

Country Context 10

Table 1: Human Development Indicators in Comparison

Indicator PNG EAP LowIncome

L i fe expectancy at birth (years) 56 71 59 Infant mortality rate (per 1,000 live births) 64 26 75 Maternal mortality ratio (modeled estimate, per 100,000 live births) 300 117 684 HIV prevalence (% total population 15-49) 1.7 0.2 1.7 Literacy rate (% people 15 and older) 57 91 61 Primary school enrollment (% gross) 75 111 104

Note: Gross primary enrollment refers to the ratio of total enrollment, regardless of age, to the total population of children in the ofJicial primary school age group. Source: World Development Indicators (SIMA & HNP Stats). Data are for 2005, or most recent available.

30. Health outcomes have declined in the last decade, and Papua New Guinea is facing the most serious HZV/AZDS epidemic in the East Asia and Pacific region.14 L i f e expectancy i s low, immunization rates are inadequate, and maternal and infant mortality rates remain unacceptably high. Health system performance i s faltering (Table 2). At the same time, the H N / A I D S epidemic i s generalized and accelerating. Among sexually active adults, HN prevalence exceeds 1 percent in many rural areas, 2 percent in many urban areas, and 3 percent in the capital, Port Moresby. I t i s estimated that about 66 percent o f al l infections are in the majority rural population. In 2007, the GoPNG released a report estimating that 1.28 percent o f the population i s l iv ing with HIV/AIDS. Without effective interventions, the epidemic could significantly increase. Though GoPNG has taken steps to establish an institutional, legal, and strategic framework for preventing and treating HIV/AIDS, much more needs to be done to mount an effective national response to the epidemic.

Table 2: Health System Performance in Decline

Indicator Open aid posts (% o f original number) Outpatient visits (per person per year) Supervisory doctor visits (% o f health centers) Measles vaccinations (% o f children 12-23 mos.) DPT3 vaccinations (% o f children 12-23 mos.) Antenatal care coverage (%) Delivery rooms with running water and sink (%) Births attended by skilled health staff (%)

75 2.39

53 24 56 80 61 52

Then 1995 1988 1995 1996 1996 1991 2000 1991

63 1.49

41 60 61 58 51 39

Now 2000 2003 2000 2004 2004 2004 2002 2004

Sources: ADB, AusAID, World Bank. 2006. Papua New Guinea: Strategic Directions for Human Development; World Development Indicators (SIMA & HNP Stats).

3 1. Access to education has improved considerably, but there is a need to strengthen quality, eficiency, and equity. The number o f students in PNG doubled in the decade following the national education reform o f 1993. With the school-age population growing at nearly 3 percent per year, gross primary enrollment rates have remained steady at about 75 percent, well short o f the goal of universal basic education. Girls account for about 45 percent o f enrollment in the basic education cycle, but their share drops to 40 percent b y grade 10, and 35 percent b y grades

l4 Prevalence o f H I V among those aged 15-49 i s estimated at 1.7% in PNG, as compared to 1.6% in Cambodia, 1.4% in Thailand, 1.3% in Myanmar, and between 0.1% and 0.5% elsewhere in the region.

11 Country Context

11 and 12.15 About one in f ive children do not yet attend school, and most do not complete the basic cycle. Literacy rates among youths and adults are l ow at 67 and 57 percent respectively. According to the 2004 Public Expenditure and Service Delivery (PESD) study, school facilities are in decline and absenteeism i s high (averaging 15 percent among both students and teachers).

32. Despite some advances, progress toward the MDGs has been disappointing. Recognizing that the internationally defined MDG targets would remain out of PNG’ s reach well beyond 2015, GoPNG has endorsed a set o f nationally relevant targets and indicators. The national MDGs are considerably more modest, but s t i l l present an ambitious agenda for the next seven years. Progress has generally been slow, and in some areas has stalled or even deteriorated (Attachment B), while the rapid spread o f HIV/AIDS threatens to reverse many o f the gains made. The first national MDG progress report, produced joint ly b y GoPNG and UN in 2004, concluded that most o f the national MDGs-with the exception o f those focusing on HIV/AIDS and the environment-could be achieved on time, but only wi th concerted efforts to improve service delivery in low-performing provinces.

F. Social Inclusion

33. The status of women in society varies widely across the country, but general trends point to significant gender inequalities. GoPNG has ratified the United Nations Convention on the Elimination o f Discrimination Against Women and incorporated i t s provisions into national policies, strategies, and laws. Women have substantially poorer access to health care services, and lower levels o f educational attainment and literacy pose significant barriers to their equal participation in economic activity and political life. Women receive a smaller share o f household income than men and are less l ikely to participate in the formal non-agricultural wage economy. Even where women are most economically active, they exercise little control over the benefits generated b y their activity. Most women lack access to credit, banking, and markets. Their representation in politics i s negligible, with only one female among 109 national parliamentarians. Women are disproportionately the victims o f violence, and their ability to participate in economic and social l i fe i s reportedly constrained b y the associated injuries, feelings o f fear, and increased risk o f contracting HIV/AIDS. The country’s law and justice institutions are dominated by men, and women are not always able to access judicial recourse.16

Implementation w i l l be the next challenge.

34. The rapidly growing youth population faces formidable challenges in finding employment. Nearly half of the population i s under the age o f 20, and the number of young people i s expected to double in the next 20 years. Youth unemployment and underemployment are on the rise, and only one in ten school graduates i s l ikely to find a j o b in the private sector. Many young people in PNG leave their villages in search o f jobs in cities and towns, only to find that urban job markets are highly competitive and that they lack the sk i l l s needed to perform the few jobs that are available. This situation has fuelled the expansion o f urban youth gangs. As populations in urban settlements lose their links with their rural areas o f origin, these young people become more dependent on involvement in gangs as their main source o f livelihood and social acceptance. Even within their local communities, young people often feel they have

l5 Government of Papua New Guinea and United Nations in Papua New Guinea. 2004. Millennium Development Goals: Progress Report for Papua New Guinea 2004. l6 World Bank. 1998. Gender Analysis in Papua New Guinea. Washington DC: World Bank.

PNG’ s Development Program, Prospects, and Challenges

12

limited opportunities to participate actively in local affairs or express their concerns to decision makers, and that when they do speak out they are not taken seriously b y their elders.17 This sense o f disenfranchisement can lead to frustration, apathy, and disengagement from society, which in turn feeds social conflict and crime. In addition, young people are highly vulnerable to health risks such as HIV/AIDS and alcohol and substance abuse.

111. PNG’S DEVELOPMENT PROGRAM, PROSPECTS, AND CHALLENGES

A. Country Priorities and Agenda

35. Papua New Guinea’s Medium Term Development Strategy for 2005 to 2010 lays out a vision of the country’s development goals and the Government’s approach to achieving them. The ultimate aim o f the MTDS i s to foster sustainable improvements in the quality o f l i fe o f all Papua New Guineans b y promoting economic growth and social development. Drawing from the Government’s Program for Recovery and Development, announced in 2002, the M T D S promotes three strategic priorities: good governance, including public sector reform and enhanced political stability; export-driven economic growth, focusing on sectors in which PNG has a comparative advantage, such as agriculture, forestry, fisheries, and tourism, supported b y mining, petroleum, and gas; and rural development, poverty reduction, and empowerment through human resource development. The strategic approach i s underpinned b y the Medium Term Resource Framework and the Strategic Plan for Supporting Public Sector Reform, covering 2003-2007. The M T D S objectives w i l l be reflected in a National Poverty Reduction Strategy which i s currently under preparation.

36. In hopes of achieving maximum development impact f rom available resources, the strategy defines seven pro-poor expenditure priorities: (i) rehabilitation and maintenance o f transport infrastructure; (ii) promotion o f income earning opportunities; (iii) basic education; (iv) development-oriented informal adult education; (v) primary health care; (vi) HIV/AIDS prevention; and (vii) law and justice. GoPNG has made progress in reorienting broad public expenditure categories toward M T D S priorities, but the real test lies in fully implementing the strategy. The M T D S recognizes that effective implementation depends on clarifying the fiscal envelope, identifying cost savings, and improving the efficiency o f public spending. Inter-related tools include the Medium Term Fiscal Strategy, the associated Medium Term Debt Strategy, and efforts to strengthen public expenditure and personnel management begun under the Public Expenditure Review and Rationalization (PERR) process.

The Government’s development strategy prioritizes pro-poor spending.

37. The MTDS was prepared through a consultative process and is widely owned. The M T D S seeks to strengthen ownership and implementation through strategic alliances and partnerships with key stakeholders, including provincial and local governments, churches, community-based organizations (CBOs), NGOs, ordinary Papua New Guineans, international development partners, and the private sector. Consultations involved al l levels o f government and c iv i l society representatives, took place across the country, and revealed strong support for the three strategic priorities.

Such feelings were expressed by young people during the Bank-sponsored Youth Open Space Forum in July 2006.

13 PNG’ s Development Program, Prospects, and Challenges

38. Development partners have endorsed the MTDS and are defining their assistance programs according to its priorities. The national MDGs have been incorporated into the strategy and are relatively well specified, though more work needs to be done in defining targets for combating diseases, protecting the environment, and strengthening partnerships for global development. The Government has adopted an M T D S performance framework, but there i s a need to clarify and strengthen the targets and indicators. The Bank Group supports GoPNG’s framework and w i l l help further define targets and indicators, with a view to using these to evaluate CAS results.

UNDP i s supporting GoPNG in i t s efforts to refine these targets.

B. Medium-Term Economic Outlook

39. PNG’s macroeconomic outlook is expected to remain positive if the current direction of fiscal and monetary policy is maintained (Table 3). Real GDP growth rates over the CAS period are projected b y the staffs o f the Bank and International Monetary Fund (IMF) to be around 4 percent per year on average, with faster growth in 2009-2010 (when several new mines are due to be commissioned). With structural reforms assumed to proceed only gradually, non-mineral growth i s expected to be slower than overall economic growth. The external current account surplus would narrow considerably following an anticipated decline in prices o f key export commodities and an increase in demand (both for the imports needed to construct new mines, and for domestic consumption and investment). Foreign exchange reserve accumulation would continue, although more slowly than in recent years. Fiscal surpluses are also forecast to decline as mineral revenues fal l and spending, especially on investment projects, increases. The non- mineral fiscal deficit should remain broadly stable, however, wi th efforts to sustain non-mineral tax revenue collections. The central bank i s expected to contain the inflationary pressures emanating from record-high natural resource revenues and expanding domestic credit, with inflation l ikely to remain in the lower to middle single digits.

Table 3: Medium-Term Economic Projections

Indicator 2005 2006 2007 2008 2009 2010 2011 Real GDP growth (%) 3.4 2.6 5.2 4.0 4.5 4.4 3.6 Inflation (CPI, %, period average) 1.7 2.3 3.0 4.8 4.8 4.5 4.5 Fiscal balance (% o f GDP)’ 3.7 7.4 4.9 1.2 0.4 -1.0 -1.9 Non-mineral fiscal balance (% o f GDP) -4.7 -7.7 -8.2 -9.7 -8.5 -8.2 -8.1 Current account balance (% o f GDP) 3.9 5.3 7.1 2.6 1.7 0.1 0.6 Gross public and publicly-guaranteed debt 47.7 39.2 37.7 35.8 35.7 33.0 31.6

External public and publicly-guaranteed 25.5 21.4 19.8 18.8 17.6 16.3 15.3 debt (% o f GDP)’

(% of GDP)*

From above the line. Including central government and statutory authorities. Source: IMF

40. Given the structure and openness o f PNG’s economy, a sharp decline in world commodity prices or the postponement or closure o f large mineral projects would heighten the need for fiscal adjustment to permit continued room for essential development spending. Excessive or inefficient spending could place upward pressure on prices, leading to a rise in interest rates and a consequent dampening o f growth. A lukewarm commitment to further structural reform could curb investor confidence. The rapid spread o f HIV/AIDS would impair growth and human development. On the upside, the rapid development of PNG’s gas reserves could improve the longer-term outlook for growth.

These growth prospects are moderated by substantial downside risks.

PNG’s Development Program Prospects, and Challenges

14

41. I n addition to sustained formal sector growth, significant reductions in poverty and unemployment wil l require the expansion of opportunities for income generation and improved service delivery, especially in rural areas. Broad-based growth requires a medium-term fiscal policy that gives priority to infrastructure and service provision, as well as structural reforms to stimulate investment and productivity in the non-mineral sector.

42. PNG is considered to be at low to moderate risk of debt distress, and sustained vigilance in public debt management wil l be required. Under the baseline scenario-which assumes continued prudence in fiscal policy, relatively favorable external circumstances, and moderate levels o f growth-PNG’s external public and publicly-guaranteed debt i s sustainable, dropping from 21 percent o f GDP in 2006 to 16 percent in 201 1, and to 6 percent in 2026.’* PNG faces a l ow to moderate risk o f debt distress under the IMF-World Bank debt sustainability analysis framework for low-income countries (Attachment C), but given the economy’s vulnerability to external shocks, i t i s prudent to take a cautious view o f PNG’s debt service capacity. GoPNG has recognized the risks, and i t s Medium Term Debt Strategy targets a further reduction in debt ratios.

C. Papua New Guinea’s Development Challenges and Opportunities

43. As described above, PNG faces a number of formidable challenges on the road to enhanced growth and poverty reduction, but there are also considerable opportunities for progress. In responding decisively to these challenges and establishing partnerships with key stakeholders, PNG’s decision makers have the opportunity to harness considerable resources in pursuit o f improved economic and social development in the years to come.

44. Promoting strong, accountable, and sustainable performance of resource-based exports. Growth in the extractive industries and other resource-based exports can be sustained over the medium term by enabling responsible investment, exploration, and innovation, while minimizing the environmental damage from extractive activities and logging. Measures to improve the collection and management o f natural resource revenues w i l l help finance national poverty reduction programs; in addition, locally based strategies can be used to enhance the benefits that enclave projects bring to local communities. Improved transparency in mining and petroleum revenues, as the EITI principles mandate, and improved forestry concession management w i l l help local people have a voice in how resource-based industries are managed and w i l l also help provide a secure environment for long-term investment in these sectors.

45. Diversifying economic growth to broaden the potential for livelihood improvements. There i s a need to use the window afforded by today’s high mineral prices to diversify PNG’s economic base. As the supplies o f exhaustible resources dwindle, growth in the non-mineral sectors w i l l become increasingly important. Growth opportunities exist in food production for the domestic market, high-value export crops, plantation forestry and downstream agro-industry, small-scale manufacturing, tourism, and the service industry. Prospects are also good for artisanal and small-scale activities in fishing, mining, and village-based forestry. Harnessing the potential for economic growth in the non-mineral sector requires increased investment efficiency and urgent efforts to improve the investment environment and promote entrepreneurship.

The total (external and domestic) public sector debt ratio i s projected to decline from 39 percent of GDP in 2006 to 32 percent by 201 1 and 15 percent by 2027.

15 Role of Development Partners

46. Ensuring good governance and sound public financial management. Good governance i s fundamental to equitable economic growth and the efficient delivery o f services. GoPNG has taken important steps to improve fiscal discipline and establish sound policies, laws, and oversight institutions. What i s now required i s to ensure that these policies are adhered to, that laws are enforced, and that oversight institutions are given the human and financial resources they need to accomplish their mission. The system o f governance in PNG has the potential to be strong and vibrant if careful attention i s paid to improving the financial and operational structures for decentralized service delivery; this in turn requires transparent information and accountability at all levels o f government.

47. Ensuring that development resources are delivered equitably throughout the country. Better access to roads, energy, and communications would have a major beneficial impact on the lives o f the poor. A recent study indicated that cutting the average travel time to the nearest road by two to three hours could lower the incidence o f poverty in PNG by 6 to 12 percent.” In addition, curbing the rapid spread of HIV/AIDS and ensuring that local health and education providers (including the Government and NGOs) are well staffed and resourced are essential both for improved rural productivity and to the achievement o f the country’s MDGs.

48. Empowering women and youth. Enhancing the ability o f women and girls to access education, health services, markets, credit, and income-earning opportunities can improve development outcomes and broaden the participation o f ordinary Papua New Guineans in their country’s economic growth. Reducing the rate o f gender-based violence would limit a major factor in the rapid spread o f HIV/AIDS and other sexually transmitted infections. Providing young people with a relevant education and opportunities for income generation can tap into a vital source o f entrepreneurial energy, while curbing the potential for dissatisfaction and idleness to foster crime, gang activity, and abuse o f alcohol and drugs.

49. Protecting the environment and mitigating the risk of natural disasters. PNG’s natural environment has brought economic and social wealth to i t s people for thousands o f years, but i t i s now under threat-from intensified farming, unsustainable logging, destructive fishing technology, the pollution o f streams and rivers b y extractive industries, as wel l as from climate change and natural disasters. Efforts to raise environmental awareness, enforce environmental policies and laws, and provide sufficient resources to relevant agencies are needed, as i s the integration o f disaster preparedness and mitigation into the country’s development. With responsible use, PNG’s natural resources offer the potential to sustain many generations to come by supporting rural livelihoods and attracting tourism and revenues.

IV. ROLE OF DEVELOPMENT PARTNERS

A. Development Partner Activities

50. PNG mobilizes substantial assistance from international development partners. Australia’s program i s the largest, with AusAID providing grants o f about US$ 300 mi l l ion per year.20 Focus areas include governance and nation building, infrastructure (especially roads),

Gibson and Rozelle. 2003. “Poverty and Access to Roads in Papua New Guinea.” Economic Development and Cultural Change. Oct. 2003.52(1): 159-185. 2o I n addition, the Australian Treasury’s Enhanced Cooperation Program has deployed about 40 Australian Government employees in advisory and in-line positions throughout GoPNG.

Role of Development Partners 16

livelihoods development (agriculture, private sector development), basic service delivery, and HIV/AIDS. The Asian Development Bank (US$28 mi l l ion per year) focuses on public financial management, private sector development, transport, health, and HIV/AIDS. The European Commission (US$ 35 mi l l ion per year) concentrates on rural development and environment, education and training, health, governance and decentralization, c iv i l society, and electoral support. The United Nations agencies (US$ 8 mi l l ion per year)21 focus on capacity building, crisis management, human development, gender equity, and HIV/AIDS. New Zealand provides about US$ 15 mil l ion per year for rural livelihoods development, health, education, law and justice, governance, and c iv i l society development. Other key bilateral partners include China, Germany, Japan, and Korea. The IMF has a Resident Representative in PNG, working closely with the GoPNG on macroeconomic issues and conducting periodic Article IV Consultations. (See Attachment D for a listing o f development partner programs.)

51. These include international and national NGOs, CBOs, religious organizations, and the private sector. The Papua New Guinea Sustainable Development Program, Ltd. (PNGSDP), established in 200 1 b y GoPNG and the BHP Bi l l i ton mining company, i s an independent trust devoted to investing a portion o f profits from the O k Tedi mine in sustainable development activities. PNGSDP’s principal areas o f focus are infrastructure, rural development, energy, microfinance, and community development.

GoPNG works closely with a variety of non-governmental partners.

B. Donor Coordination and Aid Effectiveness

52. There is considerable room to improve donor coordination in PNG, but steps are being taken to enhance dialogue and align donor programs with national goals. Development partners work under different institutional arrangements, and as in many other countries there have been inconsistent messages and programming overlaps. T o address this concern, GoPNG instituted an annual joint Government-Donor Consultation Forum in 2005 and has established a series o f Thematic Working Groups. A Technical Working Group on Aid Effectiveness has been created, and GoPNG and all i t s development partners have issued a joint statement committing to localize the principles o f the Paris Declaration and define targets and actions to improve aid effectiveness b y 2012 (Attachment E). In addition, ADB, AusAID, and the World Bank are working toward improving harmonization o f approaches in the transport sector. Though the harmonization agenda faces important challenges (including the need for continued strengthening of fiduciary and accountability systems, and widely varying institutional structures and program sizes among donors), the Bank Group i s committed to working with GoPNG and development partners to improve aid effectiveness. GoPNG has had reservations in the past about a unified donor strategy approach, but development partner alignment behind the M T D S provides a positive opportunity to increase coordination among donors and with the Government’s programs. ADB, AusAID, and the UN have recently issued country strategies, and the E C and NZAID are in the process o f developing theirs. The CAS draws on these to ensure complementarity. In addition, the Bank Group w i l l help to strengthen GoPNG’s capacity to lead donor coordination; this w i l l include assisting the Government to prepare the next MTDS.

