Documentof The World Bank FOROFFICIAL USEONLY ReportNo. 41571-PG INTERNATIONALBANKFORRECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENTASSOCIATION INTERNATIONALFINANCECORPORATION COUNTRYASSISTANCESTRATEGY FOR PAPUA NEW GUINEA FORTHEPERIODFYOS-FY11 November 20,2007 PapuaNew Guinea, Pacific Islands and Timor-Leste Country Management Unit East Asia and Pacific Region, EAP East Asia and The Pacific InternationalFinance Corporation, IFC This document has arestricteddistribution and may be used by recipients only inthe performance of their official Duties. Its contents mav not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange rate effective as of November 20, 2007) Currency Unit:Papua New Guinea Kina (K) K 1=US$0.3540 US$ 1= K 2.8249 WEIGHTS AND MEASURES: Metric System FISCAL YEAR: January 1-December 31 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 with the Government of Papua New Guinea in the preparation of this CAS, as well as valuable feedback from members of civil society and development partners. IDADBRD IFC Vice President: James W. Adams Farida Khambata Country Director: Nigel Roberts Richard Ranken Task Team: Benson Ateng Peter Cusack Amanda Green Stoyan Tenev FOROFFICIAL USE ONLY ABBREVIATIONSAND ACRONYMS AAA Analytical and Advisory Activities I T InformationTechnology ABG Autonomous BougainvilleGovernment IRC Internal RevenueCommission ADB Asian Development Bank ISN Interim Strategy Note ASM Artisanal and Small-scale Mining JCS Joint Country Strategy ASTAE Asia Alternative Energy Program JSDF Japan Social DevelopmentFund AusAID Australian Agency for International Development LICUS Low Income CountriesUnder Stress CAS Country Assistance Strategy LNG Liquefied Natural Gas CAE Country AssistanceEvaluation MDG MillenniumDevelopment Goal CBO Community-Based Organization MSME Micro, Small, and Medium Enterprises CDD Community-Driven Development MTDS Medium Term Development Strategy CEM Country Economic Memorandum NGL Natural Gas Liquids CGAP Consultative Group to Assist the Poor NGO Non-Governmental Organization CPAR Country ProcurementAssessmentReport NPV Net Present Value CPI ConsumerPrice Index NZAID New ZealandAgency for International Development DM Development Marketplace PAC Public Accounts Committee DME Di-methylEther PEP-Pacific Private EnterprisePartnershipfor thePacific DSA Debt Sustainability Analysis PERR Public Expenditure Review and Rationalization DSDLG District ServiceDelivery andLocal Governance PESD Public Expenditure and ServiceDelivery EAP East Asia and Pacific PETS Public Expenditure Tracking Survey EC EuropeanCommission PFR Public FinanceReview ECP EnhancedCooperation Program PNG PapuaNew Guinea EITI Extractive Industries TransparencyInitiative PNGSDP PapuaNew GuineaSustainableDevelopment Program, Ltd. ESW Economic and Sector Work PNGSEL PapuaNew GuineaSustainableEnergy, Ltd. FCP Forestry and ConservationProject PPP Public-Private Partnership FCPF ForestCarbonPartnershipFacility PTF Partnershipfor TransparencyFund FIAS Foreign Investment Advisory Service RDP Rural Development Program FTI Fast Track Initiative REDD ReducedEmissions from Deforestation & Degradation GDLN Global Development Learning Network RMRP Road Maintenanceand Rehabilitation Project GDP Gross Domestic Product SADP Smallholder Agriculture DevelopmentProject GEF Global Environment Facility SIOA StrengtheningInstitutions of Oversight and Accountability GEF-PAS GEFPacific Alliance for Sustainability SWG Sector Working Group GoPNG Governmentof PapuaNew Guinea TA Technical Assistance GTL Gas-to-Liquids TSLP Teacher's Solar LightingProject HIV/AIDS Human Immunodeficiency VirudAcquired UN United Nations Immunodeficiency Syndrome IBRD International Bank for Reconstructionand UNAIDS Joint UnitedNations Programmeon HIV/AIDS Development IDA International Development Association UNDP United Nations Development Programme IFC International Finance Corporation WB World Bank IMF International Monetary Fund WHO World Health Organization a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosedwithout WorldBankauthorization. TABLE OF CONTENTS EXECUTIVESUMMARY.......................................................................................................................... i I INTRODUCTION................................................................................................................................ 1 I1 COUNTRY CONTEXT........................................................................................................................ .. A. Sociopolitical Landscape................................................................................................................. 1 B. RecentEconomic Developments ...................................................................................................... -2 3 -4 D. Public FinancialManagement and Governance............................................................................... C. Natural ResourceManagement........................................................................................................ E. Poverty, Livelihoods, and Service Delivery..................................................................................... -5 . Social Inclusion............................................................................................................................... -7 11 I11 PNG'S DEVELOPMENTPROGRAM,PROSPECTS,AND CHALLENGES.......................... .F -12 A. Country Priorities andAgenda........................................................................................................ B. Medium-TermEconomic Outlook.................................................................................................. 12 13 14 IV ROLEOFDEVELOPMENTPARTNERS...................................................................................... .C. PapuaNew Guinea's Development Challenges and Opportunities ................................................ 15 15 B. Donor CoordinationandAid Effectiveness.................................................................................... A. Development Partner Activities ...................................................................................................... V BANK GROUPASSISTANCESTRATEGY.................................................................................. . 16 A. Lessonsof Experience .................................................................................................................... 17 . ProposedBank GroupAssistance Strategy..................................................................................... 20 17 VI RISKSAND MITIGATIONMEASURES....................................................................................... .B 29 Figures Figure 1: Strong Macroeconomic Performance since 2003 ......................................................................... 3 Figure2: Governance and Corruption inPapuaNew Guinea..................................................................... Figure 3: A Strategy for Engagement inPNG........................................................................................... -6 21 Tables 10 Table 2: HealthSystem Performance inDecline ....................................................................................... Table 1: Human Development Indicators inComparison.......................................................................... Table 3: Medium-Term Economic Projections .......................................................................................... 10 13 23 Table 5: ImprovingLivelihoods and Service Delivery, Especially for the Rural Poor.............................. Table 4: Promoting and Maintaining Sound Economic and Natural ResourceManagement .................... 25 Table 6: ProposedCAS Programfor FY08 to FY11................................................................................ -28 Text Boxes Box 1: Principles of Engagement inPNG.................................................................................................. 22 Attachments 31 Attachment B: Progress Toward Achieving the MDGs............................................................................. Attachment A: The Role of Extractive Industries inPNG.......................................................................... 41 42 50 Attachment E: Aid Effectiveness inPapuaNew Guinea ........................................................................... Attachment D: Key Development Partner Programs ................................................................................. Attachment C: Debt Sustainability Analysis.............................................................................................. 54 Attachment F: The Bank's Recent Experience Under the Interim Strategy Note...................................... 56 Attachment G: Governance and Anticorruption Strategy .......................................................................... 65 Annexes Annex A2: PapuaNew Guinea at a Glance................................................................................................. 69 Annex B2: PapuaNew Guinea SelectedIndicators of Bank Portfolio Performance and Management .....72 Annex B3: IBRD/IDAProgram Summary PapuaNew Guinea.................................................................. 73 Annex B3: PapuaNew Guinea: IFCInvestment Operations Program ....................................................... 74 Annex B4: Summary of Nonlending Services . 75 Annex B5: PapuaNew Guinea .Social Indicators ..................................................................................... PapuaNew Guinea.......................................................... 76 Annex B7: PapuaNew Guinea - Key Exposure Indicators......................................................................... Annex B6: PapuaNew Guinea - Key Economic Indicators........................................................................ 77 79 80 Annex B8: IFC for PapuaNew Guinea....................................................................................................... Annex B8: PapuaNew Guinea Operations Portfolio (IBRDADAand Grants) .......................................... Annex B9: PapuaNew Guinea 2008-2011CAS Results Matrix................................................................ 81 82 EXECUTIVE SUMMARY i. Followingaperiodof politicalstabilizationandeconomicrecovery,PapuaNewGuinea (PNG) has emergedfrom the climate of uncertainty that precipitated the 2005 Interim Strategy Note (ISN). Positive developments include the passage of 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 of 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 2005-2010 and the national Millennium 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 little impact on the lives of poor people, most of whom live in rural areas and depend on agriculture and informal activities for their livelihoods. It is estimated that more people are living inpoverty now than a decade ago, and the creation of jobs and other income-earning opportunities i s not keeping up with the needs of a growing population. Women and young people are particularly disadvantaged by unequal access to jobs and services. The availability and quality of basic infrastructure and social services have declined, holding back business growth and human development outcomes. The rapid spread of HIVIAIDS poses a serious threat to future productivity unless the epidemic is brought under control through decisive, coordinated action. Yet systems for distributing resources and coordinating across levels of government are weak, and political leaders face incentives to place the interests of their local group above those of the nation as a whole. Within the country's rich cultural diversity, there i s a potential for social fragmentation and exclusion, and a lack of security in some areas of the country deters private investment andfreedom of movement. iii. The WorldBank Group's CountryAssistanceStrategy (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 will allow the Bank Group and GoPNG to take action on challenges that can be addressedin the short term, while starting to work on issues that require a long-term approach. In an effort to support country ownership, the CAS is 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 civil society and the private sector will 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 of private sector development in PNG and the substantial scope for collaboration on this agenda. The Bank and IFC will 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 will focus its 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 will 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 will focus on strengthening governance, maintaining sound management of the extractive industries, and promoting effective and sustainable management of natural resources. Pillar IIwill 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 will 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 will be guided by the principles of 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 afocused country program with regional and global resources. The annual IDA allocation i s tentatively estimated at US$ 45 million for FY08 and US$ 30-32 million 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 of three in a typical year; "core" analytical pieces will be limited to two per year. Country program interventions will focus on areas where the Bank Group has performedwell inthe past or where it can draw on global knowledge and experience to complement the work of other development partners. In addition, the CAS will draw upon regional and global funds such as the Global Environment Facility, Infrastructurefor Growth Facility, and Forest Carbon Partnership Facility. vii. Theprogram presented in Table 6 (page 28) is ambitious in relation to the Bank Group's budgetary and lending resources. It should be understood more as a menu of valid assistance activities than a literal roadmap, and will 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 will be held with GoPNG, with a view to solidifying the coming year's lending and AAA. viii. 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 of 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 assistanceon climate change mitigation and adaptation, and avoided deforestation. Inaddition to supporting microfinance, the IFC will 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 will 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 of the state of 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 of 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 will 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 of successful community outreach activities will also be continued. x. The eflectiveness of theproposed program and attainment of CAS objectives is subject to a number of risks. Political conflict could leadto a deterioration in the governance environment, and a steep drop in commodity prices would likely trigger a rapid decline in economic performance. Economic and social disruptions could also arise as a result of growing unemployment, especially among youth, or in the event o f a natural disaster. The risks to program implementation include a lack of ownership of reform, weaknesses in public fiduciary systems, ineffective donor coordination, and an insufficiently large-scale or long-term engagement on the part of the Bank Group to achieve traction on difficult development issues. The CAS i s designed to mitigate these risks to the extent possible, taking a long-term approach to governance and job creation while working to improve livelihoods and service delivery, and buildconstituencies for change. xi, The following issues are proposed for Boarddiscussion: 0 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 of recent years? 0 I s the proposed two-pillared, two-platform strategic approach appropriate? 0 I s the mix of instruments and activities consistent with 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. It i s the first full CAS for PNG since 1999, and the first to be prepared jointly b y the Bank and the International Finance Corporation (FC). Inthe early part of this decade, a combination of factors including political instability, economic and fiscal decline, and differences of opinion between the Bank and the Government of Papua New Guinea (GoPNG), ledthe Bank in2005 to prepare an Interim Strategy Note (ISN). Positive developments now warrant the preparation of a full CAS. First, legislative reforms have improved continuity in government, with 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 of 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 by both parties to find areas of consensus and productive cooperation. In addition, the international assistance environment is 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 will 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 MTDS seeks to alleviate poverty through sound economic and natural resource management and through the direct delivery of services to the poor. Given IDA'Srelatively modest resource envelope for PNG, the CAS places emphasis on working with other donor partners and using the Bank's global experience and skills 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 with 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 thefruits of growth have not led to poverty reduction. PNG's economy i s highly dualistic, consisting of an enclave-based formal sector focused mainly on the large- scale export of natural resources, and an informal sector dominated by the subsistence and semi- subsistence activities of the majority rural population. Recent growth i s the result of improved performance in the formal economy, and has so far had little impact on the livelihoods of 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. CountryContext 2 5. The country's main development challenge i s to ensure that its 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 limited preferential voting system, in which candidates need to attract a greater percentage of votes to be elected. The Government of Prime Minister Michael Somare was the first since independence in 1975 to serve a full five-year term and was re-elected in 2007. It is, however, early to tell whether this stability will result in greater predictability, efficiency, and accountability innational 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 is 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, PNGhas experienced no such galvanizing event, and most people today see themselves primarily as members of local, clan-based groups rather than as citizens of Papua New Guinea. This perspective is reflected in a style of 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 of a clear national vision and of policies and practices supportingthe same. 8. Internal stability has improved withpeace 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 from agriculture and mining. Despite peace in Bougainville, internal stability remains a concern in some areas (e.g. Port Moresby, Lae, Southern Highlands). The causes of 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 by conflict over oil 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 of its 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 of the Asian Pacific Economic Cooperation Forum, and the largest developing country member of the Pacific Islands Forum, PNGhas the potential to explore growing regional markets. 3 Country Context B. RecentEconomicDevelopments 10. Papua New Guinea's economic recovery has accelerated over the last four Figure 1: Strong Macroeconomic Performance since 2003 years, buoyed by booming commodity prices, sound macroeconomic policies, and -Real GDPgrowth improved fiscal discipline. Following a prolonged period of contraction, real GDP 12 growth rebounded in 2003 and reached 2.6 10 percent in 2006 (Figure 1). Growth i s E 8 expected to rise above 5 percent in 2007 as F a 6 new mines begin production and increased 4 public spending stimulates the non-mineral 2 sector. Inflation fell sharply from 14.7 0 percent in 2003 to 1.7 percent in 2005, but i s -1 projected to exceed 3 percent in 2007 as a -4 result of higher fuel prices, foreign 1998 1999 3000 Mol uH)2 2003 2004 2005 2 0 6 uH)7P exchange reserve accumulation, and expanding private sector credit.' Interest rates remain low at just over 3 percent. The kina has strengthened against the US dollar, appreciating by 6 percent on a real effective basis in 2006. 11. High international prices for key export commodities have created signijkant surpluses on the external account. PNG has one of the least restrictive trade regimes in the region, following a program of tariff reductions and the abolition of exclusive agricultural commodity export arrangements. Despite the continued expansion of imports, the merchandise trade surplus widened to nearly US$ 1.5 billion in 2006 as exports of both mineral and non-mineral goods grew to US$4.3 billion. The current account surplus expanded from 3.9 percent of GDP in2005 to 5.3 percent in 2006, but i s expected to narrow in the medium term as commodity prices soften. International reserves have continued to accumulate on a net basis, rising to about US$ 1.9 billion in 2006 (the equivalent of about 8 months of non-mineral merchandise imports). Given the PNG economy's vulnerability to shifts in international commodity prices, it i s prudent to maintain a higher level of foreign exchange reserves than inmany other countries. 