OFFICIAL DOCUMENTS CREDIT NUMBER 6076-PG Financing Agreement (Rural Service Delivery Project) between INDEPENDENT STATE OF PAPUA NEW GUINEA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated , 2017 CREDIT NUMBER 6076-PG FINANCING AGREEMENT AGREEMENT dated 1 , 2017, entered into between INDEPENDENT STATE OF PAPUA NEW GUINEA ("Recipient") and INTERNATIONAL DEVELOPMENT ASSOCIATION ("Association"). WHERAS: (A) the Recipient, having satisfied itself as to the feasibility and priority of the project described in Schedule 1 to this Agreement ("Project"), has requested the Association to extend a credit to assist in financing the Project, and the Association has agreed, to extend the credit as provided for in Section 2.01 of this Agreement, upon the terms and conditions set forth in this Agreement; and (B) the Recipient has also requested the Association, acting as administrator of grant funds provided under the Papua New Guinea Strategic Partnership Multi-Donor Trust Fund ("MDTF"), to provide additional assistance towards the financing of the Project, and the Association, acting in such capacity, has agreed to make available to the Recipient from the MDTF a grant in an amount of four million five hundred thousand Dollars (US$ 4,500,000) to assist in financing the Project, pursuant to the grant agreement to be entered into between the Recipient and the Association ("MDTF Grant Agreement"). The Recipient and the Association hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to this Agreement) constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II - FINANCING 2.01. The Association agrees to extend to the Recipient, on the terms and conditions set forth or referred to in this Agreement, a credit in an amount equivalent to seventeen million Special Drawing Rights (SDR 17,000,000) (variously, "Credit" and "Financing"), to assist in financing the project described in Schedule I to this Agreement ("Project"). -2- 2.02. The Recipient may withdraw the proceeds of the Financing in accordance with Section IV of Schedule 2 to this Agreement. 2.03. The Maximum Commitment Charge Rate payable by the Recipient on the Unwithdrawn Financing Balance shall be one-half of one percent (1/2 of 1%) per annum. 2.04. The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three-fourths of one percent (3/4 of 1%) per annum. 2.05. The Interest Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to one and a quarter percent (1.25%) per annum. 2.06. The Payment Dates are June 1 and December 1 in each year. 2.07. The principal amount of the Credit shall be repaid in accordance with the repayment schedule set forth in Schedule 3 to this Agreement. 2.08. The Payment Currency is Dollar. ARTICLE III - PROJECT 3.01. The Recipient declares its commitment to the objective of the Project. To this end, the Recipient shall carry out the Project through Department of Provincial and Local Government Affairs in accordance with the provisions of Article IV of the General Conditions. 3.02. Without limitation upon the provisions of Section 3.01 of this Agreement, and except as the Recipient and the Association shall otherwise agree, the Recipient shall ensure that the Project is carried out in accordance with the provisions of Schedule 2 to this Agreement. ARTICLE IV - EFFECTIVENESS; TERMINATION 4.01. The Additional Condition of Effectiveness consists of the following: (a) the MDTF Grant Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled. -3- 4.02 The Effectiveness Deadline is the date ninety (90) days after the date of this Agreement. 4.03. For purposes of Section 8.05 (b) of the General Conditions, the date on which the obligations of the Recipient under this Agreement (other than those providing for payment obligations) shall terminate is twenty (20) years after the date of this Agreement. ARTICLE V - REPRESENTATIVE; ADDRESSES 5.01. The Recipient's Representative is the minister at the time responsible for treasury. 5.02. The Recipient's Address is: Department of Treasury The Treasury Building 1 0 floor P.O. Box 542 Waigani, 131 NCD Papua New Guinea 5.03. The Association's Address is: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Telex: Facsimile: 248423 (MCI) 1-202-477-6391 -4- )b2T7 &00e5%y, P&)3 AGREED at S14 addeL 6h/f LtJEt- 1O ,as of the day and year first above written. INDEPENDENT STATE OF PAPUA NEW GUINEA By Authorized Representative N m NVN~[ G'4~C~r) Title: INTERNATIONAL DEVELOPMENT ASSOCIATION By A Authorized Representative Name: S(Af Title: ACfs COU&)T' ,D I It E c"0 A -5- SCHEDULE 1 Project Description The objective of the Project is to improve communities' access to basic infrastructure and services in targeted rural areas using inclusive, participatory planning and implementation. The Project consists of the following parts: Part 1. Preparation and implementation of Sub-projects (a) Provision of Ward Development Grants ("WDGs") to finance the implementation of Sub-projects; and (b) Provision of Sub-project Preparation and Implementation Support Grants ("SPIS Grants") to selected Local Level Governments ("Participating LLGs") to finance Operating Costs incurred supporting the preparation and implementation of Sub-projects. Part 2. Capacity building of national and sub-national entities Carrying out a program of Training and activities designed to strengthen the capacity of the Recipient's national and sub-national government entities for management and implementation of the Project and basic service delivery. Part 3. Project Management (a) Carrying out a program of activities designed to strengthen the Project Management Unit and the Provincial Project Offices for the day to day management of the Project including inter alia, coordination and supervision of implementation activities, financial management, audits, and monitoring and evaluation; and (b) Hiring and maintaining two community development workers and one technical facilitator for each Participating LLG. -6- SCHEDULE 2 Project Execution Section I. Implementation Arrangements A. Institutional Arrangements. 