21 The UN agencies expect to mobilize an additional US$77 million over five years, or about US$ 15 million per year.

17 Bank Group Assistance Strategy

53. Recognizing that a coordinated approach is critical to achieving tangible results in PNG, development partners have begun to strengthen collaboration in key sectors. Multi-donor programmatic support has been adopted to enhance coordination and aid effectiveness in the health sector, and momentum i s building for s im i la r approaches in education, transport, and law and justice. Development partners have also had some success in conducting joint analytical initiatives. ADB, AusAID, and the World Bank have worked together to support GoPNG in developing a human development strategy and in implementing PERR recommendations to streamline governance and public expenditure management, PNGSDP has become an important development partner for the Bank Group, providing co-financing to the Smallholder Agriculture Development Project (SADP) and the Road Maintenance and Rehabilitation Project (RMRP) as wel l as supporting the Global Environment Facility (GEF)-financed Teacher’s Solar Lighting Project (TSLP), and collaborating with the IFC on microfinance and forestry.

V. BANK GROUP ASSISTANCE STRATEGY

A. Lessons of Experience

Lessons from Previous World Bank Involvement

54. I n 2000, a Country Assistance Evaluation (CAE) rated the outcome of the World Bank Group’s assistance program to PNG in the 1990s as “unsatisfactory, with modest institutional development impact and uncertain sustainability.” On the positive side, the C A E recognized the country team’s focus on policy issues, high quality economic and sector work, and positive efforts in engaging NGOs. Partly in response to the CAE’s recommendations, the Bank scaled back i t s lending program, making no new loans to PNG between June 2002 and April 2007. The country team focused on intensifying communication with Government and c iv i l society on the basis o f an expanded program o f analytical and advisory activities (AAA) and outreach programs. The Bank liaison office in Port Moresby was upgraded to a full Country Office, and in January 2006 IFC established a full-time in-country presence through i t s Private Enterprise Partnership for the Pacific (PEP-Pacific). Dialogue with Government, donors, and civ i l society continues to broaden and deepen as a result o f these measures.

55. The 1999-2002 CAS focused on governance and rural development. The Bank flagship under this CAS was a Governance Promotion Adjustment Loan, supported by investments in health, education, smallholder o i l palm development, rehabilitation o f the Gazelle Peninsula, solar power, and technical assistance in mining and petroleum. Good progress was made in the smaller investments, but two structural adjustment loans and the Forestry and Conservation Project (FCP) did not achieve their intended outcomes. Problems encountered included Government capacity limitations and bureaucratic delays, corruption, ineffective donor coordination, difficulties receiving counterpart funds, and inadequate Government engagement with private sector and civil society. Perceptions o f the Bank’s role in PNG turned decidedly negative in some quarters. Added to this, controversy attached itself to the FCP. In August 2003, the Bank suspended disbursements due to noncompliance with legal covenants and with the country’s own legislation regarding the award of forest concessions. The loan, which comprised a US$ 17.36 mi l l ion IBRD loan and two GEF grants o f SDR 13.31 mi l l ion each, was eventually cancelled at the Government’s request in June 2005, with only US$ 2.6 mi l l ion o f US$40 mi l l ion disbursed.

Bank Group Assistance Strategy 18

56. In the face of growing political and economic uncertainty and a deterioration in its relationship with GoPNG, the Bank opted to produce an Interim Strategy Note in March 2005. The Bank had launched preparation o f a new CAS in 2002, joining ADB and AusAID in pursuing improved donor coordination through the elaboration o f a Joint Country Strategy (JCS). This effort was set aside in view o f the Government’s concern that the JCS was a means for donors to exert coordinated pressure on the Government, and b y Australia’s introduction o f the ECP in 2004 (it being unclear initially how the hands-on approach o f the ECP would affect the overall aid environment). The I S N focused on promoting development dialogue, stemming the decline in social indicators and building the foundations for recovery and improved governance.

57. The approach taken under the ISN has shown promise, but there is a need to further refine dialogue, strengthen communication, and improve outcomes at both the national and local levels. Sustained dialogue with GoPNG and other development partners has brought productive collaboration in public expenditure management, human development, and transport, as well as a broad endorsement o f M T D S priorities, Recent analytical work on poverty, public expenditure and procurement, human development, transport, and energy has been well received and forms the basis for more strategic and coordinated approaches in these sectors. Under the ISN, the Bank has deepened i t s engagement at the local level, including through the promotion of alternative energy sources in teachers’ homes and continued reconstruction and development in the Gazelle region. A much stronger focus on communication and outreach has not only improved understanding and perceptions o f the Bank in PNG, but has empowered citizens to play a greater role in the country’s development.22 The cancellation o f the FCP highlighted several important lessons for the design and implementation o f complex programs in PNG, including the need for comprehensive institutional and political analysis to ensure that project objectives are aligned with the interests and incentives of both the implementing agency and the beneficiary community. Other elements o f the I S N were not accomplished as a result o f insufficient coordination between the Bank, the Government, and other development partners- for example, plans to conduct an updated poverty analysis on the basis o f a new household survey and Demographic and Health Survey were not implemented due to delays in the design and implementation o f underlying surveys. The Bank did however lead the PERR (with ADB and AusAID assistance) as well as the PESD (with AusAID and the National Research Institute). Both activities worked well, and the PERR has helped sustain Government-donor policy dialogue during a difficult period. (See Attachment F for a more thorough assessment o f progress and performance under the ISN.) The CAS for 2008-201 1 draws on the lessons learned under the I S N by maintaining and deepening this intensified approach to dialogue, communication, and outreach with Government and non-government stakeholders across PNG.

Portfolio Management

58. Portfolio pefonnance during the pre-ISN period was compromised by a lack of counterpart funding, problems with special accounts, and overdue audits. Two o f the five projects in the portfolio (Gazelle Restoration and RMRP) were considered at risk o f not

Examples include the active participation in the Tingim Yut Kornpetisen development marketplace, the Youth Open Space Forum, and the Women in Mining initiative. In addition, the Bank has taken advantage o f the Public Information Center and the Global Distance Learning Network’s Distance Learning Center to strengthen information-sharing within PNG, as well as between PNG and other countries.

22

19 Bank Group Assistance Strategy

achieving their development objectives. Their status has since been upgraded, though long-term risk flags remain due to historical performance. The two projects that closed during the I S N period (Mining TA and Petroleum TA) were rated satisfactory at the time o f closing.

59. The current portfolio is small, but effective. There are no safeguard, monitoring and evaluation, counterpart funding, or legal covenant issues facing any o f the active projects in the portfolio.23 With recent improvements in government revenues, counterpart funding i s no longer an issue. The current portfolio has managed the operation of special accounts reasonably well, and timeliness o f audit reports i s expected to improve now that the Auditor General’s office (responsible for auditing Bank-financed projects) has augmented i t s capacity by contracting out some o f the work to private sector auditors. Aside from audit issues, financial management arrangements in the portfolio have been satisfactory. Ongoing project operations have been rated moderately satisfactory or satisfactory for procurement performance, which i s mainly affected b y insufficient co-financing and lack o f adequate local procurement ski l ls . Despite improvements, the portfolio s t i l l has a country record flag over which individual projects have no control.

60. The portfolio of trust funds is relatively modest. Current trust funds include a Japan Policy and Human Resources Development Fund (PHRD) for SADP preparation and two Japan Social Development Fund (JSDF) grants to support women and artisanal and small-scale miners under the Mining TA operations. The PNG country program has drawn substantial resources from GEF, including for TSLP and regional work on sustainable energy financing, and from the Australian-funded Pacific Facility I1 and I11 trust funds. The CAS for 2008-2011 envisages continued use o f available trust funds to support operational and administrative costs, including GEF, the Forest Carbon Partnership Facility (FCPF), Pacific Facility, and others.

Feedback from Stakeholder Consultations

61. In preparing the CAS, the Bank team received valuable advice from consultations with a broad cross-section of stakeholders. During 2001-2003, before moving to an I S N approach, the PNG country team conducted extensive CAS consultations at national and sub-national levels, with both government and non-government stakeholders. These consultations (particularly those carried out in rural areas) pointed to a consistent set o f priorities: (i) reducing corruption and improving public accountability and transparency; (ii) promoting agricultural development, especially market information and access; (iii) promoting small business development, the informal sector, and access to credit, while reducing impediments to business formation; (iv) upgrading roads, shipping services, electricity, and water supply; (v) improving access to and quality o f education and health services, especially in rural areas; and (vi) facilitating better access to information. Stakeholders indicated that donors had an important role to play, but should insist on more accountability and transparency, direct more funds to the community level, prevent project loans from increasing public debt, and consult stakeholders more frequently.

62. I n refining the CAS, the Bank consulted widely with Government, civil society, the private sector, and the donor community and received very similar feedback once again. In these recent consultations, c iv i l society representatives encouraged the Bank and other development partners to involve CBOs in the design and implementation o f community-based development programs. Women’s groups emphasized the importance o f improving rural infrastructure, strengthening law

23 On the fiduciary side, RMRP has a slow disbursement flag resulting from delays in the receipt of audit reports.

Bank Group Assistance Strategy 20

and order, enhancing livelihood opportunities, and mainstreaming gender-related activities across all sectors. Among representatives o f the private sector, the top priorities were infrastructure development, the business environment, governance, and security. Development partners confirmed their interest in strengthening donor coordination through programmatic approaches and joint work, in line with M T D S priorities and each donor’s comparative advantage. Over the course o f several joint Bank-Government retreats this year on the proposed CAS, GoPNG initially highlighted four key areas for World Bank Group support: (i) stimulating economic growth and creating economic opportunities for poor people; (ii) promoting sustainable natural resource management; (iii) improving governance; and (iv) enhancing human development and service delivery. In later sessions, GoPNG placed particular emphasis on the first two o f these areas and requested that the selection of CAS program activities be prioritized according to their contribution to alleviating poverty, both incomelconsumption poverty and poverty o f access. These priorities came together to form the two pillars o f the CAS.

B. Proposed Bank Group Assistance Strategy

Key Features of the CAS for 2008-2011

63. The CAS seeks to foster a constructive, long-term partnership with the government, people, and development partners of Papua New Guinea to further the goals set out in the MTDS and MDGs. PNG’s development strategy embodies a tension between a longer-term capacity and institution-building agenda, and a need to deliver manifestly improved services in the near term. The CAS, accordingly, i s structured to address short-term service deficits without ignoring the longer-tern institutional and policy challenge. As noted above, the four-year CAS should be seen as the first in a series that w i l l cover the next 15 to 20 years, allowing the Bank Group space to tackle immediate concerns while working at a more appropriate pace on issues that w i l l require a generation or longer to bear real fruit. I t i s also a results-based CAS, establishing targets and indicators by which realistic progress over the CAS period can be measured.

64. With poverty reduction as its overarching objective, the CAS consists of two pillars: (I) Promoting and maintaining sound economic and natural resource management, and (11) Improving livelihoods and service delivery, especially for the rural poor. The two pillars respond to the dualistic nature o f the PNG economy, and to the main M T D S goal o f fostering sustainable quality o f l i fe improvements by promoting economic growth and social development. Activities under Pillar I w i l l focus on three key areas: strengthening governance, particularly public financial management and core oversight functions; maintaining sound management of the extractive industries through improved exploration, revenue management, and environmental and social sustainability; and promoting effective and sustainable management of natural resources, both as a significant basis for rural livelihoods and as global public goods. Activities under Pillar I1 w i l l address five main topics: supporting development of the private sector as the engine of growth, focusing on the business environment, niche industries, and public-private partnerships; enhancing rural livelihoods, particularly in the o i l palm and artisanal and small- scale mining sectors; improving local service delivery through community-driven development approaches and other innovative service delivery models that strengthen local governance; expanding access to infrastructure services, particularly rural roads, electricity, and telecommunications; and supporting multi-donor approaches to human development, focusing on expanded access to basic education, improved health system performance, and effective responses to HIVIAIDS.

21 Bank Group Assistance Strategy

65. Activities under each pillar wil l be selected and prioritized according to their role in alleviating poverty, together with the Bank Group’s comparative advantage among development partners. As cross-cutting issues, improving governance and empowering women and youth wi l l be mainstreamed across both pillars. (See Attachment G for a review o f governance and anticorruption approaches under the CAS.)

66. To better align the CAS with PNG’s key institutional arrangements, the CAS is designed to be delivered at both the national and local level. The Bank w i l l aim to support the efforts o f national-level institutions to facilitate economic growth and poverty reduction, while at a sub- national level (and especially at the district level and below) focusing on improving service delivery systems, drawing on a range o f existing and non-traditional depicts the overall approach embodied b y the CAS.

Figure 3: A Strategy for Engagement in PNG

delivery models. Figure 3

Service Delivery for Natural Resources

67. The CAS represents a joint Bank-IFC strategy, recognizing the substantial scope for synergy between public and private sector development activities. The Bank and IFC w i l l work to integrate their country programs, from upstream analytical work to complementary investment and advisory activities in areas such as natural resource management, rural development and agriculture (especially agro-industries), infrastructure, and the overall business environment. As an example o f this, IFC plans to support the expansion o f microfinance, while the Bank w i l l address infrastructure constraints to small business growth (such as poor roads and low access to electricity). The Bank and IFC w i l l also look for opportunities to co-finance work in areas l i ke airport and aviation development, rural telecommunications, fisheries development, gas field exploitation, and forestry.

World Bank Group Instruments and Selectivity

68. Today’s small but efective portfolio provides a good basis for a fresh start in PNG. The current portfolio i s limited to three projects: the Second Gazelle Restoration Project; the RMRP, with supplemental financing; and the GEF-supported TSLP. All three projects are performing satisfactorily.

Bank Group Assistance Strategy 22

69. Selectivity is critical to maximizing impact within a limited resource envelope. The estimated IDA allocation for FY08 i s about US$ 45 mil l ion (including about US$ 18 mi l l ion in unused carryover f rom FY06 and FY07). For FY09-FY 1 1, the indicative IDA allocation i s more modest, at about US$30-32 mi l l ion per year, though actual amounts wi l l be determined annually on the basis o f PNG’s performance relative to other IDA borrowers. I t i s expected that Bank financing w i l l be provided on IDA terms. As a blend country, PNG could also possibly tap into IBRD resources, though this would require careful scrutiny on a case-by-case basis and would be subject to a creditworthiness evaluation by IBRD. Country program funds w i l l also include the combined resources o f IFC’s PEP-Pacific and the Foreign Investment Advisory Service (FIAS). Given the resource limitations, the CAS aims to restrict new IDA operations to a maximum o f three in a typical year. Similarly, “core” AAA tasks would be l imited to two per year in an effort to ensure adequate analytical and pol icy depth.

Box 1: Principles of Engagement in PNG

The CAS sets out five guiding principles for future engagement in PNG.

1. Long-term Partnership: Partnering with Government and key stakeholder groups, recognizing that comprehensive development w i l l take time, and managing expectations on al l sides

2. Government Leadership: Providing (and encouraging other donors to provide) development assistance in line with the Government’s own priorities and strategies, and engaging in more consistent policy dialogue with the GoPNG

3. Country Ownership: Fostering real ownership o f reform and development programs by strengthening existing GoPNG structures and processes; encouraging sustainable, affordable, and effective government decisions; and helping to strengthen implementation capacity, avoiding expensive duplication o f structures and proliferation o f external consultants

4. Results Focus: Seeking to define intended results not only over the CAS period, but also over the longer term, to support strengthened data collection and analysis, and to develop and implement comprehensive monitoring and evaluation mechanisms

5. Openness and Transparency: Making a concerted effort to communicate with and reach out to broader society, including the private sector, NGOs, and CBOs such as Women’s Associations, youth organizations, and church-based service delivery groups; and to support the GoPNG’s own efforts in this area

70. The CAS aims to focus the Bank Group’s comparatively modest country program resources as well as draw on regional and global funds to PNG. Country-level interventions w i l l focus on areas where the Bank has established a good track record in PNG (mining, telecommunications, transport, and rural energy); where the Bank can draw on i t s global reach to complement other donors’ activities (in sectors such as education, health, ut i l i ty reform, and environmental management); or where the IFC can leverage private sector investment (financial markets, extractive industries, agribusiness, manufacturing, and telecommunications). Operations w i l l be complemented b y AAA that draws on experience from around the world, and by efforts to help strengthen PNG’s data bases (e.g. on the effectiveness o f public expenditures and on poverty). The CAS w i l l also continue to support the current crop o f successful community outreach programs (footnote 22). In addition to country program resources, the Bank

23 Bank Group Assistance Strategy

Strategic Longer-Term Country Outcomes

Promote sound macroeconomic and public expenditure management

Promote good governance through independent and capable oversight institutions and improved citizen monitoring

Promote well governed, sustainable mining and petroleum industries offering significant benefits at local as well as national levels Promote effective and sustainable management o f PNG’s natural resources

Grou can access regional funds (such as the GEF Pacific Alliance for Sustainability (GEF PAS) and the Global Facility for Disaster Reduction and Recovery) and global products (such as F C ’ s work on improving the business enabling environment and emerging programs on climate change and avoided deforestation). The principles underlying the Bank Group’s engagement in PNG are la id out in Box 1.

!4

CAS Outcomes the World Bank Group Expects to Influence in Four Years

GoPNG shows continued awareness o f the importance o f maintaining fiscal discipline and a stable macroeconomic environment Improved effectiveness and transparency in budget preparation, execution, and reporting Improved oversight o f the public sector, including by the Ombudsman Commission and Auditor General Increased public availability o f accessible information to support monitoring o f government performance Strengthened institutional structures in the mining sector, emphasizing transparent management and resource distribution

Climate change mitigation, adaptation, and disaster risk management investment program adopted by GoPNG and implementation initiated

Strategic Pillars, Objectives, and Programs Pillar I: Promoting and maintaining sound economic and natural resource management

7 1. The first pillar of the CAS aims to consolidate recent improvements in economic growth and fiscal policy while increasing transparency and accountability in the management of public finances and natural resources. As part o f a longer-tern engagement strategy, the CAS w i l l promote sound macroeconomic and public expenditure management, improved governance through strengthened oversight o f the public sector, improved management and sustainability in the extractive industries, and effective and sustainable management o f natural resources. Table 4 suggests links between these long-term objectives and the CAS outcomes to which Pillar I activities aim to contribute.

Table 4: Promoting and Maintaining Sound Economic and Natural Resource Management

24 The GEF-PAS i s a regionally-oriented, nationally-executed program for environmental management in the Pacific region. The program would support capacity building and partnerships with c iv i l society and the private sector, recognizing the advantages o f a more coordinated approach to environmental management in the Pacific. PNG could benefit significantly from participation in this program, and could position itself to acquire additional resources and capacity if it chooses to participate actively.

Bank Group Assistance Strategy 24

73. Improving the effectiveness and transparency of budget preparation, execution, and reporting. Building on the Government’s substantial progress in strengthening the legal and regulatory framework for public expenditure management and procurement, the CAS w i l l support efforts to enhance the credibility o f budgeting and tendering through improved compliance and enforcement. The Bank w i l l continue to engage with GoPNG under a multi- donor framework, including through the PERR process and implementation o f CPAR recommendations. The proposed Public Expenditure Tracking Survey (PETS) would shed light on the impediments to effective public spending at the agency and sub-national levels.

74. As recognized in the Bank’s new Governance and Anticorruption Strategy, strong, well-functioning accountability institutions are essential i f corruption, mismanagement, and waste in the public sector are to be contained. The proposed Strengthening Institutions o f Oversight and Accountability (SIOA) Project would help strengthen the capacity o f the Auditor General, Parliamentary Public Accounts Committee, and Ombudsman Commission to conduct and evaluate audits and investigations. SIOA w i l l also help to strengthen the Central Supply and Tender Board, which oversees public procurement. Collaboration with AusAID on programmatic support to the law and justice sector i s also under consideration.

Strengthening oversight of the public sector.

75. Supporting improved monitoring of government performance through greater public availability of information. Building on GoPNG’s ongoing “Opening the Budget” initiative, the Bank Group w i l l help develop the capacity o f CBOs, NGOs, journalists, and citizens to engage with the Government b y working with ministries to issue information in a format that can be easily understood b y the general reader, and b y helping c iv i l society organizations to develop capacity for budget analysis, citizen monitoring, and investigative journalism. As part o f the SIOA approach, the Bank w i l l emphasize partnerships with provincial governments, c iv i l society, and research and policy institutes, combined with technical assistance, training in budget analysis, local-level pilots, and selective interventions at the grassroots level. In cooperation with ADB, AusAID, and IMF, and with support f rom the Multi-Donor Trust Fund for the Extractive Industries Transparency Initiative, the Bank w i l l help GoPNG move to adoption of EITI principles in the mining and petroleum sectors.