12. In 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 of GDP in 2005 to 8.2 percent in 2007, reflects growth in development spending financed by the record inflow 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 of domestic payments arrears to suppliers, scaling back future liabilities by funding the public sector pension plan, andrestructuring domestic debt. Total public sector debt fell from 67 percent of 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 of the unpredictable nature of these inflows). This reorientation of Government expenditures i s sound, but the desired results will require the creation of adequate operating capacity and consistent allocation of recurrent funds for implementation and maintenance. C. NaturalResource Management 13. As in many other resource-rich nations, PNG remains highly dependent on the extractive industries. PNGis endowed with substantial deposits of minerals (mainly gold and copper), oil, and gas. Minerals and petroleum alone account for over 20 percent of GDP and nearly 80 percent of exports, and this trend i s likely 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 of geological data, and tax adjustments enhancing PNG's competitiveness. New mineral exploration and investment will be critical in the years ahead since the country will likely face the closure of the Ok Tedi mine, its biggest miningoperation, as early as 2013. The export of oil has also contributed significantly to PNG's economy, though it i s expected that current oil fields will be largely depleted by 2015. Recoverable natural gas resources are estimated to be substantial, and are likely to be an important source of economic growth and commercial development in the years ahead. (See Attachment A for a review of 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 of the world's four remaining significant tropical rainforests, covering over three-quarters of the country's total land area. Fisheries resources are large and relatively unexploitedcompared to other parts of 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 of Papua New Guineans. The country's rugged physical beauty, rich 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 of 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 of extreme weather events, such as droughts and floods, threatening the food security and economic base of rural populations. GoPNG has launched a number of 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- butthey are only at an embryonic stage. 5 Country Context D. PublicFinancialManagementand 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 of procedure are not effectively penalized. A lack of transparency inbudgetexecution makes it difficult to track expenditures. Considerable diversion of 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 by weak integration between development and recurrent budgets together with compression of recurrent spending, resulting in insufficient recurrent funds to deliver services and development budget programs. The alignment of the budget with broad MTDS priorities has improved inrecent 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 will 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 of competitive processes remain widespread. This lack of transparency contributes to perceptions of 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 processesintroduced. 18. Flaws in the decentralization framework further impede service delivery and accountability. The system of 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 of schools, health posts, and housingfor 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 well aligned, and communication between levels of government, and between government and non- state actors, i s poor. Inpractice, local government budgets are largely influenced by Members of 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 all levels of government, and particularly in the areas of Valuable researchby the National Economic and Fiscal Commission has demonstrated that only five provinces have sufficient resourcesto carry out their basic responsibilities for service delivery and infrastructure maintenance, and four of 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"dout of 179 countries inTransparency International's Corruption Perceptions Index, as compared to 118thout of 133 countries in 2003,3 and there i s evidence that control of corruption has worsened over the last decade (Figure 2). The causes of corruption in PNG include insufficient capacity among oversight, audit, and enforcement agencies; a lack of transparency and rule respect in the use of public funds and natural resources; politicization of bureaucratic processes; and the redirection of public resources to meet personal or social demands, such as wantok obligation^.^ In the MTDS, GoPNG has highlighted the costs of corruption in terms of 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 of communal lands, studies undertaken by the Department of 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 of 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. Figure2: Governanceand CorruptioninPapuaNew Guinea ,__" " "-I-- --- _I - Voice and Accountability 11 Political Stability Governnent Effectiveness BottomBar: 1996 Regulatory Quality Rule o f Lau I Control of Corruption I I I I 9 25 59 75 iee Worst Country's PercentileRank 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 of administrative malpractice, and the Auditor General i s making strong efforts to erase the backlog of audits of public accounts. Both institutions, however, are hampered by a lack of budget and qualified staff The Corruption Perceptions Index seeks to measurethe extent of corruption as perceived by businesspeople and country analysts. 4 Wantok (or "one talk") refers to one's family or clan. 7 Country Context with specialized skills, and delays occur in tabling their reports to Parliament. Parliamentary scrutiny of 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 will improve as a result. The judiciary functions reasonably well and independently at the national level, but its independence i s reportedly under pressure and it lacks adequate resources and skills. The police force i s widely criticized for corruption and human rights abusesa5 It 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 of doing business.6 21. There is, however, a significant and growing demandfor good governance in PNG. The media are well developed and lively, freely reporting on governance issues and allegations of 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, civil society, and other actors, creating communities of interest that share in the pursuit of good governance and its translation into better service delivery at the local level. GoPNG has recently made important progress in strengthening consultations with the private sector and civil society around the preparation of the budget, but budget information i s still too limited, and largely inaccessible at the community level. E. Poverty, Livelihoods,andService Delivery 22. Zn Papua New Guinea,poverty is defined as a lack of access. Importantly, this includes the inability to take advantage of basic public services and infrastructure, as well as a lack of access to income and income-earning opportunities. Viewing poverty through this lens offers valuable insights into the design of effective poverty alleviation programs inPNG. 23. As noted, recent improvements in economicperformance have not had a tangible impact on poverty. Although the information from the 1996 National Household Survey i s in urgent need of updating, poverty today can be estimated by combining the 1996 survey data with information on the rate and sectoral pattern of output and employment growth since then. The Bank estimates that the incidence of poverty has risen sharply in the last decade. In 2006, an estimated 39 percent of Papua New Guineans lived on less than US$ 1 per day (using 1993 Purchasing Power Parity), up from 25 percent in 1996. It 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 of economic contraction between 5HumanRights Watch. 2006. "Still Making Their OwnRules: Ongoing Impunity for Police Beatings, Rape, and Torture inPapuaNew Guinea." HRW Index, Vol. 18, No. 13 (C). In2004, it was estimatedthat costs associated with securityandtheft amountedto 12-15percentofbusiness turnover. Though large (mostly foreign-owned) firms were able to shoulder the burdenof this "crime tax," small- and medium-sizedenterprises spent about 12percentof their gross incomeon security. See Satish Chand. 2004. "Papua New GuineaEconomic Survey: Transforming GoodLuck into Policies for Long-TermGrowth." Pacific Economic Bulletin: 19(1): 1-19. 'The national poverty line allows for 2,200 caloriesper adult equivalentper day and an allowance for basic non- food expenditure. 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 limited growth in real per capita incomes. In comparative terms, PNG's per capita income (Atlas method) of about US$770 in 2006 only slightly exceeds the low-income country average of US$ 650, and i s well below the East Asia and Pacific Region's (EAP) average of 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 of the poor lived in rural areas. Since then, the incidence of both rural and urban poverty i s estimated to have increased, with urban poverty growing faster. But even today, the share of rural poverty i s estimated to be around 85 percent. Income disparities between urban and rural areas, and among regions, remain high, and nearly all socio-economic indicators are significantly worse in rural areas than in the cities. Inequality i s also high overall. In 1996, the poorest 20 percent of the population accounted for only 4.5 percent of total consumption, while the richest 20 percent accounted for over 56 percent, giving PNG a Gini coefficient of 0.48 and making it the country with the most unequal distribution of consumption in the EAP region,* Inequality i s related to the remoteness and isolation of the poorest rural areas, which tend to lack access to markets, services, and income-generating opportunities, and where returns on agriculture are often reduced by low soil fertility, difficult terrain, and higher vulnerability to pests or climatic events. 25. Poverty rates are lowest among the few households who participate in the formal business sector or hold wage-earningjobs. Only about 6 percent of the working-age population in PNG is employed in the formal sector (2002).9 In urban areas, unemployment and underemployment are high and likely growing, as formal sector employment in the National Capital District declined by approximately 6 percent between 1996 and 2005. There are indications of an encouraging revival of 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 job creation challenge i s enormous, and particularly critical because of the associations between youth, unemployment, and lawlessness. The population of about 6.2 million people i s set to double in 25 years or so, makingjob 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 of poor people (62 percent in 1996) live in a household where agriculture i s the principal source of cash income for the household head. Subsistence agriculture i s also important, and though most households that grow food for consumption sell a portion of their food crops at market, these transactions are usually small and opportunistic in nature. A large number of people, estimated at somewhere between 250,000 and 500,000, participate in coastal subsistence fisheries, and a similar number benefit from artisanal and small-scale mining activities. In addition, forests play The Gini coefficient is a measureof inequality,rangingfrom 0 (perfect equality)to 1(perfect inequality). By comparison, the Gini coefficientsfor other EAPcountries are: Cambodia0.42 (2004), China0.46 (2002), Indonesia 0.35 (2006), Laos 0.35 (2002), Philippines0.45 (2003), Thailand0.43 (2004), and Vietnam 0.38 (2002). These inequalityindices do not take account of spatialprice differenceswithin countries. Selectedregionalcomparatorsincludethe SolomonIslands9% (2002), Vanuatu 15% (2004), FijiIslands25% (2003), Samoa 63% (2001), and Tonga 67% (2003). World Bank.2006. At Home and Away: Expanding Job Opportunitiesfor Pacific Islanders through Labour Mobility. Washington DC: World Bank. 9 Country Context an important role in the livelihoods and cultural lives of many of PNG's rural residents. Further development of these income-earning opportunities faces important challenges, including limited and expensive access to inputs and markets, poor infrastructure, ineffective extension services, limited 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 84ti? out of 178 economies for overall ease of doing business. Rankings are substantially lower, however, for dealing with licenses, getting credit, and enforcing contracts." Cumbersome administrative processes and limited access to finance hamper the formation and growth of small businesses. A lack of financial market competition and underdeveloped financial infrastructure compound this problem by increasing the cost of finance and raising the risk of becoming trapped in debt. Many of the thousands of micro, small, and medium enterprises that are in operation are in the informal sector, and the absence of effective business services holds back productivity. Business development i s also discouraged by the deterioration of public infrastructure and the breakdown of law andorder. 28. The condition of physical infrastructure has deteriorated, with far-reaching consequencesfor the livelihoods of poor people. Transport networks are in poor condition, limiting access to markets and social services, and imposing highcosts on businesses. About 85 percent o f the main roads and nearly all feeder roads are impassable during at least part o f the year. Though reliable statistics are difficult to obtain, it i s estimated that 17 percent of the population has no road access. Shipping and air transport services to isolatedcommunities are in decline, and wharves and airstrips are falling into disrepair." Only 7 percent of the population has access to electricity, with wide variations across regions, holding back enterprise formation, service quality, and the efficiency of local adrninistration.l2 Access to information and telecommunications i s among the lowest inthe w0r1d.l~ 29. There is an emerging consensus that human development outcomes and social service delivery performance have declined in recent years. PNGranks 139' out of 177 countries inthe latest United Nations Development Programme (UNDP) Human Development Index (2004), falling from 12Efh out of 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 of clarity in the decentralization framework, a squeeze on recurrent spending, and inefficiencies in resource allocation; the consequence has been shortages of funding and qualified staff on the frontlines of service delivery. loPNGis ranked 118* for Dealing with Licenses, 115" for Getting Credit, and 162"dfor EnforcingContracts. 'IThe ports serving Port Moresby, Lae, Madang, Kimbe, and Rabaul carry internationaland coastal traffic and have reasonable infrastructure, but lesser ports provide only basic services and are often unusable inbad weather. The deteriorating condition o f runways at major and secondary airports often causes services to be diverted or cancelled. 12Nearly two-fifths of healthhub-healthcenters and an even greater proportion of rural health posts have no electricity to power essential medical equipment, and among the small minority of schools that have access to electricity, energy costs account for as much as 70 percent of their budget. l3Fewer than 3 in 100PapuaNew Guineans have access to basic telecommunications. Fixed-line infrastructure reachesonly 80 population centers, and mobile service is limited. Internet access is primarily limited to the capital, largely through slow-speed dial-up connections. Country Context 10 Table 1: HumanDevelopmentIndicatorsinComparison Indicator PNG EAP LowIncome Life 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: Grossprimary enrollment refers to the ratio of total enrollment, regardless of age, to the total population of children in the ofJicialprimary school age group. Source: World DevelopmentIndicators (SIMA & HNP Stats). Data arefor 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 Life expectancy is low, immunization rates are inadequate, and maternal and infant mortality rates remain unacceptably high. Health system performance is faltering (Table 2). At the same time, the HN/AIDS 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. It i s estimated that about 66 percent of all infections are in the majority rural population. In 2007, the GoPNG released a report estimating that 1.28 percent of the population i s living 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: HealthSystemPerformanceinDecline Indicator Then Now Open aid posts (% of original number) 75 1995 63 2000 Outpatient visits (per person per year) 2.39 1988 1.49 2003 Supervisory doctor visits (% of health centers) 53 1995 41 2000 Measles vaccinations (% of children 12-23mos.) 24 1996 60 2004 DPT3 vaccinations (% of children 12-23mos.) 56 1996 61 2004 Antenatal care coverage (%) 80 1991 58 2004 Delivery rooms with running water and sink (%) 61 2000 51 2002 Birthsattendedby skilled healthstaff (%) 52 1991 39 2004 Sources: ADB, AusAID, WorldBank. 2006. Papua New Guinea: Strategic Directionsfor Human Development; World Development Indicators (SIMA & HNP Stats). 31. Access to education has improved considerably, but there is a need to strengthen quality, eficiency, and equity. The number of students in PNG doubled in the decade following the national education reform of 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 of the goal of universal basic education. Girls account for about 45 percent of enrollment in the basic education cycle, but their share drops to 40 percent by grade 10, and 35 percent by grades l4Prevalence of H I V among those aged 15-49 is estimated at 1.7%inPNG, as compared to 1.6% inCambodia, 1.4%inThailand, 1.3% inMyanmar, and between 0.1% and 0.5% elsewhereinthe region. 11 Country Context 11and 12.15 About one infive children do not yet attend school, andmost do not complete the basic cycle. Literacy rates among youths and adults are low 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. Recognizingthat the internationally defined MDG targets would remain out of PNG's reach well beyond 2015, GoPNG has endorsed a set of nationally relevant targets and indicators. The national MDGs are considerably more modest, but still 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 of HIV/AIDS threatens to reverse many of the gains made. The first national MDG progress report, produced jointly by GoPNG and UN in 2004, concluded that most of the national MDGs-with the exception of those focusing on HIV/AIDS and the environment-could be achieved on time, but only with 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 trendspoint to significant gender inequalities. GoPNG has ratified the United Nations Convention on the Elimination of Discrimination Against Women and incorporated its provisions into national policies, strategies, and laws. Implementation will be the next challenge. Women have substantially poorer access to health care services, and lower levels of educational attainment and literacy pose significant barriers to their equal participation in economic activity and political life. Women receive a smaller share of household income than men and are less likely to participate in the formal non-agricultural wage economy. Even where women are most economically active, they exercise little control over the benefits generated by 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 of violence, and their ability to participate in economic and social life i s reportedly constrained by the associated injuries, feelings of fear, and increased risk of contracting HIV/AIDS. The country's law and justice institutions are dominated by men, and women are not always able to accessjudicial recourse.16 34. The rapidly growing youth population faces formidable challenges in finding employment. Nearly half of the population i s under the age of 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 likely to find a job in the private sector. Many young people in PNGleave their villages in search of jobs incities and towns, only to find that urbanjob markets are highly competitive and that they lack the skills needed to perform the few jobs that are available. This situation has fuelled the expansion of urban youth gangs. As populations in urban settlements lose their links with their rural areas of origin, these young people become more dependent on involvement in gangs as their main source of livelihood and social acceptance. Even within their local communities, young people often feel they have l5 Governmentof PapuaNew Guineaand UnitedNations inPapuaNew Guinea.2004.Millennium Development Goals: Progress Reportfor Papua New Guinea 2004. l6 World Bank. 1998. Gender Analysis in Papua New Guinea. WashingtonDC: World Bank. PNG's Development Program, 12 Prospects, and Challenges limitedopportunities 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 by their elders.17 This sense of 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 DEVELOPMENTPROGRAM,PROSPECTS,AND CHALLENGES A. CountryPrioritiesandAgenda 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 of the MTDS i s to foster sustainable improvements in the quality of life of all Papua New Guineans by promoting economic growth and social development. Drawing from the Government's Program for Recovery and Development, announced in 2002, the MTDS 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 by mining, petroleum, and gas; and rural development, poverty reduction, and empowerment through human resource development. The strategic approach is underpinned by the Medium Term Resource Framework and the Strategic Plan for Supporting Public Sector Reform, covering 2003-2007. The MTDS objectives will be reflected in a National Poverty Reduction Strategy which i s currently underpreparation. 