FOR OFFICIAL USE ONLY Report No: ICR00005601 IMPLEMENTATION COMPLETION AND RESULTS REPORT IDA-63110 ON A CREDIT IN THE AMOUNT OF SDR 106.8 MILLION (US$ 150 MILLION EQUIVALENT) TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR THE FIRST ECONOMIC AND FISCAL RESELIENCE DEVELOPMENT POLICY OPERATION September 30, 2021 Macroeconomics, Trade And Investment Global Practice East Asia And Pacific Region The World Bank Papua New Guinea Development Policy Operation (P165717) CURRENCY EQUIVALENTS (Exchange Rate Effective September 30, 2021) Currency Unit = Papua New Guinea Kina (PGK) PGK 1 = US$ 0.2850 US$ 1 = SDR 0.7054 FISCAL YEAR January 1 – December 31 Regional Vice President: Manuela V. Ferro Country Director: Stephen N. Ndegwa Regional Director: Hassan Zaman Practice Manager: Lars Christian Moller Task Team Leader(s): Ruslan Piontkivsky; Ilyas Sarsenov; Alief Aulia Rezza ICR Main Contributor: Aristomene Varoudakis The World Bank Papua New Guinea Development Policy Operation (P165717) ABBREVIATIONS AND ACRONYMS AGO Auditor General's Office BPNG Bank of Papua New Guinea CEFI Center for Excellence in Financial Inclusion CIT Corporate income tax CPF Country Partnership Framework DPO Development Policy Operation GST Goods and services tax G2P Government to Person FX Foreign exchange FSDS Financial Sector Development Strategy GESI Gender Equity and Social Inclusion ICR Implementation Completion and Results Report IFMS Integrated Financial Management System IMF International Monetary Fund IRC Internal Revenue Commission ISR Implementation Status and Results Report ITA Income Tax Act LNG Liquefied natural gas LTO Large Taxpayer Office MTFS Medium-Term Fiscal Strategy MTRS Medium-Term Revenue Strategy NFIP National Financial Inclusion Policy NRPB Non-resource primary balance PDO Program Development Objective PEFA Public Expenditure and Finance Accountability PFM Public finance management PGK Papua New Guinea Kina PNG Papua New Guinea REPS Retail Electronic Payment System SIGTAS Standards Integrated Tax Administration System SME Small and medium-sized enterprise TAA Tax Administration Act TADAT Tax Administration Diagnostic Assessment Tool TES Tax expenditure statement TIN Taxpayer Identification Number SWF Sovereign Wealth Fund WBG World Bank Group The World Bank Papua New Guinea Development Policy Operation (P165717) TABLE OF CONTENTS DATA SHEET .........................................................................................................................1 I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES ............................................... 5 II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES.......................................... 8 III. OTHER OUTCOMES AND IMPACTS ............................................................................ 22 IV. BANK PERFORMANCE............................................................................................... 24 V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES .......................................... 25 VI. LESSONS AND NEXT PHASE ....................................................................................... 26 ANNEX 1. RESULTS FRAMEWORK ........................................................................................ 28 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES ..... 31 ANNEX 3. BORROWER COMMENTS ..................................................................................... 33 ANNEX 4. SUPPORTING DOCUMENTS ................................................................................. 34 The World Bank Papua New Guinea Development Policy Operation (P165717) . . DATA SHEET BASIC INFORMATION Product Information Project ID Program Name P165717 Papua New Guinea Development Policy Operation Country Financing Instrument Papua New Guinea Development Policy Lending DPF Options Programmatic Regular Deferred Drawdown Option Catastrophic Deferred Drawdown Option No No Crisis or Post Conflict Sub-National Lending Special Development Policy Lending No No No Organizations Borrower Implementing Agency The Independent State of Papua New Guinea Department of Treasury Program Development Objective (PDO) Program Development Objective (PDO) (i) strengthen fiscal management and revenue performance; and (ii) strengthen key building blocks for public financial management and financial inclusion. PROGRAM FINANCING DATA (USD) FINANCE_TBL Approved Amount Actual Disbursed World Bank Administered Financing Page 1 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) 150,000,000 147,989,556 IDA-63110 Total 150,000,000 147,989,556 KEY DATES Concept Review Decision Review Approval Effectiveness Original Closing Actual Closing 13-Apr-2018 26-Jun-2018 25-Oct-2018 10-Dec-2018 31-Mar-2020 31-Mar-2020 RATINGS SUMMARY Program Performance Overall Outcome Relevance of Prior Actions Achievement of Objectives (Efficacy) Unsatisfactory Satisfactory Unsatisfactory Bank Performance Moderately Satisfactory RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) Moderately 01 17-Feb-2020 Moderately Unsatisfactory 147.99 Unsatisfactory SECTORS AND THEMES Sectors Mitigation Co- Adaptation Co- Major Sector/Sector (%) benefits (%) benefits (%) SECTOR0 TBL Public Administration 67 0.00 0.00 Central Government (Central Agencies) 67 0 0 SECTOR0 TBL Financial Sector 8 0.00 0.00 Capital Markets 8 0 0 SECTOR0 TBL Energy and Extractives 17 17.00 0.00 Oil and Gas 17 100 0 Page 2 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) SECTOR0 TBL Social Protection 8 0.00 0.00 Social Protection 8 0 0 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Economic Policy 33 Fiscal Policy 33 Fiscal sustainability 17 Tax policy 17 Economic Growth and Planning 17 Inclusive Growth 17 Finance 17 Financial Infrastructure and Access 17 Financial inclusion 17 Public Sector Management 67 Public Finance Management 67 Public Expenditure Management 33 Domestic Revenue Administration 33 Human Development and Gender 17 Gender 17 Environment and Natural Resource Management 17 Climate change 17 Mitigation 17 ACCOUNTABILITY AND DECISION MAKING Role At Approval At ICR Regional Vice President: Victoria Kwakwa Manuela V. Ferro Country Director: Michel Kerf Stephen N. Ndegwa Director: John Panzer Hassan Zaman Practice Manager: Ndiame Diop Lars Christian Moller Page 3 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Chandana Kularatne, Virginia Ann Ruslan Piontkivsky, Ilyas Task Team Leader(s): Horscroft Sarsenov . Page 4 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES A. Context at Appraisal Context 1. Before the COVID-19 pandemic, Papua New Guinea’s (PNG) economy had grown sluggishly, reflecting the influence of external factors. In 2014, PNG became an exporter of liquefied natural gas (LNG), which boosted growth in the extractive sector (Table 1). However, low commodity prices and the completion of large investment projects dampened growth in the extractive sector from double-digit to 8.1 percent in 2017. Additionally, a severe drought due to El Niño in 2015-16 pulled down growth in agriculture. As a result, growth in the non-resource sector has generally been sluggish. It turned negative in 2015 before recovering at a moderate pace. Overall GDP growth slowed to 3.5 percent in 2017, from 6.6 percent in 2015, and was expected to strengthen in 2018 and converge to a 3 percent level over the medium term. But a major earthquake of magnitude 7.5 hit the country in 2018, disrupting the output and exports of the oil, gas, and mining industries. Growth in the extractive sector declined by 8.6 percentage points in 2018, triggering a 0.3 percent contraction in overall GDP despite steady growth in the non-resource sector. In addition to dampening growth, external shocks boosted inflation, which increased to 6.7 percent in 2016, from 5.2 percent in 2014, but had receded to 4.6 percent in 2018. 2. Insufficient traction from the non-resource sector, due to policy distortions, also contributed to sluggish growth. But foreign exchange shortages created distortions despite the large current account surplus since LNG exports came on stream. Since the commencement of LNG exports in 2014, the current account has shifted into a large surplus, rising to 23.5 percent of GDP in 2018 from 12.4 percent of GDP in 2014. However, the sharp decline in capital inflows since the completion of the PNG LNG project in 2014; the outflow of export proceeds to service debt obligations of the PNG LNG project; a steep decline in oil prices; and an insufficiently flexible exchange rate, which according to the IMF was overvalued, have all contributed to a shortage of foreign exchange (FX). 1 The shortage of foreign exchange led to import compression and dampened growth by inhibiting investment and production in the non-resource sector. Part of the current account surplus reflected import compression because of the FX shortage. 3. External shocks undermined the fiscal position, but fiscal management supported fiscal sustainability. The combination of commodity price and El Niño shocks led to a sizeable decline in mining and petroleum tax receipts, bringing total revenue down to 15.9 percent of GDP in 2017, from 20.4 percent of GDP in 2014 (Table 1). In response, the government reduced public spending sharply to 18.4 percent of GDP in 2017, from 25.4 percent of GDP in 2014. This was done at the expense of higher budget arrears that were accumulated the government in 2017 and 2018. As a result, the budget deficit declined from 4.6 percent to 2.5 percent of GDP in the same period, while the non-resource primary balance (NRPB) improved from -5.2 percent to -1.3 percent of GDP. However, despite fiscal consolidation, gross public debt rose from 26.9 percent of GDP in 2014 to 35.9 percent in 2017. Fiscal consolidation, while essential to preserving fiscal sustainability, dampened aggregate demand and thus GDP growth. 4. The quality of fiscal consolidation was initially poor. Much of the burden of the adjustment fell until 2017 on capital spending, which was reduced by 75 percent. From 2014 to 2017 the compensation of employees increased by 116 percent while interest payments rose by 63 percent. The significant increase in the public 1 IMF, Article IV consultation with PNG, 2018. Page 5 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) sector wage bill reflected the limited effectiveness of payroll monitoring and control. Interest payments rose because of the increasing level and servicing cost of domestic debt. Moreover, according to the Program Document, because of the generous tax concessions offered to the PNG LNG project, little additional tax revenue could be generated from this source and is not expected to be forthcoming for at least the first ten years of production. 5. Corrective fiscal action was taken in 2017. Disappointing revenue collection and inability to contain spending growth in the first half of 2017 prompted a decisive Budget revision in August 2017. The government introduced a supplementary budget to collect more revenue and reduce expenditures, focusing on minimizing unproductive spending. Thanks to significant compliance efforts undertaken by both the PNG Customs and the Internal Revenue Commission (IRC), revenue collection ended up higher than expected in the Supplementary Budget for 2017. On wage bill control, the Supplementary Budget efforts included: commencement of payroll audit; a freeze on new recruitments; cessation of use of the parallel payroll system, and migration of all government employees onto the centralized government payroll. However, at the same time, as spending controls remained weak, substantial budget arrears appeared. By end-October 2018, the government estimated that budget arrears accounted for PGK 948.1 million (about 1.3 percent of GDP). Table 1: Key Macroeconomic Indicators (2014-2021) 2014 2015 2016 2017 2018 2019 2020 20211 In percent Real GDP growth 13.5 6.6 5.5 3.5 -0.3 5.9 -3.9 1.0 Extractive sector 73.9 47.2 15.3 8.1 -8.6 16.3 -8.5 -0.6 Non-extractive sector 4.1 -4.2 2.3 2.2 2.8 1.8 -1.9 2.4 CPI inflation (period average) 5.2 6.0 6.7 5.4 4.6 3.7 4.9 3.7 In percent of GDP Revenue and grants 20.8 18.3 16.1 15.9 17.7 16.3 14.8 14.0 Total expenditure 25.4 22.4 20.9 18.4 20.3 20.7 23.8 21.2 Overall balance -4.6 -4.1 -4.7 -2.5 -2.6 -4.4 -8.9 -7.2 Non-resource primary balance -5.2 -3.4 -3.4 -1.3 -2.0 -3.4 -7.4 -5.5 Gross public debt 26.9 30.7 34.6 35.9 38.2 40.0 49.2 54.6 Current account balance 12.4 21.0 25.5 23.8 23.5 22.2 23.8 22.2 Source: PNG government, IMF and World Bank staff estimates and projections. Note: 1 projection. 