76. Strengthening institutional structures in the mining sector, with an emphasis on transparent management and resource distribution. The Second Mining Development TA operation aims to strengthen the legislative and institutional framework for mining in PNG, including in Bougainville; build capacity for increased tax collection and mine closure planning; and help mine-affected communities to manage the benefits and r isks from mining activities (including those to women and youth). The Bank Group i s also considering the provision of support for a gas development risk-sharing operation with the ADB. This may complement the potential IFC participation in the commercialization o f gas resources,

77. Promoting sustainable management of natural resources. The CAS w i l l focus on areas where GoPNG has expressed openness to engaging with development partners, including capacity building and possible readiness activities under the Reduced Emissions from Deforestation and Degradation (REDD) program. PNG wi l l also participate in the GEF-PAS, a regional Bank-managed GEF initiative focusing on environmental management and adaptation to climate change. IFC i s planning to support PNGSDP’s sustainable forestry initiative. The CAS w i l l adopt a long-term perspective to re-engagement in the forestry sector, working to establish a

25 Bank Group Assistance Strategy

Strategic Longer-Term Country Outcomes

Promote the ability o f the private sector to provide significant employment and livelihood opportunities

Improve rural livelihoods through policies and investments that promote inclusive, sustainable growth

basis for discussion and engagement with GoPNG in this area, possibly under the REDD program.

Pillar II: Improving livelihoods and sewice delivery, especially for the rural poor

78. The second pillar of the CAS aims to encourage broad-based economic growth and wider participation in economic development through expanded opportunities for income generation and improved services, especially for the rural poor. Over the longer term, the Bank Group intends to help reduce poverty in PNG by promoting private sector development, sustainable and inclusive rural growth, responsive and accountable local governments, well-managed transport services, expanded access to reliable and affordable energy and telecommunications, and improved human development outcomes. Table 5 suggests links between these long-term objectives and the CAS outcomes to which Pillar 11 activities aim to contribute.

Table 5: Improving Livelihoods and Service Delivery, Especially for the Rural Poor

CAS Outcomes the World Bank Group Expects to Influence in Four Years

Stronger business enabling environment, with improved access to finance and financial infrastructure Improved potential in niche industries, including tourism Public-private partnerships supporting infrastructure development Sustainable increases in o i l palm production and artisanal and small-scale mining

services Expand access to reliable, affordable electricity to support service delivery and rural enterprise development Facilitate the provision of reliable, affordable access to telecommunications infrastructure & services

Improve human development outcomes across the country

Support the development o f more responsive, accountable local governments that deliver cost-

Improved local service delivery through partnerships between government and civi l society, and within and

provinces Improved availability and lower cost o f electricity services in selected rural centers and towns

Expanded access to affordable and reliable telecommunications services in rural areas and outside Port Moresby Increased primary school participation and grade retention Improved health system performance through multi- donor programmatic support to the health sector More effective national HIV/AIDS response through evidence-based policy and interventions

effective public services based on community needs Help develop well-managed national and local transport I Improved condition o f roads and bridges in selected

I across communities

Bank Group Assistance Strategy 26

80. Promoting growth in niche industries. The CAS w i l l focus on sectors where PNG has a comparative advantage (such as tourism and niche agribusiness products such as coffee, cocoa, spices, and some fisheries and forestry products). PEP-Pacific w i l l build on existing support for the development o f a Tourism Master Plan by diagnosing barriers to tourism investment and marketing, strengthening access to markets, regulatory and institutional reforms, and investment support. PEP-Pacific w i l l also work to leverage partnerships wi th private sector agribusiness f i r m s to strengthen supply chains, including commodity standards and certification and training and financing for suppliers.

8 1. Supporting private sector development through public-private partnerships in infrastructure development. The I F C w i l l advise on strengthening private sector participation in infrastructure and other public services, and on restructuring state-owned enterprises. Apart from potential opportunities to leverage IFC assistance in the delivery o f rural electricity and telecommunications, the CAS w i l l support regional analytical work in the fisheries and aviation sectors, which may point to further opportunities for public-private partnerships in PNG.

82. Seizing opportunities for more inclusive and sustainable rural growth and income generation. The CAS w i l l support income generation in areas where the Bank i s already engaged, including development in the smallholder o i l palm sector25 and further support for artisanal and small-scale mining.26 The CAS would also stimulate growth in rural areas through joint Bank-EC implementation o f a proposed Rural Development Program (RDP), and through support for increased access to modern energy and IT services. The Bank’s support o f income generation opportunities w i l l draw on a comprehensive program o f AAA, including a Poverty Assessment and a Rural Growth and Livelihoods Strategy (possibly in cooperation with the EC). A Youth Integration Strategy would be developed to address problems of youth unemployment and exclusion, with a particular focus on urban areas.

83. Improving local service delivery through partnerships between government and civil society, and within and across communities. Within the framework of decentralization reform, the CAS w i l l support analysis intended to better understand the flow and use o f resources in selected districts. A District Service Delivery and Local Governance Project would help strengthen local governments and support service delivery partnerships with churches and CBOs. The Provincial Reconstruction and Development Program would adapt the successful service delivery model o f the Gazelle Restoration Authority to other areas. CAS support for C D D approaches would be underpinned by a number o f AAA and outreach activities, including the C E M and a Review of Local Service Delivery Models. The Bank w i l l continue the Women in Mining initiative, expanding i t s focus to address youth concerns as well.

25 Through the SADP, the CAS wi l l sustainably enhance the involvement o f targeted communities in their local development through measures aimed at increasing o i l palm revenue and local participation. 26 The CAS wi l l support artisanal and small-scale mining as a significant source o f rural income b y improving extension services and training youth in new, environmentally sound mining and processing technologies. This work w i l l build on successful pilot initiatives under the JSDF grant program, with increased support for women and youth through both JSDF and the Mining T A operation.

27 Bank Group Assistance Strategy

84. Improving access to specific economic and social services, including:

Improving the condition of roads and bridges. Under Road Maintenance and Rehabilitation supplemental financing and RMRP II, the CAS w i l l support planning and management in the roads sector, rehabilitation o f key national and provincial roads and bridges, and stronger institutional arrangements for road maintenance in line with GoPNG’s National Transport Development Plan. The Bank w i l l continue to work with ADB and AusAID to improve harmonization in the transport sector. Bank-supported road sector activities w i l l support a broader approach to infrastructure, and a National Infrastructure Study i s planned in order to explore the financing, delivery, and maintenance o f a sustainable infrastructure system for PNG.

Expanding the availability and lowering the cost of electricity services in rural centers and towns. The CAS w i l l continue to support alternative energy in rural areas through the TSLP, in cooperation with Papua New Guinea Sustainable Energy, Ltd. (PNGSEL), a PNGSDP subsidiary. In addition, the Bank w i l l partner with PNGSEL to implement a Rural Electrification Project to bring electricity and Internet access to households, schools, health clinics, and rural enterprises across PNG. CAS support to the energy sector wi l l be underpinned b y various pieces o f AAA, including the National Infrastructure Study and a joint Bank-ADB Regulatory Framework Study.

Expanding access to affordable and reliable telecommunications services in rural areas and outside Port Moresby. The proposed Rural Communications Project would provide TA and seed funding to help establish a rural communications fund, which would aim to stimulate extension o f telecommunications infrastructure (mobile telephony and, where feasible, Internet) to commercially non-viable areas. Once infrastructure and enabling policies are in place, the Bank (possibly in partnership with I F C and CGAP) w i l l explore opportunities to support income generation through mobile phone-enabled financial services for the rural poor. This work may be facilitated b y a potential IFC investment in mobile telephony.

Increasing primary school participation and retention. The CAS w i l l promote the achievement o f universal basic education in PNG, providing TA to support GoPNG’s participation in FTI and application for grant financing from the Catalytic Fund. Once FTI funding has been secured, the CAS may provide programmatic support to Basic Education.

Improving health system performance and strengthening the national response to the HIV/AIDS epidemic. In an effort to better understand the nature of the HIV/AIDS epidemic in PNG, the CAS w i l l support a national population bio-behavioral survey. In coordination with donor partners the CAS w i l l also support the ongoing multi-donor programmatic approach in the health sector.

85. The proposed CAS program for FY08 to F Y l l is laid out in Table 6. This program may not be realized in full, and should be understood as indicative and inclusive; i t s exact composition w i l l depend on the availability o f IDA and Bank Group budget resources, evolving opportunities, and the performance of GoPNG and the PNG economy. As indicated above, the progress of the CAS program w i l l be reviewed on an annual basis with the Government, at which time the coming year’s program w i l l be firmed up.

B a n k Group Assistance Strategy 28

FY08

FY09

FYlO

F Y l l

Table 6: Proposed CAS Program for FYOS to F Y l l

0 Smallholder Agriculture Development (US$27.5

0 Rural Electrification (US$6.5 million) 0 Provincial Reconstruction and Development 0 Rural Telecommunications 0 Programmatic Support to Health Sector 0 District Service Delivery and Local Governance 0 Programmatic Support to Basic Education

0 Rural Development 0 Road Maintenance and Rehabilitation I 1

0 Mining T A (US$ 11 million) million)

0 Strengthening Institutions of Oversight and

0 Gas Field Development (Guarantee) Accountability

Public-Private Partnerships in Infrastructure: Fisheries and Petroleum

Potential investments in: petroleum, mining, forestry, and fisheries

FY08

0 PNG Microfinance Ltd. (US$3 million) 0 Doing Business Reform (Pacific Regional)

Informal Economy Phase I 0 Financial Infrastructure (Pacific Regional): Credit

0 Tourism Development (Pacific Regional):

Informal Economy Phase I1 0 Financial Infrastructure (Pacific Regional): Secured

Transactions RegistryRayment Systems Reform Tourism Development (Pacific Regional): Regulatory Reform

0 Public-Private Partnerships in Infrastructure: Health and Education

0 Tourism Development (Pacific Regional): Market Accessnnvestment Support

0 Public-Private Partnerships in Infrastructure: Aviation and Airports Development (with WB)

0 Potential investments in: telecommunications, agribusiness, financial markets, and renewable energy

Bureau

Identifying Barriers to Investment and Marketing

FY09

FYlO

F Y l l

FY08-11

29 Risks and Mitigation Measures

Delivery Platforms

86. To amplify the impact of the Bank’s relatively modest funding, the CAS will work simultaneously at two levels, with national and local-level activities designed to complement one another. At a national level, the CAS w i l l focus on unblocking the constraints to local-level service effectiveness, concentrating on improved governance and public expenditure management to promote accountability and transparency in the use of public resources, especially through the use o f country systems for procurement and financial management. Local level operations w i l l be used as a reality check on national-level policy and systems work, with the Bank committed to ensuring strong inter-sectoral synergy. Given the growing coverage o f provinces b y other development partners, local activities w i l l ini t ial ly build on operations in areas in which the Bank i s already active, and w i l l focus on supporting country systems o f local planning and budgeting-the poor functioning o f which i s a major constraint to effective service delivery.

Organizing to Deliver

87. Successful implementation of the proposed CAS will require a new Bank Group approach to doing business in PNG. The Bank w i l l give a stronger decision-making role and greater autonomy to the country office and w i l l increase staffing to create a ‘core’ o f professionals sufficient to conduct regular dialogue with GoPNG and other development partners, as well as to provide continuous supervision and follow-up. A senior country economist has joined the Port Moresby office, and the Bank i s in the process o f hiring a new senior operations officer and additional national staff. T o strengthen coordination among a highly dispersed team, annual country team retreats wi l l be held, complemented b y regular country team meetings via videoconference. Through this joint CAS, the Bank, IFC, and FIAS aim to integrate their individual country programs much more closely than before, including by preparing joint work.

88. The CAS Results Matrix (Annex B9) presents a framework for the Bank’s engagement in PNG over the next four years. I t takes as i t s starting point GoPNG’s priority objectives over the longer term as la id out in the MTDS, and the challenges i t faces in achieving those goals. Within that longer-term agenda, CAS outcomes are those that the Bank expects to influence directly through i t s interventions, accompanied b y targets and indicators b y which to measure progress. The Bank w i l l continue to support the Government’s efforts to refine i t s MTDS performance management framework, with a view to eventually integrating GoPNG targets and indicators into i t s evaluation o f CAS results. The results matrix has been developed in consultation with GoPNG, development partners, and other key stakeholders in PNG’s development. A CAS Progress Report w i l l provide a mid-term review o f the strategy’s relevance and implementation progress, allowing for adjustments as needed. The results matrix w i l l be reviewed regularly to incorporate new baseline data, targets, and indicators; to take stock o f progress on CAS outcomes; and to adjust implementation plans accordingly.

VI. RISKS AND MITIGATION MEASURES Country Risks 89. Political conflict may lead to a serious decline in the governance environment. The CAS w i l l aim to mitigate this risk by focusing on improved transparency and accountability in the use

Risks and Mitigation Measures 30

of extractive industry revenues, the institutional strengthening o f key oversight agencies, and community-driven development approaches that emphasize good governance. In order to build coalitions for improved governance, the CAS w i l l also support dialogue among key stakeholders, including national and sub-national government, the private sector, c iv i l society, and development partners.

90. A fall in commodity prices may trigger a rapid decline in economic performance. The CAS w i l l support the steady accumulation o f reserves and the reduction o f public debt, as well as promote the wise and effective use o f public resources, and intensify efforts to diversify the economy.

91. Growing unemployment, especially among urban youth, may lead to increased violence and criminal activity, and to deteriorating social stability. The CAS w i l l support the articulation of a Youth Integration Strategy designed to create productive employment opportunities for youth at risk, especially in urban areas, and to create ways o f fostering their social and political inclusion in community and political affairs.

92. Natural disasters may cause significant economic disruption and social dislocation. The CAS attempts to mitigate this risk b y supporting the development o f a climate change strategy and PNG’s participation in regional disaster risk reduction initiatives, while also promoting responsible and sustainable natural resource management practices.

Implementation Risks 93. Lack of ownership of public expenditure and governance refonn and lack of support for national oversight agencies may stall the progress of CAS implementation. The CAS attempts to mitigate this risk by supporting efforts to build broad-based constituencies for change, reaching out to c iv i l society and the media b y helping them access information for monitoring and evaluation. In addition, the SIAO program w i l l support the capacity o f PNG’s oversight institutions to carry out their functions effectively and to communicate with citizens about their work.

94. The Bank’s engagement wil l either be too short-lived or too small-scale to affect governance over the long term. The CAS only intends to take a first step in dealing with complex socio-political issues o f this kind. Over time, and with persistence and consistent engagement, the Bank expects to be able to assist significantly in spite o f i t s limited financial capacity in PNG.

95. Weaknesses in public fiduciary systems may impede project implementation. Through the PERR and CPAR processes, the CAS w i l l attempt to reduce this risk b y strengthening GoPNG’s capacity to implement effective, transparent procurement, and to apply and monitor procurement and fiduciary guidelines systematically.

96. Efforts to promote closer coordination between the Government and development partners may not be successful. The CAS w i l l attempt to mitigate this risk b y a more straightforward, transparent approach to communicating the Bank Group’s views and intentions, and b y giving greater attention to consultation with a wide range o f stakeholders.

Attachment A: The Role of Extractive Industries in PNG

A. Background

1. Papua New Guinea has favorable geology for minerals, oil and gas. The discovery o f the world class Panguna copper and gold deposit on the island of Bougainville in the mid-1960s was followed b y the discovery o f the Ok Tedi copper and gold deposit and the Frieda copper deposit in the late 1960s, and gold deposits at Porgera, Misima, and Hidden Valley in the 1970s, and Lihir, Wafi, Simberi, Tolukuma, Mt Sinivit, and Mt Kare in the 1980s and 1990s. In the late 1990s and early 2000s, seabed mineral deposits were identified and are now being explored. With the Bougainville Peace Accord and the establishment o f the Autonomous Government o f Bougainville, Bougainville could again become a prime destination for mineral exploration.

Exploration and Mineral Geology.

2. Exploration and Hydrocarbon Development. On the o i l and gas side, exploration in the 1970s and 1980s led first to the discovery o f the Hides gas deposit and later the Kutubu o i l deposit. Subsequently modest additional o i l and very substantial additional gas reservoirs were discovered at Gobe, Moran and Mananda. Despite these mineral and hydrocarbon exploration successes, exploration costs in PNG remain high because of remote locations and lack o f infrastructure. Remaining proven, probable, and possible recoverable o i l reserves are estimated at 185 mi l l ion barrels. Oil production i s declining due to the maturity o f o i l fields and the difficulty o f dealing with increasing volumes o f associated gas produced with oil. The producing fields are l ikely to be largely depleted b y 2015. There has been no significant o i l find since the discovery o f the Moran o i l field in 1996. Natural gas recoverable reserves and resources are substantial, with an estimated 25 tr i l l ion cubic feet in proven, probable, and possible categories. These reserves and resources are equivalent to about 5 bil l ion barrels of oil.

3. Government’s Strategy and Main Mining Developments. The Government’s strategy i s to develop the extractive industries (EI) sector by encouraging socially, environmentally, technically, and financially responsible private sector exploration and development o f PNG’s mineral and hydrocarbon resources. The Panguna copper and gold mine started production in the early 1970s, during a copper market boom, and was extremely profitable, providing important balance o f payments and fiscal benefits for PNG as a whole at independence. Production ceased in 1989 fol lowing an armed uprising which subsequently lasted over a decade and the mine remains closed today, although peace has now been restored on the Island. Four world class mines-Ok Tedi copper and gold mine and the Porgera, Misima and Lihir gold mines-were subsequently developed in the 1980s and 1990s. There are also small gold operations at Tolukuma, and Kainantu, with Hidden Valley and Simberi currently under construction. A world-class nickel project i s also under construction at Ramu.

4. Main Oil and Gas Developments. Since 1985, the o i l industry has invested about US$ 5.8 bi l l ion in petroleum exploration and development. Commercial production o f o i l began in 1992, and a total o f about 400 mi l l ion barrels o f o i l had been produced as o f August 2006. Almost a l l o f the o i l has been exported. The Kutubu oi l operation was developed in the early 1990s with additional o i l developments at Gobe and Moran in the late 1990s. The Hides gas operation started production in the mid-1990s to provide power for the Porgera mine. An earlier proposal for a gas development wi th a pipeline to Queensland has been shelved. The Government has called for and given consideration to alternate gas developments, all o f which

31

Attachment A 32

would require processing the gas within PNG in order to bring more capital and operating investment into the country, boost local employment and economic growth through project construction activities, and enable synergies with domestic gas utilization projects. These schemes variously include a methanol/di-methyl ether (DME) plant, production o f synthetic gas- to-liquids (GTL) fuels, and an ammonidurea plant. In other developments, InterOil has made announcements about establishing a liquefied natural gas (LNG) plant and a natural gas liquids (NGL) plant at Napa Napa based on i t s recent gas discovery at the Elk-1 well, which may have found a large fractured carbonate reservoir with abundant recoverable gas. However, the extent o f the discovery depends very much on the further evaluation o f the geological extent and character o f the structure. The Government has also had talks wi th both the Chinese National Petroleum Company and BG Group (formerly British Gas) about gas developments and gas processing with an emphasis on LNG. There are now two different gas development project proposals for LNG production in PNG, the most advanced o f which i s being prepared b y ExxonMobil. LNG investments could eventually be in the range o f US$ 10-15 billion. The gas project would also help increase recoverable o i l since associated gas would no longer be re- injected which currently reduces potential oil production.

5. Production. The main E1 production at present i s oil, copper and gold-almost al l of which are exported. The volumes and values o f E1 exports are as shown in Table A-1. O i l production has declined from over 21 mi l l ion bbls in 2001 to just over 14 mi l l ion bbls in 2006 due to declining reserves. Oil and gas exploration has surged with increased commodity prices and a revision o f o i l and gas fiscal incentives, but o i l production w i l l continue to decline unless new deposits are discovered. Gas production w i l l increase substantially because PNG has extensive major gas reserves which are yet to be developed. With regard to minerals, copper production, which i s primarily from O k Tedi, has fluctuated between 170,000 and 230,000 tons per year depending on operating conditions, and in recent times there has also been copper production f rom new smaller mines. Declining gold production at Misima, which closed in 2004, and Porgera, where reserves are declining, has been largely offset by increased production at other mines. Investments for mineral exploration and development in PNG steadily declined in the 1990s from US$ 83 mi l l ion in 1988 to US$ 12 mi l l ion in 1999 but, supported b y the first PNG Mining and Institutional Strengthening Technical Assistance Project, have since recovered to US$ 30 mi l l ion in 2006. Ok Tedi has a limited l i fe wi th production ending possibly as early as 2013. Porgera would l ikely have another 10-20 years production and Lihir thirty years or more.