36. The Government's development strategy prioritizes pro-poor spending. In hopes of achieving maximum development impact from available resources, the strategy defines seven pro-poor expenditure priorities: (i) rehabilitation and maintenance of transport infrastructure; (ii) promotion of income earning opportunities; (iii) education; (iv) development-oriented basic 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 MTDS priorities, but the real test lies infully implementing the strategy. The MTDS recognizes that effective implementation depends on clarifying the fiscal envelope, identifying cost savings, and improving the efficiency of public spending. Inter-relatedtools 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. 37. The MTDS was prepared through a consultative process and is widely owned. The MTDS 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 all levels of government and civil society representatives, took place across the country, and revealed strong support for the three strategic priorities. Suchfeelings were expressedby young peopleduring the Bank-sponsoredYouth Open SpaceForuminJuly 2006. 13 PNG's DevelopmentProgram, Prospects,andChallenges 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. UNDP i s supporting GoPNG in its efforts to refine these targets. The Government has adopted an MTDS performance framework, but there i s a need to clarify and strengthen the targets and indicators. The Bank Group supports GoPNG's framework and will help further define targets and indicators, with a view to usingthese to evaluate CAS results. B. Medium-TermEconomic 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 by the staffs of 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 of 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 fall and spending, especially on investment projects, increases. The non- mineral fiscal deficit should remain broadly stable, however, with efforts to sustain non-mineral tax revenue collections. The central bank is expected to contain the inflationary pressures emanating from record-high natural resource revenues and expanding domestic credit, with inflation likely to remain inthe lower to middle single digits. Table 3: Medium-TermEconomicProjections 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 (% of GDP)' 3.7 7.4 4.9 1.2 0.4 -1.0 -1.9 Non-mineral fiscal balance (% of GDP) -4.7 -7.7 -8.2 -9.7 -8.5 -8.2 -8.1 Current account balance (% of 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 (% of GDP)* External public and publicly-guaranteed 25.5 21.4 19.8 18.8 17.6 16.3 15.3 debt (% of GDP)' From above the line. Including central government and statutory authorities. Source: IMF 40. These growth prospects are moderated by substantial downside risks. Given the structure and openness of PNG's economy, a sharp decline in world commodity prices or the postponement or closure of 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 of growth. A lukewarm commitment to further structural reform could curb investor confidence. The rapid spread of 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. PNG'sDevelopment Program 14 Prospects, and Challenges 41. In addition to sustained formal sector growth, significant reductions in poverty and unemployment will 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 inthe non-mineral sector. 42. PNG is considered to be at low to moderate risk of debt distress, and sustained vigilance in public debt management will be required. Under the baseline scenario-which assumes continued prudence in fiscal policy, relatively favorable external circumstances, and moderate levels of growth-PNG's external public and publicly-guaranteed debt i s sustainable, dropping from 21 percent of GDP in 2006 to 16 percent in 2011, and to 6 percent in 2026.'* PNGfaces a low to moderate risk of 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, it i s prudent to take a cautious view of PNG's debt service capacity. GoPNG has recognizedthe risks, and its Medium Term Debt Strategy targets a further reduction in debt ratios. C. PapuaNew Guinea'sDevelopmentChallengesand 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 of improvedeconomic and social development inthe 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 of natural resource revenues will 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 will help local people have a voice in how resource-based industries are managed and will also help provide a secure environment for long-term investment inthese 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 of exhaustible resources dwindle, growth in the non-mineral sectors will 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 is projected to decline from 39 percent of GDP in 2006 to 32 percent by 2011and 15 percent by 2027. 15 Role of DevelopmentPartners 46. Ensuring good governanceand sound publicfinancial management. Good governance i s fundamental to equitable economic growth and the efficient delivery of 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 of governance in PNGhas 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 of 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 of 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 of 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 andto the achievement of the country's MDGs. 48. Empowering women and youth. Enhancing the ability of women and girls to access education, health services, markets, credit, and income-earning opportunities can improve development outcomes and broaden the participation of ordinary Papua New Guineans in their country's economic growth. Reducing the rate of gender-based violence would limit a major factor in the rapid spread of 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 of entrepreneurial energy, while curbing the potential for dissatisfaction and idleness to foster crime, gang activity, and abuse of alcohol and drugs. 49. Protecting the environmentand mitigating the risk of natural disasters. PNG's natural environment has brought economic and social wealth to its people for thousands of years, but it i s now under threat-from intensified farming, unsustainable logging, destructive fishing technology, the pollution of streams and rivers by extractive industries, as well 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 of 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 andrevenues. IV. ROLEOFDEVELOPMENTPARTNERS A. Development Partner Activities 50. PNG mobilizes substantial assistance from international development partners. Australia's program i s the largest, with AusAID providing grants of about US$ 300 million per year.20 Focus areas include governance and nation building, infrastructure (especially roads), GibsonandRozelle.2003. "Poverty and Access to Roads in PapuaNew Guinea." Economic Development and Cultural Change. Oct. 2003.52(1): 159-185. 2o Inaddition,the AustralianTreasury's EnhancedCooperationProgramhas deployedabout 40 Australian Governmentemployees in advisory and in-line positions throughout GoPNG. Role of DevelopmentPartners 16 livelihoods development (agriculture, private sector development), basic service delivery, and HIV/AIDS. The Asian Development Bank (US$28 million per year) focuses on public financial management, private sector development, transport, health, and HIV/AIDS. The European Commission (US$ 35 million per year) concentrates on rural development and environment, education and training, health, governance and decentralization, civil society, and electoral support. The United Nations agencies (US$ 8 million per year)21 focus on capacity building, crisis management, human development, gender equity, and HIV/AIDS. New Zealand provides about US$ 15 million per year for rural livelihoods development, health, education, law and justice, governance, and civil 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 of development partner programs.) 51. GoPNG works closely with a variety of non-governmental partners. These include international and national NGOs, CBOs, religious organizations, and the private sector. The Papua New Guinea Sustainable Development Program, Ltd. (PNGSDP), established in 2001by GoPNG and the BHP Billiton mining company, i s an independent trust devoted to investing a portion of profits from the Ok Tedi mine in sustainable development activities. PNGSDP's principal areas of focus are infrastructure, rural development, energy, microfinance, and community development. 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. To address this concern, GoPNG instituted an annual joint Government-Donor Consultation Forum in 2005 and has established a series of Thematic Working Groups. A Technical Working Group on Aid Effectiveness has been created, and GoPNG and all its development partners have issued ajoint statement committing to localize the principles of the Paris Declaration and define targets and actions to improve aid effectiveness by 2012 (Attachment E). In addition, ADB, AusAID, and the World Bank are working toward improving harmonization of 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 MTDS provides a positive opportunity to increase coordination among donors and with the Government's programs. ADB, AusAID, and the UNhave recently issued country strategies, and the EC and NZAID are in the process of developing theirs. The CAS draws on these to ensure complementarity. In addition, the Bank Group will help to strengthen GoPNG's capacity to lead donor coordination; this will include assisting the Government to prepare the next MTDS. 21The UNagencies expect to mobilize an additional US$77 million over five years, or aboutUS$ 15 millionper year. 17 BankGroup AssistanceStrategy 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 similar 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 well 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 GROUPASSISTANCE STRATEGY A. Lessons of Experience Lessonsfrom Previous World Bank Involvement 54. In 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 CAE 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 its lending program, making no new loans to PNGbetween June 2002 and April 2007. The country team focused on intensifying communication with Government and civil society on the basis of an expanded program of 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 its Private Enterprise Partnership for the Pacific (PEP-Pacific). Dialogue with Government, donors, and civil society continues to broaden and deepen as a result of these measures. 55. The 1999-2002 CASfocused on governance and rural development. The Bank flagship under this CAS was a Governance Promotion Adjustment Loan, supported by investments in health, education, smallholder oil palm development, rehabilitation of 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 of 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 million IBRD loan and two GEF grants of SDR 13.31 million each, was eventually cancelled at the Government's request in June 2005, with only US$ 2.6 million of US$40million disbursed. BankGroupAssistanceStrategy 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 of a new CAS in 2002, joining ADB and AusAID in pursuingimproved donor coordination through the elaboration of a Joint Country Strategy (JCS). This effort was set aside in view of the Government's concern that the JCS was a means for donors to exert coordinated pressure on the Government, and by Australia's introduction of the ECP in 2004 (it being unclear initially how the hands-on approach of the ECP would affect the overall aid environment). The ISN focused on promoting development dialogue, stemming the decline in social indicators and buildingthe 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 inpublic expenditure management, human development, and transport, as well as a broad endorsement of MTDS 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 its 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 of the Bank in PNG, but has empowered citizens to play a greater role in the country's development.22 The cancellation of the FCP highlighted several important lessons for the design and implementation of 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 of the ISN were not accomplished as a result of insufficient coordination between the Bank, the Government, and other development partners- for example, plans to conduct an updated poverty analysis on the basis of a new household survey and Demographic and Health Survey were not implemented due to delays in the design and implementation of 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 of progress and performance under the ISN.) The CAS for 2008-2011draws on the lessons learned under the ISN 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 of the five projects in the portfolio (Gazelle Restoration and RMRP) were considered at risk of not 22Examples include the active participation in the Tingim Yut Kornpetisen development marketplace, the Youth Open Space Forum, and the Women inMining initiative. Inaddition, the Bank has taken advantage of the Public Information Center and the Global Distance Learning Network's Distance Learning Center to strengthen information-sharing within PNG, as well as between PNGand other countries. 19 BankGroup 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 (MiningTA and Petroleum TA) were rated satisfactory at the time of closing. 59. The current portfolio is small, but effective. There are no safeguard, monitoring and evaluation, counterpart funding, or legal covenant issues facing any of 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 of audit reports i s expected to improve now that the Auditor General's office (responsible for auditing Bank-financed projects) has augmented its capacity by contracting out some of the work to private sector auditors. Aside from audit issues, financial management arrangements inthe portfolio have been satisfactory. Ongoing project operations have been rated moderately satisfactory or satisfactory for procurement performance, which i s mainly affected by insufficient co-financing and lack of adequate local procurement skills. Despite improvements, the portfolio still 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 of available trust funds to support operational and administrative costs, including GEF,the Forest Carbon Partnership Facility (FCPF),Pacific Facility, andothers. Feedbackfrom Stakeholder Consultations 61. In preparing the CAS, the Bank team received valuable advicefrom consultations with a broad cross-section of stakeholders. During2001-2003, before moving to an ISN 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 of 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 of 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 increasingpublic debt, and consult stakeholders more frequently. 62. In refining the CAS, the Bank consulted widely with Government, civil society, theprivate sector, and the donor community and received very similar feedback once again. In these recent consultations, civil society representatives encouraged the Bank and other development partners to involve CBOs in the design and implementation of community-based development programs. Women's groups emphasized the importance of improving rural infrastructure, strengthening law 23Onthe fiduciary side, RMRPhas a slow disbursementflagresultingfrom delays inthe receipt of auditreports. BankGroupAssistance Strategy 20 and order, enhancing livelihood opportunities, and mainstreaming gender-related activities across all sectors. Among representatives of 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 MTDS priorities and each donor's comparative advantage. Over the course of 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 of 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 of access. These priorities came together to form the two pillars of the CAS. B. ProposedBank Group AssistanceStrategy Key Features of the CASfor 2008-2011 63. The CAS seeks to foster a constructive, long-term partnership with the government, people, and developmentpartners of Papua New Guinea tofurther 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 will 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 will require a generation or longer to bear real fruit. It 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 of the PNG economy, and to the main MTDS goal of fostering sustainable quality of life improvementsby promoting economic growth and social development. Activities under Pillar Iwill 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 I1will 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 oil 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 responsesto HIVIAIDS. 21 Bank GroupAssistanceStrategy 65. Activities under each pillar will 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 will be mainstreamed across both pillars. (See Attachment G for a review of 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 will aim to support the efforts of 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 of existing and non-traditional delivery models. Figure 3 depicts the overall approach embodied by the CAS. Figure 3: A Strategy for Engagement in PNG Service Deliveryfor NaturalResources 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 will 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 of this, IFC plans to support the expansion of microfinance, while the Bank will address infrastructure constraints to small business growth (such as poor roads and low access to electricity). The Bank and IFC will also look for opportunities to co-finance work in areas like airport and aviation development, rural telecommunications, fisheries development, gas field exploitation, and forestry. WorldBank Group Instruments and Selectivity 68. Today's small but efective portfolio provides a good basisfor afresh 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. BankGroupAssistance 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 million (including about US$ 18 million in unused carryover from FY06 and FY07). For FY09-FY11,the indicative IDA allocation i s more modest, at about US$30-32 million per year, though actual amounts will be determined annually on the basis of PNG's performance relative to other IDA borrowers. It i s expected that Bank financing will be provided on IDA terms. As a blend country, PNGcould also possibly tap into IBRDresources, though this would require careful scrutiny on a case-by-case basis andwould be subject to a creditworthiness evaluation by IBRD. Country program funds will also include the combined resources of 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 of three in a typical year. Similarly, "core" AAA tasks would be limitedto two per year in an effort to ensure adequate analytical andpolicy depth. Box 1: Principlesof EngagementinPNG The CAS sets out five guiding principles for future engagement inPNG. 