6. The earthquake that struck in February 2018 had a significant impact on PNG's fiscal outlook, which had been expected to improve. Before the earthquake, the government's fiscal corrective actions were anticipated to further reduce the deficit to 1.9 percent of GDP in 2018. Improved domestic resource mobilization was expected to raise the tax-to-GDP ratio, while the NRPB was projected in 2020 to be at -0.9 percent of non- resource GDP. The fiscal deficit increased to 2.6 percent of GDP in 2018, 0.7 percentage points higher than the pre-earthquake projection. The increase in the deficit was mainly attributable to lower dividend payments from the resource sector. Page 6 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) 7. Faced with these challenges, the government strengthened the fiscal policy framework and improved prospects for inclusive growth. After the 2017 elections, the government announced a 100-Day Economic Stimulus Plan, which included measures to enhance the medium-term sustainability of the economy and public finances and support inclusive growth. It also published a Medium-Term Fiscal Strategy (MTFS) for 2018-2022, and a Medium-Term Revenue Strategy (MTRS) for the same period. The MTFS aimed to improve fiscal resilience by adhering to fiscal anchors to mitigate the impact of commodity price volatility on the budget. In addition, the MTRS outlined measures to modernize revenue policy and legislation and strengthen revenue administration, with the aim of reducing compliance costs and increasing tax collections. 8. In June 2018, the government requested a budget support program of up to US$ 300 million to confront PNG's challenging fiscal and economic conditions. The program was initially designed as a programmatic series of two Development Policy Operations (DPOs) of US$ 100 million each, with the possibility of a third operation. The World Bank approved the first DPO, of an amount of US$ 150 million, in October 2018. This amount was increased from the initial US$ 100 million foreseen to help mitigate the fiscal cost of the earthquake. The operation supported four key components of the government's development program, as articulated in the Alotau Accord II, MTFS, MTRS and the Medium-Term Development Plan II for 2016-2017. First, the operation supported government efforts in fiscal management to improve fiscal resilience to resource-linked volatility by establishing the non-resource primary balance as a medium-term fiscal anchor. Second, the operation focused on revenue mobilization to broaden the tax base and improve the fairness and efficiency of revenue administration. Third, the operation looked into public financial management (PFM) reform, with the objective to continue the implementation of the Public Expenditure and Financial Accountability (PEFA) Road Map for 2015-2018, which set the rollout of the Integrated Financial Management System (IFMS) among the highest priorities. Fourth, the operation considered particularly severe constraints on access to finance for women, to support inclusive growth in the non-resource sector of the economy as access to finance is a key constraint to the growth of informal enterprises but also of small and medium-sized enterprises (SMEs) in PNG. Original Program Development Objective(s) (PDO) (as approved) 9. The Program Development Objective of the operation was to: (i) strengthen fiscal management and revenue performance; and (ii) strengthen key building blocks for public financial management and financial inclusion. Original Policy Areas/Pillars Supported by the Program (as approved) 10. The DPO was structured around two pillars, all linked to the government program's priority reform areas: • Pillar 1: Strengthening fiscal management and revenue performance. The DPO supported (i) the adoption of the non-resource primary balance as a fiscal anchor, (ii) measures to improve tax administration and compliance, (iii) the preparation of a tax expenditure statement, and (iv) an increase in diesel excises with climate co-benefits. • Pillar 2: Strengthening key building blocks for public financial management and financial inclusion. The DPO also supported (v) the IFMS institutional reform, and (vi) measures to increase financial inclusion, particularly for women. Page 7 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) B. Significant Changes During Implementation 11. There were no changes in the design of the program during implementation. However, the second DPO in the series was dropped (after the series lapsed), as several of the indicative triggers for this operation were not met, especially in macro-fiscal management (see section on achievement of objectives). II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES Indicative Triggers Prior Actions for DPO1 for DPO2 Results Indicators (Note: DPO2 was dropped) (Note: Original from DPO1 – no revisions as DPO2 was dropped) PILLAR 1: Strengthening fiscal management and revenue performance Prior Action 1: Indicative Trigger 1: Result Indicator 1: In order to establish a medium-term The 2019 Budget is consistent with The non-resource primary fiscal fiscal anchor: (i) the Recipient's the MTFS 2018-2022, which targets a balance as a percentage of non- Parliament has amended its Fiscal zero average annual non-resource resource GDP improves Responsibility Act to require the fiscal primary fiscal balance over the strategy to target a zero average medium term. Baseline (2016): -4.7 percent annual non-resource primary fiscal Target (2020): -0.9 percent balance over the medium term; (ii) the Trigger not met Current status (2020): -9.4 percent Recipient's National Executive Council has approved a Medium Term Fiscal Strategy for 2018-2022 that is consistent with a zero average annual non-resource primary fiscal balance over the medium term; and (iii) the 2018 Budget presented to the Recipient's Parliament is consistent with the MTFS for 2018-2022. Prior Action 2: Indicative Trigger 2: Result Indicator 2: (applies to Prior To improve revenue administration The Recipient has: (i) passed the first Actions 2, 3, and 4) and enhance compliance: (i) the phase of consequential amendments Tax buoyancy (i.e., tax revenue as a Recipient's Parliament has voted its to existing tax legislation, in share of GDP) increases: approval of the Tax Administration preparation for the entry into force Bill; (ii) the Recipient's Parliament has of the Tax Administration Act; Baseline (2016): 14.2 percent (12.9 amended the Income Tax Act to make (ii) completed the first phase of the percent of GDP—revised) Taxpayer Identification Numbers compliance strategy for data Target (2020): 14.6 percent (13.3 mandatory; and (iii) the Recipient's matching between banking data and percent of GDP—revised) Internal Revenue Commission has income tax records to identify Current status (2020): 12 percent of approved the establishment of a new business accounts with and without GDP (down due to the COVID-19 Page 8 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Large Taxpayer Office. Tax Identification Numbers; and crisis; before the crisis, in 2019, it (iii) developed and implemented the was 13 percent of GDP) Standard Operational Procedural Manual for the IRC's new risk-based audit referral tool. Component (i) of the trigger not met; components (ii) and (iii) met Prior Action 3: Indicative Trigger 3: The Recipient, through the The Recipient's Department of Department of Treasury and the Treasury will complete the review of Internal Revenue Commission, has tax incentives and the prepared a tax expenditure statement recommendations of the review will and made it publicly available as part be tabled at the Recipient's National of the 2018 Budget. Executive Council. Trigger not met Prior Action 4: There was no Indicative Trigger The Recipient has increased the excise associated to this Prior Action 4: on diesel in the 2018 Budget, in order _ to raise revenue, reduce the distortion between diesel and petrol taxes, and reduce environmental pollution. PILLAR 2: Strengthening key building blocks for public financial management and financial inclusion Prior Action 5: Indicative Trigger 4: Result Indicator 3: The Recipient's Department of Finance The Recipient has brought bank Accountability and transparency in has implemented the Integrated reconciliations in national the use of public funds is improved Financial Management System in government departments through timely submission of the national government departments, representing at least 85 percent of annual financial statements to the such that it is being used to record all the total expenditure of national Auditor General's Office: expenditures other than trust fund government departments up to expenditures. date. Baseline (2014-2016): statements submitted at least 12 months after Trigger not met the end of each fiscal year Target (2018-2020): statements submitted within three months of the end of each fiscal year. Current status (June 2021): statements for 2019 and 2020 not yet submitted to AGO. Page 9 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Prior Action 6: Indicative Trigger 5: Result Indicator 4: (i) To support increase financial The Bank of Papua New Guinea will Financial inclusion increases, as inclusion, the Recipient's National implement a new National Switch indicated by the percentage of Executive Council has approved the platform, available to all regulated adults with an account at a formal Financial Sector Development Strategy financial institutions – including financial institution: and the National Financial Inclusion microfinance institutions. Policy; and (ii) to increase women's Baseline (June 2016): 36.96 percent financial inclusion, the Recipient, Trigger met Target (June 2020): ≥ 50 percent through the Bank of Papua New Current status (2020 Q2): 63.8 Guinea, has launched the Gender percent Equity and Social Inclusion (GESI) Policy for Microfinance Institutions. Result Indicator 5: The gender gap in new bank account establishment declines: Baseline (2016): 26 percent of the new bank accounts established 2013-2016 were by women Target (2020): ≥ 35 percent of the new bank accounts established 2016-2020 are by women Current status (2019): 32 percent. No publicly available data for 2020 A. Relevance of Prior Actions Rating: Satisfactory 12. Prior actions 1,2,3, and 4, under pillar 1, addressed PNG's two key macroeconomic and development challenges. • First, the country is exposed to volatility linked to resource revenue, which is projected to increase as LNG production further grows in the future. The challenge is to insulate public expenditure —especially social and development spending — from resource revenue volatility to ensure a stable environment conducive to the growth of the non-resource sector of the economy. At the same time, part of the resource revenue needs to be saved in the sovereign wealth fund (SWF) established for that purpose, to ensure a steady flow of benefits over time and intergenerational equity when non-renewable natural resource revenue eventually declines. • Second, tax revenue has been declining over time, from nearly 15 percent of GDP in 2015 to 12 percent of 2019. Therefore, the government lacks the resources needed to finance social programs and infrastructure on a stable basis. Raising the capacity for domestic resource mobilization is thus key for development. 