1. Project Steering Committee The Recipient shall maintain, at all times during the implementation of the Project, the Project Steering Committee ("PSC"): (a) chaired by the Secretary of DPLGA or his or her designee; (b) composed of secretaries or their delegates from, inter alia, the Department of Finance; the Department of Treasury; the Department of National Planning and Monitoring; the Department of Implementation and Rural Development; the Department of Community Development, Religion & Sports and representatives of other relevant departments or agencies as may be required; and (c) with responsibility for coordination and oversight of preparation and implementation of the Project including, inter alia, planning, fiscal transfers and performance monitoring of sub-national government organizations. 2. Project Management Unit The Recipient shall establish not later than four (4) months after the Effective Date and thereafter maintain at all times during the implementation of the Project, the Project Management Unit ("PMU"), within DPLGA with mandate, functions and resources satisfactory to the Association, and with staff in adequate numbers and with qualifications, experience and terms of reference satisfactory to the Association, including, at a minimum, (a) Project manager; (b) financial management specialist; and (c) procurement specialist. In addition, the Recipient shall undertake best efforts to fully staff the PMU as soon as possible with, inter alia, (a) deputy Project manager; (b) coordinator for Central Province; (c) capacity building specialist; (d) community driven development/safeguards specialist; (e) monitoring and evaluation specialist; (f) finance assistants; and (g) support staff. The PMU shall be responsible for, inter alia: (i) day-to-day Project operations; (ii) preparing the draft Annual Work Plans and Budgets for no- objection by the Association; (iii) overseeing and coordinating Provincial Project Office activities; (iv) facilitating the implementation of Project activities; (v) overseeing and guiding the overall administration of procurement, financial management, environmental and social management, and communication of the Project; and (vi) carrying out the overall monitoring, evaluation and reporting on Project activities. The Recipient shall, through the DPLGA, provide sufficient office space and utilities to the PMU as required. -7- 3. Provincial Project Offices (a) The Recipient shall establish not later than six (6) months after the Effective Date and thereafter maintain at all times during the implementation of the Project, the Provincial Project Offices ("PPOs") at the provincial level in each of the Participating Provinces (except Central Province, which shall have a PPO consolidated within the PMU), with terms of reference and resources, including qualified and experienced staff in adequate numbers, all satisfactory to the Association, including at a minimum: (a) provincial coordinator; (b) finance officer; and (c) procurement officer. In addition, the Recipient shall undertake best efforts to fully staff the PPO as soon as possible with, inter alia, (a) technical facilitators; and (b) support staff. The PPOs will be responsible for: (i) overseeing day to day implementation of the Project at the provincial level including reviewing and recommending for approval proposals for Sub-projects; (ii) coordinating operational activities with the concerned provincial, district, LLGs, and ward administrations; and (iii) managing and monitoring the implementation of Sub-projects. The Recipient shall, through its Provincial Authorities, provide sufficient office space and utilities to the PPOs as required. B. Implementation Arrangements 1 . Project Operations Manual The Recipient shall carry out the Project in accordance with the Project Operations Manual, satisfactory to the Association, which shall include, inter alia: (a) implementation and dispute resolution arrangements for the Project including the grievance redress mechanism; (b) eligibility, criteria, and process for the selection of Beneficiaries, Participating LLGs, Sub-grants, and Sub-Projects; (c) DPLGA support to organizations responsible for Project activities; (d) financial management, disbursement and procurement requirements and procedures for the implementation, and the monitoring and evaluation, of the Project; (e) Environmental and Social Management Framework, and other special features of the Project to ensure that the Project activities are carried out in an environmentally and culturally appropriate manner; (f) DPLGA's internal control framework regarding WDGs and SPIS Grants; -8- (g) requirements and templates for