1. Long-term Partnership: Partnering with Government and key stakeholder groups, recognizing that comprehensive development will take time, and managing expectations on all sides 2. GovernmentLeadership: Providing (and encouraging other donors to provide) development assistancein line with the Government's own priorities and strategies, and engaging in more consistent policy dialogue with the GoPNG 3. Country Ownership: Fosteringreal ownership of 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 of structures and proliferation of 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. Opennessand 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 will 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 its global reach to complement other donors' activities (in sectors such as education, health, utility reform, and environmental management); or where the IFC can leverage private sector investment (financial markets, extractive industries, agribusiness, manufacturing, and telecommunications). Operations will be complemented by AAA that draws on experience from around the world, and by efforts to help strengthen PNG's data bases (e.g. on the effectiveness of public expenditures and on poverty). The CAS will also continue to support the current crop of successful community outreach programs (footnote 22). In addition to country program resources, the Bank 23 BankGroup Assistance Strategy Grou can access regional funds (such as the GEF Pacific Alliance for Sustainability (GEF PAS)!4 and the Global Facility for Disaster Reduction and Recovery) and global products (such as FC'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 inPNGare laid out inBox 1. StrategicPillars, Objectives, and Programs Pillar I: Promoting and maintaining sound economic and natural resource management 71. Thefirst pillar of the CAS aims to consolidate recent improvements in economic growth andfiscal policy while increasing transparency and accountability in the management of public finances and natural resources. As part of a longer-tern engagement strategy, the CAS will promote sound macroeconomic and public expenditure management, improved governance through strengthened oversight of the public sector, improved management and sustainability in the extractive industries, andeffective and sustainable management of 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 Strategic Longer-Term Country Outcomes CAS Outcomes the World Bank Group Expects to Influence inFour Years Promote sound macroeconomic and public GoPNG shows continued awareness o f the importance of expenditure management maintaining fiscal discipline and a stable macroeconomic environment Improved effectiveness and transparency inbudget preparation, execution, and reporting Promote good governance through independent Improved oversight of the public sector, including by the and capable oversight institutions and improved Ombudsman Commission and Auditor General citizen monitoring Increased public availability of accessible information to support monitoring o f government performance Promote well governed, sustainable mining and Strengthened institutional structures inthe mining sector, petroleum industries offering significant benefits emphasizing transparent management and resource distribution at local as well as national levels Promote effective and sustainable management of Climate change mitigation, adaptation, and disaster risk PNG's naturalresources management investment program adopted by GoPNG and implementation initiated 24The GEF-PAS i s a regionally-oriented, nationally-executed program for environmental management inthe Pacific region. The program would support capacity building and partnerships with civil society and the private sector, recognizing the advantageso f a more coordinated approach to environmental management in the Pacific. PNGcould benefit significantly from participation in this program, and could position itself to acquire additional resourcesand capacity if it choosesto 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 will support efforts to enhance the credibility of budgeting and tendering through improved compliance and enforcement. The Bank will continue to engage with GoPNG under a multi- donor framework, including through the PERR process and implementation of 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. Strengthening oversight of the public sector. As recognized in the Bank's new Governance and Anticorruption Strategy, strong, well-functioning accountability institutions are essential if corruption, mismanagement, and waste in the public sector are to be contained. The proposed Strengthening Institutions of Oversight and Accountability (SIOA) Project would help strengthen the capacity of the Auditor General, Parliamentary Public Accounts Committee, and Ombudsman Commission to conduct and evaluate audits and investigations. SIOA will 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. 75. Supporting improved monitoring of government performance through greater public availability of information. Buildingon GoPNG's ongoing "Opening the Budget" initiative, the Bank Group will help develop the capacity of CBOs, NGOs, journalists, and citizens to engage with the Government by working with ministries to issue information in a format that can be easily understood by the general reader, and b y helping civil society organizations to develop capacity for budget analysis, citizen monitoring, and investigative journalism. As part of the SIOA approach, the Bank will emphasize partnerships with provincial governments, civil society, and research and policy institutes, combined with technical assistance, training inbudget analysis, local-level pilots, and selective interventions at the grassroots level. In cooperation with ADB, AusAID, and IMF, and with support from the Multi-Donor Trust Fund for the Extractive Industries Transparency Initiative, the Bank will help GoPNG move to adoption of EITIprinciplesinthe miningandpetroleum 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; buildcapacity for increased tax collection and mine closure planning; and help mine-affected communities to manage the benefits and risks 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 inthe commercialization of gas resources, 77. Promoting sustainable management of natural resources. The CAS will 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 will also participate in the GEF-PAS, a regional Bank-managed GEF initiative focusing on environmental management and adaptation to climate change. IFC is planning to support PNGSDP's sustainable forestry initiative. The CAS will adopt a long-term perspective to re-engagement inthe forestry sector, working to establish a 25 BankGroupAssistance Strategy basis for discussion and engagement with GoPNG in this area, possibly under the REDD program. Pillar II: Improving livelihoods and sewice delivery, especiallyfor the rural poor 78. Thesecondpillar 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 inPNGby 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 11activities aim to contribute. Table 5: Improving Livelihoods and Service Delivery, Especially for the Rural Poor Strategic Longer-TermCountry Outcomes CAS Outcomes the World Bank Group Expects to Influence inFour Years Promote the ability of the private sector to provide Stronger business enabling environment, with improved significant employment and livelihood opportunities access to finance and financial infrastructure Improved potential inniche industries, including tourism Public-private partnerships supporting infrastructure development Improverural livelihoods through policies and Sustainable increases inoil palmproduction and artisanal investments that promote inclusive, sustainable growth and small-scale mining Support the development of more responsive, Improved local service delivery through partnerships accountable local governments that deliver cost- between government and civil society, and within and effective public services basedon community needs Iacross communities Help develop well-managed national and local transport IImproved condition of roads and bridges in selected services provinces Expand access to reliable, affordable electricity to Improved availability and lower cost of electricity support service delivery and rural enterprise services inselectedrural centers and towns development Facilitate the provision of reliable, affordable access to Expanded access to affordable and reliable telecommunications infrastructure & services telecommunications services inrural areas and outside Port Moresby Improve human development outcomes across the Increased primary school participation and grade country retention Improved health system performance through multi- donor programmatic support to the health sector More effective national HIV/AIDS response through evidence-basedpolicy and interventions BankGroupAssistance Strategy 26 80. Promoting growth in niche industries. The CAS will focus on sectors where PNGhas a comparative advantage (such as tourism and niche agribusiness products such as coffee, cocoa, spices, and some fisheries and forestry products). PEP-Pacific will buildon existing support for the development of 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 will also work to leverage partnerships with private sector agribusiness firms to strengthen supply chains, including commodity standards and certification and training and financing for suppliers. 81. Supporting private sector development through public-private partnerships in infrastructure development. The IFC will 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 of rural electricity and telecommunications, the CAS will support regional analytical work in the fisheries and aviation sectors, which may point to further opportunities for public-private partnerships inPNG. 82. Seizing opportunities for more inclusive and sustainable rural growth and income generation. The CAS will support income generation in areas where the Bank is already engaged, including development in the smallholder oil palm sector25 and further support for artisanal and small-scale mining.26The CAS would also stimulate growth in rural areas through joint Bank-EC implementation of a proposed Rural Development Program (RDP), and through support for increased access to modern energy and IT services. The Bank's support of income generation opportunities will draw on a comprehensive program of AAA, including a Poverty Assessment and a Rural Growth and Livelihoods Strategy (possibly incooperation with the EC). A Youth Integration Strategy would be developed to address problems of youth unemployment andexclusion, 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 will support analysis intended to better understand the flow and use of 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 of the Gazelle Restoration Authority to other areas. CAS support for CDD approaches would be underpinned by a number of AAA and outreach activities, including the C E M and a Review of Local Service Delivery Models. The Bank will continue the Women in Mininginitiative, expandingits focus to address youth concerns as well. 25Through the SADP, the CAS will sustainably enhance the involvement o f targeted communities intheir local development through measuresaimed at increasing oil palm revenue and local participation. 26The CAS will support artisanal and small-scale mining as a significant source of rural income by improving extension services and training youth in new, environmentally sound mining and processing technologies. This work will buildon successful pilot initiatives under the JSDF grant program, with increased support for women and youth through bothJSDF and the Mining T A operation. 27 Bank Group Assistance Strategy 84. Improving access to specific economicand social services, including: Improving the condition of roads and bridges. Under Road Maintenance and Rehabilitation supplemental financing and RMRP II,the CAS will support planning and management in the roads sector, rehabilitation of 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 will continue to work with ADB and AusAID to improve harmonization in the transport sector. Bank-supported road sector activities will support a broader approach to infrastructure, and a National Infrastructure Study i s planned in order to explore the financing, delivery, and maintenance of a sustainable infrastructure system for PNG. Expanding the availability and lowering the cost of electricity services in rural centers and towns. The CAS will 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 will 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 will be underpinned by various pieces of AAA, including the National Infrastructure Study and ajoint 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 seedfundingto help establish a rural communications fund, which would aim to stimulate extension of 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 IFC and CGAP) will explore opportunities to support income generation through mobile phone-enabled financial services for the rural poor. This work may be facilitated by a potential IFC investment inmobile telephony. Increasing primary school participation and retention. The CAS will promote the achievement of 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 will support a national population bio-behavioral survey. In coordination with donor partners the CAS will also support the ongoing multi-donor programmatic approach inthe health sector. 85. Theproposed CASprogramfor FY08 to F Y l l is laid out in Table6. This programmay not be realized in full, and should be understood as indicative and inclusive; its exact composition will depend on the availability of 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 will be reviewed on an annual basis with the Government, at which time the coming year's program will be firmed up. Bank Group Assistance Strategy 28 Table 6: Proposed CAS Program for FYOS to FYll 0Smallholder Agriculture Development (US$27.5 FY08 0Mining T A (US$11million) million) 0RuralElectrification (US$6.5 million) 0Provincial Reconstruction and Development FY09 0Rural Telecommunications 0Programmatic Support to Health Sector 0Strengthening Institutions of Oversight and 0District Service Delivery and Local Governance FYlO Accountability 0Programmatic Support to Basic Education 0Gas Field Development (Guarantee) 0RuralDevelopment FYll 0RoadMaintenance and RehabilitationI 1 0PNGMicrofinance Ltd.(US$3 million) 0Doing BusinessReform (Pacific Regional) InformalEconomy PhaseI FY08 0Financial Infrastructure (Pacific Regional): Credit Bureau 0Tourism Development (Pacific Regional): Identifying Barriers to Investment and Marketing Public-Private Partnershipsin Informal Economy PhaseI1 Infrastructure: Fisheries and Petroleum 0Financial Infrastructure (Pacific Regional): Secured FY09 Transactions RegistryRayment Systems Reform Tourism Development (Pacific Regional): Regulatory Reform 0Public-Private Partnerships inInfrastructure: FYlO Health andEducation 0Tourism Development (Pacific Regional): Market Accessnnvestment Support FYll 0Public-Private PartnershipsinInfrastructure: Aviation and Airports Development (with WB) FY08-11 Potential investments in: petroleum, mining, 0Potential investments in: telecommunications, forestry, and fisheries agribusiness, financial markets, and renewable energy 29 Risksand 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 will 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 of country systems for procurement and financial management. Local level operations will 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 of provinces by other development partners, local activities will initially build on operations in areas in which the Bank i s already active, and will focus on supporting country systems of local planning andbudgeting-the poor functioning of which i s a major constraint to effective service delivery. Organizing to Deliver 87. Successful implementation of theproposed CAS will require a new Bank Group approach to doing business in PNG. The Bank will give a stronger decision-making role and greater autonomy to the country office and will increase staffing to create a `core' of 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 of hiring a new senior operations officer and additional national staff. To strengthen coordination among a highly dispersed team, annual country team retreats will 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 preparingjoint work. 88. The CAS Results Matrix (Annex B9) presents aframework for the Bank's engagement in PNG over the nextfour years. It takes as its starting point GoPNG's priority objectives over the longer term as laid out in the MTDS, andthe challenges it faces inachieving those goals. Within that longer-term agenda, CAS outcomes are those that the Bank expects to influence directly through its interventions, accompanied by targets and indicators b y which to measure progress. The Bank will continue to support the Government's efforts to refine its MTDS performance management framework, with a view to eventually integrating GoPNG targets and indicators into its evaluation of 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 will provide a mid-term review of the strategy's relevance and implementation progress, allowing for adjustments as needed. The results matrix will be reviewed regularly to incorporate new baseline data, targets, and indicators; to take stock of progress on CAS outcomes; and to adjust implementation plans accordingly. VI. RISKS AND MITIGATIONMEASURES Country Risks 89. Political conflict may lead to a serious decline in the governance environment. The CAS will aim to mitigate this risk by focusing on improved transparency and accountability inthe use Risks andMitigation Measures 30 of extractive industry revenues, the institutional strengthening of key oversight agencies, and community-driven development approaches that emphasize good governance. In order to build coalitions for improved governance, the CAS will also support dialogue among key stakeholders, including national and sub-national government, the private sector, civil society, and development partners. 90. A fall in commodity prices may trigger a rapid decline in economic performance. The CAS will support the steady accumulation of reserves and the reduction of public debt, as well as promote the wise and effective use of 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 will 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 of 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 by supporting the development of 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 theprogress of CAS implementation. The CAS attempts to mitigate this risk by supporting efforts to build broad-based constituencies for change, reaching out to civil society and the media by helping them access information for monitoring and evaluation. In addition, the SIAO program will support the capacity of PNG's oversight institutions to carry out their functions effectively and to communicate with citizens about their work. 94. The Bank's engagement will 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 of this kind. Over time, and with persistence and consistent engagement, the Bank expects to be able to assist significantly in spite of its limited financial capacity inPNG. 95. Weaknessesinpublicfiduciary systems may impedeproject implementation. Through the PERR and CPAR processes, the CAS will attempt to reduce this risk by 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 will attempt to mitigate this risk by a more straightforward, transparent approach to communicating the Bank Group's views and intentions, andby giving greater attention to consultation with a wide range of stakeholders. Attachment A: The Roleof Extractive Industries inPNG A. Background 1. Exploration and Mineral Geology. Papua New Guinea has favorable geology for minerals, oil and gas. The discovery of the world class Panguna copper and gold deposit on the island of Bougainville in the mid-1960s was followed by the discovery of 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 of the Autonomous Government of Bougainville, Bougainville could again become a prime destination for mineral exploration. 2. Exploration and Hydrocarbon Development. On the oil and gas side, exploration in the 1970s and 1980s led first to the discovery of the Hides gas deposit and later the Kutubuoil deposit. Subsequently modest additional oil 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 of infrastructure. Remaining proven, probable, and possible recoverable oil reserves are estimated at 185 million barrels. Oil production i s declining due to the maturity of oil fields and the difficulty of dealing with increasingvolumes of associated gas producedwith oil. The producing fields are likely to be largely depleted by 2015. There has been no significant oil find since the discovery of the Moran oil field in 1996. Natural gas recoverable reserves and resources are substantial, with an estimated 25 trillion cubic feet in proven, probable, and possible categories. These reserves andresources are equivalent to about 5 billion 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 of 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 of payments and fiscal benefits for PNG as a whole at independence. Production ceasedin 1989 following 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 oil industry has invested about US$ 5.8 billion in petroleum exploration and development. Commercial production of oil began in 1992, and a total of about 400 million barrels of oil had been produced as of August 2006. Almost all of the oil has been exported. The Kutubu oil operation was developed in the early 1990s with additional oil 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 with a pipeline to Queensland has been shelved. The Government has called for and given consideration to alternate gas developments, all of 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 of 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 its recent gas discovery at the Elk-1well, which may have found a large fractured carbonate reservoir with abundant recoverable gas. However, the extent of the discovery depends very much on the further evaluation of the geological extent and character of the structure. The Government has also had talks with 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 of which i s being prepared b y ExxonMobil. LNG investments could eventually be in the range of US$ 10-15 billion. The gas project would also help increase recoverable oil since associated gas would no longer be re- injectedwhich currently reduces potential oil production. 