13. Prior action 1 was relevant for meeting the challenge of dampening volatility linked to resource revenue. Adhering to the non-resource fiscal balance as a fiscal anchor insulates fiscal policy from resource revenue Page 10 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) volatility. A generally accepted fiscal rule for resource-dependent economies 2 sets the target for the non- resource fiscal balance equal to the permanent resource revenue over time, calculated based on long-term price projections and extraction capacity. Surplus resource revenue in boom years is saved in the SWF, thus avoiding excessive spending and overheating the economy. Accumulated savings can be used to finance public expenditures in years of low resource revenue so as to avoid expenditure contraction in "bad years". The prior action was more restrictive as the target for the NRPB was set to zero. The target was to be achieved over the medium term by 2021-22 (MTFS, p.5). A zero non-resource balance would help accelerate the accumulation of savings in the SWF. However, the NRPB can be pro-cyclical, especially when non-resource revenue is strongly correlated with resource revenue. It may also provide incentives for off-budget operations and creative accounting. The first risk can be mitigated by an additional expenditure rule, or reforms to strengthen non- resource tax collections, like those supported by the DPO series. The second risk can be mitigated by improved budget transparency, which was supported by the PFM reforms targeted by the DPO. 14. Prior actions 2,3, and 4 were all relevant for meeting the challenge of improving domestic revenue mobilization. They were part of the government's MTRS, which was a key pillar of the MTFS. Prior action 2 supported highly relevant reforms for the improvement of tax collections: The Tax Administration Bill aiming to modernize the IRC; the rollout of the Taxpayer Identification Number (TIN); and the establishment of the Large Taxpayer Office (LTO). The reform of IRC systems, procedures, forms, filing, and payment mechanisms was highly relevant as the simplification of tax administration and reduction of taxpayer compliance costs would reduce the informal economy and boost tax revenue collection. The size of the informal economy in PNG is estimated at around 30 percent of GDP. 3 The introduction of TIN would make it possible for IRC to more effectively fight against tax evasion by using third-party information, especially from banks. The establishment of the LTO was highly relevant as in PNG 20 percent of taxpayers contribute 80 percent of tax revenue. The LTO would improve the efficiency of IRC engagement with large taxpayers, thus improving tax compliance. 15. Prior action 3 was relevant as PNG offers a wide variety of costly tax incentives with questionable economic benefits. These include tax credits for investment in infrastructure, tax holidays, reduced tax rates, exemptions, double deductions, and additional depreciation. The corporate tax base in PNG is narrowed significantly by the extensive use of tax incentives. The tax expenditure statement (TES) was a first step in quantifying the extent of the problem and increasing transparency to initiate a rationalization of tax incentives. 16. Prior action 4, to increase diesel excise taxes to 23 toea from 10 toea, was relevant for domestic revenue mobilization and addressing the negative environmental externalities of diesel consumption. Emissions from diesel combustion have severe environmental impacts, compared to those from petroleum, especially in a low- income country where the vehicle fleet is old, and commercial diesel generators are unlikely to include newer mitigation technologies. Yet, the excise tax on diesel was six times lower per liter than for petrol, providing strong incentives for diesel use. By better aligning diesel price with that of petroleum, the prior action would rebalance the incentives for switching from diesel to petrol use while boosting tax revenue collection. 17. Prior action 5, supporting the implementation of the Integrated Financial Management System in national government departments, was highly relevant for fiscal management. It was part of a comprehensive PFM reform plan based on the 2015 PEFA assessment. The IFMS would support efforts to control public expenditure, especially the wage bill, by identifying ghost workers and automated identification of abnormal operations. The effectiveness of payroll controls was rated D+ in the 2015 PEFA. More generally, a functioning IFMS was 2 See for instance IMF Staff Discussion Note 12/04, “Fiscal Frameworks for Resource Rich Developing Countries”, Washington DC. 3 National Audit of the Informal Economy, Department for Community Development and Religion, 2018 Page 11 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) considered a critical institutional requirement for improving performance along with the 15 of the 22 dimensions of PEFA with a D/D+ rating in the 2015 assessment. It would also involve a comprehensive reporting format, including requirements for all administrative units at the national, regional and local level to adopt unified budget classifications and charts of account. Although the IFMS rollout would not by itself result in those improvements, it would provide a necessary foundation for them. 18. The focus of prior action 6 on improving financial inclusion was relevant for supporting inclusive growth in the non-resource sector of the economy. Access to finance is a key constraint to the growth of informal enterprises but also of small and medium-sized enterprises (SMEs) in PNG. Constraints on access to finance for women are particularly severe. The implementation of the Financial Sector Development Strategy (FSDS) and the National Financial Inclusion Policy (NFIP) was expected to support the extension of banking services in rural economies and facilitate access to finance of micro and small enterprises, particularly amongst women entrepreneurs. The Gender Equity and Social Inclusion (GESI) Policy for Microfinance Institutions, implemented by the Bank of Papua New Guinea (BPNG), was the third policy targeted specifically to promoting women's financial inclusion. 19. The FSDS was relevant for financial inclusion because it supported the innovative use of technology for scaling up access to financial services and financial literacy. The use of technology would help expand access to financial services, especially for payments, to the economy's formal and informal sectors. The NFIP was also relevant as it outlined programs to advance financial inclusion through digital financial services, inclusive insurance, financial literacy, consumer protection, and specific programs tailored to the informal economy and agricultural sector and SMEs. GESI was relevant as it included measures to (i) remove barriers to the employment and promotion of women within microfinance institutions; (ii) design products and services to fit the needs of women customers; and (iii) change the way microfinance institutions engage with women customers. 20. The triggers for DPO2, associated to DPO1 prior actions, were relevant for deepening the reforms in the program's policy areas during 2019. The trigger associated to prior action 1 aimed to ensure continuation of fiscal consolidation based on the NRPB. The trigger could have been, however, formulated in a more precise way concerning the 2019 target for the fiscal consolidation path. The triggers associated with prior actions 2 and 3 focused on the continuation of tax administration reforms and the reform of tax incentives. There was no trigger associated to prior action four as the authorities had committed to raising the diesel tax every two years. With hindsight, as the diesel tax was not further raised in subsequent years (see section B), other revenue enhancing measures could have been used as triggers associated to this prior action. The trigger associated to prior action 5 was relevant to verify that the IFMS was working properly by automating the bank reconciliations, which is a critical financial control for spending discrepancies and external audits. The trigger associated to prior action 6 was relevant because it required all regulated financial institutions, including microfinance institutions, to offer digital financial services — an effective step to promote women's financial inclusion. 21. The DPO was aligned with the WBG overall engagement with PNG, as laid out in the FY2019-23 Country Partnership Framework (CPF) (Report # 128471-PG). The first focus area of the CPF is 'improving macro and fiscal resilience', under which the first objective is strengthening fiscal management, including both macroeconomic management and public finance management. The CPF indicators for this objective are improved NRPB as a share of non-resource GDP, increased non-resource tax revenue as a share of GDP, and improved accountability and transparency in the use of public funds through the timely submission of annual financial statements to the Auditor General's Office (AGO). Both pillars of the DPO were closely aligned with this CPF objective and its outcome indicators, supporting the twin goals of poverty reduction and shared prosperity through improved medium-term fiscal stability, expenditure sustainability and budget execution. The third focus area of the CPF is 'encouraging private sector growth and job creation in the non-resource sectors', under which Page 12 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) the first objective is improving micro and SME competitiveness and access to financial services, and the third objective is deepening economic participation of women and youth. The CPF Objective indicators include improved financial inclusion and increased numbers of women holding bank accounts. Prior action 6 in the second pillar of the DPO was closely aligned with these CPF objectives and outcome indicators, through improving the institutional environment for microfinance providers and women's access to finance. B. Achievement of Objectives (Efficacy) Rating: Unsatisfactory A) Strengthening Fiscal Management and Revenue Performance Prior action 1 22. The targets of the MTFS went gradually off track. The NRPB had already registered a deficit of 2.7 percent of non-resource GDP in 2018 — wider than the budgeted deficit of 1 percent of non-resource GDP (Table 2). The deterioration of the NRPB in 2018 was mainly the result of an increase in uncontrolled recurrent spending, especially in the government wage bill. In 2018, spending on wages reached 6.5 percent of GDP, surpassing the original budget by more than 25 percent. The increase was partly attributable to unbudgeted annual 3 percent salary increases in 2017 and 2018, and partly by the clearing of payment arrears. The 2019 budget, built on the outturn for 2018, targeted a NRPB of 2.7 percent of non-extractive GDP. The target looked unrealistic as the budget was based on a nominal decline in personnel emolument spending, underestimating the adjustments made