Table A-1: Production and Exports of Copper, Gold, and Oil 2000-2006

Year Copper ('000 tonnes) Gold (tonnes) Oil (million bbls) 200 1 170.1 69.1 21.3 2002 170.1 59.1 15.4 2003 230.6 68.4 14.9 2004 173.9 67.3 12.5 2005 226.1 70.5 13.3 2006 216.7 56.7 14.5

Source: Bank of Papua New Guinea

33 Attachment A

6. Economic Importance of EI. Extractive industries have always been a major part o f the formal economy in PNG and in recent years have accounted for about twenty percent o f government receipts, one-third o f GDP, and about three-quarters o f exports. Copper has accounted for about half o f E1 exports, o i l about one-third, and gold about one-sixth. With the present worldwide minerals commodity boom, E1 has increased to over 80 percent o f exports and 40 percent o f fiscal receipts in 2006 as shown in Table A -2 below. Formal employment provided b y commercial E1 projects i s rather modest-about 15,000 jobs, equivalent to 5 percent o f formal employment in PNG.

Table A-2: E1 Macroeconomic Impacts 2004-2006

Year E1 share of exports (%) E1 share of fiscal receipts (%)

2004 73.1 21 2005 75.4 32 2006 82.2 42

Source: Bank of Papua New Guinea

7. Artisanal and Small-scale Mining (ASM). There are an estimated 100,000 artisanal and small-scale miners in Papua New Guinea, o f which approximately 25,000 l ive in the area around Wau and Bulolo, Morobe Province. After agriculture, small-scale mining i s the largest generator o f rural incomes in Papua New Guinea supporting an estimated 500,000 miners and family members-thus, close to 10 percent o f the population o f Papua New Guinea derive either direct or indirect cash benefits from small-scale mining, which i s often the only source o f cash income available to remote rural communities. Furthermore, the number o f miners continues to rise as other alternative livelihoods fai l to materialize or as infrastructure for market access for agricultural goods deteriorates. However, the income benefits f rom the sector must be balanced against the potentially high environmental and community health costs. The miners in general have low levels o f education and liberally use mercury and occasionally other toxic chemicals without adequately understanding the impacts on their own health or the general environment.

8. Sector Organization. There are four main organizations that administer the E1 sector. O i l and gas are administered b y the Department o f Petroleum and Energy (DOPE), which i s responsible for licensing, monitoring, and enforcement o f license and contract conditions including health and safety regulations. The Mineral Resources Authority (MRA) was approved in late 2005 and established in 2007 and has taken over responsibility for licensing, monitoring, and enforcement o f license and contract conditions f rom the old Department o f Mining (DoM). A newly formed Department o f Mineral Policy and Geohazard Management (DoMPGM) i s responsible the development o f Mineral Policy and Legislation and for monitoring o f volcanic and earthquake-related risks. The Department o f Environment and Conservation (DEC) i s responsible for environmental monitoring and enforcement o f social and environmental safeguards and programs. The Internal Revenue Commission (IRC) i s responsible for income tax collection and enforcement.

9. Petroleum Division. The Petroleum Division has limited ability to attract and keep high- quality staff, as many are enticed by higher salaries elsewhere. An institutional study was undertaken in 2003-4 to examine the possibility o f converting the Petroleum Division into a Statutory Authority o f the Government. A follow-up study in mid-2005 reviewed the management organizational practices and operational procedures o f the Petroleum Division

Attachment A 34

under DOPE and recommended a detailed action plan comprised o f management training; corporate and strategic planning; review o f the organizational structure; review of employee terms and conditions; preparation and implementation o f a performance management system; revenue, financial, and budgetary system planning and reform; and preparation o f an IT master plan. This plan was executed, and a proposal to convert the Petroleum Division into a Statutory Authority was submitted to the National Executive Council (NEC) for i t s policy consideration in August 2006. A draft bill has been prepared for presentation to Parliament in the event that an affirmative policy decision i s made by the NEC. Whether or not the NEC approves the transition to a Statutory Authority, reform o f the staff remuneration package w i l l be necessary to ensure that the Petroleum Division or i t s successor organization remains a sustainable institution capable o f providing coherent sector advice to the Government.

10. The Development Forum. PNG has established i s own unique and highly effective process for E1 project approval. At the time a license application i s made for mineral exploitation or o i l and gas production, the development proposal and other key documentation are circulated to al l interested government departments and involved parties (in particular landowner groups). These documents are then considered at a Development Forum where the project developer presents the proposed project to al l interested parties and departments and, fol lowing due deliberation and resolution o f issues raised b y the various parties, a government decision i s taken to approve the project (or not) with all conditions specified. The conditions are then placed in legally binding documents including a Development Contract which i s signed between the investor and the government for each project as well as subsidiary agreements between the investor and the landowners regarding compensation, and a multiparty agreement between the investor, government, and the landowners concerning the sharing o f mineral royalties, local economic development, etc. Included in these agreements are social and environmental protection plans.

11. Environmental Impacts. E1 projects have significant environmental impacts. These tend to be more severe for mining than o i l and gas because mining causes greater ground disruption and requires more waste rock disposal than o i l and gas. The most significant mining impacts in PNG involve the disposal o f waste and tailings at Ok Tedi and Porgera into the local river system and at Lihir into the ocean. For o i l and gas, the environmental issues relate mostly to potential o i l spills-at transshipment points or due to pipeline ruptures. There are serious environmental legacy issues at both the Panguna and Ok Tedi mines, where tailings disposal in the local river systems w i l l l ikely involve significant impacts over a long period o f time.

12. Social Impacts. E1 projects have substantial social impacts, but these have been better managed in PNG than in many other countries because due to customary land ownership and usage rights, landowners have both de facto and de jure control over what happens on their land. Thus, with the exception o f the armed uprising on Bougainville, PNG has avoided the more severe human rights incidents that have occurred in some other countries. However, local communities suffer f rom a number o f negative social impacts including the creation o f “haves” and “have riots"-the latter typically include the poorest members o f the population (especially single mothers and children), who often find their gardens and income sources shrinking while the arrival o f new people for mine employment drives up food costs. Other impacts include the creation o f shanty areas populated with people who are attracted to mining sites but unable to find employment; a breakdown in family cohesion and relationship; and unfulfilled expectations for young people who anticipate better employment opportunities but do not find them.

35 Attachment A

13. All o f the E1 operations in PNG are majority owned and operated b y private sector investors with the exception of the Ramu nickel project, where the majority owner and operator i s the Chinese state-owned China Mining and Metallurgical Company. The GoPNG policy i s to reserve the right to take up a minority share o f the equity in al l E1 projects at cost on a contributing basis, and the state has taken a minority shareholding in most o f the projects. Part o f the state equity has been passed on to landowners and provincial governments on a carried interest basis. Major international investors and operators include ExxonMobil (Kutubu oil), BP (Hides gas), and Barrick (Porgera). R i o Tinto was the original operator at Lihir and BHP the original operator and majority owner o f the Ok Tedi. The Ok Tedi operation was subject to significant opposition due to i t s negative environmental impacts, especially for communities downriver o f the mines where flooding was severely damaging agriculture, forests, and associated livelihoods. In a 2001 agreement wi th the Government, BHP placed i t s shares (which comprised 52 percent o f total shares) in trust for the local people in return for indemnity for environmental and other liabilities. These shares are now held by the PNG Sustainable Development Program, Ltd. (PNGSDP). PNGSDP i s responsible for overseeing the use o f dividends and income for both present and future generations, including landowners in the vicinity o f the areas o f impact o f the project, the population o f Western Province, and the population o f the country as a whole according to a contractually defined formula.

E1 Project Ownership.

B. E1 Development Issues

14. Macroeconomic Management of E1 Revenues. Countries with large E1 sectors relative to the rest o f the economy face three main macro economic challenges. The first challenge i s to use the E1 revenues to develop the non-E1 sector in parallel wi th the E1 sector and to the extent possible diversify the economy in order to avoid over dependence on E1 and the r isks o f “Dutch disease.” Over the past twenty years, PNG has not been successful in growing the non-E1 sectors o f the economy relative to EI. The second challenge i s to manage potentially large swings in EI- related government receipts relating to the volatility o f commodity prices. Twenty years ago, PNG had a Mineral Resources Stabilization Fund (MRSF), which was instrumental in partially cushioning the national level economic impacts o f the closure o f the Panguna mine. However, the MRSF was discontinued. The third challenge i s to successfully use the income from E1 to support improved development outcomes including, in particular, health and education. But, over the past twenty years, health and education outcomes have tended to deteriorate not improve. At the present time PNG i s experiencing a significant upswing in government receipts from the world commodity boom. The Government’s policy at present i s to use the surpluses to pay down i t s international debt, which i s basically a sound policy, providing that adequate funds are available for the Government’s recurrent budget needs. However, the challenge of developing the non-E1 sector remains significant. The sound use of E l income to diversify the economy and improve development outcomes, while at the same time managing volatile income streams, is a key focus of the Bank’s macroeconomic and development dialogue with the GoPNG, including the Country Economic Memorandum, the Public Finance Review, and the Public Expenditure Tracking Survey.

Attachment A 36

15. All o f the E1 operations in PNG operate in compliance with government regulations and contract terms and conditions, which are generally based on good international practice with the exception o f the controversial methods related to waste disposal (i.e. disposal o f mine overburden and concentrator tailings) used at the larger mine sites. The use o f riverine waste disposal methods at Ok Tedi and Porgera i s generally considered unacceptable practice today. In the past the substantial harm downriver from the O k Tedi mine was not well addressed or compensated, but this been recognized and better addressed in the past ten years and considerable improvement has been made to reduce the down river impacts through dredging. The present arrangements at both Ok Tedi and Porgera are generally well accepted b y both the affected landowners and the Government, and preferred to the alternative o f closing down the operations, which would have severe adverse impacts for the local communities, the province, and the national economy. Ocean disposal o f tailings and waste, which i s used at Lihir, i s also controversial, though potentially less harmful than riverine disposal providing disposal i s undertaken at depth and consistent with best practice. At Lihir, the alternative would be to have waste disposal sites on land, but the island i s so small that deep ocean disposal i s preferred by both landowners and the Government. Deep-sea waste disposal was used at Misima along with regular monitoring b y DEC, and the impacts were considered acceptable.

Mitigating Environmental Risks.

16. Mitigating Health and Safety Risks. With regard to health and safety, there have been no serious o i l spi l ls to date and the government and the operators have ensured that good practice pipeline design and safety procedures are in place to avoid any rupture due to technical factors and to minimize the impacts should the pipeline be damaged b y a sever earthquake or seismic event. Oil and gas pipelines and other plant and facilities are at r i sk o f explosion but the Government requires and the companies adhere to strict safety standards in line with good international practice and there have been no major safety incidents or fatalities. Mine health and safety standards are also generally in line with good international practice although there was a major explosion in the explosives preparation plant wi th loss o f l i fe at Porgera in 1994. Though mine health and safety inspections were previously inadequate, support for improvements was provided through the first Mining TA and Institutional Strengthening operation.

17. The strong voice o f the landowners having de jure control over development in their areas, combined with the Development Forum process, has helped local communities to receive substantial benefits from the E1 sector. In addition, E1 companies have made significant efforts to increase local sourcing o f goods and services in order to reduce the enclave nature o f the E1 sector as compared to twenty years ago. This has been achieved partly through the agreements that are signed with local people, and partly through the recognition by E1 companies that positive relationships with local communities and outsourcing business to local companies i s not just good for development but i s also good for business. While communities can gain benefits from EI, i t i s only in the past decade that the disparities in social benefits and r isks between different groups have started to be well recognized and addressed in PNG. Work on gender issues under the Mining TA project has identified that men take a disproportionately large share o f the benefits o f E1 projects (in particular employment, income, and compensation) whereas the bulk o f the social and environmental r isks fal l upon those least able to represent themselves-mostly women and children. The Mining Women’s Associations ( W A S ) at each o f the main mining sites have

Mitigating Social Risks and Improving Social Impacts.

37 Attachment A

prepared five-year Women in Mining (WM) Action Plans for 2007-201 1 that address the needs o f women and children. D O M and DoNP have been strongly involved in and supportive of the WIM Action Plans and have merged them into a National Five Year Women in Mining Action Plan that has been submitted to and endorsed by the National Executive Committee. The action plans are now being prepared for implementation b y the MWAs with monitoring and support b y D o M and DoNP, as well as initial implementation funding from JSDF. There are also women’s programs at some o f the o i l and gas sites. All o f these programs include specific actions to improve the positive impacts o f mining and reduce the negative impacts for women and families. The Mining TA 2 operation wil l support improved benefits and reduced risks of EI operations for women, children, and youth through support to the DoMPGM Policy Division for finalizing and issuing its Sustainable Mining Development Policy (which has a strong focus on community level issues) and through support to the MRA Coordination Department for working with MWAs to implement the Women in Mining Programs. The Mining TA 2 project wil l also support the MRA Coordination Department to develop and implement a strategy and engagement program to improve the impacts of mining for youth and the MRA ASM Department to improve livelihoods for youth from ASM.

18. Mitigating Social Risks: Closure of E1 Operations. Closure o f E1 operations can result in loss o f income and employment and significant contraction o f the local economy. This happened at the Misima mine when i t closed, and the Government i s concerned to see the impacts managed as well as possible at both the O k Tedi and Porgera mines, both o f which may close within the next decade due to exhaustion o f presently known reserves. The Government intends to put in place good practice mine closure and oil/gas decommissioning policies supported b y sound planning and solid implementation procedures. Some initial work on mine closure was conducted under the first Mining TA, and additional work to support improved planning and implementation of mine closure activities wil l be supported under the second Mining TA operation, including assistance to MRA and DoMPGM for a Misima Mine Closure Review and to DoMPGM for preparing a Mine Closure Policy to better manage mine closure impacts.

19. Sustainable Local Community Development. I f E1 are to make a greater contribution to development in PNG, then sustainable institutions w i l l need to be established in mining and petroleum affected communities. The government i s presently considering how E1 development can be better integrated with community-driven development (CDD), and pilot work w i l l be supported b y the Mining TA 2 project. The community related activities o f the MWAs represent a practical start and, as part o f i t s support for implementing the Women in Mining Program, the TA operation wil l provide support to the MRA Coordination Department to support development of joint programs by the MWAs and local/district level government agencies.

20. Improving the Development Impacts of Artisanal and Small-scale Mining (ASM). A S M brings considerable benefits in terms o f rural incomes but also significant health and safety r isks and environmental harm. The Government, with the support o f a Japanese Social Development Fund grant, has taken a number o f initiatives including developing training materials, supporting training and outreach initiatives, and developing a database for the collection o f basic statistics on small-scale miners by the newly formed Small Scale Miners Association (to include exploration, mining and processing methodologies, mercury usage, and the health and education status of miners and their families) in order to bring more order to ASM

Attachment A 38

and to build the knowledge and capabilities o f the A S M miners so that they can operate in a more sustainable manner. The project has been successful in taking a holistic approach to the sustainable development o f A S M communities b y addressing how to increase livelihoods through improved mining techniques, and b y providing support for addressing education, health, environmental, and social issues associated with small-scale mining. The new Mining TA wil l take this effort further by providing support to MRA’s ASM Department to expand the availability of information and to expand the reach and scope of technical assistance services, training and development activities on a pilot basis to other small-scale mining areas in Papua New Guinea, through support for the newly formed Small Scale Miners Association.

C. E1 Governance Issues

21. E1 Revenue Transparency. The larger E1 operations are al l operated in a ful ly commercial manner by multi-national mining or o i l companies, and the smaller operations b y well-qualified, competent local companies. All produce and publish financial accounts, and there i s good transparency regarding payment by companies to all levels o f government- although there i s little dissemination or public discussion o f such payments and no publicly available reconciliation of what the companies say they pay with what Government says it receives. There i s also good transparency regarding transfers o f E1 and other funds by the national government to provincial governments, which include not only general budgetary funds but also mineral royalties and special support grants to mineral producing provinces. There i s little or no indication o f corruption in the minerals sector at the national level. However, there i s very poor transparency regarding the receipt and use o f funds at the provincial and local government levels due to lack o f published budgets, lack o f published accounts, and lack of audits o f sub-national government funds. Improving the transparency of collection and use of EI funds to support greaterfinancial accountability of E l revenue flows at national, provincial, and district levels wil l be addressed through the Bank’s macroeconomic and development dialogue, including AAA work on public expenditure management which wi l l also support the Government’s possible participation in EITI.

22. E1 Licensing. One o f the most important E1 governance issues i s licensing arrangements. As indicated previously, PNG has a sound system for licensing E1 projects, but the institutional capacity o f the government in general and both D o M and DoPE in particular has eroded over the past ten years, and recurrent budgets for D o M and DoPE have been inadequate to support effective oversight of E1 operations. The establishment o f the MRA i s helping improve mineral licensing. First, because the MRA i s self-funding from mining sector fees, i t should be able to attract sufficient staff who have good qualifications and experience (this was a problem for DoM, which lost some o f i t s best staff to more attractive employment elsewhere but was held back from filling vacancies b y the Department of Personnel Management) and sufficient recurrent funding to undertake necessary mine site visits and inspections (which D o M lacked). Second, the MRA’s governance structure has a clear separation between Board membership and management, and Board members are appointed b y different constituencies (which prevents the Board from being politically influenced). A mining administration w i l l also need to be established for Bougainville. Efforts to strengthen the institutional structure of EZ sector bodies and their capacity to license and administer the sector (including in Bougainville) wil l be supported under the new Mining TA 2 operation.

39 Attachment A

23. E1 Fiscal Regime and Tax Assessment and Collection. All of PNG’s mining and oil/gas projects are subject to a common fiscal regime that i s in line with good international practice, with the exception of the recently approved Ramu Nickel project where a ten year tax holiday was granted by the Government. Tax holidays for E1 projects are considered highly undesirable because they create the risk of distorted production decisions whereby an operator wi l l maximize production prior to the expiration of the tax holiday, resulting in sub-optimal development of the ore body and sacrifice of lower-grade resources. The Mining TA 2 operation wi l l assist DoMPGM in encouraging Government negotiating teams to avoid offering special treatment through tax holidays. The PNG fiscal regime i s implemented through well designed tax regulations which are generally well enforced by the JRC, with the important exception that the JRC lacks sufficient staff and sk i l l s to conduct field audits of E1 companies. As a result, there are missed opportunities for revenue collection from existing mining and petroleum operations. Some pilot work carried out under the Mining TA project resulted in significant additional assessments, and i t i s expected that E1 tax revenues would increase substantially i f the IRC were able to conduct field audits of al l companies lodging income tax returns. Additional substantial support to build the IRC capabilities to undertake field audits wil l be provided under the Mining TA 2.

24. Distribution of E1 Royalties and Compensation to Landowners. There are significant concerns about the distribution and use of landowner royalties, with a reported tendency for men to keep the bulk of the income and compensation for themselves and spend i t on their own priorities. The situation i s most severe regarding landowner compensation for oi l and gas, which i s paid to landowners not at the sites near their homes but in Port Moresby, and stories abound of landowners returning with most of the funds already dissipated on good living in the capital’s hotels. The Government has not made this a priority, but under the Mining TA 2, support wil l be provided to the Policy Division of DoMPGM to improve the accountability systems for transfer of mining compensation and benefits to landowners.

25. Rights of People Affected by E1 Projects. As noted previously, there are no known major human rights abuses or violations associated with E1 projects in PNG. Some NGOs have raised concerns that local people’s views are not sufficiently taken into account by E1 operators, but this concern has not been raised by landowners per se. To the extent that there are rights issues, they largely relate to the impact of E1 on women. This i s being addressed through mining and EI-gender related work as outlined in Paragraph 14 above.

26. the instruments to be used.