5. Production. The main E1production at present is oil, copper and gold-almost all of which are exported. The volumes and values of E1exports are as shown in Table A-1. Oil production has declined from over 21 million bbls in 2001 to just over 14 million bbls in 2006 due to declining reserves. Oil and gas exploration has surged with increased commodity prices and a revision of oil and gas fiscal incentives, but oil production will continue to decline unless new deposits are discovered. Gas production will 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 Ok 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 from 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 inthe 1990s from US$ 83 million in 1988 to US$ 12 million in 1999 but, supported by the first PNGMining and Institutional Strengthening Technical Assistance Project, have since recovered to US$ 30 million in 2006. Ok Tedi has a limited life with production ending possibly as early as 2013. Porgera would likely have another 10-20 years production and Lihir thirty years or more. Table A-1: ProductionandExportsof Copper,Gold,and Oil 2000-2006 Year Copper ('000 tonnes) Gold(tonnes) Oil(million bbls) 2001 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 PapuaNew Guinea 33 Attachment A 6. Economic Importance of EI. Extractive industries have always been a major part of the formal economy in PNG and in recent years have accounted for about twenty percent of government receipts, one-third of GDP, and about three-quarters of exports. Copper has accounted for about half of E1exports, oil about one-third, and gold about one-sixth. With the present worldwide minerals commodity boom, E1has increasedto over 80 percent of exports and 40 percent of fiscal receipts in 2006 as shown in Table A-2 below. Formal employment provided by commercial E1projects i s rather modest-about 15,000jobs, equivalent to 5 percent of formal employment inPNG. Table A-2: E1MacroeconomicImpacts 2004-2006 Year E1share of exports (%) E1share offiscal 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, of which approximately 25,000 live in the area around Wau and Bulolo, Morobe Province. After agriculture, small-scale mining i s the largest generator of rural incomes in Papua New Guinea supporting an estimated 500,000 miners and family members-thus, close to 10percent of the population of Papua New Guinea derive either direct or indirect cash benefits from small-scale mining, which i s often the only source of cash income available to remote rural communities. Furthermore, the number of miners continues to rise as other alternative livelihoods fail to materialize or as infrastructure for market access for agricultural goods deteriorates. However, the income benefits from the sector must be balanced against the potentially high environmental and community health costs. The miners in general have low levels of 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 E1sector. Oil and gas are administered by the Department of Petroleum and Energy (DOPE), which i s responsible for licensing, monitoring, and enforcement of license and contract conditions including health and safety regulations. The Mineral Resources Authority (MRA) was approved inlate 2005 and established in 2007 and has taken over responsibility for licensing, monitoring, and enforcement of license and contract conditions from the old Department of Mining (DoM). A newly formed Department of Mineral Policy and Geohazard Management (DoMPGM) is responsible the development of Mineral Policy and Legislation and for monitoring of volcanic and earthquake-related risks. The Department of Environment and Conservation (DEC) i s responsible for environmental monitoring and enforcement of social and environmental safeguards and programs. The Internal Revenue Commission (IRC) i s responsible for income tax collection and enforcement. 9. Petroleum Division. The PetroleumDivisionhas 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 of converting the Petroleum Division into a Statutory Authority of the Government. A follow-up study in mid-2005 reviewed the management organizational practices and operational procedures of the Petroleum Division Attachment A 34 under DOPE and recommended a detailed action plan comprised of management training; corporate and strategic planning; review of the organizational structure; review of employee terms and conditions; preparation and implementation of a performance management system; revenue, financial, and budgetary system planning and reform; and preparation of 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 its policy consideration in August 2006. A draft billhas 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 of the staff remuneration package will be necessary to ensure that the Petroleum Division or its successor organization remains a sustainable institution capable of providing coherent sector advice to the Government. 10. The Development Forum. PNG has established is own unique and highly effective process for E1 project approval. At the time a license application i s made for mineral exploitation or oil and gas production, the development proposal and other key documentation are circulated to all 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 all interested parties and departments and, following due deliberation and resolution of issues raised by 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 of mineral royalties, local economic development, etc. Included in these agreements are social and environmental protection plans. 11. Environmental Impacts. E1projects have significant environmental impacts. These tend to be more severe for mining than oil and gas because mining causes greater ground disruption and requires more waste rock disposal than oil and gas. The most significant mining impacts in PNGinvolve the disposal of waste and tailings at Ok Tedi and Porgera into the local river system and at Lihir into the ocean. For oil and gas, the environmental issues relate mostly to potential oil 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 will likely involve significant impacts over a longperiod of time. 12. Social Impacts. E1projects 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 of 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 from a number of negative social impacts including the creation of "haves" and "have riots"-the latter typically include the poorest members of the population (especially single mothers and children), who often find their gardens and income sources shrinking while the arrival of new people for mine employment drives up food costs. Other impacts include the creation of 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. E1 Project Ownership. All of the E1 operations in PNG are majority owned and operated by 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 of the equity in all E1projects at cost on a contributing basis, and the state has taken a minority shareholding in most of the projects. Part of 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). Rio Tinto was the original operator at Lihir andBHP the original operator and majority owner of the Ok Tedi. The Ok Tedi operation was subject to significant opposition due to its negative environmental impacts, especially for communities downriver of the mines where flooding was severely damaging agriculture, forests, and associated livelihoods. In a 2001 agreement with the Government, BHP placed its shares (which comprised 52 percent of 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 of dividends and income for both present and future generations, including landowners in the vicinity of the areas of impact of the project, the population of Western Province, and the population of the country as a whole according to a contractually defined formula. B. E1DevelopmentIssues 14. Macroeconomic Management of E1Revenues. Countries with large E1sectors relative to the rest of the economy face three main macro economic challenges. The first challenge i s to use the E1revenues to develop the non-E1 sector in parallel with the E1sector and to the extent possible diversify the economy in order to avoid over dependence on E1and the risks of "Dutch disease." Over the past twenty years, PNGhas not been successful in growing the non-E1sectors of the economy relative to EI. The second challenge i s to manage potentially large swings inEI- related government receipts relating to the volatility of commodity prices. Twenty years ago, PNG had a Mineral Resources Stabilization Fund (MRSF), which was instrumental in partially cushioning the national level economic impacts of the closure of the Panguna mine. However, the MRSF was discontinued. The third challenge i s to successfully use the income from E1to 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 PNGi 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 its 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 El 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. Mitigating Environmental Risks. All of 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 of the controversial methods related to waste disposal (i.e. disposal of mine overburden and concentrator tailings) used at the larger mine sites. The use of riverine waste disposal methods at Ok Tedi and Porgera i s generally considered unacceptable practice today. Inthe past the substantial harm downriver from the Ok Tedi mine was not well addressedor compensated, but this been recognizedand 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 of closing down the operations, which would have severe adverse impacts for the local communities, the province, and the national economy. Ocean disposal of 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 by DEC, and the impacts were considered acceptable. 16. Mitigating Health and Safety Risks. With regard to health and safety, there have been no serious oil spills to date andthe government andthe 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 risk of 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 inline with good international practice although there was a major explosion in the explosives preparation plant with loss of life 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. Mitigating Social Risks and Improving Social Impacts. The strong voice of 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 E1sector. In addition, E1companies have made significant efforts to increase local sourcing of goods and services in order to reduce the enclave nature of 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 E1companies that positive relationships with local communities and outsourcing business to local companies i s notjust good for development but is also good for business. While communities can gain benefits from EI, it is only inthe past decade that the disparities in social benefits and risks between different groups have started to be well recognizedand addressed in PNG. Work on gender issues under the MiningTA project has identified that men take a disproportionately large share of the benefits of E1 projects (in particular employment, income, and compensation) whereas the bulk of the social and environmental risks fall upon those least able to represent themselves-mostly women and children. The Mining Women's Associations ( W A S ) at each of the main mining sites have 37 Attachment A prepared five-year Women inMining (WM) Action Plans for 2007-2011that address the needs of 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 by the MWAs with monitoring and support by D o M and DoNP, as well as initial implementation funding from JSDF. There are also women's programs at some of the oil and gas sites. All of these programs include specific actions to improve the positive impacts of mining and reduce the negative impacts for women and families. TheMining TA 2 operation will support improved benefits and reduced risks of EI operationsfor women, children, and youth through support to the DoMPGM Policy Divisionfor finalizing and issuing its SustainableMining Development Policy (which has a strongfocus 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 will 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 youthfrom ASM. 18. MitigatingSocial Risks:Closureof E1Operations. Closure of E1operations can result in loss of income and employment and significant contraction of the local economy. This happened at the Misima mine when it closed, and the Government i s concerned to see the impacts managed as well as possible at both the Ok Tedi and Porgera mines, both of which may close within the next decade due to exhaustion of presently known reserves. The Government intends to put in place good practice mine closure and oil/gas decommissioning policies supported by 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 will be supported under the second Mining TA operation, including assistance to MRA and DoMPGMfor a Misima Mine Closure Review and to DoMPGM for preparing a Mine Closure Policy to better manage mine closure impacts. 19. SustainableLocal Community Development. If E1are to make a greater contribution to development in PNG, then sustainable institutions will need to be established in mining and petroleum affected communities. The government i s presently considering how E1development can be better integrated with community-driven development (CDD), and pilot work will be supported by the MiningTA 2 project. The community related activities of the MWAs represent a practical start and, as part of its support for implementing the Women in MiningProgram, the TA operation will provide support to the MRA Coordination Department to support development of joint programs by the MWAs and local/district level government agencies. 20. Improvingthe DevelopmentImpacts of Artisanal and Small-scale Mining (ASM). A S M bringsconsiderable benefits in terms of rural incomes but also significant health and safety risks and environmental harm. The Government, with the support of a Japanese Social Development Fund grant, has taken a number of initiatives including developing training materials, supporting training and outreach initiatives, and developing a database for the collection of 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) inorder to bringmore order to ASM Attachment A 38 and to build the knowledge and capabilities of 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 of A S M communities by addressing how to increase livelihoods through improved mining techniques, and by providing support for addressing education, health, environmental, and social issues associated with small-scale mining. The new Mining TA will 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 supportfor the newlyformed Small ScaleMiners Association. C. E1GovernanceIssues 21. E1 Revenue Transparency. The larger E1 operations are all operated in a fully commercial manner by multi-national mining or oil companies, and the smaller operations by well-qualified, competent local companies. All produce and publish financial accounts, and there i s good transparency regarding payment by companies to all levels of government- although there i s little dissemination or public discussion of 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 of 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 is little or no indication of corruption in the minerals sector at the national level. However, there i s very poor transparency regarding the receipt and use of funds at the provincial and local government levels due to lack of published budgets, lack of published accounts, and lack of audits of sub-national government funds. Improving the transparency of collection and use of EI funds to support greaterfinancial accountability of El revenueflows at national, provincial, and district levels will be addressed through the Bank's macroeconomic and development dialogue, including AAA work on public expenditure management which will also support the Government'spossible participation in EITI. 22. E1 Licensing. One of the most important E1 governance issues i s licensing arrangements. As indicated previously, PNG has a sound system for licensing E1projects, but the institutional capacity of 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 of the MRA i s helping improve mineral licensing. First, because the MRA i s self-funding from mining sector fees, it should be able to attract sufficient staff who have good qualifications and experience (this was a problem for DoM, which lost some of its best staff to more attractive employment elsewhere but was held back from filling vacancies by 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 by different constituencies (which prevents the Board from being politically influenced). A mining administration will 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) will be supported under the new Mining TA2 operation. 39 Attachment A 23. E1Fiscal 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 E1projects are considered highly undesirable because they create the risk of distorted production decisions whereby an operator will 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 will 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 skills to conduct field audits of E1companies. 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 it i s expectedthat E1tax revenues would increase substantially if the IRC were able to conduct field audits of all companies lodging income tax returns. Additional substantial support to build the IRC capabilities to undertakefield audits will be provided under the Mining TA2. 24. Distributionof E1Royalties 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 it on their own priorities. The situation i s most severe regarding landowner compensation for oil and gas, which i s paidto 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 TA2, support will be provided to the Policy Division of DoMPGM to improve the accountability systemsfor transfer of mining compensation and benefits to landowners. 25. Rights of People Affected by E1Projects. As noted previously, there are no known major human rights abuses or violations associatedwith E1projects inPNG. Some NGOs have raised concerns that local people's views are not sufficiently taken into account by E1operators, 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 E1on women. This i s being addressedthrough mining andEI-genderrelated work as outlined inParagraph 14 above. 26. Table A-3 provides a summary of the main issues that will be addressedby the CAS and the instruments to be used. Attachment A 40 Table A-3: Summaryof PriorityE1Issuesto beAddressed under the CASandInstrumentsto beUsed Issue CASResponse Instrument Sustaining sound macro- Macroeconomic and Public Finance Review economic management of E1 development dialogue to Country Economic Memorandum income support and sustain sound use Public Expenditure Tracking Survey of minine income Mitigating E1Social Risks and Lending to support improved MiningTA 2 support to DoMPGM Improving E1Social Impacts benefits and reduced risks of Policy Division for finalizing E1operations for women, Sustainable Mining Development children and youth Policy and to MRA Coordination Department for Women inMining Mitigating local and provincial Lendingto support improved Mining TA 2 support to MRA and impacts of mine closure planning and implementation DoMPGM for Misima Mine Closure of mine closure activities Review and to DoMPGM for preparing Mine Closure Policy Increasing sustainable local Lending to supportjoint MiningTA 2 support to MRA community development programs between the Mine Coordination Department for Women's Associations and implementing Women inMining local governments and Program Landowners Associations. Improving development and Lending to support provision MiningTA 2 support to MRA local impacts of artisanal and of T A services to ASM miners Artisanal and Small Scale Mining small scale mining Department to provide TA Programs to ASM miners and ASM mining communities Improving transparency of Macroeconomic and Public Finance Review collection and use of E1funds at development dialogue Country Economic Memorandum national, provincial and district including EITIto support Public Expenditure Tracking Survey levels greater financial accountability of E1revenue flows Strengthening institutional Lendingto support capacity Mining T A 2 support to DoMPGM, structure and capacity of E1 building for E1sector MRA, and to Autonomous sector institutions, to license institutions Bougainville Government and administer the sector including an institutional structure for Bougainville. Improving E1revenue Lending to support IRC to Mining TA 2 support to IRC Resource collection buildE1sector field audit Management Division capacity Improving distribution of Lending to support improved Mining T A 2 support to DoMPGM Royalties and Compensation to accountability for transfer Policy Division to improve benefits Landowners mechanisms policy and mechanisms AttachmentB: Progress Toward Achievingthe MDGs Deterioration Haltandbeginto reverse Havethe spreadof Incidence of TB (per 100,000people) the incidence of malaria pneumonia,malaria, other I 1 andother major diseases major diseasescontrolledby No progress 2015 & either stabilizedor 250 250 250 (2005) reversedby 2020 Deterioration Notes: World Bank. 2004. Papua New Guinea: Poverty Assessment. Washington DC: World Bank. Asian Development Bank.2006. a ADB Country Strategy and Program: Papua New Guinea (2006-2010). Appendix 2. Manila: Asian Development Bank. Government of Papua New Guinea and UnitedNations 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 Directionsfor 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 by 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 of various exogenous shocks on the sustainability of public sector debt and external debt under the baseline scenario. A. Main Assumptions a Real GDPis projectedto grow at about 4 percent in2007-12 as several mining projects come on stream, agricultural productivity improves, and continued gradual progress i s made on structural reform. a Monetary policy will be geared toward maintaining low inflation and achieving exchange rate stability and sound external position. a Fiscal policy remains in line with 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 increasinggovernment spending, but the non-mineral fiscal balance i s expected to be stable. a Papua New Guinea would have access to external concessional finance and continue to follow a prudent debt strategy. a Structural reforms outlined under the authorities' Medium-Term Development Strategy, including those on public sector reform, are implemented at a gradual pace. B. Total PublicSector Debt Sustainability 2. The publicsector debt ratio declinedfrom the high of 76-77percent of GDPin2001- 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 of total public debt. Multilateral debt, primarily to Asian Development Bank, Papua New Guinea's largest creditor, and the World Bank, accounts for two-thirds of external public and publicly-guaranteed debt. Japan i s the main bilateral creditor, accounting for more than 80 percent of bilateral debt. Under the authorities' Medium- Term Debt Strategy, foreign-currenc y loans are considered only if they are highly concessionary (grant element of 35 percent or more). 