in the 2018 supplementary budget. Spending across the board, other than capital expenditure and interest payments, was also projected to decline. By mid-year the World Bank team, based on conservative budget estimates, was projecting the NRPB deficit to rise to about 4 percent of non-resource GDP in 2019.4 As the World Bank swiftly reckoned, the widening of the NRPB deficit indicated a deviation from the fiscal consolidation path. 23. The fiscal policy landscape changed significantly in the second half of 2019. After a tumultuous period in PNG’s political life, which led to the resignation of the Prime Minister, and during which several members of the Parliament kept changing sides, a new government coalition was formed in May 2019 under a new Prime Minister. The new government initiated a review of key economic and fiscal parameters by an external due diligence team, conducted in August-September 2019. The outcome was a Supplementary Budget for 2019, approved by Parliament in October 2019. The Supplementary Budget identified substantial revenue shortfalls and revealed budget arrears accumulated by the previous administration. On the revenue side, the due diligence uncovered shortfalls of over PGK 1 billion in 2019, reversing the progress reported in 2018. On the expenditure side, the due diligence found outstanding budget arrears of PGK 120 million to public servants, and of PGK 521 million to other service providers. Public service exit payment arrears were also uncovered of approximately PGK 2 billion. The payment of budget arrears in 2019 and 2020 resulted in wider fiscal deficits and higher debt- to-GDP ratios. In parallel, a new Medium-Term Fiscal Strategy was elaborated, using the findings of the due diligence, which revised key fiscal and debt parameters. A revised trajectory for the NRPB was adopted while cuts in operating expenses were implemented to allocate more resources to capital spending. Other key revisions included an increase to the threshold for the debt-to-GDP ratio, raised to 45 percent from 35 percent, with a clause that every five years the upper limit will fall by five percentage points. 4 The World Bank, PNG Economic Update, July 2019. Page 13 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) 24. The 2019 Medium-Term Fiscal Strategy envisaged a significantly slower fiscal consolidation. The NRPB was projected at -3.9 percent of non-resource GDP in 2022, while the previous MTFS targeted a zero NRPB by 2022. However, the 2020 budget, approved in November 2019, envisaged a more ambitious fiscal consolidation than the MTFS, with the NRPB declining to -1.3 percent of non-resource GDP in 2022. The government introduced revenue-enhancing measures in the 2020 budget to improve the unfavorable fiscal and debt performance, including higher excises on alcohol and cigarettes and higher levies in the telecommunication and banking sectors. However, in 2020 the NRPB was projected, before the pandemic, at -5.9 percent of non-resource GDP, or -4.3 percent after subtracting budget arrears. On both counts the NRPB was largely off the -0.9 target of the results indicator associated with prior action 1. 25. The targets set for the results indicator and the trigger for DPO2, associated to prior action 1, were not achieved. As the momentum of fiscal consolidation stalled in 2019 the trigger for DPO2, which required a 2019 budget consistent with a zero average NRPB over the medium term, as projected by the 2018-22 MTFS, could not be met. The NRPB reached eventually -5.2 percent of non-resource GDP in 2019, against a target of -2.7 percent (Table 2). As a result of the cumulative deviations from fiscal targets the IMF projected gross public debt to increase from 32.5 percent of GDP in 2017 to 42.2 percent of GDP in 2022, while the 2018-22 MTFS projected gross public debt to decrease to 30 percent of GDP in 2022. 5 As the fiscal framework went off track, the second DPO was dropped after the whole series lapsed on October 25, 2020, after 24 months from Board approval of the first DPO. 26. The COVID-19 crisis further changed the trajectory and timing of the government's economic and fiscal objectives, but also the engagement with the World Bank. Pandemic-related restrictions weakened external and domestic demand and hit commodity prices. This led to a sharp economic contraction and a sizable fiscal gap. As a result, the economy contracted by an estimated 3.9 percent in 2020, the NRPB expanded to 9.4 percent of non-resource GDP, and the debt-to-GDP ratio reached 49.2 percent (Tables 1 and 2). To mitigate the crisis, the government rolled out an immediate health response and economic support package, estimated at US$525 million (2.2 percent of GDP) in 2020, while an extra US$170 million (0.7 percent of GDP) has been allocated to the crisis-mitigation program in the 2021 budget. In alignment with the WBG's COVID-19 response strategy, 6 the World Bank approved in June 2021 a Crisis Response and Sustainable Recovery DPO with a dual objective to: (i) protect lives and livelihoods of the population during the crisis; and, (ii) lay foundations for a more sustainable recovery over the medium-term. Table 2: Fiscal Outcomes and Projections: 2017-2021 2017 2018 2019 2020 20211 In percent of GDP Total revenue and grants 15.9 17.7 16.3 14.8 14.0 Resource revenue 0.9 1.8 1.5 1.1 0.8 Non-resource revenue 15.0 15.9 14.8 13.7 13.2 Tax revenue 12.6 13.2 13.0 12.0 12.0 Taxes on income, profits, and capital gains 7.3 7.7 7.2 7.0 6.4 Taxes on goods and services 4.5 4.5 4.7 4.1 4.7 Taxes on international trade and transactions 0.8 1.0 1.1 0.9 0.9 Donor grants 2.0 2.3 2.1 1.7 1.1 Other revenue 1.3 2.2 1.2 1.1 0.9 5 IMF, 2019 Article IV Consultation with PNG, February 2020. 6 World Bank Group. 2020. COVID-19 Crisis Response Approach Paper. June 2020. Page 14 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) 2017 2018 2019 2020 20211 In percent of GDP Total expenditure 18.4 20.3 20.7 23.8 21.2 Current expenditure 16.6 17.7 17.5 19.5 18.2 Compensation of employees 6.0 6.5 6.4 7.2 6.2 Interest payments 2.1 2.3 2.5 2.6 2.4 Capital expenditure 1.8 2.7 3.2 4.3 2.9 Overall fiscal balance/net borrowing -2.5 -2.6 -4.4 -8.9 -7.2 Primary fiscal balance -0.4 -0.2 -1.9 -6.3 -4.7 Non-resource primary balance (NRPB) -1.3 -2.0 -3.4 -7.4 -5.5 In percent of non-resource GDP Non-resource primary balance (NRPB) -1.6 -2.7 -5.2 -9.4 -7.6 Source: World Bank, IMF and PNG government data. Note: 1 projection. Prior action 2 27. The Tax Administration Act (TAA) was gazetted in August 2018 to modernize, simplify and harmonize legislation relating to tax administration and ensure efficient collection. The TAA was expected to go into effect on January 1, 2020. However, TAA implementation required changes in the provisions of the specific tax acts. In parallel, the IRC established a TAA working group to create awareness and update systems to enable implementation. Delays occurred in rewriting specific tax acts and also in the required IRC systems updates. For example, the Income Tax Act (ITA) rewrite was significantly delayed and its implementation could be deferred until January 1, 2022. The TAA has not been fully implemented so far. As a result, trigger (i) for DPO2 associated to prior action 2 was not met. 28. The TAA includes provisions to reduce the cost of tax compliance following the 2018-22 Medium-Term Revenue Strategy. Important planned steps in this direction are: the introduction of the self-assessment system for income tax returns and Goods and Services Tax (GST) returns; the removal of the obligation for IRC to process assessments, facilitating the payment of tax due; the generalization of electronic filing of tax return; facilitation of taxpayer appeals to IRC decisions to the Tax Review Tribunal by eliminating the need to appeal directly to the National Court. However, as the TAA has not been fully implemented, the cost of tax compliance remains high. According to the World Bank's Cost of Doing Business assessment, in 2020 PNG ranked 118th among 190 countries regarding the ease of paying taxes, below the regional average for East Asia and the Pacific region, while in 2017 it ranked 94th. The estimated time required to pay taxes was unchanged at 207 hours per year, but the number of payments had increased to 45 from 32 in 2017 owing to an increase in the number of employer payments for social security contributions. 29. Despite the taxpayer identification number (TIN) rollout the integrity of the information held in the registration database is low. The TIN rollout was completed, and third-party information is used in IRC risk assessments mainly based on banking sources. A unique TIN is generated automatically by the Standards Integrated Tax Administration System (SIGTAS) following registration. At the same time, taxpayers are also registered for various tax types upon request but often based on IRC's recommendation. Separate accounts with distinct numbers are created for each tax type. All accounts are linked to the taxpayers' registration information. Page 15 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) The TIN is required for opening business bank accounts. However, a recently completed assessment of the IRC, using the Tax Administration Diagnostic Assessment Tool (TADAT), revealed key IT system design weaknesses that affect compliance management and the security of the taxpayer register. 7 Key gaps include: (i) the absence of an audit trail of user access and changes in taxpayer registration information; (ii) no online access for taxpayers; (iii) no connection between the accounts of associated entities; (iv) the absence of a self-validating mechanism in the TIN; (v) no classification of sole traders by sector; and (vi) no interface with other IT systems to support the registration process. According to the assessment, critical taxpayer background information, such as contact details, is missing or outdated. A March 2019 IRC internal audit report highlighted significant concerns about the accuracy of the registration database including incorrect registrations and opening of accounts, multiple accounts, duplicates and inactive taxpayers. Owing to these weaknesses the TADAT score on the indicator of "Knowledge of the potential taxpayer base" was C, indicating "weak performance relative to international good practice". The trigger (ii) for DPO2 associated to prior action 2 was formally met. However, the integrity of the taxpayer registry is low due to broader issues ranging from IT system design to the lack of regular update by IRC staff. 30. The Large Taxpayers Office (LTO) has been operational since October 2018. It caters to taxpayers with a turnover of more than PGK 100 million and/or an undisclosed substantial aggregate tax contribution. The LTO is staffed with 19 account managers and 11 audit officers focusing on 170 large taxpayers by the end of 2019, split across sectors. At the same time, recruitment of highly qualified staff has proven difficult. The large taxpayer audit case selections are weighed towards sectors such as finance/banking, construction and extractives. A range of audit types is used including comprehensive audits; specific issues; special projects and GST refund audits. According to the TADAT assessment, LTO audits are generally limited to verification of supporting documents. Indirect audit methods to verify amounts reported are rarely used. The LTO also aims to provide a streamlined and faster service as a "one-stop-shop" for all tax matters, including stamp duty, tax clearance applications, certificates of compliance, statements of account and tax returns. In the past these services were spread across various tax units—leading to unnecessary delays and repeated requests for the same information. 