Table A-3 provides a summary of the main issues that wi l l be addressed by the CAS and

Attachment A 40

Table A-3: Summary of Priority E1 Issues to be Addressed under the CAS and Instruments to be Used

Issue Sustaining sound macro- economic management o f E1 income

Mitigating E1 Social Risks and Improving E1 Social Impacts

Mitigating local and provincial impacts o f mine closure

Increasing sustainable local community development

Improving development and local impacts o f artisanal and small scale mining

Improving transparency o f collection and use o f E1 funds at national, provincial and district levels

Strengthening institutional structure and capacity o f E1 sector institutions, to license and administer the sector including an institutional structure for Bougainville. Improving E1 revenue collection

Improving distribution o f Royalties and Compensation to Landowners

CAS Response Macroeconomic and development dialogue to support and sustain sound use o f minine income Lending to support improved benefits and reduced risks o f E1 operations for women, children and youth

Lending to support improved planning and implementation o f mine closure activities

Lending to support joint programs between the Mine Women’s Associations and local governments and Landowners Associations. Lending to support provision o f T A services to A S M miners

Macroeconomic and development dialogue including EITI to support greater financial accountability o f E1 revenue flows Lending to support capacity building for E1 sector institutions

Lending to support IRC to build E1 sector field audit capacity Lending to support improved accountability for transfer mechanisms

Instrument Public Finance Review Country Economic Memorandum Public Expenditure Tracking Survey

Mining TA 2 support to DoMPGM Policy Division for finalizing Sustainable Mining Development Policy and to MRA Coordination Department for Women in Mining Mining TA 2 support to MRA and DoMPGM for Misima Mine Closure Review and to DoMPGM for preparing Mine Closure Policy Mining TA 2 support to MRA Coordination Department for implementing Women in Mining Program

Mining TA 2 support to MRA Artisanal and Small Scale Mining Department to provide TA Programs to A S M miners and ASM mining communities Public Finance Review Country Economic Memorandum Public Expenditure Tracking Survey

Mining T A 2 support to DoMPGM, MRA, and to Autonomous Bougainville Government

Mining TA 2 support to IRC Resource Management Division

Mining T A 2 support to DoMPGM Policy Division to improve benefits policy and mechanisms

Attachment B: Progress Toward Achieving the MDGs

Deterioration

Halt and begin to reverse the incidence of malaria pneumonia, malaria, other I 1

Have the spread of Incidence of TB (per 100,000 people)

No progress 250 250 250 (2005)

and other major diseases major diseases controlled by 2015 & either stabilized or reversed by 2020

Deterioration

Notes: a World Bank. 2004. Papua New Guinea: Poverty Assessment. Washington DC: World Bank. Asian Development Bank. 2006. ADB Country Strategy and Program: Papua New Guinea (2006-2010). Appendix 2. Manila: Asian Development Bank. Government of Papua New Guinea and United Nations in Papua New Guinea. 2004. Millennium Development Goals: Progress Report for Papua New Guinea 2004. World Bank. World Development Indicators. SIMA database and/or HNP Stats database. e UNDP. 2006. Human Development Report 2006. New York: UNDP. World Bank. 2006. World Development Report 2007: Development and the Next Generation. Washington DC: World Bank. Asian Development Bank, AusAID, World Bank. 2006. Papua New Guinea: Strategic Directions for Human Development. Manuscript.

41

Attachment C: Debt Sustainability Analysis27

1. This attachment summarizes the debt sustainability analysis @SA) for Papua New Guinea prepared using the framework for low-income countries. The baseline macroeconomic scenario underlying this DSA was prepared b y the International Monetary Fund in September 2007 for the 2007 Article IV Consultation mission and envisions a sustained implementation of the government’s medium-term fiscal strategy. The DSA also assesses the impact o f various exogenous shocks on the sustainability o f public sector debt and external debt under the baseline scenario.

A. Main Assumptions

a

a

a

a

a

2.

Real GDP i s projected to grow at about 4 percent in 2007-12 as several mining projects come on stream, agricultural productivity improves, and continued gradual progress i s made on structural reform.

Monetary policy w i l l be geared toward maintaining low inflation and achieving exchange rate stability and sound external position.

Fiscal policy remains in line wi th the government’s medium-term fiscal strategy; overall budget surpluses are expected to decline and turn into deficits by 2010 due to falling mineral prices and increasing government spending, but the non-mineral fiscal balance i s expected to be stable.

Papua New Guinea would have access to external concessional finance and continue to follow a prudent debt strategy.

Structural reforms outlined under the authorities’ Medium-Term Development Strategy, including those on public sector reform, are implemented at a gradual pace.

B. Total Public Sector Debt Sustainability

The public sector debt ratio declined from the high of 76-77 percent of GDP in 2001- 02 to 39.2 percent of GDP at end-2006 (Table C-1). This improvement reflects prudent fiscal policy, favorable mineral sector developments (in particular, strong prices of key export commodities in recent years), kina appreciation, lower interest rates, and a sustained economic recovery since the current government took office in mid-2002. External public and publicly- guaranteed debt accounts for just over half o f total public debt. Multilateral debt, primarily to Asian Development Bank, Papua New Guinea’s largest creditor, and the Wor ld Bank, accounts for two-thirds o f external public and publicly-guaranteed debt. Japan i s the main bilateral creditor, accounting for more than 80 percent o f bilateral debt. Under the authorities’ Medium- Term Debt Strategy, foreign-currenc y loans are considered only i f they are highly concessionary (grant element of 35 percent or more).

27 The following analysis draws on the I M F ’ s DSA analysis prepared for the Mission Brief for 2007 Article I V Consultations, which are scheduled to be held in November 2007. The DSA was prepared using the IMF-WB DSA framework for Low-Income Countries.

42

43 Attachment C

3. Under the baseline scenario, the public sector debt-to-GDP ratio i s projected to decline to 29.5 percent by 2012 and 14.6 percent by 2027. The projected improvement o f the ratio stems mainly f rom the expectation o f a prudent fiscal policy continuing into the medium term, as well as f rom favorable automatic debt dynamics. The NPV o f public debt would decline from around 40 percent of GDP in 2006 to 30 percent b y 2012 and to less than 16 percent b y 2027. The NPV of public sector debt-to-revenue ratio, which has fallen significantly over the past 4 years due to high windfall revenue, i s expected to rise somewhat b y 2010-11 as mineral revenue moderates. However, in the longer term the ratio i s expected to significantly decline. The debt service-to-revenue ratio would similarly rise slightly (from 10.3 to 14.9 percent between 2006 and 2010) before declining.

4. The standard analysis indicates that the paths of the debt ratios are particularly sensitive to changes in real GDP growth (Table C-2 and Figure C-1). A decline in real GDP growth in 2008-09 by one standard deviation below i t s historical average would raise the NPV o f public debt-to-GDP ratio by more than 20 percentage points o f GDP in the long term. A one- time 30 percent devaluation in 2008 would also increase the debt burden in the medium term (by 6 percentage points o f GDP within a year), but the ratio would decline over the longer term.

C. External Debt Sustainability

5. Papua New Guinea’s external public and publicly-guaranteed debt has declined in recent years, from the high of 52.4 percent of GDP in 2002 to 21.4 percent in 2006 (Table C-3). During the same period, total external debt declined from 76.8 percent o f GDP to 34.0 percent. As a percentage o f exports o f goods and services, total external debt declined from 127.5 percent in 2002 to 41.7 percent in 2006. Based on available data, private external debt accounted for 37 percent o f total external debt at end-2006 and stood at 13 percent o f GDP.

6. External public and publicly-guaranteed debt dynamics are sustainable under the baseline scenario, and Papua New Guinea faces a low to moderate risk of debt distress under the IMF-WB DSA framework for L I C S . ~ ~ All the key debt indicators (the NPV o f public and publicly-guaranteed external debt in percent o f GDP, the NPV o f debt in percent o f exports, the NPV o f debt in percent of government revenue, and the debt service to exports and to revenue ratios) remain within the thresholds and are projected to steadily improve over the CAS period.29 Only under one bound test (for lower export value growth) i s one threshold (NPV o f debt-to-GDP) breached (Table C-4).

7. External debt sustainability i s most vulnerable to shocks resulting in lower export growth. The decline in export value growth in 2008-09 by one standard deviation below i t s historical average would raise the NPV o f public and publicly-guaranteed external debt-to-GDP ratio by more than 20 percentage points by 2009-10, and the ratio would fa l l below the threshold level for the poorly performing countries by 2020. A one-time, 30 percent nominal depreciation

28 Papua New Guinea i s rated a poor performer for i t s policies and institutions for the purposes o f the IMF-WB LIC DSA framework. Thus, debt sustainability thresholds applicable to Papua New Guinea are: (i) 100 percent for NPV o f debt-to-exports, (ii) 30 percent for NPV o f debt-to-GDP, and (iii) 200 percent for NPV o f debt-to-fiscal revenue; and for debt service: (i) 15 percent o f exports o f goods and services and (ii) 25 percent o f fiscal revenue. 29 Private external debt i s also expected to decline over the long term, as large mineral projects that account for a high proportion o f debt reach completion.

Attachment C 44

in 2008 would raise the NPV o f debt to GDP by 7 percentage points in the f i rs t years before falling over the longer term. Under any circumstances, Papua New Guinea’s external debt distress risk i s moderated b y the fact that the country has an excellent external repayment record, having never defaulted in the past.

D. Conclusions

8. Papua New Guinea has made significant progress in reducing its public debt burden, but it will need to continue its prudent management of debt over the medium-to- long term in order to mitigate risks to public debt sustainability. Currently, most indicators show that the public and external debts are manageable, and Papua New Guinea faces a low to moderate risk o f debt distress. The outlook, however, i s sensitive to changes in real GDP growth and export performance, highlighting the vulnerability o f the debt dynamics to potential shocks from lower world market prices o f the country’s key export commodities. This requires the policy aimed at accumulating sufficient precautionary foreign exchange reserves andor paying down external debt during the periods o f high commodity prices, and a continuation o f conservative borrowing policy. T o further help guard against vulnerabilities, Papua New Guinea should ensure that any external borrowing i s obtained on concessional terms, as envisioned in i t s Medium-Term Debt Strategy.

45 Attachment C

9 9 9 0 0 0

- y - ' 0 " m o r - o m

9 9

" Y r ! 7 3 - - d

m m 01 4 2 7

9 9 " 0 0 6

y m

0 N

r!r! v! m - m P I y

9 9 0 0

0 0 " : : 0 0 9

. . . .

Attachment C 46

Table C2: Sensitivity Analysis for Key Indicators o f Public Debt 2007-2027

Projections 2007 2008 2009 2010 2011 2012 2017 2027

NPV of Debt-to-GDP Ratio Baseline

A. Alternative scenarios

AI. Real GDP growth and primary balance are at historical averages A2. Primary balance i s unchanged from 2007 A3. Permanently lower GDP growth 1/

B. Bound tests

B I . Real GDP growth i s at historical average minus one standard deviations in 2008-2009 B2. Primary balance i s at historical average minus one standard deviations in 2008-2009 B3. Combination of Bl-B2 using one half standard deviation shocks B4.One-time 30 percent real depreciation in 2008 85. I O percent of GDP increase in other debt-creating flows in 2008

NPV of Debt-to-Revenue Ratio 21

Baseline

A. Alternative scenarios

AI. Real GDP growth and primary balance are at historical averages A2. Primary balance i s unchanged from 2007 A3. Permanently lower GDP growth 1/

B. Bound tests

81. Real GDP growth i s at historical average minus one standard deviations in 2008-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of B I-B2 using one half standard deviation shocks 84. One-time 30 percent real depreciation in 2008 B5. I O percent of GDP increase in other debt-creating flows in 2008

Debt Service-to-Revenue Ratio 21

Baseline

A. Alternative scenarios

Al . Real GDP growth and primary balance are at historical averages A2. Primary balance i s unchanged from 2007 A3. Permanently lower GDP growth I/

B. Bound tests

B I . Real GDP growth i s at historical average minus one standard deviations in 2008-2009 82. Primary balance i s at historical average minus one standard deviations in 2008-2009 B3. Combination of 81-B2 using one half standard deviation shocks B4.One-time 30 percent real depreciation in 2008 B5. I O percent of GDP increase in other debt-creating flows in 2008

39

39 39 39

39 39 39 39 39

107

107 107 107

107 107 107 107 107

10

I O 10 10

I O I O I O I O 10

37

39 33 37

41 40 41 46 46

108

1 I 4 98

109

1 I 9 118 119 135 135

11

11 11 11

12 11 11 11 11

36

40 29 37

47 43 44 45 46

114

125 91

117

145 134 137 143 143

12

13 8

12

15 15 15 13 22

33

37 21 35

47 39 41 42 42

1 I 4

125 71

119

155 134 136 143 144

13

15 6

14

19 18 17 14 17

32

35 13 35

48 38 39 41 41

114

121 47

123

169 135 136 144 146

12

13 3

14

20 15 15 14 15

30

30 4

34

49 36 36 38 39

110

108 16

122

175 131 129 140 142

12

11 -1 14

21 14 14 14 14

30

25 -24 41

63 35 34 37 38

107

86 -88 145

225 127 122 134 138

11

8 -9 15

22 12 12 12 12

16

6 -82 54

71 21 18 22 23

55

20 -287 187

265 72 61 76 80

4

-4 -38 19

29 7 5 5 8

Sources: Country authorities; and Fund staff estimates and projections. I/ Assumes that real GDP growth i s at baseline minus one standard deviation divided by the square root of 20 (Le., the length of the projection period). 21 Revenues are defined inclusive of grants.

47 Attachment C

1 - ? f

9 w s T N

" N O ' ? " ! j " " 0 j j m - m p - - 0 0

N N m

? - h w ? j 9 " O j j N m N z - 0 0 0 N

Attachment C 48

Table C4: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27 (In percent)

Projections 2007 2008 2009 2010 2011 2012 2017 2027

NPV of debt-to-GDP rat io

Baseline 21 19 18 17 16 15

A. Alternative Scenarios

I 2 8

AI. Key variables at their historical averages in 2008-27 11 A2. New public Sector loans on less favorable t e r n in 2008-27 2/

B. Bound Tests

B 1. Real GDP growth at historical average minus one standard deviation in 2008-09 B2. Export value growth at historical average minus one standard deviation in 2008-09 31 B3. US dollar GDP deflator at historical average minus one standard deviation in 2008-09 B4. Net non-debt creating flows at historical average minus one standard deviation in 2008-09 41 B5. Combination of B 1-B4 using one-half standard deviation shocks B6.One-time 30 percent nominal depreciation relative to the baseline in 2008 51

21 19 16 13 9 5 21 20 19 17 17 16

-27 14

-88 11

21 21 21 19 18 17 21 28 44 42 40 40 21 22 24 22 21 20 21 21 22 20 19 18 21 25 37 35 33 32 21 28 26 24 23 21

13 35 15 14 27 16

9 16 I O 9

14 11

NPV of debt-to-exports rat io

Baseline 23 23 21 20 19 19

A. Alternative Scenarios

17 16

A l . Key variables at their historical averages in 2007-26 11 A2. New public Sector loans on less favorable t e r n in 2007-26 21

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2008-09 B2. Export value growth at historical average minus one standard deviation in 2008-09 31 B3. US dollar GDP deflator at historical average minus one standard deviation in 2008-09 B4. Net non-debt creating flows at historical average minus one standard deviation in 2008-09 41 B5. Combination of BI-B4 using one-half standard deviation shocks B6.One-time 30 percent nominal depreciation relative to the baseline in 2008 5/

23 22 19 16 12 6 23 23 22 21 21 21

-42 21

-184 24

23 23 21 20 19 19 23 38 72 72 71 72 23 23 21 20 19 19 23 25 25 24 23 23 23 27 39 39 37 38 23 23 21 20 19 19

17 75 17 22 38 17

16 49 16 18 28 16

NF'V of debt-to-revenue rat io

Baseline 66 67 67 66 65 64

A. Alternative Scenarios

48 32

A I . Key variables at their historical averages in 2007-26 I/ A2. New public sector loans on less favorable t e r n in 2007-26 2/

66 65 61 50 39 20 66 68 68 69 69 69

-115 58

-362 47

B. Bound Tests

B 1. Real GDP growth at historical average minus one standard deviation in 2008-09 66 71 76 76 74 73 82. Export value growth at historical average minus one standard deviation in 2008-09 3/ 66 95 160 165 168 169 83. US dollar GDP deflator at historical average minus one standard deviation in 2008-09 66 77 88 88 86 84 B4. Net non-debt creating flows at historical average minus one standard deviation in 2008-09 4/ 66 73 79 79 78 77 B5. Combination of BI-B4 using one-half standard deviation shocks 66 86 135 137 137 137 B6. One-time 30 percent nominal depreciation relative to the baseline in 2008 51 66 96 96 95 93 91

55 146 64 61

114 69

36 67 42 36 59 46 -

49 Attachment C

Figure C1: Indicators of Public Debt Under Alternative Scenarios, 2007-2027 1/

90

80

70

60

50

40

30

20

10

0

300

250

200

150

100

50

0

35

30

25

20

15

10

5

0

NPV of debt-to-GDP ratio

1 Baseline -

most extreme stress test

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

hTV of Debt-to-Revenue Ratio 2/

t Poor performer threshold

-Most exneme stress test

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Debt Service-to-Revenue Ratio 2/ Poor uerformer threshold

Baseline

Most exueme sues test

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Source: Staff projections and simulations. 11 Most extreme stress test i s test that yields highest ratio in 2017. 21 Revenue including grants.

Attachment D: Key Development Partner Programs

PRIORITIES Mining and petroleum

Forestry

Environment

Public sector reform

Public expenditure and financial management

Decentralization and community support

Statistical capacity building

KEY PARTNER PROGRAMS Support to the Mining Sector (EC, PNGSDP)

D Forestry Policy and Training (AUS) D Eco-forestry (EC)

Support to Disaster Management (AUS, EC, UN) Rabaul Vulcanological Twinning Program (AUS)

Management (UNDP)

protection of marine species (EC)

(EC)

e Support for Environmental Monitoring and

e Support to WWF on coastal management and

* Protected Area Development, Trans F ly & Sepik

Economic Cooperation Programme (AUS) Advisory Support Facility Phase I1 (AUS) Public Sector Workforce Development (AUS) Public Sector Reform Programme (NZAID) Public Expenditure Review and Rationalization (ADB, AUS, WB)

(ADB , AUS, UNDP) Financial Management Improvement Program

Provincial Performance Improvement Initiative

Provincial Planning and Management (UNDP) 0 Bougainville Governance and Implementation

Capacity Building in DistrictProvincial Government

Local Governance and Rural Livelihoods (tentative;

0 Community Development Scheme (AUS) Civ i l Society Sector Support (NZAID) Support to Civ i l Society - NSAs (EC)

0 Grassroots Projects (Japan) Integrated Community Development (Japan)

0 Dispatching Volunteers (Japan) Support for Census and Statistical Capacity

Economic and Social Statistics (ADB) MTDS and MDGs in National Planning and

0 Macroeconomic Statistics (IMF)

@US)

(AUS, NZAID)

(EC)

NZAID, WB)

Strengthening (AUS)

Monitoring (UNDP)

WBG ROLE Mining TA Petroleum T A Women in Mining Initiative Gas Field Development

Guarantee JSDF on artisanal and small-

scale mining IFC Sustainable Forestry FCPF-related activities to

achieve REDD readiness criteria Climate Change Mitigation &

Adaptation Strategy Conservation Stocktaking

0 GEF Pacific Alliance for Sustainability

Regional engagement on disaster risk reduction & management

Collaboration through PERR implementation

0 PERR implementation (with AUS, ADB)

Policy Notes Public Finance Review Country Economic

Memorandum Public Expenditure Tracking

Survey Local governance and

community participation pilot under SADP

Provincial Reconstruction and Development

Review o f local service delivery models

District Service Delivery and Local Governance

Community outreach (esp. women and youth)

Possible work with NZAID on local governance and rural livelihoods

National Household Poverty Survey

50

51 Attachment D

I Other governance

L Education

KEY PARTNER PROGRAMS B Law and Justice Sector Program (AUS) D Justice Advisory Group (AUS) D Bougainville Community Policing (NZAID) B Reducing Gender-Based Violence (UNFPA) B Electoral Support (AUS) B Election 2007 Support (EC) B Support to Parliamentary Accounts Committee

Support to Parliament (UNDP) Support to National Research Institute (AUS) Media Development (AUS) Protection and Advocacy o f Human Rights

Conflict Prevention and Nation Building (UNDP) Women in Leadership (UNFPA) Education Capacity Building (AUS) Basic Education Development Project (AUS) Education Sector Technical Support (NZAID) Development Scholarships (NZAID) Support to Universal Primary Education (UNICEF)

0 National Enrollment Rate Survey (UNDP) Improving Teacher Quality (UNICEF) Support to Gender Equity in Education Policy

0 ETHRDP - Basic Education and Literacy (EC) Teacher Training and Capacity Building (EC) Rural Primary Education Facility Improvement (EC)

0 Enhancing Quality o f Teaching through T V program

0 Dispatching Volunteers (Japan) Health Sector Support (ADB) Community Health Projects (NZAID)

0 Health Service Improvement Program -

@US)

( W C R )