Partnership Agreements, WDG Agreements and SPIS Grant Agreements; (h) financial management and record keeping requirements for Beneficiaries and implementation organizations; (i) participatory planning methodology for Sub-Projects; (j) composition and requirements for organizations responsible for Project activities, including PPOs, Participating LLGs, LLG Development Committee, Ward Development Committee, and Community Driven Development Subcommittees ("CDD-SCs"); (k) selection procedures for members of Ward Development Committees and CDD-SCs. The Recipient shall not amend or waive any provision of the Project Operational Manual without the prior written agreement of the Association. In case of any inconsistency between the provisions of the Project Operational Manual and those of this Agreement, the provisions of this Agreement shall prevail. 2. Annual Work Plan and Budget (a) The Recipient shall prepare and furnish to the Association not later than: (i) two months after the Effective Date (or such later date as the Association may agree); and (i) November 30 of each year for every subsequent year during the implementation of the Project (or such later date as the Association may agree), for the Association's no-objection, an Annual Work Plan and Budget containing all eligible Project activities and Eligible Expenditures, including Sub-projects, proposed to be included in the Project in the Recipient's following calendar year, including a specification of the source or sources of financing for all Eligible Expenditures, and environmental and social safeguard measures taken or planned to be taken in accordance with the provisions of Section I.E of this Schedule. (b) The Recipient shall ensure that the Project is implemented in accordance with the Annual Work Plan and Budget accepted by the Association for the Recipient's respective calendar year; provided, however, that in the event of any conflict between the Annual Work Plan and Budget and the provisions of this Agreement, the provisions of this Agreement shall prevail. -9- (c) The Recipient shall not make or allow to be made any change to the Annual Work Plan and Budget without prior no-objection in writing by the Association. 3. Partnership Agreements The Recipient shall execute, not later than ten (10) months after the Effective Date and thereafter maintain throughout Project implementation, a Partnership Agreement between the DPLGA, the Provincial Government, the District Administration, and each of the Participating LLGs. Each Partnership Agreement shall: (a) detail the financing and implementation responsibilities of the DPLGA, the Provincial Government, the District Administration, and the Participating LLG; (b) be consistent with the requirements detailed in the Project Operations Manual; and (c) be satisfactory to the Association in substance and form. C. Anti-Corruption The Recipient shall ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines. D. Sub-grants 1 . The Recipient shall make WDGs to Beneficiaries and SPIS Grants to Participating LLGs in accordance with the eligibility criteria and procedures detailed in the Project Operations Manual, and in accordance with this Section I.D. 2. The Recipient shall make available WDGs out of the proceeds of the Credit to one or more eligible Beneficiary(s), in each case under a WDG Agreement to be entered into between the Beneficiary and the Recipient, on terms and conditions approved by the Association, and including in all cases the provisions of sub- paragraph 4 of this Section I.D, for the purposes of carrying out Sub-project activities in accordance with the Project Operations Manual. 3. The Recipient shall make available SPIS Grants out of the proceeds of the Credit to one or more Participating LLG, in each case under a SPIS Grant Agreement to be entered into between the Participating LLG and the Recipient, on terms and conditions approved by the Association, and including in all cases the provisions of sub-paragraph 5 of this Section I.D, for the purposes of carrying out Sub-project activities in accordance with the Project Operations Manual. 4. The Recipient shall ensure that each WDG Agreement shall provide for rights adequate to protect the interests of the Association and the Recipient and shall: (i) require the Beneficiary, with the support of the respective Participating LLG, to carry out activities specified in the relevant WDG Agreement with due -10- diligence and efficiency and in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the Association, including in accordance with the Environment and Social Management Framework ("ESMF") and Resettlement Policy Framework ("RPF"), the Project Operations Manual, and the Anti-Corruption Guidelines; (ii) require that all goods, works, and services necessary for the Sub-project shall be procured by the Beneficiary in accordance with Section III of this Schedule; (iii) require that all goods, works, services and Operating Costs be used exclusively in the carrying out of the Sub-project activities; (iv) require that the Beneficiary, with the support of the respective Participating LLG, monitor and evaluate the progress of the Sub-project in accordance with the Project Operations Manual; (v) require that the Beneficiary, with the support of the respective Participating LLG, maintain a financial management system in accordance