31. IRC's tax audit programs remain inadequate to strengthen taxpayer compliance. Trigger (iii) for DPO2, associated to prior action 2, focused on strengthening the tax audit function through the development and implementation of the Standard Operational Procedural Manual for the IRC's new risk-based audit referral tool. This trigger was met as an SOP for risk-based audit was adopted, and the risk-based audit itself was operationalized. However, the effectiveness of the overall audit program remains questionable, as indicated by the overall TADAT score on the indicator of "Scope of verification actions taken to detect and deter inaccurate reporting", which was D, indicating inadequate performance. The assessment found that, although there are audit procedures for the major taxes, there is no evidence of special audit procedures for major economic sectors. "The audit procedures outline the stages and include preparation of audit case plan, creating taxpayer profiles, advising taxpayer on the nature and scope of audit, examining records and determining any changes in the scope of the audit, and advising taxpayers of the audit findings, additional tax and penalties. However, the procedures do not provide instructions on how to manage case files, nor require auditors to inform taxpayers of their dispute rights and adhere to procedures and criteria that need to be applied in the settlement of audit cases. There is no evidence of specific industry/sector audit manuals and risk rankings in terms of their importance to the economy. The manuals have not been updated in at least two years." 8 32. The recent TADAT assessment of the IRC revealed several performance gaps that need to be addressed. 7 IMF, PNG TADAT Performance Assessment Report, January 2020, p.18-19. 8 IMF, PNG TADAT Performance Assessment Report, January 2020, p.35. Page 16 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) The score of IRC systems and procedures in 29 out of the 32 indicators was "inadequate". Notable issues include: the lack of a comprehensive risk management framework to manage compliance and institutional risks; lack of a due process to register taxpayers; the absence of a strategy to cleanse the taxpayer register; inadequate direct interaction with taxpayers and territorial coverage outside of the capital; absence of a well-targeted outreach program, etc. The 2020 Budget document voiced concern about persistent weaknesses in tax administration, which have led to a compliance gap possibly worth up to PGK 3 billion, despite the significant increase of IRC resources. 9 The document acknowledged major failures in implementing the strategy to increase tax revenues and recommended stronger oversight by the Department of Treasury of administrative changes within the IRC to ensure focus on revenue collection. Prior action 3 33. With a view of strengthening the governance and reporting of tax expenditure, the government published its first Tax Expenditure Statement (TES) in the 2018 National Budget. The publication of TES has continued with gradual refinements each fiscal year. 10 The first TES estimated the foregone revenue of the incentives provided under the Income Tax Act, particularly the Infrastructure Tax Credit scheme; and zero ratings under the Goods and Services Tax (GST) Act. The 2019 Budget expanded the coverage of the TES by capturing additional tax incentives provided in the ITA, GST Act, and Customs Tariff Act. The 2020 budget presented more reliable estimates of revenue foregone by incentives in the 2018 TES. This was made possible because in 2019 the declaration of the use of corporate tax incentives in the Corporate Income Tax (CIT) form was made mandatory for the tax to be assessed. 34. The TES is divided into two sections, covering the non-resource and resource sectors. Each section contains sub-sections of specific tax incentives granted within the corresponding sectors. Each sub-section begins with (a) the section of the law in which the specific incentive can be found, (b) a description of the incentive with its policy intent and if available, a brief history, (c) table containing administrative data on the tax incentive, (d) source of data and description, and (e) any other relevant information regarding the incentive. 35. Foregone revenue is significant, especially for excise taxes. In 2018, estimated revenue foregone in corporate income tax incentives in the non-resource sector was PGK 49.0 million and in the resource sector PGK 65.3 million. In the GST regime, the estimated total GST exemption in the compliant population was PGK 36.9 million and the cost of zero-rated sales as opposed to regular 10 percent GST rate was PGK 110.9 million. The estimated revenue foregone from exemptions in excise and international trade tax regime was PGK 138.5 million. The estimated total tax exemptions in 2018 were PGK 400.6 million, equivalent to 3.8 percent of total tax revenue collected (Table 3). 92020 PNG National Budget, Volume 1, p. 63. 10The government does not consider all exemptions and deductions as tax expenditure. For example, minimum threshold and progressive tax rates in the individual income tax regime is not considered as an incentive as taxing all income levels at the same rate is not envisaged. Similarly, accelerated depreciation is not considered tax expenditure as the tax authorities can be considered to have foregone revenue only temporally by not collecting revenue earlier. Page 17 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Table 3: Tax Expenditures by Type of Tax: 2018 Income tax GST Excise and customs taxes Total revenue foregone In million PGK 114.3 147.8 138.5 400.6 In % of revenue 1.9 4.2 17.0 collected from each tax In % of total tax revenue 1.1 1.4 1.3 3.8 Source: PNG National Budget 2020 and World Bank data. 36. No reform of tax incentives has taken place although the government took preparatory steps in this direction. The government committed to strengthening the governance and reporting mechanisms around these tax incentives. As Parliament and Parliamentary committees, the media and the general public, scrutinize direct government expenditures during the annual budget process, tax expenditures were expected to receive the same level of scrutiny. The World Bank advised on the methodology and the comprehensiveness of reporting improved over time. In May 2019, the Department of Treasury completed the review of the tax incentives. The MTRS Steering Committee discussed the tax incentives review report in August 2019. In the 2020 Budget Strategy Paper, presented on 19 November 2019, the Department of Treasury announced that rationalizing corporate tax incentives were among the three key tax reforms planned in 2020, pending further public consultation and analysis. However, no policy action was taken in the National Budget 2020. The Department of Treasury reflected the tax incentives reform in the draft rewrite Income Tax Act, which is yet to be adopted. However, as a review of tax incentives to rationalize their design and targeting has not been completed, the trigger for DPO2, associated to this prior action, was not met. Prior action 4 37. The increase in diesel excise tariff boosted excise tax revenue. The excise tariff rate on diesel was raised from PGK 0.10/lt to PGK 0.23/lt, with effect on January 1, 2018. Owing mainly to this increase, the tax revenue from inland excise taxes increased in 2019 to 1.3 percent of GDP, from 1 percent of GDP in 2017 (Table 2). The government initially committed to increasing the excise for diesel by PGK 0.13/lt every two years over the medium term until the gap between petrol and diesel excise tariff is closed. However, further increases have not materialized so far. 38. Tax revenue collections continued to underperform and were further hit by the pandemic. The tax administration reforms and tax measures introduced since 2018 were not sufficient to substantially boost revenue collections. Tax revenue reached 13.0 percent of GDP in 2019, from 12.8 percent in 2016. The results indicator associated to prior actions 2, 3, and 4 was revised owing to revisions of the underlying data series since the original specification of the baselines and targets. Tax revenue collection before the pandemic was largely off track compared to the revised target of the results indicator. Weak tax collections occurred mainly in income taxes (Table 2). Tax buoyancy further worsened in 2020 because of the disruptions in economic activity caused by the pandemic. Tax revenue declined to 12 percent of GDP in 2020. The revised target associated to results indicator 2 was missed. Page 18 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) B) Strengthening Key Building Blocks for Public Financial Management and Financial Inclusion Prior action 5 39. The rollout of the Integrated Financial Management System (IFMS) to central government agencies has been completed. From only three departments (Treasury, Finance, and National Planning & Monitoring) directly linked to the system in 2014, the IFMS is now operational in all (37) national departments. Moreover, IFMS rollout has been completed in 7 of the 9 Statutory Authorities of the first phase. 11 A comprehensive range of control mechanisms exists at the central government level, which are incorporated into the payment process module of IFMS. Access and changes to records is restricted and recorded, and results in an audit trail. However, there is still need for end users to fully understand the workings of the system to be able to use it more effectively. Moreover, Internet connectivity hampers the smooth functioning of the system. 40. The roll out of IFMS to the subnational level is in progress, beyond the roll out at the national level foreseen in the prior action. The IFMS has so far been implemented in 13 out of the 20 Provinces. It has also been completed in 8 newly devolved Provincial Health Authorities. The 2021 National Budget outlines the Finance Department's plan to rollout the IFMS to the remaining Provincial Health Authorities. The rollout of the IFMS to national departments provides more reliable and consistent reports. Going forward the comprehensiveness of the financial reporting from IFMS will be improved once all provincial governments and health authorities are included in the IFMS. Additionally, the activation of the IFMS commitment module will provide useful information to monitor arrears and manage cash. 41. The interface of IFMS with other systems has improved. In an effort to manage the overruns in the wage bill, the government initiated the process of linking the IFMS and the Alesco payroll system to ensure salary expenditures are kept within the monthly warrant ceilings. 12 The Organizational Staffing Personnel Emoluments Audit Committee, which is also responsible for implementing other initiatives to manage the wage bill, heads the process. Enabling improved interface of IFMS with other systems, such as Alesco for payroll and SIGTAS for tax revenue administration, is expected to improve the ability to implement internal controls on spending. The Government is also planning to have all fixed assets managed through IFMS, using the consolidated Fixed Assets Register module. This would improve the record of fixed assets, such as buildings and structures, machinery and equipment and other fixed assets. However, proper awareness will be needed for interphase between standalone payroll, asset management applications, and Revenue Accounting systems. 