Implementation (UNICEF)

(Japan)

Programmatic Support to the Health Sector (AusAID, NZAID, WHO, UNICEF, UNFPA, ADB, WB)

(NZAID) Bougainville Healthy Communities Project

Health TA (WHO, UNICEF) Rural Water Supply and Sanitation (EC) NGO Support for Health and Education, selected

Provision o f Cold Chain Equipment (Japan) Dispatching Volunteers (Japan) HIV/AIDS Support Program (AUS) ADB Pilot HIV/AIDS Care Centers (ADB) Prevention of HIV in Rural Development Enclaves

Capacity Building for National AIDS Council

Support for HIV/AIDS Treatment (WHO, UNAIDS) NGO Support to Sexual Health (EC)

schools (EC)

(ADB)

(WHO, UNAIDS)

WBG ROLE Possible participation in multi-

donor programmatic support to the law and justice sector

Strengthening Institutions o f Oversight and Accountability

0 TA to support participation in Fast Track Initiative 0 Basic Education operation (supporting sector policies and strategies)

Possible participation in multi- donor programmatic support to basic education

Participation in multi-donor programmatic support to the health sector

HIV/AIDS Population Bio- behavioral survey

Attachment D 52

PRIORITIES Protecting the vulnerable

Transport

Energy

Telecommunications

Agriculture, fisheries, and rural livelihoods

~ ~~ ~~

KEY PARTNER PROGRAMS Support for Child Protection (AUS, UNICEF)

e NGO Support for Disabled Persons, 12 provinces (EC)

0 Transport Sector Support Program (AUS) 0 Key Roads for Growth (AUS)

Bridge Restoration Project (AUS) 0 Highlands Rural Feeder Roads (ADB) 0 Community Water Transport (ADB) 0 Highlands Highway Upgrading (ADB)

Maritime Navigation Aids (ADB) 0 Lae Port Upgrading (ADB) 0 Bridge Rehabilitation Projects (Japan)

Support for Renewable Energy (UNDP) Regulatory Framework Study (ADB, WB)

Agriculture Research and Development Support

Agriculture Research Support (EC) Australian Centre for International Agricultural

Coastal Fisheries (ADB) Smallholder Support Services (ADB, NZAID) Nucleus Agro-Enterprises (ADB) AgriculturelRD Sector Study (ADB) Vudal Agricultural Institutional Strengthening

Fresh Produce Development Agency Institutional

National Agricultural Research and Extension Policy

Support for Sustainable Agriculture (UNDP) Local Governance and Rural Livelihoods

Rural Coastal Fisheries Development (EC) Fish Marketing (EC) Support for Cooperative Marketing (EC) Rural Income Generation Support (EC) Construction o f Fish Market & Jetty in Wewak;

Promotion o f Smallholder Rice Production (Japan)

Facility (AUS, NZ)

Research Trust Fund (AUS)

Project (NZ AID)

Strengthening (NZAID)

Development (tentative; NZAID)

(tentatively NZAID, WB)

studies being carried out (Japan)

WBG ROLE D National Youth Integration Strategy

Youth Integration Mainstreamed support for women

and youth RMRF' (ongoing, with

supplemental funding)

e Support for road rehabilitatiodrnaintenance under SADP, Provincial Reconstruction & Development

National Infrastructure Study (roads, energy, telecoms)

WB/IFC: AviatiodAirports Development

Teachers' Solar Lighting Project Regulatory Framework Study

(with ADB) Regional Sustainable Energy

Finance Project Rural Electrification National Infrastructure Study

(roads, energy, telecoms) Rural Telecommunications National Infrastructure Study

(roads, energy, telecoms) IFC investments in telecoms Smallholder Agriculture

Development Project Sources o f Rural Growth/Rural

Livelihoods Strategy (possibly with EC) 0 Rural Development Program (possibly with EC) 0 Poverty Assessment

RMRF'II

53 Attachment D

PRIORITIES Business enabling environment

KEY PARTNER PROGRAMS Bougainville Microfinance (AUS) Microfinance and Employment Project (ADB) Bris Kanda Rural Enterprise Development

Pacific Technical College (AUS) Employment-Oriented Skills (ADB) Policies for Private Sector Development (ADB)

0 Trade-related Support (EC)

Program (NZAID)

WBG ROLE IFC: Informal Economy Project

Phase I and I1 IFC: Doing Business Reform

(Pacific Regional) IFC: Financial Infrastructure

0 IFC: PNG Microfinance 0 IFC: Tourism Development

IFC: Public-Private Partnerships in Infrastructure

Attachment E: Aid Effectiveness in Papua New Guinea

1, In an effort to improve the effectiveness o f aid in Papua New Guinea, GoPNG and i t s development partners have drafted a joint statement committing to localize the Paris Declaration. The “Joint Commitment o f Principles and Actions between the Government and Development Partners,” drafted in September 2007, sets out a series of shared principles for aid effectiveness in the PNG context, together with monitorable targets and indicators to measure improvements between 2007 and 2012. Following i s a brief review o f these elements of the draft statement.

2. Papua New Guinea would define operational development policies by leading the development and implementation o f the M T D S through broad consultation and integration o f development aid into mainstream planning; strengthening i t s leadership role in coordinating aid at al l levels; and inviting non-governmental and faith-based organizations to participate in these efforts. Indicators o f increased ownership would include a new MTDS, a mid-tern review o f the current MTDS, increased budget allocations to M T D S priorities, GoPNG’s adoption o f an aid coordination strategy, and rollout o f Sector Investment Plans.

Ownership.

3. Development partners would align their assistance and dialogue to the M T D S and related national and sectoral plans. Government and development partners would establish mutually agreed frameworks to assess country systems, procedures, and performance, and work to implement and strengthen program-based approaches, including agreement on government-led policies, strategies, and plans; processes for joint dialogue and decision making; flexible implementation mechanisms; and consideration o f an expenditure framework covering Government, development partner, and other funding. With support from development partners, Government would work to strengthen institutional capacity by integrating capacity building objectives into plans and strategies; publishing timely, transparent, and reliable information on budget planning and execution; undertaking reforms that promote long-term capacity development and accountable, transparent aid management; and committing sufficient resources to sustain these reforms. Development partners would, in turn, increasingly use Government systems, as mutually agreed standards for procurement and public financial management are attained, avoiding the creation o f parallel structures for project management. Indicators o f increased alignment would include the share o f each donor’s aid expenditures that are aligned to M T D S priorities, amount o f capacity building assistance, fewer separate Project Management Units, and stronger procurement and public financial management systems.

AZignment.

4. Harmonization and SimpZiJication, Development partners would implement common arrangements and simplify procedures through more joint missions and analytical work; collaboration with Government in the preparation and use o f core diagnostic reviews; development o f common arrangements for planning, design, monitoring and evaluation, and reporting to Government on donor activities using the M T D S Performance Management Framework and whole-of-government assessment framework (when developed); and decentralization/delegation o f authority to the country level to the maximum extent possible for each donor. GoPNG would provide development partners with clear views on their comparative advantage, aid modalities, and complementarities at the country or sector level; development partners would operate on the basis o f comparative advantage by aligning support and agreeing, where appropriate, on which donor would take the lead in a given area. Indicators o f harmonization and simplification would include the amount o f aid provided through

54

55 Attachment E

programmatic approaches; the on-time submission o f donor budget and expenditure estimates to GoPNG; the production o f fewer, better, core diagnostic and country analytical reviews; agreemenuuse o f common project cycle management tools; and the share o f each donor’s resources managed at the country level.

5 . Managing for Results. Government and development partners would joint ly use results- oriented performance assessment frameworks to maximize effectiveness and manage implementation o f national strategies and plans. Development partners’ country strategies, programs, and resources would be assessed according to their contribution to the development results recorded in these performance assessment frameworks. The indicator o f improved results management would be the development and use o f an agreed results framework to assess performance o f the M T D S and sector programs, and the use o f this information in decision making.

6. Mutual Accountability. Each year, Government and development partners would joint ly review progress in implementing agreed commitments on aid effectiveness, including progress on annual action plans and longer-term targets and indicators. In addition, Government and development partners would identify transparent mechanisms for assessing the quality and progress o f technical assistance; joint ly select and undertake missions; enhance the predictability of future aid through joint decision making processes and timely provision o f reliable information on indicative aid commitments over a multi-year timeframe. Indicators o f mutual accountability would include periodic mutual assessment o f progress in implementing aid effectiveness principles, and the share o f aid disbursed according to agreed schedules in annual or multi-year frameworks.

Attachment F: The Bank’s Recent Experience Under the Interim Strategy Note

A. Introduction

1. The last CAS for Papua New Guinea was prepared in 1999 and covered the period from 1999 to 2002. After this time, a climate o f political instability, economic decline, and uncertainty in the backdrop o f donor assistance prompted the Bank to issue an Interim Strategy Note (ISN) in 2005.

2. The Bank had launched preparation o f a new full CAS in 2002, conducting consultations with the Government o f Papua New Guinea (GoPNG) and a broad range o f stakeholders on development priorities and challenges. However, chronic political instability made i t difficult to sustain dialogue with the Government on the development agenda, and with development partners on a common assistance framework. Economic and social indicators were deteriorating rapidly, wi th per capita income declining f rom US$ 970 in 1997 to US$ 510 in 2003. The resulting uncertainty was compounded by Australia’s decision in mid-2003 to take a more proactive role in PNG’ s development, posting Australian personnel in advisory and in-line positions throughout the GoPNG under the Enhanced Cooperation Program (ECP). I t was unclear initially how the ECP’s hands-on approach would alter the aid paradigm in PNG. The GoPNG had produced a Medium Term Development Strategy for 2003-2007 based on three key objectives: export-driven growth, rural development, and poverty reduction and empowerment. There were questions, however, as to the degree of country ownership o f this document, as well as the strategy’s consistency with financial realities and the effective prioritization o f public investments.

3. During this time, the Bank’s relationship wi th the GoPNG was becoming increasingly strained. The Bank had suspended disbursements under a major operation, the Forestry and Conservation Project (FCP), in August 2003 due to noncompliance with legal covenants and national legislation on award o f forest concessions. The loan, which comprised a US$ 17.36 mi l l ion IBRD loan and two GEF grants o f SDR 13.31 mi l l ion each, was eventually cancelled in June 2005 at the Government’s request, with only US$ 2.6 mi l l ion disbursed out US$ 40 million.30 These difficulties affected the implementation o f some, but not all, o f the Bank’s other ongoing programs in PNG.

4. began in 2003.

Based on these factors, and on the advice o f the Bank’s LICUS unit, I S N preparation

B. Objectives and Assistance Program

5. The I S N was prepared in l ieu o f a CAS to guide the Bank’s involvement in PNG for a period o f 18 months f rom March 2005 to September 2006, and to enable the Bank to evaluate i t s longer-term comparative advantage in the country. I t s two main objectives were to: (a) promote development dialogue and stem the decline in social indicators; and (b) build the foundations for improved governance and sustained recovery.

30 Around this time, the Asian Development Bank deferred the release o f the second tranche of a public sector reform loan because of governance-related concerns in the application o f civi l service procedures, especially in the fisheries sector.

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57 Attachment F

6. assistance program (summarized in Table F-1) as follows:

Over the eighteen-month period the Bank was to focus i t s efforts on the non-lending

(A) Promote development dialogue and stem the decline in social indicators;

(1) Assist the Government and c iv i l society in reaching a consensus on appropriate development priorities and policies by:

(a) Facilitating dialogue and debate on development themes, including through retreatdworkshops with Government, consultations with private sector, academia, and c iv i l society; and the Global Development Learning Network (GDLN) center in the country office; and

Disseminating recent analytical work on key development themes to inform the dialogue, notably on public expenditure management, health and education service delivery; HIV/AIDS; transport; rural energy; and the investment climate.

(b)

(2) Mitigate the social effects o f the prolonged economic downturn and assist the Government in tackling the HIV/AIDS epidemic through:

(a) Strategic support for Government’s response to the HIV/AIDS epidemic; and

(b) Capacity building and small grants for priority HIV/AIDS initiatives and public expenditure management.

(B) Build the foundations for improved governance and sustained recovery

Assess the viability o f sub-national and community-level development support through:

(a) Analysis o f alternative modes o f assistance, including through non-

(b)

(c)

governmental stakeholders, and political economy implications;

Updated poverty assessment by undertaking a household survey; and

Capacity building for community-led development and local governance.

Support selected priority investments that generate high social and economic returns, contribute to local-/community-level engagement, strengthen donor coordination, improve income-generating opportunities and service delivery, and enhance sustainability. Consideration o f new operations was to be subjected to satisfactory, monitorable progress on governance and portfolio performance- related issues, including FCP.

Generate sustainable employment opportunities by improving the environment for domestic and foreign investment (through coordinated efforts o f IFC and FIAS).

Attachment F 58

C. Assessment of ISN’s Achievements 7. The program under the I S N had strategic relevance. A number o f initiatives (including community outreach, dissemination o f analytical work, pol icy dialogue, etc.) were successful and contributed to the implementation o f Government programs. Overall, the ISN succeeded in promoting development dialogue and building foundations for improved governance and sustained recovery. However, there were a few areas where achievements fel l below expectations.

What Worked Well

8. The highlights o f what worked well are summarized below.

(a) Facilitating Dialogue and Debate on Key Development Themes 9. The Bank focused on community outreach, spreading information about development and empowering local communities to become actively involved in development programs that matter to them. The Women in Mining initiative (Box F-1) empowers women to speak out about how the mining industry affects them and to play a stronger role in planning and decision making processes. The Youth Open Space Forum brings together “at-risk” young people to discuss their concerns about development and their views on possible solutions. The Yu Tok Radio Program provides young people with an opportunity to voice their interests, concerns, and ideas on the radio. Port Moresby’s Distance Learning Center i s a frequently-used and powerful tool for communication and outreach. The new Public Information Center, which

Box F-1: Voices for Change - Giving Women a Say in Mining Community Development

“You can’t eat the stones when the mine i s gone,” said Scholla Warai Kakas at a Papua New Guinea’s Women in Mining Conference, held July 11-14, 2005. Ms. Warai was one o f 140 women from mining areas across the country who gathered in Madang to voice their concerns about the impact o f mining activities on their lives and communities.

The Women in Mining initiative grew out o f a recognition that women and children tend to bear the heaviest social costs o f mining development and closure, but because they often remain outside formal decision making structures, they have had limited opportunities to speak out about their concerns.

In 2003, the f i rst Women in Mining conference, entitled “Voices for Change,” provided an opportunity for women with diverse backgrounds and experiences to meet on common ground and talk about how mining activities have affected them. They discussed the negative impacts, including the disproportionate employment and social representation o f men, increased workload for women, destruction o f homes and gardens, pollution o f water sources, alcoholism, violence, and the spread o f HIVIAIDS. They also identified a variety o f positive effects o f mining activities, such as the provision of housing, micro-credit programs, improved health services, school scholarships, adult literacy and vocational training programs, HIV/AIDS education, and counseling for victims o f violence. Together, conference participants developed a vision statement focusing on five themes they considered priorities for attention, especially from the Government: health and education, economic empowerment, social empowerment, safety and security, and sustainable artisanal and small-scale mining. This work was followed up during the 2005 conference, which resulted in the design o f a five-year action plan to support economic and social development in mining communities.

By giving women a stronger voice in expressing their needs and concerns, the Women in Mining initiative has empowered women to take action in developing their communities and planning for the future. There i s a strong sense that women wi l l be the drivers o f sustainable development in PNG, based on research showing that women are more likely than men to use financial resources for the education and health o f their children. The greater involvement of women in community development also promises to strengthen the demand for good governance, both at the local level and nationwide. As such, this important initiative serves as a model for community-driven development interventions in PNG.

59 Attachment F

has attracted a good number of partners f rom the donor community and private and public sectors, provides access to useful resources on the activities o f the World Bank Group and development in general. The proposed CAS for 2008-201 1 w i l l support and expand the current program o f innovative and successful community outreach activities. The follow up work on Women in Mining, for example, w i l l include a stronger focus on youth. Youth and gender issues w i l l be mainstreamed in the proposed CAS.

10. There were also other factors, besides lending and AAA work, that helped turn around the difficult country relationship issues. These factors included continued engagement with GoPNG in areas o f interest (such as supporting the new M T D S as i t came on line); introducing new products such as the Development Marketplace, which focused on youth issues (a major area o f concern to the Government); improved consultations; avoiding surprises; and treating Government counterparts with respect.

(b) Completion and Dissemination of Analytical Work on Key Development Themes 11. The dissemination o f a number o f high quality analytical reports provided an avenue for continued dialogue with the Government at a time when the Bank’s portfolio was rapidly dwindling and preparation of new projects was put on hold due to issues surrounding FCP. Support for the Government’s implementation of the recommendations o f the Public Expenditure Review and Rationalization (PERR), led b y the Bank and carried out joint ly with AusAID and ADB, takes the form of a continuing analysis and dialogue that i s ful ly owned b y the Government. Joint donor missions have continued to attract high-level access to senior Government Ministers and bureaucrats, even at the time when Bank-country relations were severely damaged b y disagreements over FCP. Continued PERR Implementation, not originally in the I S N program but added later at the Government’s request, provides a crucial opportunity for the Bank, ADB and AusAID to discuss and influence the Government’s macro-fiscal policies, funding for service delivery, approach to capacity building, and provision o f budget information to the public. PERR missions have visited PNG twice a year, and, at the request o f the Government, three times in FY07.

12. A Public Expenditure and Service Delivery (PESD) tracking study was completed in 2004, based on a tracking survey conducted during 2002. The PESD examined the state o f school administration and finance, educational facilities, and student and teacher attendance in hopes o f better understanding bottlenecks to effective service delivery on the ground. A public workshop on the PESD was held in March 2007. The workshop theme was “Opening Up the PNG Budget,” as it focused on how public funds are spent and what information would be required to better monitor government spending. The issue o f improved transparency for more effective monitoring w i l l continue to be an area o f focus under the CAS for 2008-201 1.

13. A Country Procurement Assessment Report (CPAR) was completed during the I S N period in 2006. A number o f i t s recommendations have been implemented. Procurement processes have improved considerably on paper, but improvements in practice w i l l depend on management signals, stronger rule respect, targeted capacity building and standardized documentation. The CPAR concluded that the legal and regulatory framework for public procurement in PNG has improved substantially following amendments to the Public Financial Management Act (PFMA) in 2003, but the use of certificates o f inexpediency (waivers o f competitive procurement) remains widespread. Several guidance documents have been developed to support implementation of the new regulations, including a Good Procurement

Attachment F 60

Manual and an Operations Manual, but the manuals have not been widely disseminated and there i s a need for training in their proper application. The CPAR highlighted the importance of moving forward with the development o f standard bidding documents that are consistent with the amended legislation and accompanied by clear tender evaluation processes aimed at achieving efficient use o f public funds. I t would be useful to design the standard bidding documents so that they can be modified easily to apply to donor-financed contracts. Sustained attention w i l l s t i l l need to be paid to enforce standards o f procurement and contract execution at both national and sub-national levels.

14. A Human Development Sector Review, conducted joint ly wi th ADB and AusAID, was completed and disseminated widely. This study made a significant contribution to an emerging consensus in PNG that human development outcomes have deteriorated in recent years, and service delivery in many parts o f the country i s collapsing despite significant levels o f both Government and development partner financing. Though the Bank was not supporting any lending operations in the human development sector during the I S N period, the Government valued the Bank’s strategic guidance and donor collaboration in the sector.

15. The dialogue around the Energy Sector Issues/Options report resulted in the Teachers’ Solar Lighting Project (TSLP), a highly successful small scale project that supports alternative energy in rural areas has substantial potential for scaling up. A National Rural Electrification Project has also been identified as a result o f the analytical work and subsequent dialogue, and forms part o f the proposed CAS program for 2008-201 1.

16. Rural Telecommunications Options Study. In the process o f the ongoing dialogue with the Government on telecommunications policy, i t was agreed that the Bank would assist the Government in conducting a study to come up with options for taking telecommunications services to rural areas even though this activity was not planned under the ISN. The study i s about to be completed and i s expected to result in support for a public-private partnership in a Rural Telecommunications operation under the CAS for 2008-201 1.

17. A GDLN Youth Outreach study has been completed and the report i s being edited for publication. The report emphasizes the need to involve young people in decisions that affect them through mechanisms such as youth engagement, curriculum development, and youth employment. This work w i l l inform the development of a National Youth Integration strategy and operation under the proposed CAS for 2008-201 1.