27The following analysis draws on the I M F ' s DSA analysis prepared for the Mission Brief for 2007 Article IV 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 is projected to decline to 29.5 percent by 2012 and 14.6 percent by 2027. The projected improvement of the ratio stems mainly from the expectation of a prudent fiscal policy continuing into the medium term, as well as from favorable automatic debt dynamics. The NPV of public debt would decline from around 40 percent of GDP in 2006 to 30 percent by 2012 and to less than 16 percent by 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 by 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 its historical average would raise the NPV of public debt-to-GDP ratio by more than 20 percentage points of GDP in the long term. A one- time 30 percent devaluation in 2008 would also increase the debt burden inthe medium term (by 6 percentage points of GDP within a year), but the ratio would decline over the longer term. C. ExternalDebt 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 of GDP to 34.0 percent. As a percentage of exports of 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 of total external debt at end-2006 and stood at 13 percent of 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 of public and publicly-guaranteed external debt in percent of GDP, the NPV of debt in percent of exports, the NPV of 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 boundtest (for lower export value growth) is one threshold (NPV of debt-to-GDP) breached (Table C-4). 7. External debt sustainability is most vulnerable to shocks resulting in lower export growth. The decline in export value growth in 2008-09 by one standard deviation below its historical average would raise the NPV of public and publicly-guaranteed external debt-to-GDP ratio by more than 20 percentage points by 2009-10, and the ratio would fall 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 its policies and institutions for the purposes of the IMF-WB LIC DSA framework. Thus, debt sustainability thresholds applicable to Papua New Guinea are: (i) percent for NPV 100 of debt-to-exports, (ii) 30 percent for NPV of debt-to-GDP, and (iii) percent for NPV of debt-to-fiscalrevenue; 200 and for debt service: (i)15 percent of exports of goods and services and (ii) 25 percent of fiscal revenue. 29Private external debt i s also expected to decline over the long term, as large mineral projects that account for a high proportion of debt reach completion. Attachment C 44 in 2008 would raise the NPV of debt to GDP by 7 percentage points in the first years before falling over the longer term. Under any circumstances, Papua New Guinea's external debt distress risk i s moderated by the fact that the country has an excellent external repayment record, having never defaulted inthe 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- longterm inorder 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 of debt distress. The outlook, however, i s sensitive to changes inreal GDP growth and export performance, highlighting the vulnerability of the debt dynamics to potential shocks from lower world market prices of 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 of high commodity prices, and a continuation of conservative borrowing policy. To further help guard against vulnerabilities, Papua New Guinea should ensure that any external borrowing i s obtained on concessional terms, as envisioned in its Medium-Term Debt Strategy. 45 Attachment C 9 9 9 0 0 0 -my - ' 0 " o r - o m 9 " Y r ! 9 7 3 - -d m m 4 2 701 9 9 " m y 0 0 6 0 N r!r! v! m - mPI y 9 90 0 " : :.. . . 0 00 0 9 Attachment C 46 Table C2: Sensitivity Analysis for Key Indicators of Public Debt 2007-2027 Projections 2007 2008 2009 2010 2011 2012 2017 2027 NPV of Debt-to-GDP Ratio Baseline 39 37 36 33 32 30 30 16 A. Alternative scenarios AI. RealGDP growth andprimary balanceare at historical averages 39 39 40 37 35 30 25 6 A2. Primarybalanceis unchangedfrom 2007 39 33 29 21 13 4 -24 -82 A3. Permanentlylower GDP growth 1/ 39 37 37 35 35 34 41 54 B. Bound tests BI. Real GDP growthis at historical average minusone standarddeviationsin 2008-2009 39 41 47 47 48 49 63 71 B2. Primarybalanceis at historical averageminus one standard deviationsin 2008-2009 39 40 43 39 38 36 35 21 B3. Combinationof Bl-B2 usingone half standard deviation shocks 39 41 44 41 39 36 34 18 B4.One-time 30 percentrealdepreciationin 2008 39 46 45 42 41 38 37 22 85. I O percent of GDP increase in other debt-creatingflows in 2008 39 46 46 42 41 39 38 23 NPVofDebt-to-RevenueRatio 21 Baseline 107 108 114 1I4 114 110 107 55 A. Alternative scenarios AI. Real GDP growth andprimary balance are at historical averages 107 1I4 125 125 121 108 86 20 A2. Primary balanceis unchangedfrom 2007 107 98 91 71 47 16 -88 -287 A3. Permanently lower GDP growth 1/ 107 109 117 119 123 122 145 187 B. Bound tests 81. Real GDP growth is at historical average minusone standarddeviationsin2008-2009 107 1I9 145 155 169 175 225 265 82. Primary balanceisat historical average minusone standarddeviationsin2008-2009 107 118 134 134 135 131 127 72 83. Combination of BI-B2using one half standarddeviation shocks 107 119 137 136 136 129 122 61 84. One-time30 percentrealdepreciationin 2008 107 135 143 143 144 140 134 76 B5. I O percent of GDP increase in other debt-creatingflows in 2008 107 135 143 144 146 142 138 80 Debt Service-to-RevenueRatio 21 Baseline 10 11 12 13 12 12 11 4 A. Alternative scenarios Al. Real GDP growth andprimary balance are at historical averages I O 11 13 15 13 11 8 -4 A2. Primary balancei s unchangedfrom 2007 10 11 8 6 3 -1 -9 -38 A3. Permanently lower GDP growth I/ 10 11 12 14 14 14 15 19 B. Bound tests BI. Real GDP growth is at historical average minusone standard deviationsin2008-2009 I O 12 15 19 20 21 22 29 82. Primary balanceis at historical average minusone standarddeviationsin 2008-2009 I O 11 15 18 15 14 12 7 B3. Combinationof 81-B2 using one half standarddeviation shocks I O 11 15 17 15 14 12 5 B4.One-time30 percentreal depreciationin2008 I O 11 13 14 14 14 12 5 B5. I Opercent of GDP increase in other debt-creatingflows in 2008 10 11 22 17 15 14 12 8 Sources: Country authorities; and Fundstaff estimates and projections. I/AssumesthatrealGDPgrowthisatbaselineminusonestandarddeviationdividedbythesquarerootof20(Le.,thelengthoftheprojectionperiod). 21Revenuesare definedinclusive of grants. 47 Attachment C 1 - ? f s 9 T N w " N O ' ? " ! j " " 0 j j m - m pN-m N - 0 0 N m N z -N ? - h w ? j9"O j j 0 0 0 Attachment C 48 Table C4: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27 (Inpercent) Projections 2007 2008 2009 2010 2011 2012 2017 2027 NPVof debt-to-GDP ratio Baseline 21 19 18 17 16 15 I 2 8 A. Alternative Scenarios AI. Key variablesat their historicalaveragesin2008-27 11 21 19 16 13 9 5 -27 -88 A2. Newpublic Sector loansonless favorable t e r n in 2008-27 2/ 21 20 19 17 17 16 14 11 B. Bound Tests B1.RealGDP growthat historicalaverageminusone standarddeviationin 2008-09 21 21 21 19 18 17 13 9 B2.Export value growthat historicalaverageminus one standarddeviationin 2008-09 31 21 28 44 42 40 40 35 16 B3. USdollar GDP deflator at historicalaverage minusone standarddeviationin 2008-09 21 22 24 22 21 20 15 I O B4. Netnon-debtcreatingflows at historicalaverage minus one standarddeviationin 2008-0941 21 21 22 20 19 18 14 9 B5. Combinationof B1-B4usingone-half standarddeviationshocks 21 25 37 35 33 32 27 14 B6.One-time 30 percent nominaldepreciationrelativeto the baselinein 2008 51 21 28 26 24 23 21 16 11 NPVof debt-to-exports ratio Baseline 23 23 21 20 19 19 17 16 A. Alternative Scenarios Al. Key variablesat their historicalaveragesin2007-26 11 23 22 19 16 12 6 -42 -184 A2. Newpublic Sector loans on less favorablet e r n in2007-26 21 23 23 22 21 21 21 21 24 B. BoundTests B1. RealGDP growthat historicalaverageminusone standarddeviationin2008-09 23 23 21 20 19 19 17 16 B2. Exportvalue growthat historicalaverageminus one standarddeviationin 2008-09 31 23 38 72 72 71 72 75 49 B3. US dollar GDP deflator at historicalaverage minusone standarddeviationin 2008-09 23 23 21 20 19 19 17 16 B4. Netnon-debtcreatingflows at historicalaverage minusone standarddeviationin 2008-0941 23 25 25 24 23 23 22 18 B5. Combinationof BI-B4 usingone-half standarddeviationshocks 23 27 39 39 37 38 38 28 B6.One-time30 percent nominaldepreciationrelativeto the baselinein2008 5/ 23 23 21 20 19 19 17 16 NF'V of debt-to-revenue ratio Baseline 66 67 67 66 65 64 48 32 A. Alternative Scenarios AI. Key variablesat their historicalaveragesin2007-26 I/ 66 65 61 50 39 20 -115 -362 A2. Newpublic sector loansonless favorable t e r n in 2007-26 2/ 66 68 68 69 69 69 58 47 B. Bound Tests B1.RealGDP growthat historicalaverage minusone standarddeviationin 2008-09 66 71 76 76 74 73 55 36 82. Exportvalue growthat historicalaverageminus one standarddeviationin 2008-093/ 66 95 160 165 168 169 146 67 83. US dollar GDP deflator at historicalaverage minus one standarddeviationin 2008-09 66 77 88 88 86 84 64 42 B4. Netnon-debtcreatingflows at historicalaverage minusone standarddeviationin 2008-094/ 66 73 79 79 78 77 61 36 B5. Combinationof BI-B4 usingone-half standarddeviationshocks 66 86 135 137 137 137 114 59 B6. One-time30 percent nominaldepreciationrelativeto the baselinein2008 51 66 96 96 95 93 91 69 - 46 49 Attachment C Figure C1: Indicators of Public DebtUnder Alternative Scenarios, 2007-2027 1/ 90 NPV of debt-to-GDP ratio 80 70 60 50 40 1 30 20 - Baseline 10 mostextremestresstest 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 300 hTV of Debt-to-Revenue Ratio 2/ 250 200 t 150 Poor performer threshold 100 50 -Most exneme stress test 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 35 Debt Service-to-Revenue Ratio 2/ 30 Poor uerformer threshold 25 20 Baseline Mostexueme sues test 15 10 5 0 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 is test that yields highestratio in 2017. 21Revenue including grants. Attachment D: Key Development Partner Programs PRIORITIES KEY PARTNERPROGRAMS WBG ROLE Mining and petroleum Support to the Mining Sector (EC, PNGSDP) MiningTA Petroleum T A Women in Mining Initiative Gas Field Development Guarantee JSDF on artisanal and small- scale mining Forestry DForestry Policy and Training (AUS) IFC Sustainable Forestry DEco-forestry (EC) FCPF-relatedactivities to achieve REDDreadiness criteria Environment Support to Disaster Management (AUS, EC, UN) Climate Change Mitigation & Rabaul Vulcanological Twinning Program (AUS) Adaptation Strategy e Support for Environmental Monitoring and Conservation Stocktaking Management (UNDP) 0 GEFPacific Alliance for e Support to WWF on coastal management and Sustainability protection of marine species (EC) Regional engagement on * Protected Area Development, Trans Fly & Sepik disaster risk reduction & (EC) management Public sector reform Economic CooperationProgramme (AUS) Collaboration through PERR Advisory Support Facility PhaseI1(AUS) implementation Public Sector Workforce Development (AUS) Public Sector ReformProgramme (NZAID) Public expenditure and Public Expenditure Review and Rationalization 0 PERR implementation (with financial management (ADB,AUS, WB) AUS, ADB) Financial Management Improvement Program Policy Notes (ADB,AUS, UNDP) Public Finance Review Country Economic Memorandum Public Expenditure Tracking Survey Decentralization and Provincial Performance Improvement Initiative Local governance and community support @US) community participationpilot Provincial Planning and Management (UNDP) under SADP 0 Bougainville Governance and Implementation Provincial Reconstruction and (AUS, NZAID) Development Capacity Building in DistrictProvincial Government Review of local service delivery (EC) models Local Governance and RuralLivelihoods (tentative; District Service Delivery and NZAID, WB) Local Governance 0 Community Development Scheme (AUS) Community outreach (esp. Civil Society Sector Support (NZAID) women and youth) Support to Civil Society - NSAs (EC) Possible work with NZAIDon 0 Grassroots Projects (Japan) local governance and rural Integrated Community Development (Japan) livelihoods 0 Dispatching Volunteers (Japan) Statistical capacity Support for Census and Statistical Capacity National Household Poverty building Strengthening (AUS) Survey Economic and Social Statistics (ADB) MTDS and MDGs inNational Planning and Monitoring (UNDP) 0 Macroeconomic Statistics (IMF) 50 51 Attachment D KEY PARTNERPROGRAMS WBG ROLE BLaw and Justice Sector Program (AUS) Possible participation in multi- DJustice Advisory Group (AUS) donor programmatic support to the Bougainville Community Policing (NZAID) law andjustice sector I D BReducing Gender-Based Violence (UNFPA) Other governance BElectoral Support (AUS) Strengthening Institutions of BElection 2007 Support (EC) Oversight and Accountability BSupport to Parliamentary Accounts Committee @US) L Support to Parliament (UNDP) Support to National Research Institute (AUS) Media Development (AUS) Protection and Advocacy of HumanRights ( W C R ) Conflict Prevention and NationBuilding (UNDP) Women inLeadership (UNFPA) Education Education Capacity Building (AUS) 0 TA to support participation in Basic Education Development Project (AUS) Fast Track Initiative Education Sector Technical Support (NZAID) 0 Basic Education operation Development Scholarships (NZAID) (supporting sector policies and Support to Universal Primary Education (UNICEF) strategies) 0National Enrollment Rate Survey (UNDP) Possible participation in multi- Improving Teacher Quality (UNICEF) donor programmatic support to Support to Gender Equity inEducation Policy basic education Implementation (UNICEF) 0ETHRDP-Basic Education and Literacy (EC) Teacher Training and Capacity Building (EC) RuralPrimary Education Facility Improvement (EC) 0Enhancing Quality of Teaching through T V program (Japan) 0Dispatching Volunteers (Japan) Health Sector Support (ADB) Participation in multi-donor Community Health Projects (NZAID) programmatic support to the health 0Health Service Improvement Program- sector Programmatic Support to the Health Sector (AusAID,NZAID,WHO, UNICEF, UNFPA,ADB, WB) Bougainville Healthy Communities Project (NZAID) Health TA (WHO, UNICEF) Rural Water Supply and Sanitation (EC) NGO Support for Health and Education, selected schools (EC) Provision of Cold Chain Equipment (Japan) Dispatching Volunteers (Japan) HIV/AIDS Support Program (AUS) HIV/AIDS PopulationBio- ADB Pilot HIV/AIDS Care Centers (ADB) behavioral survey Prevention of HIV inRural DevelopmentEnclaves (ADB) Capacity Building for National AIDS Council (WHO, UNAIDS) Support for HIV/AIDS Treatment (WHO, UNAIDS) NGOSupport to Sexual Health (EC) Attachment D 52 ~ ~~ ~~ PRIORITIES KEY PARTNERPROGRAMS WBG ROLE Protecting the Support for Child Protection (AUS, UNICEF) D National Youth Integration vulnerable e NGO Support for Disabled Persons, 12 provinces Strategy (EC) Youth Integration Mainstreamedsupport for women andyouth Transport 0 Transport Sector Support Program (AUS) RMRF' (ongoing, with 0 Key Roads for Growth (AUS) supplemental funding) Bridge Restoration Project (AUS) RMRF'II 0 Highlands RuralFeeder Roads (ADB) e Support for road 0 Community Water Transport (ADB) rehabilitatiodrnaintenance under 0 Highlands Highway Upgrading (ADB) SADP,Provincial Reconstruction & Maritime Navigation Aids (ADB) Development 0 Lae Port Upgrading (ADB) National Infrastructure Study 0 Bridge Rehabilitation Projects (Japan) (roads, energy, telecoms) WB/IFC: AviatiodAirports Development Energy Support for Renewable Energy (UNDP) Teachers' Solar LightingProject Regulatory Framework Study (ADB, WB) Regulatory Framework Study (with ADB) Regional Sustainable Energy Finance Project RuralElectrification National Infrastructure Study (roads, energy, telecoms) Telecommunications Rural Telecommunications National InfrastructureStudy (roads, energy, telecoms) IFC investments intelecoms Agriculture, fisheries, Agriculture Research and Development Support Smallholder Agriculture and rural livelihoods Facility (AUS, NZ) DevelopmentProject Agriculture Research Support (EC) Sources of Rural Growth/Rural Australian Centre for InternationalAgricultural Livelihoods Strategy (possibly with Research Trust Fund(AUS) EC) Coastal Fisheries (ADB) 0 Rural DevelopmentProgram Smallholder Support Services (ADB, NZAID) (possibly with EC) Nucleus Agro-Enterprises (ADB) 0 Poverty Assessment AgriculturelRD Sector Study (ADB) Vudal Agricultural Institutional Strengthening Project (NZAID) FreshProduce Development Agency Institutional Strengthening (NZAID) National Agricultural Research and Extension Policy Development (tentative; NZAID) Support for Sustainable Agriculture (UNDP) Local Governance and Rural Livelihoods (tentatively NZAID,WB) Rural Coastal Fisheries Development (EC) FishMarketing(EC) Support for Cooperative Marketing (EC) Rural Income Generation Support (EC) Construction of FishMarket & Jetty inWewak; studies being carried out (Japan) Promotion of Smallholder RiceProduction (Japan) 53 Attachment D PRIORITIES KEY PARTNERPROGRAMS WBG ROLE Business enabling Bougainville Microfinance (AUS) IFC: Informal Economy Project environment Microfinance and Employment Project (ADB) PhaseIand I1 BrisKandaRural EnterpriseDevelopment IFC: Doing Business Reform Program (NZAID) (Pacific Regional) Pacific Technical College (AUS) IFC: Financial Infrastructure Employment-Oriented Skills (ADB) 0IFC: PNGMicrofinance Policies for Private Sector Development (ADB) 0IFC: Tourism Development 0Trade-related Support (EC) IFC: Public-Private Partnerships inInfrastructure Attachment E: Aid Effectiveness inPapuaNew Guinea 1, In an effort to improve the effectiveness of aid in Papua New Guinea, GoPNG and its development partners have drafted ajoint statement committing to localize the ParisDeclaration. The "Joint Commitment of 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 of these elements of the draft statement. 2. Ownership. Papua New Guinea would define operational development policies by leading the development and implementation of the MTDS through broad consultation and integration of development aid into mainstream planning; strengthening its leadership role in coordinating aid at all levels; and inviting non-governmental and faith-based organizations to participate in these efforts. Indicators of increased ownership would include a new MTDS, a mid-tern review of the current MTDS, increased budget allocations to MTDS priorities, GoPNG's adoption of an aid coordination strategy, and rollout of Sector Investment Plans. 3. AZignment. Development partners would align their assistance and dialogue to the MTDS 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 of 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; publishingtimely, 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 of parallel structures for project management. Indicators of increased alignment would include the share of each donor's aid expenditures that are aligned to MTDS priorities, amount of capacity building assistance, fewer separate Project Management Units, and stronger procurement andpublic financial management systems. 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 of core diagnostic reviews; development of common arrangements for planning, design, monitoring and evaluation, and reporting to Government on donor activities using the MTDS Performance Management Framework and whole-of-government assessment framework (when developed); and decentralization/delegation of 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 of comparative advantage by aligning support and agreeing, where appropriate, on which donor would take the lead in a given area. Indicators of harmonization and simplification would include the amount of aid provided through 54 55 Attachment E programmatic approaches; the on-time submission of donor budget and expenditure estimates to GoPNG; the production of fewer, better, core diagnostic and country analytical reviews; agreemenuuse of common project cycle management tools; and the share of each donor's resources managed at the country level. 