42. The IFMS rollout has not yet enabled a more punctual submission of the government's accounts to the Auditor General Office (AGO). Issues around the reliability and consistency of reporting remain for both national departments and provincial governments and other statutory authorities covered by the IFMS. The format of the financial statements submitted to AGO is unsatisfactory, not aligned with International Public Sector Accounting Standards. The financial reports submitted to AGO include 12 statements, some of which are not generated by the IFMS (Table 4). As the Department of Finance collects all statements at the national level before submitting the financial reports to the AGO, the timing of the submission has only marginally improved. 13 11 IFMS rollout completed at IRC (as a pilot); Ombudsman Commission; National Museum and Arts; Customs; Immigration and Citizenship Services; Auditor General Office; Science and Technology Commission. IFMS rollout is pending at Office of Libraries and Archives; National Procurement Office. 12 PNG National Budget 2020, Volume 1, p.69. 13 Prior to 2006, the PFM Act mandated reporting of the financial statements of the preceding fiscal year by all government entities by 31 March. That provision was replaced in the amendment to the PFM Act by a requirement for submission to AGO of the financial statements of a fiscal year “as soon as practicable”. This left much leeway to the Department of Finance for the submission of the financial statements to AGO. Page 19 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) The national departments' financial statements for 2016, 2017, and 2018 have been submitted to AGO. 14 However, the statements for 2019 and 2020 are yet to be submitted. The results indicator associated to prior action 5 was therefore not met. With hindsight the results indicator was not appropriate to measure the results of this prior action because debt, lending, and guarantees are very rarely part of an IFMIS but covered by parallel debt management systems in most countries. As long as some statements (including non IFMIS related) are missing the financial statements are not submitted to the AGO. Moreover, the results indicator associated to this prior action should have clarified that the target of timely submission of financial statements referred only to the national departments (central government), where the IFMS rollout was already in progress, and not to the provincial governments and Provincial Health Authorities where the rollout had yet to be initiated. At the provincial government level, the East New Britain Provincial Government was the first to roll out the IFMS in 2017. However, Annual Financial Statements were not produced until 2020, when those for 2017-2018 were prepared and presented to AGO. Other provincial governments that have rolled out the IFMS are yet to prepare and submit their Financial Statements to AGO. Provincial Health Authorities that rolled out IFMS have not submitted their Annual Financial Statements to AGO so far. Table 4: Statements of Financial Reports Audited by the AGO A Statement of Public Account Balances IFMIS generated B Summary of Receipts and Expenditure of the IFMIS generated Consolidated Fund C Statement of Receipts and Expenditure of the IFMIS generated Trust Fund D Statement of Sources and Application of Funds Non IFMIS generated E Trust Fund of Investments IFMIS generated F Statement of Direct Investments, Capital Non IFMIS generated Contributions and Equity Option Rights G Statement of Public Debt Non IFMIS generated H Statement of On Lending Non IFMIS generated I Statement of Government Guaranteed Loans Non IFMIS generated J CRF Receipts by Revenue Head IFMIS generated K Statement of Public Debt Non IFMIS generated L Budget Expenditure by Heads of Appropriations. IFMIS generated Source: PEFA 2020. 43. The Department of Finance undertakes monthly reconciliations of the government's accounts at the central bank on a partial basis. While the bank reconciliation process is not yet fully automated, the government has been able to obtain electronic bank statements from BPNG, which are uploaded to IFMS to enable automated matching. Hard copies of the bank statements are obtained as a double verification. There has been little progress with the development of a similar electronic bank statement upload and automated bank reconciliation function between the IFMS and the commercial banks. As a result, department operating and trust account reconciliations are not up to date, exceeding an estimated 10 percent of total central government bank accounts. The trigger for DPO2, associated to prior action 5, was not met, as bank reconciliation by mid- 2019 covered an estimated 60 percent of total expenditure of central government departments. The 14On May 11, 2018 for 2016 and 2017 and on April 24, 2019 for 2018. The audits of 2016 and 2017 have yet to be finalized and the one for 2018 has yet to start. Page 20 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Department of Finance assists agencies to undertake the bank reconciliations of their operating accounts, trust accounts and revenue collection accounts which are due monthly. 44. The significant delay in the submission of financial statements and bank reconciliation compromises the ability of the AGO to perform its mandated functions. Combined with the volume of work required of the AGO and lack of resourcing, the delays have led to audit reports not being completed until three years after the close of the fiscal year. The partial coverage of bank reconciliation is also a major issue for the quality of audits. As a result of these delays audit reports receive little review by responsible parliamentary committees and audit recommendations to management are often not implemented. Prior action 6 45. The Financial Sector Development Strategy (FSDS) and the National Financial Inclusion Policy (NFIP) were launched in January 2019. Most prominent policy areas of the NFIP included: the expansion of digital financial services as a key to promoting financial inclusion in remote communities; provision of inclusive insurance for the protection of low-income people; financial consumer protection to level the playing field between suppliers and consumers of financial products and services; promoting access to finance for informal and agricultural enterprises; promoting financing of SMEs. 46. An important milestone was the launch of the retail electronic payments system (REPS). In July 2019 the BPNG presented the nation-wide common platform for REPS. The REPS is a step towards achieving greater financial inclusion, allowing safe, efficient and convenient electronic payment services in PNG, including card and mobile phone-based payments services. It enables smaller payment service providers to enter the market at a reasonable cost, thus promoting competition and consumer choice and lowering the cost of payments to customers. The first phase of REPS is the establishment of the National Switch Platform, which offers inter- linked service across all the ATM and Electronic funds transfer at points of sale (EFTPOS) devices of financial institutions connected to REPS. This was a trigger for DPO2, associated to prior action 6, which was met. Currently, 6 financial institutions participate in the National Switch platform. 15 Other institutions will join when their systems and processes enable them to do so. 47. Mobile money and mobile payments are increasingly being used to make financial services more accessible and affordable. Work is underway to introduce more mobile and digital payment options and interoperability for mobile providers who offer mobile wallets and payments. Mobile wallets will be licensed soon. Options for rural areas with limited internet access are being developed taking into consideration the latest digital alternatives available through smartphones. The shift to digital payment services has enhanced the capacity of women to secure their financial safety and independence, thus improving financial inclusion. 48. Planned payment systems enhancements will contribute to future improvements of financial inclusion. A very large part of Government payments is currently performed and received manually via cash and cheques. The management of the funds is complex and inefficient with inaccurate review and record of the flows. This favors the development of corruption and fraud, also creating a high risk of manual errors and delays. The planned shift to digital payments would allow a much higher level of transparency, with optimal recording of the transactions and a much lower possibility of errors and fraud. Via the link with the Kina Automated Transfer System (the payment system infrastructure) electronic payment systems would be highly improved, and the issuance and receipt of payments could be centralized, removing the several bank accounts that the government 15BSP; Kina Bank, Nasfund Contributors Savings and Loan Society (NCSL); People’s Micro Bank Limited (PMBL); MiBank (Nationwide Microbank); Westpac Page 21 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) currently manages. 49. Results indicators on financial inclusion were met or on track to be met. Results indicator 4 of the DPO, associated to prior action 6 for financial inclusion was met. The number of deposit accounts in the second quarter of 2020 was 3,365,982. It represented 63.8 percent of PNG's adult population 16. Results indicator 5, associated to prior action 6, for bridging the gender gap in the establishment of new bank accounts was on track to be achieved. The number of new bank accounts established by women in 2016-2019 represented 32 percent of total new bank accounts established over the same period. Information on bank accounts held by women was not available for 2020. C. Overall Outcome Rating and Justification Rating: Unsatisfactory 50. Despite the satisfactory relevance of the design of the prior actions of the DPO program, because of the inadequate efficacy in achievement of the results, the overall development outcome of the DPO program is rated "Unsatisfactory". Prior actions 1,2,3 and 4, relating to the use of the NRPB as a fiscal anchor, tax administration reform, recording of tax expenditures, and the increase in the excise on diesel were all relevant for strengthening fiscal management and revenue performance (pillar 1). Prior actions 5 and 6, relating to the rollout of IFMS and the implementation of financial inclusion strategies were relevant for achieving the objective of strengthening key PFM blocks and financial inclusion (pillar 2). However, only one of the 5 results indicators of the program (the first indicator relating to financial inclusion) was achieved. The two results indicators linked to strengthening fiscal management and revenue performance, as well as the indicator associated to strengthening key PFM blocks, were not achieved. The second indicator, associated to gender equality, in financial inclusion was on track to be achieved. Regarding the reform agenda supported by the DPO, the picture is mixed: On the one hand, the fiscal framework reforms, concerning the targeting of the NRPB, went off track; the Tax Administration Act has yet to be fully implemented; no reform of the tax incentives has taken place; further increases in the diesel excise tax (or equivalent tax revenue enhancing measures) have not taken place. On the other hand, the TIN has been implemented; the LTO is operational; the rollout of the IFMS to central government agencies has been completed and is in progress at the subnational level; reforms pertaining to financial inclusion and the deployment of the retail electronic payments system are well advanced. As the performance of the program under pillar 1, concerning the NRPB and tax revenue collections, went off track before the start of the pandemic, the second DPO in the series was dropped. An opportunity was thus missed to take corrective action at mid-course and possibly improve the achievement of expected results. III. OTHER OUTCOMES AND IMPACTS A. Poverty, Gender and Social Impacts 51. The ineffective targeting of the non-resource primary fiscal balance questioned the ability to achieve a more stable public expenditure profile in support of the delivery of public services. The government's renewed commitment to medium-term fiscal consolidation, if combined with an appropriate fiscal anchor, could support a more stable public expenditure profile. Strengthening tax administration, despite the meager results achieved so far, is expected to improve tax revenue collection over the medium-term. This would allow for continued 16 The calculation is based on publicly available data that do not specify the average number of accounts per adult accountholder. Page 22 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) capital expenditure, while boosting funds for public service delivery, which is of critical importance to the poor, women, and children. 