with the Project Operations Manual and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Association and the Recipient; both in a manner adequate to reflect the operations, resources, and expenditures related to the Sub-project and, at the Association's or the Recipient's request, have such financial statements audited by independent auditors acceptable to the Association and the Recipient in accordance with consistently applied auditing standards acceptable to the Association, and promptly furnish the statements as so audited to the Recipient and the Association; (vi) enable the Recipient and the Association to inspect the Sub-project, its operation, and any relevant records and documents; and prepare and furnish to the Recipient and the Association all such information as the Recipient or the Association shall reasonably request relating to the foregoing; and (vii) set out the right of the Recipient to suspend or terminate the right of the WDG recipient to use the proceeds of the WDG, or obtain a refund of all or any part of the amount of the WDG upon failure of the Beneficiary to perform any of its obligations under the WDG Agreement. 5. The Recipient shall ensure that each SPIS Grant Agreement shall provide for rights adequate to protect the interests of the Association and the Recipient and shall: (i) require the Participating LLG to carry out activities specified in the relevant SPIS Grant Agreement in accordance with due diligence and efficiency and -11- in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the Association, including in accordance with the ESMF and RPF, the Project Operations Manual, and the Anti-Corruption Guidelines; (ii) require that all goods, works, and services necessary for the Sub-project shall be procured by the Participating LLG in accordance with Section III of this Schedule; (iii) require that all goods, works, services and Operating Costs be used exclusively in the carrying out of the Sub-project activities; (iv) require that the Participating LLG monitor and evaluate the progress of the Sub-project in accordance with the Project Operations Manual; (v) require that the Participating LLG maintain a financial management system in accordance with the Project Operations Manual and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Association and the Recipient; both in a manner adequate to reflect the operations, resources, and expenditures related to the Sub-project and, at the Association's or the Recipient's request, have such financial statements audited by independent auditors acceptable to the Association and the Recipient in accordance with consistently applied auditing standards acceptable to the Association, and promptly furnish the statements as so audited to the Recipient and the Association; (vi) enable the Recipient and the Association to inspect the Sub-project, its operation, and any relevant records and documents; and prepare and furnish to the Recipient and the Association all such information as the Recipient or the Association shall reasonably request relating to the foregoing; and (vii) set out the right of the Recipient to suspend or terminate the right of the Participating LLG to use the proceeds of the SPIS Grant, or obtain a refund of all or any part of the amount of the SPIS Grant upon failure of the LLG to perform any of its obligations under the SPIS Grant Agreement. E. Safeguards 1 . In carrying out the Project, the Recipient shall ensure that: (a) an environmental and social safeguard screening has been completed for each Project activity in accordance with the ESMF; (b) the recommended mitigation measures set out in the ESMF and the recommended mechanisms for community identification of environmental and social issues are implemented in respect of each Project activity, and the implementation thereof is monitored and reported in Project -12- Reports; and (c) the prescribed environmental codes of practice set out in the ESMF are followed. 2. In carrying out the Project, the Recipient shall ensure that the planning, design and implementation of each Project activity is in accordance with the Environment and Social Management Framework and the RPF. The Resettlement Policy Framework requires that no Project activities shall result in: (a) the involuntary taking of land; (b) relocation or loss of shelter, loss of assets or access to assets; (c) loss of income sources or means of livelihood whether or not the affected persons must move to another location; or (d) the involuntary restriction of access to legally designated parks and protected areas resulting in adverse impacts on the livelihoods of displaced persons. For the purposes of this paragraph, the term "involuntary" means actions that may be taken without a person's informed consent or power of choice. 3. The Recipient shall ensure that the Association is provided with accurate information regarding the location and ownership arrangements for all Project activity locations and that the Association is provided with the opportunity to review such locations prior to the commencement of any Project activities thereon to ensure that any voluntary donation of land was made in a manner meeting the requirements set out in the Environment and Social Management Framework and satisfactory to the Association. 