5 . Managingfor Results. Government and development partners would jointly use results- oriented performance assessment frameworks to maximize effectiveness and manage implementation of 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 assessmentframeworks. The indicator of improvedresults management would be the development and use of an agreed results framework to assess performance of the MTDS and sector programs, and the use of this information in decision making. 6. Mutual Accountability. Each year, Government and development partners wouldjointly 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 of technical assistance; jointly select and undertake missions; enhance the predictability of future aid through joint decision making processes and timely provision of reliable information on indicative aid commitments over a multi-year timeframe. Indicators of mutual accountability would include periodic mutual assessment of progress in implementing aid effectiveness principles, and the share of aid disbursed according to agreed schedules in annual or multi-year frameworks. Attachment F:The Bank's Recent ExperienceUnder 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 of political instability, economic decline, and uncertainty in the backdrop of donor assistance prompted the Bank to issue an Interim Strategy Note (ISN) in2005. 2. The Bank had launched preparation of a new full CAS in 2002, conducting consultations with the Government of Papua New Guinea (GoPNG) and a broad range of stakeholders on development priorities and challenges. However, chronic political instability made it 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, with per capita income declining from 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). It 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 of this document, as well as the strategy's consistency with financial realities and the effective prioritization of public investments. 3. During this time, the Bank's relationship with 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 of forest concessions. The loan, which comprised a US$ 17.36 million IBRD loan and two GEF grants of SDR 13.31 million each, was eventually cancelled in June 2005 at the Government's request, with only US$ 2.6 million disbursed out US$ 40 million.30 These difficulties affected the implementation of some, but not all, of the Bank's other ongoing programs inPNG. 4. Based on these factors, and on the advice of the Bank's LICUS unit, I S N preparation began in 2003. B. Objectives and AssistanceProgram 5. The ISN was prepared in lieu of a CAS to guide the Bank's involvement in PNG for a period o f 18 months from March2005 to September 2006, and to enable the Bank to evaluate its longer-term comparative advantage in the country. Its two main objectives were to: (a) promote developmentdialogue and stem the decline in social indicators; and (b) build thefoundations for improved governanceand sustained recovery. 30 Around this time, the Asian DevelopmentBank deferred the releaseof the secondtranche of a public sector reform loanbecauseof governance-related concerns inthe application of civil service procedures, especially in the fisheries sector. 56 57 Attachment F 6. Over the eighteen-month period the Bank was to focus its efforts on the non-lending assistanceprogram (summarized inTable F-1) as follows: (A) Promote development dialogue and stemthe decline insocial indicators; (1) Assist the Government and civil society in reaching a consensus on appropriate development priorities andpolicies by: (a) Facilitating dialogue and debate on development themes, including through retreatdworkshops with Government, consultations with private sector, academia, and civil society; and the Global Development LearningNetwork (GDLN)center inthe country office; and (b) 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. (2) Mitigate the social effects of 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) Buildthe foundationsfor improved governance andsustained recovery Assess the viability o f sub-national and community-level development support through: (a) Analysis o f alternative modes of assistance, including through non- governmental stakeholders, andpolitical economy implications; (b) Updatedpoverty assessmentby undertaking a household survey; and (c) Capacity buildingfor 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 of 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 of IFC and FIAS). Attachment F 58 C. Assessment ofISN's Achievements 7. The program under the I S N had strategic relevance. A number of initiatives (including community outreach, dissemination of analytical work, policy dialogue, etc.) were successful and contributed to the implementation of Government programs. Overall, the ISNsucceeded in promoting development dialogue and building foundations for improved governance and sustained recovery. However, there were a few areas where achievements fell below expectations. What Worked Well 8. The highlightsof what worked well are summarized below. (a) FacilitatingDialogueand DebateonKey DevelopmentThemes 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 miningindustry 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 InformationCenter, which Box F-1: Voices for Change GivingWomen a Say inMiningCommunityDevelopment - "You can't eat the stones when the mine is gone," said Scholla Warai Kakas at a Papua New Guinea's Women in Mining Conference, held July 11-14, 2005. Ms. Warai was one of 140 women from mining areas across the country who gathered in Madang to voice their concerns about the impact of 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. In2003, the first Women inMining 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 of homes and gardens, pollution o f water sources, alcoholism, violence, and the spread of HIVIAIDS. They also identified a variety of positive effects of 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 of 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 of a five-year action plan to support economic and social development inmining communities. By giving women a stronger voice in expressing their needs and concerns, the Women inMining initiative has empowered women to take action in developing their communities and planning for the future. There is a strong sense that women will be the drivers of sustainable development inPNG, based on research showing that women are more likely than men to use financial resources for the education and health of 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 inPNG. 59 Attachment F has attracted a good number of partners from the donor community and private and public sectors, provides access to useful resources on the activities of the World Bank Group and development in general. The proposedCAS for 2008-2011will support and expand the current program of innovative and successful community outreach activities. The follow up work on Women in Mining, for example, will include a stronger focus on youth. Youth and gender issues will be mainstreamed inthe 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 of interest (such as supportingthe new MTDS as it came on line); introducing new products such as the Development Marketplace, which focused on youth issues (a major area of concern to the Government); improved consultations; avoiding surprises; and treating Government counterparts with respect. (b) Completion and Disseminationof Analytical Work on Key Development Themes 11. The dissemination of a number of 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 of the Public Expenditure Review and Rationalization (PERR), ledby the Bank and carried out jointly with AusAID and ADB, takes the form of a continuing analysis and dialogue that is fully owned by 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 inthe ISN 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 of budget information to the public. PERR missions have visited PNGtwice a year, and, at the request of the Government, three times inFY07. 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 of school administration and finance, educational facilities, and student and teacher attendance in hopes of 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 of improved transparency for more effective monitoring will continue to be an area of focus under the CAS for 2008-2011. 13. A Country Procurement Assessment Report (CPAR) was completed during the I S N period in 2006. A number of its recommendations have been implemented. Procurement processes have improved considerably on paper, but improvements in practice will 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 of inexpediency (waivers of 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 of standardbiddingdocuments that are consistent with the amended legislation and accompanied by clear tender evaluation processes aimed at achieving efficient use of public funds. It would be useful to design the standard biddingdocuments so that they can be modified easily to apply to donor-financed contracts. Sustained attention will still need to be paid to enforce standards of procurement and contract execution at both national and sub-national levels. 14. A Human Development Sector Review, conducted jointly with 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 of the country i s collapsing despite significant levels of 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 of the analytical work and subsequent dialogue, and forms part of the proposed CAS program for 2008-201 1. 16. Rural Telecommunications Options Study. In the process of the ongoing dialogue with the Government on telecommunications policy, it 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 2008-2011. 17. A GDLN Youth Outreach study has been completed and the report is 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 will inform the development of a National Youth Integration strategy and operation under the proposed CAS for 2008-2011. 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 of development programs within the country's sociopolitical context. The disjunctions between local perceptions of legitimacy and authority, and largely imported national systems, profoundly affect politics, governance, and distribution of benefits. In the transfer of local socio-cultural values to the national political arena, the expectation that political leaders ("big men") will distribute benefits to their local group often comes at the expense of the broader electorate. Lessons learned from sociopolitical analyses will be integrated inprogram 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 by limiting the focus and size of 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 of decentralization policy and implementation, the range of institutions that are active at the community level in PNG, and the state of 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 of the proposed CAS for 2008- 2011. This work led to the adoption in the proposed CAS of 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 will be on lending and analytical activities focused on the sub-national level, CDD 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 rich history of community-level development, supported by 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 of 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 of areas. It 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 of those projects and the results so far are encouraging. A follow-on DM i s plannedfor FY08. (d) Selected Priority Investmentsand PortfolioSize andPerformance 23. The indicative IDA allocation for PNG during the ISN 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 1million) 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 its own resources following sour relations with the Bank. Attachment F 62 24. Following country relationship challenges andrecalibration 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 droppedfrom US$ 116.7 million 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. Portfolio performance improved significantly during the I S N period and after. As Government revenuesimproved, 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. 26. The current portfolio is small, but effective. 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 still has a slow disbursementflag, However, in spite of the improvements, the portfolio still has country record flag over which individual projects have no control. One project, the TSLP, has been approved since the ISN 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 expectedto grow gradually. What WorkedLess Well 27. While most aspects of the ISN exceeded expectations, there were a few areas where planned programs were not fully implemented. Plans to conduct an updatedpoverty analysis on the basis of a new household survey and Demographic and Health Survey were not achieved due to a number of factors. It 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, it 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, is now more than a decade old and inurgent needof being updatedthrough a new nationwide survey. This issue will be taken up inthe context of the new CAS. 63 Attachment F 28. Capacity buildingfor community-led development and local governance started on a small scale, for example through the Women in Mininginitiative, but much more remains to be done in this area. This i s an important focus of 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 by the Bank and IFC, and diagnostic work by FIAS, have identified several critical bottlenecks to private investment that need to be addressed, including lack of access to finance for small and medium enterprises, cumbersome entry processes, and lack of access to business services. However, actions to remove the constraints are yet to be taken by 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 proposedjoint Bank-IFC CAS will make livelihood improvements, including a better business environment, one of its principal areas of focus. 30. The ISN's intention to mitigate the social effects of 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 of that report will inform the Bank's support to the health sector and the fight against HIV/AIDS during the proposed CAS. D. Key Lessons Learned 31. A number of lessons were learned under ISN implementation that would inform the Bank's future involvement inthe country. These include: Programs designed on the basis of 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. It takes time to implement governance reforms. As a result, it is important to define realistic goals and time frame for governance and institutional reforms. It 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 of a constructive long-term partnership with the Government and other development partners in pursuit of development objectives i s essential in a country like PNG. Though the Bank has been very active in PNG over the past two decades, the traditional approach of implementing CAS programs with a time horizon of 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 its longer-term goals. When preparing a three- or four-year CAS in such an environment, it should be clear to all Attachment F 64 parties that the CAS is the first in a series of programs over a longer time horizon, allowing the Government and its partners to tackle challenges that can be addressednow, while making a start on those that need a longer-termperspective. It 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 of relevant, timely, and high-quality analytical work places the Bank in a position of readiness to respond promptly when the situation changes. Inthe case of PNG, the Bank's continued presence made it possible for the Bank to respond quickly to the Government's request for additional funding for the RMRPand to restart preparation of the SADP. In order to operate effectively in a country like PNG, where political leadership and priorities can change unpredictably, and sometimes negatively, Bank staff working in the country should possess a combination of technical expertise and diplomatic skills. To some extent, the improving country relations are attributable to this combination of skills on the ground. Improving communication and community-level outreach, including on the Bank's role, in rural areas of the country and dealing directly with social groups (such as youth and women's organizations), i s critical in helping ordinary people appreciate what the Bank's work i s all about. Table F-1: Summary of Non-Lending Services, Papua New Guinea FY02-FY05 As of 3/10/05 (Before ISN Board Date) Products CompletionFY Audience' Objectiveb Recent completions PublicExpenditureReview & Rationalization 2003 G,D,B KG,PD,PS Transport Sector Note 2003 G,D,B KG,PD,PS EnvironmentMonitor 2002 G,D,B,P KG,PD,PS PublicExpenditure for Poverty Reduction 2004 G,D.B,PH KD,PD,PS CountryProcurement Assessment Review 2004 G,D,B,PH KD,PS Energy Sector Issues/Options 2004 G,D,B,PH KG,PS,PD Underway HDSectorReview 2005 G,D,B,PH KG,PD,PS Planned HIV/AIDS Strategy 2005 G,D,B,PH KG,PH,PS GDLNYouth Outreach 2006 G,PD KG,PH,PS Community-LevelStocktaking 2005 G,D,PD,D KG,PH,PS LocalLevel Capacity Building 2006 GAB PS Poverty AnalysislHouseholdSurvey 2007 G,D,PD,D KG,PH,PS Note: For audience: =government, D=donor, B=bank, PD=publicdissemination; For objective:KG=knowledge generation,PD=public debate, PS=problemsolving. 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 sustainableprograms. Recognizing the importance of country ownership and leadership, the Bank Group's engagement will 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. In 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 will 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 will focus on supporting decentralized systems of planning and budgeting-the poor functioning of which is a major constraint to effective service delivery. Ongoing Support for Governance and Anticorruption Efforts inPNG Assisting GoPNG to improve its procurement system. An action program has been agreed under the recently completed Country Procurement Assessment Report, focusing on buildingthe capacity of tender boards and developing standardbiddingdocuments. Supporting better publicfinancial 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 Isupported two pilot tax audits of mining companies, and support for the IRC will continue underthe 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 underthe recently closedMining TA Iand Gas TA. Proposed Governance and Anticorruption Actions under the CAS Pillar I:Promoting;and MaintaininpSoundEconomic andNatural ResourceManagement 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 andCountry Economic Memorandum are envisioned. 31World Bank Group. March2007. StrengtheningWorld BankGroupEngagementon Governanceand Anticorruption.http://go.worldbank.org/32PINXVIJO 65 Attachment G 66 Improving the eflectiveness and transparency of budget preparation, execution, and reporting. The CAS will support efforts to enhance the credibility of budgeting and tendering through the multi-donor PERR process and the implementation of 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; buildthe 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 risks from mining activities (including those to women and youth). The Bank will support the development of internal management and governance systems for the recently-established Minerals Resource Authority, and i s also proposing to support an institutional vulnerabilities assessmentof the miningsector. Capacity building to strengthen oversight of the public sector. Under the proposed Strengthening Institutions of Oversight and Accountability Project, the CAS would help enhance the capacity of 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 of the Central Supply and Tender Board to oversee public procurement. Programmatic support to the law and justice sector i s also under consideration (incollaboration with AusAID). Increasing public availability of information to monitor Government performance. The Bank Group will help GoPNG issue information in a format that can be easily understood by the general reader, and will also help civil society organizations absorb and use this information. This work will 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 of mining andpetroleum revenues. Pillar 11: Promoting and Maintaining Sound Economic andNatural Resource Management Strengthening partnerships between government and civil society, and within and across communities. Within the framework of decentralization reform, the CAS will support analysis intended to better understand the flow and use of 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 andCBOs. Supporting multi-donor programmatic approaches in the sectors. The Bank Group will 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 ~~ MainstreamingGovernance 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 civil society consultation and participation in the design and implementationof 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 of performance; and Promoting more productive interactions between local governments and local civil 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 Papua East Key Development Indlcators New Asia & Low Guinea Pacific income Age distrlbutlon,2006 (2006) Male Female Population,mid-year(millions) 6.0 1,900 2,403 70-74 Surface area (thousandsq. km) 463 , 16,300 29,215 Populationgrowth 60-64 (Oh) 1.8 0.8 1.8 Urbanpopulation(%of total population) 13 42 30 9-54 4044 GNI (Atlas method, US$billions) 4.6 3,539 1,562 30.24 GNI per capita (Atlas method,US$) 760 1,863 650 GNI per capita (PPP, international$) 2,410 6,821 2,698 GDP growth (%) 2.6 9.4 8.0 15 10 5 0 5 10 15 GDP per capita growth (%) 0.7 8.6 6.1 percent (most recent estimate,2000-2006) Poverty headcount ratioat $1 a day (PPP, %) 9 Poverty headcount ratioat $2 a day (PPP, %) 37 Under-5mortallty rate(per 1,000) Life expectancyat birth (years) 56 71 59 Infantmortality(per 1,000live births) 55 26 75 1100, Child malnutrition(% of childrenunder 5) 15 90 ea 70 Adult literacy, male (%of ages 15 and older) 63 95 72 60 Adult literacy, female (% of ages 15and older) 51 87 50 50 Gross primaryenrollment, male rhof age group) 80 115 108 40 Gross primaryenrollment,female (% of age group) 70 113 96 30 20 10 Access to an improvedwater source (%of population) 39 79 75 0 Access to improvedsanitationfacilities (% of population) 51 38 1990 1995 2KC 2W5 0Papua NewGuinea EastAsia & Pacific Net Aid Flows 1980 1990 2000 2006 (US$millions) Net ODA and official aid 326 412 275 266 Growthof GDP and GDP per capita (%) Top3 donors (in2005): Australia 276 262 198 234 NewZealand 2 3 7 10 Netherlands 0 0 1 3 Aid (%of GNI) 13.1 13.3 8.3 5.9 Aid per capita (US$) 100 100 52 45 Long-Term Economic Trends 80 5 w Consumer prices (annual % change) 12.1 7.0 15.6 2.3 GDP implicitdeflator(annual % change) 7.1 4.1 13.1 9.1 -0-GDP -GDP per capita Exchange rate (annual average, local per US$) 0.7 1.o 2.8 3.1 Terms of trade index (2000= 100) 86 100 161 1980-90 1990-2000 200046 (average annual growih %) Population,midyear (millions) 3.2 4.1 5.3 6.0 2.4 2.5 2.1 GDP (US$ millions) 2,546 3,220 3,521 5,589 1.9 3.8 1.9 ("9 of GDP) Agriculture 35.4 30.9 35.8 35.7 1.8 4.5 1.1 Industry 28.7 32.4 41.4 45.2 1.9 5.4 2.7 Manufacturing 10.2 9.6 7.5 6.1 0.1 4.6 2.7 Services 42.8 36.8 22.8 19.1 2.0 -0.6 2.1 Householdfinal consumptionexpenditure 60.9 59.0 44.6 47.0 0.4 3.4 2.8 Generalgov't final consumptionexpenditure 24.1 24.8 16.6 12.1 -0.1 2.5 0.0 Grosscapitalformation 25.2 24.4 21.9 19.8 -0.9 1.9 -0.1 Exports of goodsand services 43.2 40.6 66.2 83.8 3.3 5.1 4.9 importsof goods and services 53.3 48.9 49.2 62.7 -1.3 3.4 5.1 Gross savings 19.0 9.0 37.7 36.7 Note: Figuresin italicsare for years other than those specified. 