18. Sociopolitical Analysis. Recognizing that PNG i s home to a highly diverse population whose members identify more closely with their local clan or group than with the nation as a whole, the Bank began to pay greater attention to the sociopolitical landscape and how this influences development. An informal Political Economy Analysis was prepared. Dialogue has also been initiated in the area o f state building. This work reveals a number of factors that have a bearing on the effectiveness o f development programs within the country’s sociopolitical context. The disjunctions between local perceptions o f legitimacy and authority, and largely imported national systems, profoundly affect politics, governance, and distribution o f benefits. In the transfer o f local socio-cultural values to the national political arena, the expectation that political leaders (“big men”) w i l l distribute benefits to their local group often comes at the expense o f the broader electorate. Lessons learned from sociopolitical analyses w i l l be integrated in program design in future operations.

61 Attachment F

19. Overall, AAA was a useful platform for Bank engagement during a difficult time, but more work needs to be done to encourage ownership through joint work with GoPNG and other stakeholders, and to encourage accessibility b y limiting the focus and size o f reports and disseminating more broadly.

(c) Sub-National and Community-Level Development Support

20. A Community Driven Development Stocktaking was undertaken with a view to better understanding the status o f decentralization policy and implementation, the range o f institutions that are active at the community level in PNG, and the state o f local-level governance. The Government and other key stakeholders were widely consulted in the process. The report has provided important background information for the preparation o f the proposed CAS for 2008- 2011. This work led to the adoption in the proposed CAS o f multiple delivery platforms, through which the Bank plans to work from the top down to strengthen systems for service delivery at the national, provincial, and local levels, while supporting community-level activities to encourage bottom-up development. Taking this work forward, emphasis w i l l be on lending and analytical activities focused on the sub-national level, C D D programs with links to provincial and district governments, innovative programs for sector-specific service delivery, and expanded outreach,

21. In response to weaknesses in public service delivery at the local level, community development initiatives have stepped in to fill the gap between available services and local needs. PNG has a long and r ich history o f community-level development, supported b y intermediary organizations such as churches; national and international non-governmental organizations (NGOs); private sector companies, particularly in the extractive industries; and bilateral and multilateral development partners. These organizations have come to play a crucial role in the delivery o f basic services in PNG, especially in remote communities where service provision i s difficult and costly for the Government.

22. The donor community has also been active in supporting community-driven development activities. The Bank made significant progress in a number o f areas. I t has supported local development projects through the Development Marketplace (DM), a nationwide competition known locally as Tingim Yut Kompetisen, which demonstrated the enthusiasm among PNG communities to develop their own solutions to development problems. The first round elicited enthusiastic response and many high-quality projects. The Bank i s monitoring the implementation o f those projects and the results so far are encouraging. A follow-on DM i s planned for FY08.

(d) Selected Priority Investments and Portfolio Size and Performance

23. The indicative IDA allocation for PNG during the I S N period was SDR 28 million. One GEF-supported project (TSLP) and one IDA-assisted project (additional funding for Road Maintenance and Rehabilitation, US$ 37.3 1 million) were approved during this period. Another project prepared during the period, the Smallholder Agriculture Development Project (SADP), has been appraised and negotiated and i s expected to go to the Board in early FY08. The Highlands Highway Project, whose preparation was suspended due to issues surrounding FCP, was dropped when the Government decided to use i t s own resources following sour relations with the Bank.

Attachment F 62

24. Following country relationship challenges and recalibration of the country program under the ISN, there was no new Bank lending to PNG between June 2002 and March 2007. Two projects (Mining TA and Petroleum TA) closed and one (FCP) was cancelled. As a result, the number of projects under implementation fell from six in 2005 to three in 2007 and the volume of commitments dropped from US$ 116.7 mill ion to US$ 72.3 million. At the time, the portfolio was plagued by difficulties with overdue audits, lack of counterpart funding, and problems with special accounts.

25. As Government revenues improved, counterpart funding, which had slowed down the disbursements from the Bank’s loanskredits in the past, was no longer an issue. Two out of the five projects (Gazelle Restoration and Road Maintenance and Rehabilitation) in the portfolio were previously rated as being at risk of not achieving their development objectives. They have since turned around, and their status has been upgraded to indicate that they are expected to achieve their development goals. However, due to their historical performance, the two operations have long- term risk flags against them. The two projects that closed during the period (Mining TA and Petroleum TA) were rated satisfactory at the time of closing.

Portfolio performance improved significantly during the I S N period and after.

26. There are no fiduciary, safeguard, monitoring and evaluation, counterpart funding, or legal covenant issues facing any of the active projects in the portfolio. Only the Road Maintenance and Rehabilitation Project (RMRP) had and s t i l l has a slow disbursement flag, However, in spite of the improvements, the portfolio s t i l l has country record flag over which individual projects have no control. One project, the TSLP, has been approved since the I S N came into place. Additional funding for the RMRP was also approved. Another addition to the portfolio was a regional GEF project for Sustainable Energy Financing, a US$ 9.5 million facility covering Fiji, PNG, Marshall Islands, Solomon Islands, and Vanuatu. The SADP i s expected to go the Board in early FY08. With the warming up of country relations, the portfolio i s expected to grow gradually.

The current portfolio i s small, but effective.

What Worked Less Well

27. While most aspects of the I S N exceeded expectations, there were a few areas where planned programs were not fully implemented. Plans to conduct an updated poverty analysis on the basis of a new household survey and Demographic and Health Survey were not achieved due to a number of factors. I t was initially envisaged that a new national household survey would be carried out in support of the work on the Poverty Assessment. However, despite a lot of preparatory work, an agreement could not be reached with the Department of National Planning or with other donor partners, especially the ADB, on carrying out such a survey. In addition, the Bank felt there was a need for additional work on tracking public expenditures and service delivery. The PESD was planned as part of a special focus for the poverty assessment. However, as the PESD generated a wealth of information, i t became a stand-alone report, which was completed at the same time as the poverty assessment in 2004. The most recent household survey on which estimates of poverty in PNG can be directly based, the 1996 National Household Survey, i s now more than a decade old and in urgent need of being updated through a new nationwide survey. This issue wi l l be taken up in the context of the new CAS.

63 Attachment F

28. Capacity building for community-led development and local governance started on a small scale, for example through the Women in Mining initiative, but much more remains to be done in this area. This i s an important focus o f the CAS for 2008-2011, including through the SADP pilot on local governance and community participation, analytical and operational work on District Service Delivery and Local Governance, and other interventions to be delivered on the local platform level.

29. Efforts to improve the environment for domestic and foreign investment have not proceeded at the pace envisioned under the ISN. Doing Business indicators compiled b y the Bank and IFC, and diagnostic work b y FIAS, have identified several critical bottlenecks to private investment that need to be addressed, including lack o f access to finance for small and medium enterprises, cumbersome entry processes, and lack o f access to business services. However, actions to remove the constraints are yet to be taken b y the Government, and security remains an obstacle to private investment. The IFC’s in-country office was established in 2006 as a first step toward deepening engagement with GoPNG on these issues, and the proposed joint Bank-IFC CAS w i l l make livelihood improvements, including a better business environment, one of i t s principal areas o f focus.

30. The ISN’s intention to mitigate the social effects o f the recession and assist the Government in tackling the HIV/AIDS epidemic through strategic support to governance and HIV/AIDS response was not achieved. The analytical work on human development, which included HIVIAIDS, took much longer to complete than expected. However, the findings o f that report w i l l inform the Bank’s support to the health sector and the fight against HIV/AIDS during the proposed CAS.

D. Key Lessons Learned

31. Bank’s future involvement in the country. These include:

A number o f lessons were learned under I S N implementation that would inform the

Programs designed on the basis o f high quality economic and sector work and small, carefully focused TA operations tend to succeed in situations where traditional investment operations would fail. The TSLP and Mining TA are good examples.

I t takes time to implement governance reforms. As a result, i t i s important to define realistic goals and time frame for governance and institutional reforms. I t may take a multi-year effort covering two or three CAS periods to successfully implement far- reaching governance reforms that are sustainable; this i s especially true at the sub- national level where capacity i s thin.

Development o f a constructive long-term partnership with the Government and other development partners in pursuit o f development objectives i s essential in a country l ike PNG. Though the Bank has been very active in PNG over the past two decades, the traditional approach o f implementing CAS programs with a time horizon o f three to four years has not proved effective in stemming the steady decline in PNG’s social indicators over the past two decades. Thus a new approach i s needed which looks at desired outcomes over a 15-20 year period, and then sets interim performance targets within the three- to four-year CAS period to move the country toward i t s longer-term goals. When preparing a three- or four-year CAS in such an environment, i t should be clear to all

Attachment F 64

parties that the CAS i s the first in a series o f programs over a longer time horizon, allowing the Government and i t s partners to tackle challenges that can be addressed now, while making a start on those that need a longer-term perspective.

I t i s important for the Bank to remain engaged in a country through AAA when circumstances do not warrant investment operations. Keeping up a program o f relevant, timely, and high-quality analytical work places the Bank in a position of readiness to respond promptly when the situation changes. In the case o f PNG, the Bank’s continued presence made i t possible for the Bank to respond quickly to the Government’s request for additional funding for the RMRP and to restart preparation o f the SADP.

In order to operate effectively in a country l ike PNG, where political leadership and priorities can change unpredictably, and sometimes negatively, Bank staff working in the country should possess a combination o f technical expertise and diplomatic ski l ls . To some extent, the improving country relations are attributable to this combination o f sk i l l s on the ground.

Improving communication and community-level outreach, including on the Bank’s role, in rural areas o f the country and dealing directly wi th social groups (such as youth and women’s organizations), i s critical in helping ordinary people appreciate what the Bank’s work i s al l about.

Table F-1: Summary of Non-Lending Services, Papua New Guinea FY02-FY05 As of 3/10/05 (Before I S N Board Date)

Products Completion FY Audience’ Objectiveb

Recent completions

Public Expenditure Review & Rationalization 2003 G,D,B KG,PD,PS

Transport Sector Note 2003 G,D,B KG,PD,PS

Environment Monitor 2002 G,D,B,P KG,PD,PS

Public Expenditure for Poverty Reduction 2004 G,D.B,PH KD,PD,PS

Country Procurement Assessment Review 2004 G,D,B,PH KD,PS

Energy Sector Issues/Options 2004 G,D,B,PH KG,PS,PD

Underway

HD Sector Review

Planned

HIV/AIDS Strategy

GDLN Youth Outreach

Community-Level Stocktaking

Local Level Capacity Building

Poverty AnalysislHousehold Survey

2005 G,D,B,PH KG,PD,PS

2005 G,D,B,PH KG,PH,PS

2006 G,PD KG,PH,PS

2005 G,D,PD,D KG,PH,PS

2006 GAB PS

2007 G,D,PD,D KG,PH,PS

Note: For audience: =government, D=donor, B=bank, PD=public dissemination; For objective: KG=knowledge generation, PD=public debate, PS=problem solving.

Attachment G: Governance and Anticorruption Strategy 1. The World Bank Group has recently adopted a strategy for addressing governance and anticorruption as an integral part of its work on reducing poverty and promoting growth.31 The strategy aims to help developing country governments identify their own priorities for improving governance, and implement effective and sustainable programs. Recognizing the importance of country ownership and leadership, the Bank Group’s engagement w i l l vary by country. The strategy aims to strengthen, not bypass, country systems, and to work closely with development partners. The Bank Group intends to engage with a broad range of government, business, and civil society stakeholders.

2. I n line with the Bank Group’s overall governance and anticorruption strategy, the Papua New Guinea CAS includes a number of measures to support GoPNG’s efforts to strengthen governance as a means to reducing poverty, enhancing growth, and improving service delivery. At the national level, the CAS wi l l support improved governance and public expenditure management to promote accountability and transparency in the use of public resources, especially through the use of country systems for procurement and financial management. Local level operations wi l l focus on supporting decentralized systems of planning and budgeting-the poor functioning of which i s a major constraint to effective service delivery.

Ongoing Support for Governance and Anticorruption Efforts in PNG

Assisting GoPNG to improve its procurement system. An action program has been agreed under the recently completed Country Procurement Assessment Report, focusing on building the capacity of tender boards and developing standard bidding documents.

Supporting better public financial management through the implementation of the Public Expenditure Review and Rationalization (PERR) recommendations.

Strengthening the capacity of the Internal Revenue Commission (IRC) to improve the quality of tax audits. The Mining TA I supported two pilot tax audits of mining companies, and support for the IRC wi l l continue under the Mining TA 11.

Helping ensure sound governance in the extractive industries. The Bank has provided support to the establishment of sound mining and oil/gas licensing and fiscal regimes under the recently closed Mining TA I and Gas TA.

Proposed Governance and Anticorruption Actions under the CAS

Pillar I: Promoting; and Maintaininp Sound Economic and Natural Resource Management

Support for improved macroeconomic stabilization and fiscal discipline through multi- donor dialogue on the PERR, combined with technical assistance, policy notes, and reports that respond to client needs and address knowledge gaps. A Public Finance Review and Country Economic Memorandum are envisioned.

31 World Bank Group. March 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption. http://go. worldbank.org/32PINXVIJO

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Attachment G 66

Improving the eflectiveness and transparency of budget preparation, execution, and reporting. The CAS w i l l support efforts to enhance the credibility o f budgeting and tendering through the multi-donor PERR process and the implementation o f CPAR recommendations. The proposed Public Finance Review would provide updated information on processes and practices, including at the sub-national level, and a proposed Public Expenditure Tracking Survey would shed light on the impediments to effective public spending at the agency and sub-national levels.

Strengthening institutional structures in the mining sector, with an emphasis on transparency and sustainability. The Mining TA I1 operation aims to strengthen the legislative and institutional framework for mining in PNG, including in Bougainville; build the IRC’s capacity for tax assessment and audit in order to increase tax collection; support mine closure planning; and help mine-affected communities to manage the benefits and r isks f rom mining activities (including those to women and youth). The Bank w i l l support the development o f internal management and governance systems for the recently-established Minerals Resource Authority, and i s also proposing to support an institutional vulnerabilities assessment o f the mining sector.

Capacity building to strengthen oversight of the public sector. Under the proposed Strengthening Institutions o f Oversight and Accountability Project, the CAS would help enhance the capacity o f the Auditor General, Parliamentary Public Accounts Committee, and Ombudsman Commission to conduct and evaluate audits and investigations (including at the sub-national level), as well as the capacity o f the Central Supply and Tender Board to oversee public procurement. Programmatic support to the law and justice sector i s also under consideration (in collaboration with AusAID).

Increasing public availability of information to monitor Government performance. The Bank Group w i l l help GoPNG issue information in a format that can be easily understood by the general reader, and w i l l also help c iv i l society organizations absorb and use this information. This work w i l l be supported through the PERR process and the proposed SIOA operation. In cooperation with other international partners, the Bank i s promoting the adoption of the Extractive Industries Transparency Initiative to assist in the monitoring o f mining and petroleum revenues.

Pillar 11: Promoting and Maintaining Sound Economic and Natural Resource Management

Strengthening partnerships between government and civil society, and within and across communities. Within the framework o f decentralization reform, the CAS w i l l support analysis intended to better understand the f low and use o f resources in selected districts. A District Service Delivery and Local Governance (DSDLG) Project would help strengthen local governments and would also support service delivery partnerships with churches and CBOs.

Supporting multi-donor programmatic approaches in the sectors. The Bank Group w i l l collaborate with development partners on programmatic support to health and education, in order to enhance coordination, minimize overlaps, and strengthen country fiduciary systems.

67 Attachment G ~~

Mainstreaming Governance

Reviewing and assessing key governance issues in AAA and program documents, where appropriate;

Building transparency and accountability mechanisms into program design, including sector-specific interventions, and at both national and local levels;

Strengthening GoPNG’s capacity to implement effective, transparent procurement, and to apply and monitor procurement and fiduciary guidelines systematically;

Providing channels for c iv i l society consultation and participation in the design and implementation of programs and accountability mechanisms;

Supporting data collection and analysis (including on poverty, health, education, mining, and the business environment) to strengthen Government and citizen monitoring and evaluation o f performance; and

Promoting more productive interactions between local governments and local c iv i l society groups, and ensuring that community development activities strengthen rather than undermine local government systems.

ANNEX A Annex A2: Papua New Guinea at a Glance lOl30l07

Key Development Indlcators

(2006)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth ( O h )

Urban population (% of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recent estimate, 2000-2006)

Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (%of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primaryenrollment, male rh of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Papua New

Guinea

6.0 463 1.8 13

4.6 760

2,410

2.6 0.7

56 55

63 51 80 70

39

East Asia & Pacific

1,900 , 16,300

0.8 42

3,539 1,863 6,821

9.4 8.6

9 37 71 26 15

95 87

115 113

79 51

Low income

2,403 29,215

1.8 30

1,562 650

2,698

8.0 6.1

59 75

72 50

108 96

75 38

Net Aid Flows

(US$ millions) Net ODA and official aid Top 3 donors (in 2005):

Australia New Zealand Netherlands

Aid (%of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, midyear (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov’t final consumption expenditure Gross capital formation

Exports of goods and services imports of goods and services Gross savings

Manufacturing

1980

326

276 2 0

13.1 100

12.1 7.1

0.7

3.2 2,546

35.4 28.7 10.2 42.8

60.9 24.1 25.2

43.2 53.3 19.0

1990 2000

412 275

262 198 3 7 0 1

13.3 8.3 100 52

7.0 15.6 4.1 13.1

1 .o 2.8 86 100

4.1 5.3 3,220 3,521

(“9 of GDP) 30.9 35.8 32.4 41.4 9.6 7.5

36.8 22.8

59.0 44.6 24.8 16.6 24.4 21.9

40.6 66.2 48.9 49.2 9.0 37.7

2006

266

234 10 3

5.9 45

2.3 9.1

3.1 161

6.0 5,589

35.7 45.2 6.1

19.1

47.0 12.1 19.8

83.8 62.7 36.7

Age distrlbutlon, 2006

Male Female

70-74

60-64 9 - 5 4 4044

30.24

15 10 5 0 5 10 15

percent

Under-5 mortallty rate (per 1,000)

1100, 90 ea 70 60 50 40 30 20 10 0

1990 1995 2KC 2W5

0 Papua New Guinea East Asia & Pacific

Growth of GDP and GDP per capita (%)

80 €5 w

-0-GDP -GDP per capita

1980-90 1990-2000 200046 (average annual growih %)

2.4 2.5 2.1 1.9 3.8 1.9

1.8 4.5 1.1 1.9 5.4 2.7 0.1 4.6 2.7 2.0 -0.6 2.1

0.4 3.4 2.8 -0.1 2.5 0.0 -0.9 1.9 -0.1

3.3 5.1 4.9 -1.3 3.4 5.1

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. . . indicates data are not available. a. Aid data are for 2005.

Development Economics, Development Data Group (DECDG).

69

Annex A2 70

Papua New Guinea

Balance of Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (ci9 Net trade in goods and services

Current account balance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Central Government Finance

("7 of GDP) Current revenue (including grants)

Current expenditure

Overall surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HiPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000

2,215 1,491

339

300 6.5

7

304

30.5 23.6 23.5

-1.1

47 25

2,354 414 -

66.8 16.6

114 0

2006

4,310 2,916

529

297 5.3

13

1,425

36.6 26.9 20.5

7.4

47 25

1,900 377 - 34.0

6.2

126 0

Composition of total external debt, 2006

I IBRD, 246 I

Private 746

Biialerhl, 352 US$ millions

Private Sector Development 2000 2006

Time required to start a business (days) 56 Cost to start a business (% of GNI per capita) - 28.2 Time required to register property (days) 72

Ranked as a major constraint to business (% of managers surveyed who agreed)

- -

n.a. n.a.

Stock market capitalization ph of GDP) 49.3 98.8 Bank capital to asset ratio (%)

IGovernance indicators, 2000 and 2006

Voice and accountability

Political stability

Regulatory quality

Rule of law

Control of corruption

0 25 50 75 1w

2006 Country's percentile rank (0-1 00) 0 2000 higher values mpiy bener ntmgs

Source: Kaulmann-Kraay-Mastrurri, Wodd Bank

Technology and Infrastructure 2000 2005

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

3.5

18.6 39.4

Envlronment

Agricultural land (% of land area) 2 2 Forest area (% of land area) Nationally protected areas (% of land area)

Freshwater resources per capita (cu. meters) .. 136,059 Freshwater withdrawal (% of internal resources)

CO2 emissions per capita (mt) 0.46 0.44

GDP per unit of energy use (2000 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

244 246 43 16 29 21 15 9

92 76 0 0 3 3

IFC (fiscal year) Total disbursed and outstanding portfolio 0 0

of which iFC own account 0 0 Disbursements for IFC own account 0 0 Portfolio sales, prepayments and

repayments for IFC own account 0 0

Gross exposure 47 0 New guarantees 0 0

MlGA

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available. -indicates observation is not applicable.