52. Measures related to public financial management are not expected to directly impact poverty or the distribution of incomes. However, indirect effects could occur. A more efficient public financial management may free up resources for social development spending. Over the medium term, the rollout of the IFMS will help ensure that budgeted resources are available and actually used to support the service delivery activities they are meant for. It is, however, important that accurate reports be generated, submitted for audit, and published in a timely way, to enable verification by policymakers, the legislature, and the public. Given that poorer people rely more on the availability of public services like primary schools and health clinics, and that women have a particular reliance on these services too (maternal and reproductive health, access to education, personal security/law and order), reforms that improve budget execution could be expected to benefit the poor and women. 53. Increased financial inclusion is expected to have positive poverty and social impacts and a specific positive impact on financial inclusion for women, through increasing access to finance and greater financial security. However, caution is warranted regarding the outcomes measured by the results indicator of new bank accounts established by women. Recent research in PNG found no significant evidence that women who own a bank account are statistically any more likely to have more autonomy over key economic decisions regarding: (i) responsibility for spending personal money; (ii) participation in household financial decisions; and (iii) involvement in major household financial decisions.17 B. Environmental, Forests, and Natural Resource Aspects 54. The increase in diesel excise tax is expected to reduce the use of this fuel and is likely to have a positive impact on environmental pollution. Emissions from diesel combustion have been found to have severe negative local environmental impacts, significantly more so than those from petroleum. Diesel emissions include nitrogen and sulfur dioxides, and particulate matter, which are harmful to human health and have been linked to respiratory illnesses. The prior actions concerning the establishment of a medium-term fiscal anchor, strengthening revenue administration, reviewing tax expenditures, implementing the IFMS, and adopting new financial inclusion strategies are not expected to have significant effects on PNG's environment, forests or natural resources. C. Institutional Change/Strengthening 55. The DPO program supported modernizing tax legislation and establishing new modern business practices and methodologies in the IRC. Key features of the IRC modernization program include a stronger focus on strategic planning, governance and organization; increasing taxpayer compliance with key obligations; and upgrading core business processes and automated systems to support improved revenue outcomes. Important performance gaps have been identified by the recent TADAT performance assessment report. The WBG and development partners continue supporting IRC to address performance gaps. In response to these challenges, as part of the MTRS, IRC is undergoing a major organization redesign, assisted by the International Monetary Fund (IMF). The objective is to realign the IRC organizational structure and its functional areas, with a separation of roles between headquarters and operational functions. The U.S. Treasury also provides assistance on large 17Fox, R., “Correlates of Women’s Autonomy over Economic Decisions in Papua New Guinea”, March 2021, Development Policy Centre Discussion Paper No. 93, Australian National University Page 23 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) taxpayer audits and the World Bank on risk-based audits. In parallel, IRC is strengthening its system of internal controls to detect and address risks of fraudulent activity. Despite COVID-19 disruptions, 16 internal audits were completed and 27 fraud and corruption investigations were completed. The World Bank's is currently preparing to extend its engagement through technical assistance to support the IRC to develop a Compliance Improvement Plan that should be used by all departments of the IRC to shape the annual operational plan with a priority of enhancing GST compliance. 56. The rollout of the IFMS across national departments and key statutory authorities has enabled an improved understanding of the current financial situation facing the government. It also allowed better expenditure controls to be implemented. It has the potential to enable more timely accounting, reporting, and auditing if the existing bottlenecks are bypassed. The ongoing rollout of the IFMS to subnational governments and Provincial Health Authorities will enable a more comprehensive tracking of resources, including by source of funds. 57. Support for financial inclusion strategies has indirectly helped strengthen capacity in this area. PNG's Center for Excellence in Financial Inclusion (CEFI), an institution created in 2013 that enhances policy and monitors progress on the financial inclusion agenda, was indirectly supported by prior policy action 6. CEFI designed the Professional Certificate in Microfinance Online Program to fulfill the need of the industry and support the Professional Certificate in Microfinance as a training toolkit and reference material. As a result of the introduction of REPS mobile payments are increasingly being used to make financial services more accessible and affordable. An efficient and accountable Government to Person (G2P) payment system is a next step for furthering financial inclusion. Building on the reforms supported by the DPO, the World Bank is planning to support piloting of digital G2P payment options in PNG, piloting a nutrition grant as an entry point for strengthening both financial inclusion and the social protection delivery system. Moreover, the World Bank and the International Finance Corporation have jointly supported: (i) drafting regulations allowing non-bank providers to join the market; (ii) implementation of the REPS; and (iii) the launch of the Instant Payment services via the REPS. D. Other Unintended Outcomes and Impacts Not applicable IV. BANK PERFORMANCE Rating: Moderately Satisfactory 58. The program supported by the DPO was grounded on extensive analytical work conducted by the World Bank. Key inputs for prior actions 2 and 3 included the World Bank's 2017 Systematic Country Diagnostic and the PNG Economic Update, which formulated recommendations on improving revenue administration and tax compliance and reversing the erosion of the tax base. Prior action 5 was anchored on the findings of PEFA 2015, which framed the PEFA Road map 2015-2018. Prior action 6 drew on the PNG Financial Development Strategy prepared by the World Bank in 2014. 59. The World Bank collaborated extensively with development partners in several areas supported by the DPO. The reforms supported by the DPO were consistent with the fiscal framework and PFM reform components of the Asian Development Bank's (ADB) policy-based lending operation, on budget allocations to priority sectors (with focus on the health sector) and on strengthening procurement, planning, budgeting, funds Page 24 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) flows, accounting and reporting. The World Bank collaborated closely with the IMF, which provides technical assistance in several areas of relevance to the DPO, particularly in support of improved revenue performance. The World Bank also coordinated with Australia's Department of Foreign Affairs and Trade, through the PNG Governance Facility, which also provides technical assistance to the government particularly for the implementation of the PEFA Road Map 2015-2018. 60. The World Bank swiftly pointed to deviations from fiscal targets and offered advice for remedial action. However, in the absence of significant policy adjustments, program performance under Pillar 1 went off track so that DPO2 was dropped. During program implementation, starting from the PNG Economic Update of June 2019, the World Bank pointed to the widening of the NRPB and the associated deviation from the fiscal- consolidation path. It underlined the difficulties in controlling the wage bill and the need to improve the realism of the budget. The January 2020 PNG Economic Update pointed to the lack of ambition of the new fiscal consolidation strategy. The Implementation Status and Results Report (ISR) of the DPO realistically acknowledged that the expected improvement in the NRPB and tax buoyancy did not look on track to occur in 2020. The Bank continued to provide technical assistance in important areas of domestic revenue mobilization under pillar 1: (i) technical assistance under preparation aims to support the IRC to develop a Compliance Improvement Plan; (ii) the Bank advised on the methodology of reporting tax expenditures helping to improve comprehensiveness over time. 61. However, the Bank team could have anticipated the complex political economy environment within which the overall project implementation was to be carried out and, accordingly, the lack of readiness from the authorities to implement reforms. In hindsight, the DPO may have been better delivered through a non- programmatic operation. Additionally, some Indicative Triggers for the second operation were not particularly strong, such as the trigger concerning the NRFB for 2019, while other revenue-enhancing triggers were missing. Separate result indicators could also have been designed for prior actions 2, 3 and 4. At the implementation stage the ISR misdiagnosed progress on IFMS rollout as it assessed that the expected improvement in the timeliness of the submission of the annual financial statements for audit was on track. V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES 62. Political and governance risks are high. Successful motions of no confidence in the government are relatively frequent, and governing coalitions do not tend to be based on clear programmatic policy platforms, so the policy environment can be quite unpredictable. The upcoming national elections in 2022 will be another test of this. As a result, there is a high risk that the policy reforms supported by the DPO may not be maintained sufficiently to yield the expected outcomes. In particular, government plans for implementing fiscal consolidation measures may be undermined by the volatile political environment, which may not be conducive to implementing revenue reforms and restraining unproductive expenditure. 