2006 dataare preliminary. indicatesdata are not available. .. a. Aid data are for 2005. DevelopmentEconomics, DevelopmentData Group (DECDG). 69 Annex A2 70 Papua New Guinea Balance of Payments and Trade 2000 2006 (US$ millions) IGovernanceindicators,2000 and 2006 Total merchandiseexports (fob) 2,215 4,310 Total merchandise imports (ci9 1,491 2,916 Voice andaccountability Net trade in goods and services 339 529 Politicalstability Current account balance 300 297 as a % of GDP 6.5 5.3 Regulatoryquality Workers' remittances and Ruleof law compensationof employees (receipts) 7 13 Controlof corruption Reserves, includinggold 304 1,425 0 25 50 75 1w Central Government Finance 2006 Country'spercentilerank (0-100) 02000 higher values mpiy bener ntmgs ("7 of GDP) Current revenue (including grants) 30.5 36.6 Source: Kaulmann-Kraay-Mastrurri,Wodd Bank Tax revenue 23.6 26.9 Current expenditure 23.5 20.5 Technology and Infrastructure 2000 2005 Overall surpluddeficit -1.1 7.4 Paved roads (%of total) 3.5 Highest marginal tax rate (%) Fixed line and mobile phone Individual 47 47 subscribers (per 1,000people) Corporate 25 25 High technologyexports (%of manufacturedexports) 18.6 39.4 External Debt and Resource Flows Envlronment (US$ millions) Total debt outstanding and disbursed 2,354 1,900 Agricultural land (% of land area) 2 2 Total debt service 414 377 Forestarea (% of land area) Debt relief (HiPC, MDRI) - - Nationallyprotected areas (%of land area) Total debt (% of GDP) 66.8 34.0 Freshwaterresourcesper capita (cu. meters) .. 136,059 Total debt service (% of exports) 16.6 6.2 Freshwaterwithdrawal (% of internal resources) Foreigndirect investment (net inflows) 114 126 CO2 emissions per capita (mt) 0.46 0.44 Portfolio equity (net inflows) 0 0 GDP per unit of energy use Compositionof totalexternaldebt,2006 (2000 PPP $ per kg of oil equivalent) I Energyuse per capita (kg of oil equivalent) IBRD,246 I Private 746 (US$ millions) IBRD Total debt outstandingand disbursed 244 246 Disbursements 43 16 Principal repayments 29 21 Interestpayments 15 9 Biialerhl,352 US$ millions IDA Total debt outstanding and disbursed 92 76 Disbursements 0 0 Private Sector Development 2000 2006 Total debt service 3 3 Time requiredto start a business (days) 56 IFC (fiscal year) Cost to start a business (% of GNI per capita) 28.2 Total disbursed and outstandingportfolio 0 0 Time requiredto registerproperty (days) --- 72 of which iFC own account 0 0 Disbursementsfor IFC own account 0 0 Ranked as a major constraintto business Portfoliosales, prepaymentsand (%of managerssurveyedwho agreed) repaymentsfor IFC own account 0 0 n.a. n.a. MlGA Stock market capitalizationph of GDP) Gross exposure 47 0 49.3 98.8 New guarantees 0 0 Bank capital to asset ratio (%) 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. 10/30/07 Development Economics,Development Data Group (DECDG) 71 Annex A2 Millennium Development Goals PaDua New Guinea Withselected targetsto achievebetween 1990and 2015 (estimateclosest to dateshown, +/- 2years) Goal 1:halvethe rate8for $1 a day poverty and malnutrition 1990 1995 2000 2005 Povertyheadcount ratioat $1 a day (PPP,% of population) Povertyheadcount ratioat nationalpovertyline (% of population) 37.5 Shareof incomeor consumptionto the poorest qunitile (%) 4.5 Prevalenceof malnutrition(%of children under 5) Goal 2: ensure that children are able to complete primary schooling Primatyschoolenrollment(net,%) . . Primajcompietionrate (e/. of relevantage group) 51 52 56 54 Secondaryschool enrollment(gross, %) 12 23 26 Youth literacyrate (% of peopleages 15-24) Goal 3: eliminategender disparity Ineducation and empower women Ratioof girls to boys inprimaryand secondary education(%) Women employed Inthe nonagriculturalsector (% of nonagriculturalemployment) Proportionof seats heldbywomen Innationalparliament(%) Goal 4: reduce under-5mortallty bytwo-thlrds Under-5mortalityrate (per 1,000) 94 87 80 74 Infantmortalityrate (per 1,OW live births) 69 64 60 55 Measlesimmunization(proportionof one-year olds immunized,%) 67 42 62 60 Goal 5: reduce maternal mortality bythree-fourths Maternalmortalityratio(modeledestimate,per 100,000livebirths) 300 Birthsattendedbyskilled healthstaff (% of total) 53 41 Goal 6: halt and beginto rewrsethe spread of HIWAIDSand other major diseases Prevalenceof HIV (%of populationages 15-49) 1.8 Contraceptiveprevalence(%of women ages 15-49) Incidenceof tuberculosis(per 1W,OOO people) Tuberculosiscases detectedunder DOTS(%) Goal 7: halvethe proportion of people wlthout sustalnable access to basic needs Access to an improvedwater source p/. of population) 39 39 Access to improvedsanitationfacilities (% of population) Forestarea (% of total land area) Nationallyprotectedareas (%of total land area) C02 emissions (metrictons per capita) 0.6 0.5 0.5 0.4 GDP per unitof energy use (constant2000 PPP $ per kg of oil equivalent) Goal 8: develop a global partnershipfor development Fixedline and mobilephonesubscribers(per 1,000 people) Internetusers(per 1,000people) 0 0 8 23 Personalcomputers(per 1,OW people) Youth unemployment (%of total labor force ages 15-24) Education Indicators(%) Measleslmmunlzatlon(?hof 1-year olds) I ICTIndicators(per 1,000 people) 251 I1w7 I7 2wo 2w2 2w5 2wo 2wo 2w2 2w5 +Primary 1990 1985 2w5 net enrollmentratio (..) +-Ratio of girls to boys in primary& secondaryeducation(..) 0PapuaNew Guinea EastAsia & Pacific 0Fixed mobilesubscnbers( ) + Rd lntemet users Note: Figuresin italicsare for years other than those specified...indicatesdataare not available. 10/30/07 DevelopmentEconomics, DevelopmentDataGroup (DECDG). ANNEX B Annex B2: PapuaNew Guinea Selected Indicators* of BankPortfolio Performance and Management As of Date 1QI3Ql2QQ7 Indicator 2005 2006 2007 2008 PortfolioAssessment Number of Projects Under Implementation a 4 3 2 2 Average Implementation Period (years) 4.7 5.6 6.3 6.6 Percent of Problem Projects by Number a,c 25.0 33.3 0.0 0.0 Percent of Problem Projects by Amount 48.6 55.4 0.0 0.0 Percent of Projects at Risk by Number 50.0 33.3 50.0 50.0 Percent of Projects at Risk by Amount 79.3 55.4 75.4 75.4 Disbursement Ratio (%) 11.4 44.0 72.9 3.0 PortfolioManagement CPPR during the year (yes/no) N N N N Supervision Resources (total US$) 412 342 284 210 Average Supervision (US$/project) - 75 MemorandumItem Since FY 80 Last Five FYs Proj Eva1by OED by Number 34 3 Proj Eva1by OED by Amt (US$ millions) 682.6 18.9 % of OED Projects Rated U or HU by Number 48.5 0.0 % of OED Projects Rated U or HU byAmt 43.2 0.0 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. 72 73 Annex B3 Annex B3: IBRDDDA ProgramSummaryPapua New Guinea As of November20,2007 Proposed IBRDhDA Base-CaseLending Program a/ Fiscalyear ProjID us$(M) StrategicRewards Ly Implementation (H/WL) Risks (WM/L) 2008 Mining Sector lnst StrengtheningTA 2 11.o M M Smallholder Agriculture Development 27.5 M M Rural Electrification 6.5 M M Provincial Reconstruction and Devt.(Standby) TBD M M Overall Results 45.0 2009 RuralTelecommunications TBD ProgrammaticSupport to the Health Sector TBD ProgrammaticSupport to Basic Education (FTI) TBD ConservationInitiativedStocktaking(GEF) TBD REDD Readiness TBD RuralGrowth DiagnostidAgric. Competitiveness TBD StrengtheningInstitutionsof Oversight and Accountability TBD PetroleumTA (Standby) TBD Gas Field Devt.-Gurantee (Standby) TBD Overall Results 0.0 a/ This table presentsthe proposed programfor the next three fiscal years. bl For each project,indicatewhether the strategicrewardsand implementationrisks are expectedto be High (H), Moderate(M). or Low (L). Annex B3 74 Annex B3: PapuaNew Guinea:IFC InvestmentOperationsProgram 2005 2006 2007 2008* Commitments(US$m) Gross 1.2 0 0 30 Net** 1.2 0 0 30 Net Commitmentsbv Sector (%) financial services 100 100 100 4 telecommmunications 0 0 0 96 Net Commitmentsbv InvestmentInstrument(%) 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 PapuaNew Guinea - As Of Date08/28/2007 Product CompletionN Cost (US$OOO) Audiencea Objective Recentcompletions HumanDevelopmentStrategy 2006 585.2 G, B, D, PD PS, K Country ProcurementAssessment Report 2006 162.6 G, B, D, PD PS, K Rural EnergyAccess 2006 54.8 G, B, D, PD PS, K Telecommunication Sector Review 2007 G, B, D, PD PS, K Community DrivenDevelopmentStrategy 2007 147.3 G, B, D, PD PS, K Underway RuralTelecommunications 2008 G, B, D, PD PSI K PopulationBio-Behavioral Survey 2008 G, B, D, PD PS, K Basic EducationReview 2008 G, B, D, PD PS, K Carbon FinancingAssist (CF) 2008 G, B, D, PD PS, K PERR FOIIOW-UP 2008 G, B, D, PD PS, K Emomic Report 2008 G, B, D, PD PSI K Governance InternalStrategy Note 2008 G, B, D, PD PSI K Public FinanceReview 2008 G, B, D, PD PS, K Policy Notes 2008 G, 8, D, PD PS, K ClimateChange Strategy 2008 G, B, D, PD PS, K National Infrastructure 2008 G, B, D, PD PS, K Community BasedDevelopment 2008 G, B, D, PD PS, K Justicefor the Poor 2008 G, B, D, PD PS, K a. Government,donor, Bank, public dissemination. b. Knowledgegeneration,publicdebate, problem-solving. Annex B5 76 Annex B5: Papua New Guinea Social Indicators - Latestsingle year Same regiodicome group East Asia & Low- 1980-85 1990-95 1999-2006 Pacific income POPULATION Totalpopulation, mid-year (millions) 3.7 4.7 6.0 1,885.5 2,352.4 Growthrate(% annualaveragefor period) 2.4 2.6 1.8 0.9 1.9 Urbanpopulation(% of population) 13.1 13.2 13.4 41.5 30.0 Totalfertility rate(birthsper woman) 5.3 4.8 3.8 2.0 3.6 POVERTY (% ofpopulation) Nationalheadcount index Urbanheadcount index Ruralheadcountindex INCOME GNIper capita(US$) 680 1,060 760 1,630 585 Consumerpriceindex(2000=100) 31 57 149 130 129 Foodpriceindex (2000=100) 32 55 100 INCOMWCONSUMPTIONDISTRIBUTION Giniindex Lowestquintile(% of incomeor consumption) Highestquintile (% of incomeor consumption) SOCIAL INDICATORS Publicexpenditure Health(% of GDP) 3.0 1.7 1.1 Education(% of GDP) 2.7 3.1 Net primaryschool enrollmentrate (% of age group) Total 93 78 Male 94 81 Female 93 75 Access to animprovedwater source (% of population) Total 39 39 79 75 Urban 88 88 92 88 Rural 32 32 70 70 Immunizationrate (% of children ages 12-23 months) Measles 33 42 60 83 65 DPT 40 62 61 84 66 Childmalnutrition(% under5 years) 30 15 43 Life expectancyat birth (years) Total 51 53 56 71 59 Male 50 53 56 69 58 Female 52 54 57 73 60 Mortality Infant(per 1,000 live births) 74 64 55 26 75 Under 5 (per 1,000) 102 87 74 33 114 Adult (15-59) Male (per 1,000 population) 480 425 388 162 290 Female(per 1,000 population) 418 386 349 105 237 Maternal(modeled,per 100,000 live births) 300 117 684 Birthsattendedby skilledhealthstaff (%) 41 87 41 Note: 0 or 0.0 meanszero or less thanhalf the unit shown.Netenrollment rate:breakinseries between 1997and 1998due to changefrom ISCED76to ISCED97.Immunization:refers to childrenages 12-23 months who receivedvaccinationsbeforeone year of age or at any time before the survey. World DevelopmentIndicatorsdatabase,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 Nationalacconnts(as % of GDP) Gross domestic product' 100 100 100 100 100 100 100 100 100 100 100 Agriculture 36 40 40 38 39 36 36 36 36 36 36 Industryandconstruction 41 37 37 39 41 45 45 44 43 44 44 Mining andquarrying 24 19 19 20 24 29 28 26 25 26 26 Services 23 23 23 23 20 19 19 20 20 20 20 Total Consumption 64 76 65 67 69 59 58 64 67 69 69 Gross domestic fixed investment 21 19 18 18 18 18 18 18 18 18 18 Governmentinvestment 10 10 9 10 11 9 9 11 12 12 12 Privateinvestment 11 9 9 8 7 9 9 7 6 6 6 Exports (GNFS)b 65 61 69 72 73 84 9169 7288 89 84 83 Imports(GNFS) 52 58 54 59 62 63 75 73 72 Gross domestic savings 36 24 35 33 31 41 42 36 33 31 31 Gross nationalsavings' 33 23 30 28 32 37 37 32 29 27 27 Memorandum items Gross domesticproduct 3,081 3,000 3,536 3,927 4,921 5,589 5,873 6,071 6,355 6,770 7,098 (US$million at currentprices) GNIper capita(US$,Atlas method) 560 530 520 590 700 760 860 900 930 960 980 Realannualgrowthrates (70,calculatedfrom 1998 prices) Gross domestic productat market prices -0.1 -0.2 2.2 2.7 3.4 2.6 5.2 4.0 4.5 4.4 3.6 Realannualper capitagrowthrates('70,calculatedfrom 1998 prices) Gross domestic productat market prices -2.3 -2.3 0.0 0.6 1.3 0.7 3.3 2.1 2.6 2.5 1.8 Balanceof Payments(US$ millinn) EXPOI~S (GNFS)~ 2,164 1,808 2,383 2,759 3,511 4,557 5,181 5,218 5,499 5,564 5,769 MerchandiseFOB 1,878 1,646 2,153 2,554 3,278 4,310 4,903 4,931 5,214 5,282 5,493 Imports(GNFS)~ 1,855 1,809 2,053 2,484 3,369 4,028 4,505 4,814 5,131 5,285 5,457 MerchandiseFOB 1,108 1,074 1,174 1,458 1,979 2,396 2,699 2,857 2,987 3,138 3,294 Resourcebalance 308 -1 330 275 142 529 676 404 368 278 312 Netcurrenttransfers 142 197 235 182 434 352 308 321 322 318 314 Currentaccountbalance 201 -31 159 88 190 297 418 158 109 9 42 Netprivateforeign direct investment 74 19 97 26 68 128 107 111 113 82 89 Long-termloans (net) -218 -154 -151 -213 -175 -137 -107 -96 -131 -99 -98 Official -60 -26 -100 -101 -69 -66 -31 -24 -23 -16 -15 Private -158 -128 -5 1 -113 -107 -70 -76 -71 -107 -83 -83 Other capital(net, incI ermrs &omissions) 9 64 82 305 78 312 -134 -79 48 83 32 Changeinreservesd -66 101 -187 -206 -161 -660 -285 -95 -140 -75 -65 Memorandum items Resourcebalance(% of GDP) 10.0 0.0 9.3 7.0 2.9 9.5 11.5 6.7 5.8 4.1 4.4 Realannualgrowthrates Merchandiseexports(FOB) -5.6 -7.3 14.7 -6.5 10.5 -7.4 13.1 1.5 9.0 -0.5 3.1 Mineral -0.3 -18.4 17.1 -10.2 10.9 -11.7 14.4 3.4 13.7 -0.1 4.1 Non-mineral -16.1 18.7 10.1 -0.3 10.0 -0.6 11.3 -1.3 2.0 -1.2 1.5 Merchandiseimports (CIF) -8.1 -2.4 -0.7 14.6 32.4 14.5 4.9 4.2 4.4 4.7 4.3 Publicfmance (as % of GDPat marketprices)' Total revenues and grants 29.7 27.8 29.1 34.1 34.8 36.8 36.0 33.8 31.8 29.5 28.1 Mineraltax revenues 5.3 3.1 4.0 5.8 7.5 11.7 11.5 9.6 7.8 6.4 5.5 Currentexpenditures 23.2 21.8 21.3 22.4 20.0 20.5 21.9 21.1 19.5 18.4 17.7 Currentaccount surplus(+)or deficit (-) 6.5 5.9 7.8 11.7 14.8 16.3 14.1 12.7 12.2 11.1 10.4 Capitalexpenditure 10.0 10.0 9.0 10.1 11.1 9.0 9.2 11.5 11.9 12.1 12.3 Foreignfinancing 3.0 -0.9 -2.1 -1.8 -1.1 -1.3 -0.5 -0.4 -0.4 -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 32.0 30.6 27.1 30.9 33.2 41.2 48.2 52.2 52.2 52.2 52.2 Growth of broad money (%) 9.8 7.3 -4.4 14.8 29.5 38.9 24.7 15.0 7.3 9.1 7.2 Private sector credit growthI 120.9 77.6 103.2 100.3 114.0 115.8 127.6 104.9 102.0 95.1 101.0 total credit growth (8) Price indices(l994 = 100) Merchandise expon price index 80.0 75.7 86.3 109.5 127.2 180.5 181.6 180.0 174.6 177.8 179.2 Merchandise import price index 85.7 86.4 95.9 104.6 108.4 112.1 119.2 121.0 121.6 122.4 123.6 Merchandise terms of trade index 93.4 87.5 90.0 104.7 117.3 160.9 152.3 148.7 143.5 145.3 145.0 Real exchange rate (US$/LCU; 2000=100)' 85.8 89.9 96.2 97.1 104.1 97.8 Central Bank's Rep0 rate 13.0 15.0 15.5 10.0 9.0 7.5 Consumerprice index (average% change) 9.3 11.8 14.7 2.1 1.7 2.3 3.0 4.8 4.8 4.5 4.5 GDP deflator (% change) 6.9 12.3 5.5 -2.0 16.7 9.1 1.4 2.1 2.7 4.5 3.5 a. GDP at factor cost b. "GNFS" denotes "goodsandnonfactor services." c. Includes net unrequited transfers. d. Includes use of IMFresources. e. Central government. f. "LCU" denotes "local currency units." An increaseinUS%LCUdenotes appreciation 79 Annex B7 Annex B7: Papua New Guinea Key Exposure Indicators - Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total debt outstanding and 2,289 2,304 2,311 2,158 2,029 1,900 1,793 1,698 1,567 1,468 1,370 disbursed(TDO) (US$m)a Net disbursements(US$m)a -93 -161 93 -178 -185 -134 -117 -127 -157 -154 -146 Total debt service (TDS) 522 354 386 351 347 377 336 340 341 349 344 (US$m)' Debt anddebt serviceindicators (%) TDOIXGNFS~ 105.8 127.5 97.0 78.2 57.8 41.7 34.6 32.5 28.5 26.4 23.7 TDOIGDP 74.3 76.8 65.3 55.0 41.2 34.0 30.5 28.0 24.7 21.7 19.3 TDSlXGNFS 24.1 19.6 16.2 12.7 9.9 8.3 6.5 6.5 6.2 6.3 6.0 ConcessionaVTDO 35.1 37.6 38.6 41.6 38.5 41.1 IBRDexposure indicators(%) IBRDDS/publicDS 22.5 22.6 16.5 12.1 14.7 22.2 29.7 30.4 29.4 26.5 23.0 PreferredcreditorDSIpublicDS (%)' 49.0 50.8 43.2 55.5 60.0 66.5 53.8 57.0 59.7 60.1 59.1 IBRDDSlXGNFS 1.8 1.9 1.3 1.1 0.9 0.8 0.7 0.8 0.7 0.7 0.5 IBRD TDO (US$mld 275 272 269 260 249 246 229 205 181 156 136 Of whichpresentvalue of 0 0 0 0 0 0 0 0 0 0 0 guarantees(US$m) Shareof IBRDportfolio(%) 0.23 0.22 0.23 0.23 0.24 0.25 0.23 0.21 0.19 0.16 0.14 IDA TDO (US$m)d 88 87 86 84 78 76 78 93 108 123 138 IFC (US$m) Loans 0 0 0 0 0 0 0 30 30 30 30 Equity andquasi-equity 0 0 0 0 1 1 1 1 1 1 1 MIGA MIGA guarantees(US$m) 0 n 0 0 0 0 0 0 0 0 0 a. Includespublic andpublicly guaranteeddebt, privatenonguaranteed,useof IMFcreditsandnet short-termcapital. b. "XGNFS" denotesexports of goods andnon-factorservices. c. Preferredcreditorsare definedas IBRD, IDA, the regionalmultilateraldevelopment banks, the IMF,and the Bankfor InternationalSettlements. d. Includespresentvalue of guarantees. e. Includesequity andquasi-equitytypes of bothloanandequity instruments. Annex B8 80 n e 81 Annex B8 Annex B8: IFC for PapuaNew Guinea C o r n e dand DisbursedOutstandinginvestmentPortfolio Assof(WJQI#wn (InUSDMillions) comnitted DisbursedOutstanding "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 TotalWolio: 0 1.2 0 0 0 0 0.82 0 0 0 * DenotesGuaranteeandRiskManagementProducts. *QuasiEquityincludesbcthloanandquitytypes. Annex B9 82 83 Annex B9 85 Annex B9 fn b Y g .I 8 Y 0 2 2 e, .i 3 rc $2 Y 0 e a MAPSECTION 142°E 144°E 146°E 148°E 150°E 152°E PAPUA NEW 0° GUINEA 0 100 200 Kilometers SOUTH PACIFIC OCEAN SELECTED CITIES AND TOWNS 0 50 100 150 Miles PROVINCE CAPITALS M A N U S Mussau Island N E W NATIONAL CAPITAL RIVERS Lorengau I R E L A N D 2°S Admiralty Momote MAIN ROADS Islands Kavieng Vanimo PROVINCE BOUNDARIES B i s m a rk A rc hi New Ireland INTERNATIONAL BOUNDARIES p Aitape e la Laefu g o Lumi Wewak SANDAUN Namatanai 156°E Maprik Bismark Sea 4°S Angoram 4°S Sepik Ambunti Awar Rabaul E A S T M A D A N G W E S T C e n t r a l S E P I K B O U G A I N V I L L E WESTERN Maliom Nantamba R a n g N E W B R I TA I N e HIGHLANDS Lemankoa Tabubil ENGA Madang Talasea Ewase Koroba Bismark Ramu Gloucester Wabag North Mt. Wilhelm Saidor Kimbe Hoskins E A S T INDONESIA Tari Mount Hagen Range (4509 m) Solomons 6°S Kiunga Strickland Goroka N E W B R I TA I N 6°S Mendi Kundiawa Kainantu Sialum Arawa New Britain SOUTHERN Nadzab Kandrian CHPurari IMBU EASTERN Aropa HIGHLANDS HIGHLANDS Lae Finschhafen Lake Kikori Buin Murray M O R O B E Bulolo Kikori Solomon SOLOMON W E S T E R N Aramia Wau Morobe Sea ISLANDS 8°S Fly Balimo Kerema 8°S To Merauke Weam G U L F N O R T H E R N Bereina Trobriand Losuja Morehead Popondetta Island Kokoda Woodlard Goodenough Island Sibidiri Daru Gulf of PORT Island Bula Papua MORESBY Owen Kulumadau Wanigela Fergussson NATIONAL Island CAPITAL Stanley Esa'ala PAPUA NEW 10°S Kupiano Range D'Entrecasteaux Normandy Islands GUINEA Coral Sea Abau Island Arafura C E N T R A L Alotau Misima M I L N E Island Sea Samarai B AY Bwagaola This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information Rossel FEBRUAR shown on this map do not imply, on the part of The World Bank Island IBRD Group, any judgment on the legal status of any territory, or any AUSTRALIA endorsement or acceptance of such boundaries. Tagula Island 33463 Y 2005 12°S 12°S 142°E 144°E 146°E 148°E 150°E 152°E 154°E 156°E