4. In carrying out the Project, the Recipient shall, in accordance with the Project Operations Manual and through a process of meaningful and informed consultation and participation, involve concerned Indigenous Peoples and interested communities in the design and implementation of the Project so as to avoid, or if that is not possible, to minimize adverse effects on Indigenous Peoples and ensure that the benefits received by the Indigenous Peoples under the Project are aligned with their economic, social and cultural preferences and protect their customary user rights. Section II. Project Monitoring, Reporting and Evaluation A. Project Reports 1 . The Recipient shall monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 4.08 of the General Conditions and on the basis of indicators acceptable to the Association. Each Project Report shall cover the period of one (1) calendar semester, and shall be furnished to the Association not later than forty five (45) days after the end of the period covered by such report. -13- 2. Mid-term Review The Recipient shall: (a) not later than three (3) years after the Effective Date (or such other date as the Association may agree), carry out a mid-term review of the Project and, prepare and furnish to the Association a mid-term report, in such detail as the Association shall reasonably request, documenting progress achieved in the carrying out of the Project during the period preceding the date of such report, taking into account the monitoring and evaluation activities performed pursuant to paragraph 1 of this Section II.A, and setting out the measures recommended to ensure the continued efficient carrying out of the Project and the achievement of its objective during the period following such date; and (b) review with the Association such mid-term report, on or about the date one (1) month after its submission, and thereafter take all measures required to ensure the continued efficient implementation of the Project and the achievement of its objective, based on the conclusions and recommendations of the mid-term report and the Association's views on the matter. B. Financial Management, Financial Reports and Audits 1 . The Recipient shall maintain or cause to be maintained a financial management system in accordance with the provisions of Section 4.09 of the General Conditions. 2. Without limitation on the provisions of Part A of this Section, the Recipient shall prepare and furnish to the Association no later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Association. 3. The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one (1) fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six (6) months after the end of such period. Section III. Procurement A. General 1 . Goods, Works and Non-consulting Services. All goods, works and non- consulting services required for the Project and to be financed out of the proceeds of the Financing shall be procured in accordance with the requirements set forth or referred to in Section I of the Procurement Guidelines, and with the provisions of this Section. -14- 2. Consultants' Services. All consultants' services required for the Project and to be financed out of the proceeds of the Financing shall be procured in accordance with the requirements set forth or referred to in Sections I and IV of the Consultant Guidelines, and with the provisions of this Section. 3. Definitions. The capitalized terms used below in this Section to describe particular procurement methods or methods of review by the Association of particular contracts, refer to the corresponding method described in Sections II and III of the Procurement Guidelines, or Sections II, III, IV and V of the Consultant Guidelines, as the case may be. B. Particular Methods of Procurement of Goods, Works and Non-consulting Services 1 . International Competitive Bidding. Except as otherwise provided in paragraph 2 below, goods, works and non-consulting services shall be procured under contracts awarded on the basis of International Competitive Bidding. 2. Other Methods of Procurement of Goods, Works and Non-consulting Services. The following methods, other than International Competitive Bidding, may be used for procurement of goods, works and non-consulting services for those contracts specified in the Procurement Plan: (a) National Competitive Bidding subject to the additional provisions set out in Section III paragraph C of this Schedule 2; (b) Shopping; (c) Direct Contracting; (d) Framework Agreements; and (e) Community Participation in Procurement procedures which have been found acceptable to the Association and are specified in the Project Operations Manual. C. Special Procedures for National Competitive Bidding The procurement procedures to be followed for National Competitive Bidding shall be those set forth in the provisions on competitive bidding in the Public Financial (Management) Act of 1995(Part VII, State Tenders and Contracts), as amended by the Public Financial (Management) Amendment Act 13/2015 and the Financial Instruction 1/2005; provided that such procedures shall be subject (a) to the provisions of Section I and Paragraphs 3.3 and 3.4 of the Procurement Guidelines; and (b) with the following modifications: Participation in Bidding 1 . The eligibility of bidders shall be as defined under the Procurement Guidelines. 2. Government-owned enterprises in Papua New Guinea shall be eligible to bid only if they