63. Macroeconomic risks are high. PNG faces a number of significant risks to the macroeconomic outlook that, if realized, would constrain fiscal space and place pressure on containing the fiscal deficit and keeping public debt on a sustainable trajectory. These risks include a larger and persistent adverse COVID-19 impact on the economy than currently projected, lack of progress on major resource projects under the expected timetable, or deterioration in global commodity prices. The eventual impact of COVID-19 is still unknown, but it may adversely affect medium-term growth prospects of the economy. Macroeconomic risks are mitigated by ongoing IMF dialogue and monitoring under the Staff-Monitored Program and associated macroeconomic policy dialogue with all development partners, including the World Bank's own policy dialogue and monitoring under the Sustainable Development Finance Policy. Page 25 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) 64. Institutional capacity for implementation poses a substantial risk to the sustainability of results. While there are segments of strong capacity in particular institutions within the government, capacity is relatively thin across the board, which poses a specific risk to the achievement of the sustainability of results from policy reforms that depend on institutional capacity, particularly in tax administration and PFM. This risk is mitigated to some extent by significant technical assistance that the WBG and development partners are providing in these reform areas. VI. LESSONS AND NEXT PHASE A. Lessons Learned 65. Reforms and changes in legislation do not translate automatically into impacts. The reforms supported by the DPO were grounded on extensive analytical work, which helped focus the prior actions on relevant measures to improve tax compliance, broaden the tax base, and improve budget execution and transparency. However, implementation experience suggests that policy actions are not enough, especially on tax administration and the PFM reform agenda. As the still weak tax revenue collections and lack of timeliness in the preparation of government financial statements testify. Capacity building is of the essence in order to achieve the expected results. An assessment of implementation capacity would be required in order to properly understand the scope of feasible reforms before embarking on an ambitious program as the one supported by the DPO. 66. Budget realism is an important underpinning of a sound macroeconomic and fiscal framework. DPO implementation suffered from lack of budget realism. The pattern involved planning an annual budget that constrains expenditure, boosts revenue, and attempts to reduce the size of the overall and NRPB deficits, although later into the financial year revenues were underperforming, recurrent expenditure was getting out of hand, and the deficit was getting much larger than budgeted. A cut in the capital budget and/or an accumulation of payment arrears was necessary to minimize the increase in public debt. Better expenditure controls, especially on the wage bill (especially addressing the persistent issue of having ‘ghost workers’ in public service), are key to improving budget realism. The decision to implement a fiscal rule, establish a sovereign wealth fund, and boost domestic revenues, can help improve budget realism, but this needs to be complemented with determined efforts to control the public wage bill. At the same time, improved budget realism calls for steady implementation of revenue mobilization reforms because slippages, as observed in PNG, usually result in an unsustainable fiscal trajectory. 67. When the policy environment is unpredictable it is important to build the strongest possible country ownership and commitment to support macroeconomic and structural reforms. It might be worth focusing on policy actions that have broad support, so as to mitigate the risks related to policy reversals if there is a change in the political environment. It is important that the World Bank and country counterparts develop common expectations on all key components of the engagement, including the specific requirements of the triggers and the timeframe for subsequent operations, to avoid missing triggers owing to differences in expectations and subsequent operations being delayed or cancelled. 68. A programmatic development policy operation should be based on a thorough understanding of the underlying political economy constraints. It is necessary to identify reforms with the political economy in mind to avoid reforms that have little chance of success. While there was generally a strong technical agreement on the proposed reforms, governance-related risks were high and mitigating measures were unable to avert their materialization. In such an environment a programmatic operation was premature for PNG. It does not appear that reforms supported by the DPO, especially in the fiscal framework and tax administration, got off track Page 26 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) because of an exogenous shock. Reforms were off-track before the COVID-19 pandemic. Mitigating measures may include the selection of policy actions that appear to have broad political support or that are being strongly supported and monitored by several development partners who are providing budget support. More modest expectations for reform would be appropriate in this challenging context. B. Next Phase 69. The Crisis Response and Recovery DPO approved on June 28, 2021, after this DPO series lapsed in October 2020, supports some reform areas that overlap with the reform program supported by DPO1. These include a renewed commitment to fiscal consolidation in the 2021 National Budget; a new simplified tax regime for SMEs; and the enhancement of the Instant Payment Transactions capability in the Retail Electronic Payments System. In November 2020, the government adopted the 2021 Budget Strategy Paper (BSP), laying out a revised fiscal policy vision over the medium term. In mid-November 2020, Parliament approved the 2021 National Budget that is in line with the BSP. The broad objective of the BSP is to prepare the platform for fiscal consolidation while continuing investment in productive infrastructure. Some of crisis-mitigation measures will continue in 2021, keeping the fiscal deficit at elevated levels. Starting from 2022, the government will start consolidating its fiscal accounts, with gradual cuts to its operating budget, while revenue is expected to start recovering. To promote the government's SME development plan, Parliament adopted a simplified Small Business Tax (SBT) regime in November 2019, with substantial amendments introduced in November 2020. The SBT policy stipulates that (1) micro-businesses with annual turnover below PGK 60,000 will subject to a flat patent tax of PGK 250; and (2) small businesses with annual turnover above PGK 60,000 and up to the GST registration threshold (PGK 250,000) will pay a turnover tax at the rate of 4 percent. In addition, three procedural changes have been introduced that will reduce compliance costs for small businesses. The establishment of the Retail Electronic Payments System (REPS) in July 2019 provided PNG with a multilateral platform enabling interoperability between participating financial institutions. Through REPS, all participating financial institutions can use the infrastructure of, and send and receive digital payments to and from, all other participating financial institutions. Building on the REPS platform, BPNG has undertaken a further reform of the payments system infrastructure and rules in order to provide for Instant Payment Transactions (IPTs). Page 27 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) ANNEX 1. RESULTS FRAMEWORK . RESULTS INDICATORS Pillar: Strengthening fiscal management and revenue performance Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion The non-resource primary fiscal Percentage -4.70 -0.90 -9.40 balance as a percentage of non- resource GDP improves 31-Dec-2016 31-Dec-2020 31-Dec-2020 Comments (achievements against targets): The underlying data series have been revised since the original specification of the baselines and targets. The figures here reflect those revisions, which explains the difference between them and the figures in the program document at approval. Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Tax buoyancy (i.e. tax revenue Percentage 12.90 13.30 12.00 as a share of GDP) increases 31-Dec-2016 31-Dec-2020 31-Dec-2020 Comments (achievements against targets): The underlying data series have been revised since the original specification of the baselines and targets. The figures here reflect those revisions, which explains the difference between them and the figures in the program document at approval. Page 28 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Pillar: Strengthening key building blocks for public financial management and financial inclusion Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Accountability and Text Statements submitted at Statements submitted Statements for 2019 and 2020 not transparency in the use of least 12 months after the within three months of yet submitted to AOG. public funds is improved end of each fiscal year the end of each fiscal through timely submission of year. the annual financial statements to the Auditor General's Office 31-Dec-2016 31-Dec-2020 30-Jun-2021 (number of months after year- end) Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Financial inclusion increases, as Percentage 36.96 50.00 63.80 indicated by the percentage of adults with an account at a 30-Jun-2016 30-Jun-2020 30-Nov-2020 formal financial institution Comments (achievements against targets): Page 29 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion The gender gap in new bank Percentage 26.00 35.00 32.00 accounts established by women declines (percentage of 31-Dec-2016 31-Dec-2020 30-Jun-2019 new bank accounts established by women) Comments (achievements against targets): . Page 30 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES A. TASK TEAM MEMBERS Name Role Preparation Chandana Kularatne, Virginia Ann Horscroft Task Team Leader(s) Eric Leonard Blackburn Procurement Specialist(s) Robert J. Gilfoyle Financial Management Specialist Ilyas Sarsenov Team Member Michelle Lee McDonall Team Member Supervision/ICR Ilyas Sarsenov, Chandana Kularatne, Virginia Ann Task Team Leader(s) Horscroft Eric Leonard Blackburn Procurement Specialist(s) Chau-Ching Shen Financial Management Specialist David Bruce Whitehead Financial Management Specialist Robert J. Gilfoyle Financial Management Specialist Duangrat Laohapakakul Counsel Carlo Corazza Team Member Michelle Lee McDonall Team Member Philippa Jane Roberts Team Member Viet Anh Nguyen Team Member Sheannal Anthony Manindha Obeyesekere Team Member Aaron Nathan Levine Team Member Rachel Ravu Leka Team Member . Page 31 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) B. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY18 40.144 256,968.90 FY19 19.950 175,170.80 Total 60.09 432,139.70 Supervision/ICR Total 120.18 864,279.40 . Page 32 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) ANNEX 3. BORROWER COMMENTS The ICR team has shared the July 2021 draft ICR report with the PNG Department of Treasury; no comments have been received. Page 33 of 34 The World Bank Papua New Guinea Development Policy Operation (P165717) ANNEX 4. SUPPORTING DOCUMENTS Page 34 of 34