Development Economics, Development Data Group (DECDG)

10/30/07

71 Annex A2

Millennium Development Goals PaDua New Guinea

With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)

Goal 1: halve the rate8 for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%)

37.5 4.5

Prevalence of malnutrition (% of children under 5)

Goal 2: ensure that children are able to complete primary schooling Primaty school enrollment (net, %) . . Primaj compietion rate (e/. of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24)

51 52 56 54 12 23 26

Goal 3: eliminate gender disparity In education and empower women Ratio of girls to boys in primary and secondary education (%) Women employed In the nonagricultural sector (% of nonagricultural employment) Proportion of seats held by women In national parliament (%)

Goal 4: reduce under-5 mortallty by two-thlrds Under-5 mortality rate (per 1,000) 94 87 80 74 Infant mortality rate (per 1 ,OW live births) 69 64 60 55 Measles immunization (proportion of one-year olds immunized, %) 67 42 62 60

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total)

300 53 41

Goal 6: halt and begin to rewrse the spread of HIWAIDS and other major diseases Prevalence of HIV (%of population ages 15-49) 1.8 Contraceptive prevalence (% of women ages 15-49) Incidence of tuberculosis (per 1 W,OOO people) Tuberculosis cases detected under DOTS (%)

Goal 7: halve the proportion of people wlthout sustalnable access to basic needs Access to an improved water source p/. of population) 39 39 Access to improved sanitation facilities (% of population) Forest area (% of total land area) Nationally protected areas (% of total land area) C02 emissions (metric tons per capita) 0.6 0.5 0.5 0.4 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent)

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) Internet users (per 1,000 people) Personal computers (per 1 ,OW people) Youth unemployment (% of total labor force ages 15-24)

0 0 8 23

Education Indicators (%)

25 1

2wo 2w2 2w5

+Primary net enrollment ratio (..)

+-Ratio of girls to boys in primary & secondary education (..)

Measles lmmunlzatlon (?h of 1-year olds)

I1w7

1990 1985 2wo 2w5

0 Papua New Guinea East Asia & Pacific

I ICT Indicators (per 1,000 people)

I7

2wo 2w2 2w5

0 Fixed + mobile subscnbers ( ) Rd lntemet users

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

10/30/07

A N N E X B

Annex B2: Papua New Guinea Selected Indicators* of Bank Portfolio Performance and Management

As of Date 1 QI3Ql2QQ7

Indicator 2005 2006 2007 2008 Portfolio Assessment Number of Projects Under Implementation a

Average Implementation Period (years) Percent of Problem Projects by Number a , c

Percent of Problem Projects by Amount Percent of Projects at Risk by Number Percent of Projects at Risk by Amount Disbursement Ratio (%) Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project)

4 4.7

25.0 48.6 50.0 79.3 11.4

N 412

3 5.6

33.3 55.4 33.3 55.4 44.0

N 342

2 6.3 0.0 0.0

50.0 75.4 72.9

N 284

Memorandum Item Since FY 80 Last Five FYs Proj Eva1 by OED by Number 34 3 Proj Eva1 by OED by Amt (US$ millions) 682.6 18.9

48.5 0.0 43.2 0.0

% of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

2 6.6 0.0 0.0

50.0 75.4 3.0

N 21 0 75 -

72

73 Annex B3

Annex B3: IBRDDDA Program Summary Papua New Guinea

As of November 20,2007

Proposed IBRDhDA Base-Case Lending Program a/

us$(M) Strategic Rewards Ly Implementation (H/WL) Risks (WM/L) Fiscal year Proj ID

2008 Mining Sector lnst Strengthening TA 2 11 .o M M Smallholder Agriculture Development Rural Electrification Provincial Reconstruction and Devt. (Standby) Overall Results

Programmatic Support to the Health Sector Programmatic Support to Basic Education (FTI) Conservation InitiativedStocktaking (GEF) REDD Readiness Rural Growth DiagnostidAgric. Competitiveness Strengthening Institutions of Oversight and Accountability Petroleum TA (Standby) Gas Field Devt. -Gurantee (Standby) Overall Results

2009 Rural Telecommunications

27.5 6.5

TBD 45.0

TBD TBD TBD TBD TBD TBD

TBD

TBD TBD 0.0

M M M

M M M

a/ This table presents the proposed program for the next three fiscal years. bl For each project, indicate whether the strategic rewards and implementation risks are expected to be High (H), Moderate (M). or Low (L).

Annex B3 74

Annex B3: Papua New Guinea: IFC Investment Operations Program 2005 2006 2007 2008*

Commitments (US$m) Gross Net**

1.2 0 0 30 1.2 0 0 30

Net Commitments bv Sector (%)

financial services 100 100 100 4 telecommmunications 0 0 0 96

Net Commitments bv Investment Instrument (%) equity 100 100 100 4 loan 0 0 0 96

* As of March 31,2008 ** IFC's Own Account only

75 Annex B4

Annex B4: Summary of Nonlending Services - Papua New Guinea As Of Date 08/28/2007

Product Completion N Cost (US$OOO) Audience a Objective

Recent completions Human Development Strategy Country Procurement Assessment Report Rural Energy Access Telecommunication Sector Review Community Driven Development Strategy

Underway Rural Telecommunications Population Bio-Behavioral Survey Basic Education Review Carbon Financing Assist (CF)

Emomic Report Governance Internal Strategy Note Public Finance Review Policy Notes Climate Change Strategy National Infrastructure Community Based Development Justice for the Poor

a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving.

PERR FOIIOW-UP

2006 2006 2006 2007 2007

2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008

585.2 G, B, D, PD 162.6 G, B, D, PD 54.8 G, B, D, PD

G, B, D, PD 147.3 G, B, D, PD

G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, 8, D, PD G, B, D, PD G, B, D, PD G, B, D, PD G, B, D, PD

PS, K PS, K PS, K PS, K PS, K

PSI K PS, K PS, K PS, K PS, K PSI K PSI K PS, K PS, K PS, K PS, K PS, K PS, K

Annex B5 76

Annex B5: Papua New Guinea - Social Indicators

POPULATION Total population, mid-year (millions)

Urban population (% of population) Total fertility rate (births per woman) POVERTY (% ofpopulation) National headcount index

Urban headcount index Rural headcount index

Growth rate (% annual average for period)

INCOME GNI per capita (US$) Consumer price index (2000=100) Food price index (2000=100) INCOMWCONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption)

SOCIAL INDICATORS Public expenditure

Health (% of GDP) Education (% of GDP)

Net primary school enrollment rate (% of age group)

Male Female

Access to an improved water source (% of population)

Urban Rural

Total

Total

Immunization rate (% of children ages 12-23 months)

Measles DPT

Child malnutrition (% under 5 years) Life expectancy at birth (years)

Total Male Female

Mortality Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59)

Maternal (modeled, per 100,000 live births)

Male (per 1,000 population) Female (per 1,000 population)

Births attended by skilled health staff (%)

Latest single year

1980-85

3.7 2.4

13.1 5.3

680 31 32

33 40 30

51 50 52

74 102

480 418

1990-95

4.7 2.6

13.2 4.8

1,060 57 55

39 88 32

42 62

53 53 54

64 87

425 386

1999-2006

6.0 1.8

13.4 3.8

760 149 100

3.0

39 88 32

60 61

56 56 57

55 74

388 349 300 41

Same regiodicome group

East Asia & Pacific

1,885.5 0.9

41.5 2.0

1,630 130

1.7 2.7

93 94 93

79 92 70

83 84 15

71 69 73

26 33

162 105 117 87

Low- income

2,352.4 1.9

30.0 3.6

585 129

1.1 3.1

78 81 75

75 88 70

65 66 43

59 58 60

75 114

290 237 684 41

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank.

77 Annex B6

Annex B6: Papua New Guinea - Key Economic Indicators

Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

National acconnts (as % of GDP) Gross domestic product'

Agriculture Industry and construction

Mining and quarrying Services

Total Consumption Gross domestic fixed investment

Government investment Private investment

Exports (GNFS)b Imports (GNFS)

Gross domestic savings Gross national savings'

Memorandum items Gross domestic product (US$ million at current prices) GNI per capita (US$, Atlas method)

Real annual growth rates (70, calculated from 1998 prices)

Real annual per capita growth rates ('70, calculated from 1998 prices)

Balance of Payments (US$ millinn)

Gross domestic product at market prices

Gross domestic product at market prices

EXPOI~S (GNFS)~ Merchandise FOB

Imports (GNFS)~ Merchandise FOB

Resource balance Net current transfers Current account balance

Net private foreign direct investment Long-term loans (net) Official Private

Other capital (net, incI ermrs &omissions)

Change in reservesd

Memorandum items Resource balance (% of GDP) Real annual growth rates Merchandise exports (FOB)

Mineral Non-mineral

Merchandise imports (CIF)

Total revenues and grants Mineral tax revenues

Current expenditures Current account surplus (+)or deficit (-) Capital expenditure Foreign financing

Public fmance (as % of GDP at market prices)'

100 36 41 24 23

64 21 10 11

65 52

36 33

3,081

560

-0.1

-2.3

2,164 1,878 1,855 1,108

308 142 20 1

74 -218

-60 -158

9 -66

10.0

-5.6 -0.3

-16.1 -8.1

29.7 5.3

23.2 6.5

10.0 3.0

100 40 37 19 23

76 19 10 9

61 58

24 23

3,000

530

-0.2

-2.3

1,808 1,646 1,809 1,074

-1 197 -3 1

19 -154

-26 -128

64 101

0.0

-7.3 -18.4 18.7 -2.4

27.8 3.1

21.8 5.9

10.0 -0.9

100 40 37 19 23

65 18 9 9

69 54

35 30

3,536

520

2.2

0.0

2,383 2,153 2,053 1,174

330 235 159

97 -151 -100 -5 1 82

-187

9.3

14.7 17.1 10.1 -0.7

29.1 4.0

21.3 7.8 9.0

-2.1

100 38 39 20 23

67 18 10 8

72 59

33 28

3,927

590

2.7

0.6

2,759 2,554 2,484 1,458

275 182 88

26 -213 -101 -113 305

-206

7.0

-6.5 -10.2

-0.3 14.6

34.1 5.8

22.4 11.7 10.1 -1.8

100 39 41 24 20

69 18 11 7

73 62

31 32

4,921

700

3.4

1.3

3,511 3,278 3,369 1,979

142 434 190

68 -175 -69

-107

-161 78

2.9

10.5 10.9 10.0 32.4

34.8 7.5

20.0 14.8 11.1 -1.1

100 36 45 29 19

59 18 9 9

84 63

41 37

5,589

760

2.6

0.7

4,557 4,310 4,028 2,396

529 352 297

128 -137 -66 -70 312

-660

9.5

-7.4 -11.7

-0.6 14.5

36.8 11.7 20.5 16.3 9.0

-1.3

100 100 36 36 45 44 28 26 19 20

58 64 18 18 9 11 9 7

91 69 72 88

42 36 37 32

5,873 6,071

860 900

5.2 4.0

3.3 2.1

5,181 5,218 4,903 4,931 4,505 4,814 2,699 2,857

676 404 308 321 418 158

107 111 -107 -96

-31 -24 -76 -71

-134 -79 -285 -95

11.5 6.7

13.1 1.5 14.4 3.4 11.3 -1.3 4.9 4.2

36.0 33.8 11.5 9.6 21.9 21.1 14.1 12.7 9.2 11.5

-0.5 -0.4

100 36 43 25 20

67 18 12 6

89 75 33 29

6,355

930

4.5

2.6

5,499 5,214 5,131 2,987

368 322 109

113 -131

-23 -107

48 -140

5.8

9.0 13.7 2.0 4.4

31.8 7.8

19.5 12.2 11.9 -0.4

100 36 44 26 20

69 18 12 6

84 73

31 27

6,770

960

4.4

2.5

5,564

5,285 3,138

278 318

9

82 -99 -16 -83 83

-75

4.1

-0.5 -0.1 -1.2 4.7

5,282

29.5 6.4

18.4 11.1 12.1

100 36 44 26 20

69 18 12 6

83 72

31 27

7,098

980

3.6

1.8

5,769 5,493 5,457 3,294

312 314 42

89 -98 -15 -83 32

-65

4.4

3.1 4.1 1.5 4.3

28.1 5.5

17.7 10.4 12.3

-0.2 -0.2

Annex B6 78

Papua New Guinea - Key Economic Indicators (continued)

Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Monetary indicators Broad money1GDP Growth of broad money (%) Private sector credit growth I total credit growth (8)

Price indices(l994 = 100) Merchandise expon price index Merchandise import price index Merchandise terms of trade index Real exchange rate (US$/LCU; 2000=100)'

Central Bank's Rep0 rate Consumer price index (average % change) GDP deflator (% change)

32.0 30.6 27.1 30.9 33.2 41.2 48.2 52.2 52.2 52.2 52.2 9.8 7.3 -4.4 14.8 29.5 38.9 24.7 15.0 7.3 9.1 7.2

120.9 77.6 103.2 100.3 114.0 115.8 127.6 104.9 102.0 95.1 101.0

80.0 75.7 86.3 109.5 127.2 180.5 181.6 180.0 174.6 177.8 179.2 85.7 86.4 95.9 104.6 108.4 112.1 119.2 121.0 121.6 122.4 123.6 93.4 87.5 90.0 104.7 117.3 160.9 152.3 148.7 143.5 145.3 145.0 85.8 89.9 96.2 97.1 104.1 97.8

13.0 15.0 15.5 10.0 9.0 7.5 9.3 11.8 14.7 2.1 1.7 2.3 3.0 4.8 4.8 4.5 4.5 6.9 12.3 5.5 -2.0 16.7 9.1 1.4 2.1 2.7 4.5 3.5

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers. d. Includes use of IMF resources. e. Central government. f. "LCU" denotes "local currency units." An increase in U S % L C U denotes appreciation

79 Annex B7

Annex B7: Papua New Guinea - Key Exposure Indicators

Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total debt outstanding and disbursed (TDO) (US$m)a

Net disbursements (US$m)a

Total debt service (TDS) (US$m)'

Debt and debt service indicators (%) TDOIXGNFS~ TDOIGDP TDSlXGNFS ConcessionaVTDO

IBRD exposure indicators (%) IBRD DS/public DS Preferred creditor DSIpublic DS (%)' IBRD DSlXGNFS IBRD TDO (US$mld

Of which present value of guarantees (US$m)

Share of IBRD portfolio (%) IDA TDO (US$m)d

IFC (US$m) Loans Equity and quasi-equity

MIGA

2,289

-93

522

105.8 74.3 24.1 35.1

22.5 49.0

1.8 275

0

0.23 88

0 0

2,304

-161

354

127.5 76.8 19.6 37.6

22.6 50.8

1.9 272

0

0.22 87

0 0

n

2,311

93

386

97.0 65.3 16.2 38.6

16.5 43.2

1.3 269

0

0.23 86

0 0

2,158

-178

351

78.2 55.0 12.7 41.6

12.1 55.5

1.1 260

0

0.23 84

0 0

2,029

-185

347

57.8 41.2

9.9 38.5

14.7 60.0 0.9 249

0

0.24 78

0 1

1,900

-134

377

41.7 34.0

8.3 41.1

22.2 66.5

0.8 246

0

0.25 76

0 1

1,793

-117

336

34.6 30.5 6.5

29.7 53.8

0.7 229

0

0.23 78

0 1

1,698

-127

340

32.5 28.0 6.5

30.4 57.0 0.8 205

0

0.21 93

30 1

1,567

-157

341

28.5 24.7 6.2

29.4 59.7 0.7 181

0

0.19 108

30 1

1,468

-154

349

26.4 21.7

6.3

26.5 60.1 0.7 156

0

0.16 123

30 1

1,370

-146

344

23.7 19.3 6.0

23.0 59.1 0.5 136

0

0.14 138

30 1

MIGA guarantees (US$m) 0 0 0 0 0 0 0 0 0 0

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital. b. "XGNFS" denotes exports of goods and non-factor services. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

Annex B8 80

e n

81 Annex B8

Annex B8: IFC for Papua New Guinea

C o r n e d and Disbursed Outstanding investment Portfolio Assof(WJQI#wn (In USD Millions)

comnitted Disbursed Outstanding

"Quasi - Partici "Quasi - Partici FYADDmval Cotmany Loan Eauity Eauitv *GTmM pant Eauitv *GTmM pant

m 2o05/05 rricrofinance 0 1.2 0 0 0 0 0.82 0 0 0

Total Wol io : 0 1.2 0 0 0 0 0.82 0 0 0

* Denotes Guarantee and Risk Management Products. * Quasi Equity includes bcth loan and quitytypes.

Annex B9 82

83 Annex B9

85 Annex B9

fn

b Y g .I

8 2 Y 0

e,

2 .i 3

$2

Y rc 0

e a

MAP SECTION

E A S TE A S TS E P I KS E P I K

ENGAENGA

WESTERNWESTERNHIGHLANDSHIGHLANDS

EASTERNEASTERNHIGHLANDSHIGHLANDS

SOUTHERNSOUTHERNHIGHLANDSHIGHLANDS

SANDAUNSANDAUN

CCHHIIMMBBUU

Mt. WilhelmMt. Wilhelm(4509 m)(4509 m)

CCeenntt rraa ll RRaannggee BB ii ssmmaarrkk RRaannggee

OOwweenn SSttaannlleeyy RRaannggee

LakeLakeMurrayMurray

KKiikkoorrii

PPuurraarrii

HoskinsHoskins

AngoramAngoramMaprikMaprik

LumiLumi

KorobaKoroba

TTabubilabubil

KiungaKiunga

BalimoBalimo

MoreheadMorehead

AmbuntiAmbunti

TTariari

KokodaKokoda

KikoriKikori

KundiawaKundiawa

Mount HagenMount HagenWWabagabag

MendiMendi

IND

ON

ESIA E A S T

S E P I K

W E S T E R N

ENGA

G U L F

M O R O B E

C E N T R A L

N O R T H E R N

W E S TN E W B R I TA I N

E A S TN E W B R I TA I N

M I L N EB AY

B O U G A I N V I L L E

N E WI R E L A N D

M A N U S

NATIONALCAPITAL

WESTERNHIGHLANDS

EASTERNHIGHLANDS

SOUTHERNHIGHLANDS

M A D A N G

SANDAUN

CHIMBU

Abau

Samarai

Esa’ala

Bwagaola

Kulumadau

Losuja

Wanigela

Kupiano

Bereina

Morobe

Finschhafen

Saidor

Sialum

Gloucester

Kandrian

TalaseaEwase

Nantamba

Laefu

Hoskins

Lemankoa

Buin

Aropa

Maliom

Namatanai

NadzabKainantu

Awar

Momote

AngoramMaprik

Lumi

Koroba

Tabubil

Kiunga

Weam

Balimo

BulaSibidiri

Morehead

Ambunti

Tari

Aitape

Kokoda

WauBulolo

Kikori

Popondetta

Kerema

Lae

Alotau

Goroka

Madang

Wewak

Kundiawa

Mount HagenWabag

Mendi

Daru

Vanimo

Kimbe

Rabaul

Kavieng

Lorengau

Arawa

PORTMORESBY

AUSTRALIA

IND

ON

ESIA

SOLOMONISLANDS

Sepik

Ramu

LakeMurray

Stric

klan

d

Fly

Aramia

Kikori

Purari

Gul f ofPapua

SolomonSea

Bismark Sea

SOUTH PACIFIC OCEAN

Coral SeaArafuraSea

To Merauke

AdmiraltyIslands

WoodlardIsland

TrobriandIsland

GoodenoughIsland

FergusssonIsland

NormandyIsland

MisimaIsland

TagulaIsland

RosselIsland

MussauIsland

New Ireland

New Britain

D’EntrecasteauxIslands

NorthSolomons

B i s m a r k A r c h i p e l a g o

Cent ra l Range Bismark Range

Owen Stanley Range

Mt. Wilhelm(4509 m)

142°E 144°E 146°E 148°E 150°E 152°E

142°E 144°E 146°E 148°E 150°E 152°E 154°E 156°E

156°E

12°S

10°S

8°S

6°S

4°S

2°S

0°

12°S

8°S

6°S

4°S

PAPUA NEWGUINEA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 100

0 10050 150 Miles

200 Kilometers

IBRD 33463

FEBRUA

RY 2005

PAPUA NEWGUINEA

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES