Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-3406-PNG REPORT AND RECOMMENDATIONS OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$31.0 MILLION TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A ROAD IMPROVEMENT PROJECT March 3, 1983 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Calendar 1981 February 1983 Currency Unit - Papua New Guinea Kina (K) K US$ 1.00 = K 0.67 K 0.7435 K 1.00 = US$1.487 US$1.3449 K 1 million US$1,487,000 US$1,344,900 WEIGHTS AND MEASURES Metric British/US Equivalent 1 meter (m) = 3.28 feet (ft) 1 linear meter (1m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (sq km) 0.386 square mile (sq mi) 1 kilogram (kg) 2.205 pounds (lbs) 1 metric ton = 2,204 lbs or 1.102 US short ton (sh ton) ABBREVIATIONS BLC = Bougainville Copper, Ltd. CPI = Consumer Price Index DME = Department of Minerals and Energy DTCA = Department of Transport and Civil Aviation DWS = Department of Works and Supply ERR = Economic Rate of Return ICB = International Competitive Bidding ICO = International Coffee Organization LCB = Local Competitive Bidding NEC = National Executive Council NPEP = National Public Expenditures Plan PMFA = Project Managed Force Account FISCAL YEAR January 1 to December 31 FOR OFFICIAL UEt ONLY PAPUA NEW GUINEA ROAD IMPROVEMENT PROJECT Loan and Project Summary Borrower: The Independent State of Papua New Guinea Beneficiaries: Department of Transport and Civil Aviation (DTCA), Depart- ment of Works and Supply (DWS), and the Department of Minerals and Energy (DME). Amount: US$31.0 million equivalent, including the capitalized front-end fee. Terms: Repayable in 17 years, including 4 years of grace, at the standard variable rate. Financing Terms: The proceeds of the loan would be allocated to DTCA, DWS and DME through the National Public Expenditure Plan (NPEP) and through budget allocations. The Government would bear the foreign exchange risk and the interest rate risk. Project The project represents the first attempt to improve Description: transport facilities at both national and provincial levels. In addition to increasing rural mobility through rehabilitation and improvement of roads and bridges, the project's objectives are to improve highway maintenance through the establishment of an efficient management system and to assist in developing the road transport and construction industries. The project also aims to assist in establishing a strategy for transport sector develop- ment leading to policy action plans and associated invest- ment programs. The project includes: (a) rehabilitation or improvement of about 15 provincial road segments; (b) rehabilitation or replacement of about 32 bridges on national roads; (c) improvement of two sections of the Highlands Highway and the first section of the Enga Highway; (d) consulting servtces for project implementation, for transport policy studies and for preparation of related transport investment programs; and (e) technical assistance in transport planning, highway maintenance, training and improvement of the domestic road construction industry. Funds to enable DME to carry out a survey of hydropower resources are also included in the loan amount. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Benefits: Rehabilitation and improvement of provincial roads would promote increased economic activity, reduce the cost of transport and improve access to health and educational services. Rehabilitation and improvement of national highways and bridges would provide lower cost, safer and speedier access to various areas of the country, and would encourage economic development. Risks: Delays in appointment of consultants and their national counterparts, in procurement and in right-of-way acquisi- tion have been problems in earlier projects; efforts have been made to avoid similar delays in this project by extending implementation schedules and by assuring the completion of right-of-way acquisition for the civil works to be undertaken in the first year. Lack of maintenance on project provincial roads after their completion is another risk which has been reduced by arranging for DWS to undertake initial maintenance of all project roads and bridges. Project Costs:/l Local Foreign Total ---- (US$ million) ---- Rehabilitation and improvement of provincial roads 2.9 4.4 7.3 Rehabilitation or replacement of bridges on national roads 2.0 3.7 5.7 Improvements to sections of the Highlands and Enga Highways 6.3 11.6 17.9 Consulting services 1.0 5.4 6.5 Technical assistance and training 0.3 1.8 2.0 Right-of-way acquisition 0.6 - 0.6 Base Costs (Feb. 83 prices) 13.1 26.9 40.0 Physical contingencies 1.6 3.0 4.6 Price contingencies 3.2 6.2 9.4 Total Project Cost 17.9 36.1 54.0 Hydropower survey 0.2 1.0 1.2 Front-end fee - 0.3 0.3 Total Financing Required 18.1 37.4 55.5 /1 Excluding taxes and duties. - iii - Financing Plan: Local Foreign Total ---- (US$ million) ---- IBRD 0.6 30.4 31.0 Government 17.5 - 17.5 Kuwait Fund - 7.0 7.0 Total Financing Provided 18.1 37.4 55.5 4_ Estimated Disbursements:Jl Bank FY 1984 1985 1986 1987 1988 1989 ---- (US$ million equivalent) -- Annual 3.5 5.0 7.5 5.7 5.5 3.8 Cumulative 3.5 8.5 16.0 21.7 27.2 31.0 Rate of Return: 20% Staff Appraisal Report: No. 4184-PNG dated March 8, 1983. Map No: IBRD 16665R1 /1 Includes US$1.0 million for hydropower survey. I REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A ROAD IMPROVEMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Independent State of Papua New Guinea for the equivalent of US$31.0 million, including the capitalized front-end fee, to help finance a road improvement project and a hydropower survey. The loan will have a term of 17 years, including four years of grace, at the standard variable rate. The Kuwait Fund has expressed an interest in providing cofinancing in an amount up to about US$7.0 million on a parallel basis. PART I - THE ECONOMY 2. The last economic report, "Papua New Guinea: Development Policies and Prospects for the 1980s" (Report No. 3544a-PNG), was distributed to the Executive Directors in December 1981. This section reflects the findings of that report and subsequent economic missions, and draws from recent IMF work on Papua New Guinea (PNG). Details of recent economic data can be found in Annex I. Structure of the Economy 3. Papua New Guinea is a land of rugged and sometimes impenetrable mountains, rich valleys and coastal plains, and numerous widely scattered islands. It is favored with abundant rainfall, considerable mineral resources, and forestry and fishery resources of good commercial potential. The capital city, Port Moresby, with a population of about 134,000, is an enclave, with no road links to other parts of the country, and is the largest urban settlement in what remains an overwhelmingly rural society. Per capita GDP in 1981 was US$820. The population as of mid-1982 was about 3.0 million, spread among 19 provinces (with populations ranging from 26,000 to 310,000), each with its own parliament and separate administrative apparatus. 4. The modern sector of the economy is dominated by copper mining and associated investments and by the public sector. In the late 1970s copper, through Bougainville Copper, Ltd. (BCL), accounted for about 15% of GDP; by 1982 this had fallen to 6.5% as prices declined sharply and as the more pro- ductive veins were being exhausted. The Ok Tedi mine is thought to have contributed about 3% to GDP in 1982 (largely through capital investments); this is expected to grow to perhaps 12% of GDP in 1987, thus more than compensating for the decline in BCL. Non-mining industry accounts for about 9% of GDP -- low for a country of PNG-s per capita income -- while government services, heavily dominated by expatriates in the upper ranks, account for about one-quarter of the total. Strikingly, the primary sector, which employs about 85% of the labor force, only contributes about 35% of GDP, a large portion of which is in the subsistence sector. - 2 - 5. PNG's growth record has been quite mixed; for the decade of the 1970s as a whole, per capita growth was negative at -0.2% per annum despite the strong growth in copper exports. The latter half of the decade was even worse in per capita income terms (-0.5% per annum) despite some good years, particularly 1978-79. The terms of trade effects on GDP during the seventies were roughly neutral. However, the years 1980 and 1981 showed an average decline of per capita income of about 4% per year, and in these years the terms of trade effect did begin to bite as the Government cut back services and restricted the growth in the money supply to protect the balance of payments and the value of the Kina. The terms of trade effect was a negative 10% of GDP in 1981; the terms of trade loss is expected to have worsened to about 15% percent of GDP in 1982 and to improve only slightly over the following five years. Growth, on the other hand, is expected by the Government to average 4.5% through 1987 (2.2% per capita), largely because of investments (direct and induced) and exports associated with the Ok Tedi mine. While growth rates are likely to improve somewhat as a result of the impact of Ok Tedi, continued poor agricultural performance, together with a prudent demand management policy (to protect the balance of payments as well as the value of the Kina) may result in continued sluggish growth. Although PNG is now actively seeking to reduce real wages to stimulate investments, this policy -- imposed at a time of austerity -- may not succeed if the demand for labor arising from the construction of the ok Tedi mine and related activities gives renewed impetus to wage demands. 6. The economy has been severely affected by the sharp drop in commodity prices that began in 1980. The price of copper dropped to its lowest level in 30 years, leading to a drop of K 60 million in the Mineral Resources Stabilization Fund reserves between 1981 and 1983. The prices of agricultural export commodities have fallen by half since the late 1970s. Lower export receipts will depress economic activity and reduce imports. Exports are not expected to regain their 1979 level until 1984, when gold will begin to be exported from the Ok Tedi mine. After taking account of the budget support grant from Australia, the current account deficit in 1982 is estimated to have been about US$430 million, or about 9% of GDP. With other official and private capital flows as projected, the expected deficits will be covered without undue strain on reserves or the debt-service ratio. The role of the Australian grant is significant in supporting higher levels of government expenditures, GDP and imports than would otherwise be possible with PNG's own resources. 7. In view of the fact that most of its export prices have been subject to fluctuations, often sharp, the Government has taken a number of measures to reduce the impact on the general economy and on the producers of export crops. The Mineral Resources Stabilization Fund was designed to smooth the impact of Fluctuating copper prices on the budget, and stabilization funds for coffee, cocoa and copra were designed to reduce the oscillations in prices received by the producers. While these funds for agricultural products have had the effect of dampening price-induced supply responses, they have -3 - Contributed to the stability of the economy. For the most part they have shielded producers from income declines, and their total resources are still relatively healthy as a result of substantial levies accumulating in the late 1970s, when export prices were at historical highs. 8. Following the establishment, prior to independence from Australia in 1975, of the Minimum Wage Boards between 1972 and 1976, real minimum wages more than doubled in that period, giving PNG the highest wage costs of the developing countries in the region. Since independence, two three-year wage agreements have limited the rise of both public and private sector wages to that of the consumer price index, subject to a present annual maximum of 11.75%, thus ending the sharp upward spiral of real wages that occurred during 1972-76. The wage situation was accompanied by a "hard Kina" policy causing the Kina to appreciate vis-a-vis PNG's major trading partners, which had the effect of dampening wage demands and keeping down prices of imports (40% of GDP by value). This tended to offset somewhat imported inflation, so that the increase in domestic price levels has averaged about 7.5% between 1977 and end-1982 as compared with the interna- tional inflation index of 8.7%. Price levels over 1981-82 have moderated further to about 4.5%, which is probably as much a reflection of the fall in business activity as it is of the moderation of import prices. 9. Increasingly concerned about the negative impact of high real wages on the economy, the Government has decided to seek to impose a three-year freeze on urban wages. This measure, which may be politically difficult to implement, will involve a strategy by which the first five percentage points of domestic inflation would not be compensated; thus a 5% increase in the CPI could not be compensated at all, and a 13% increase in the CPI would be compensated by an 8% wage increase. Youths up to 19 years of age would only be paid 50% of the basic wage. This policy, if successful, should tend to restore profits and land rents, and should begin to improve the relative competitiveness of Papua New Guinea-s exports. 10. The Government has also responded to its straitened circumstances by raising taxes in 1982 and 1983 in face of a deflationary situation, lowering government expenditure by 10% in the latter year, and laying off 3,000 employees, about 6% of the total public service. Nonetheless, the public deficit in 1983 is expected to reach K 163 million, or 10% of estimated GDP, about the same relative gap as resulted in 1982. As was the case in 1982, none of this will be financed by borrowing from the Central Bank. Borrowings from foreign commercial banks are expected to amount to about US$80 million in 1983, as compared with US$100 million in 1982. Development Strategy and Planning 11. In the post-independence period a concerted effort was made to define a set of economic and social priorities according to which government resources were to be allocated. However, as noted above, more weight has been - 4 - given to developing a viable economic strategy and a decision-making process for the budgeting of government resources than to the preparation and implementation of a comprehensive development plan. While a "National Development Strategy" has been defined and strategic objectives identified as the basis for resource allocation, these have not represented a basis for a growth-oriented development strategy as such. 12. The National Development Strategy instead places a high priority on improving the quality of life for the rural population, focusing on rural development in the less developed areas of the country. A second objective is the development of a few large natural resource projects aimed at reducing the present, very heavy, reliance on aid and leading towards economic self- reliance. The first objective recognizes not only the agricultural potential of the country, but also the fact that for quite a few generations the agricultural sector will be the main source of income generation and employ- ment. The second objective, while not directly benefiting the vast majority of the population, is intended to provide a resource base for the financing of development programs. Implementation of the second objective clearly entails the importing of foreign capital and expertise, for which PNG has been very open -- particularly with respect to minerals investments. 13. To carry out its development strategy, the Government established the annual National Public Expenditure Plan (NPEP), a rolling four-year plan for the public sector which focuses political decision making on nine strategic objectives and the tradeoffs among them. While the basic aims of the NPEP are to link the planning process with overall economic policy and to direct public spending to the activities that have the highest national priority, its coverage is limited to new projects and forward planning is only carried out for one year. The first NPEP accounted for only 4% of the 1978 expenditures (K20 million), but subsequent plans have been covering increasing portions of the budget as government revenues have grown. In the 1983 budget, the NPEP encompassed more than one-quarter of total expendi- tures. Implementation of NPEP projects has been delayed by lack of staff and experience, but the record is gradually improving. In effect, the NPEP process emphasizes the management of recurrent costs associated with capital projects, but is not, strictly speaking, geared to development. Development Issues 14. The major factors which will affect the Government's ability to promote economic development are the decentralization of government activi- ties, the ability to achieve self-reliance in both staffing and financial resources, and the willingriess to take new initiatives in policy formulation and investment in the agricultural sector. 15. Decentralization, which gives the provinces greater control over spending, reduces the national Government's ability to pursue its priorities, while inadequate staffing interferes with the ability of the provinces to develop their own plans. PNG's topography has made it a country of scattered tribes, with no great sense of national unity, and a degree of political decentralization was a necessary response to secessionist pressures. Provincial governments are gradually assuming regulatory and financial control in some areas and will share power with the National Government in others. Provincial governments are financed through national government conditional and unconditional grants, national government refunds of certain revenues and, to a very limited extent, their own taxation measures. Unconditional grants, which allow provinces to spend according to their own priorities, are by far the most important source of finance, but while in the 1982 budget they comprised over 70% of the total receipts of 4 the provinces, they amounted to less than one-quarter of total national government revenues. One of the most serious problems facing provincial governments is the shortage of trained and experienced staff, and the most urgent priority of the provinces is to develop the capability for budgeting, planning, and project identification and preparation. 16. Self-reliance in PNG involves both availability of skilled manpower and financial resources. On the staffing side, the Government has made substantial progress in replacing expatriates with nationals, especially considering that the University of Papua New Guinea produced its first graduates as recently as 1972. However, the country still relies heavily on expatriates for many necessary services. This situation has created a relatively high-cost government and a dependence on the Australian grant (now equal to about 10% of GDP) to help meet these costs. In the public sector, localization has reached an overall level of 90%, compared to 80% in 1971, but at the higher levels of skill, requiring post-secondary education, the proportion of nationals is still only around 40%. The shortage of qualified staff is reflected in the existing vacancies in government, and in some departments the shortages of professionals are critical. The establishment of provincial governments is adding to the pressures on existing staff, and the policy of localizing positions held by expatriates adds to the demand for trained Papua New Guineans. While various training programs have been established to fill these needs, they have thus far proved inadequate. 17. The Government's efforts to attain financial self-reliance emphasize modest but steady and sustainable growth in real public expenditure accom- panied by a reduction of reliance on foreign aid from Australia. Domestic revenue accounted for only about 36% of government receipts in FY68, 60% of the total in FY76 (immediately after independence); and 68% in 1981. Over the past seven years, the Bougainville copper mine has been a major source of domestic revenue, averaging 18% of the total and reaching a peak of 27% in FY76, but falling to 6.5% in 1982. While mineral revenues will be largely restored when the Ok Tedi mine becomes fully operational in 1984, revenues from these sources may not regain their former share of overall revenues. 6- Thus if agricultural commodity prices remain depressed, the Government may well have considerable difficulty in managing a more rapid phase-out of Australian aid after 1985/86. 18. Capital expenditiures (including those financed by external assist- ance) as a share of the total budget have been relatively modest. While these expenditures doubled between 1978 and 1980 (to reach 15% of the total budget), they dropped by one-third in 1981 and have stagnated at those nominal levels -- 9-10% of the total budget -- since then. While in the past the availability of the Australian grant, together with substantial revenue from the mining sector may have contributed to a certain laxity in financial discipline in the area of current expenditures (particular'ly for wages and salaries), this situation Ino longer prevails. Even with fairly substantial increases in taxes over the period (b-ut excluding the Australian grant) government revenues stagnated between 1980 and l98S3 and the Government is undertaking a 10% cut in current and capital expenditures and substantive reduction of the size of the pub'lic service. 19. While economic management has been largely sound and a nominal framework for plarning economic development has been evolved, the country's growth performance has been disappointing, averaging somewhat less than the rate of population growth over the 1970s. Of particular concern is a lack of growth in the agricultural sector, which will have to absorb the bulk of the additions to the labor force in the foreseeable Luture. Despite a great potential for agricultural development, even with the current world price situation, investment in the sector remains low, and its prospects for the coming decade are not bright unless steps are taken to bolster its growth. The major constraints have been inadequate extension services for small- holders, a lack of finance, land laws which prevent the consolidation of holdings too small for economic redevelopment, a shortage of managerial talent, and legislation designed to encourage the transfer of foreign-owned plantations to Papua New Guineans, which has been a serious disincentive to reinvestment. The Government recognizes the gravity of the situation and has taken some initiatives to improve it, including suspension of the plantation redistribution legislation, measures to supply management skills to Papua Nlew Guinean-owned estates, and steps to reorganize extension services. The country faces a particularly serious problem in the area of coffee. Producticn of this crop has fared better than other major agricul- tural exports, with production now about 50% over quota. Unfortunately, sales to the non-ICO market brirg a price 40% below the IC0 price. The Government recognizes this problem and intensive studies on crop diversification will be undertaken. External Sector 20. PNG exnerienced huge trade deficits prior to the introduction of copper exports in FY73. The current accouat deficit ivas around one qtarter of GDP in the early 1970s. r ports w-ere over 50% of GDP, whereas exports were - 7 - only about one-third as high. Since FY73, however, earnings from copper exports have dwarfed those from other commodities, and, except for small deficits in FY75/76 when copper and copra prices fell, the balance on current account, which includes the large Australian grant, remained positive, despite large service payments, and reserves of foreign exchange reached ten months' worth of imports in mid-1979. However, falling commodity prices, a decline in the copper content of the Bougainville mine and contained inflation in the import sector have dramatically changed the situation, with the current account turning from a positive K55 million in 1979 to a negative K260 million (15% of GDP) in 1981. 21. The current account position is likely to be in poor shape until the end-1983 at least, with the deficit up by 75% -- and assuming the Australian grant below the line -- between 1980 and 1982. This will be the case not only because of the adverse commodity price situation, but also because requirements for the construction of Ok Tedi will cause imports to grow faster than exports. Especially with the help of Ok Tedi gold exports and continuing conservative demand management, exports will begin again to exceed imports and the resource balance will turn positive by the mid-1980s. PNG is likely to require an average net capital inflow of over US$200 million p.a. (in 1981 prices) through 1990, but the bulk of it will come in 1981-86, when the minerals sector will finance over half of the inflow through direct foreign investment and borrowing. If the rest of the capital requirement is met by concessional loans and through official borrowing on terms similar to those recently obtained by the Government in world capital markets, the result would be a small increase in debt service requirements. Assuming a small improvement in growth rates (to 3.5% p.a.), debt service ratios would rise to about 10% by mid-decade (the 1981 level was 6.1%) to fall to around 3% in 1990. Total external public debt outstanding as of December 31, 1981 amounted to US$757.0 million, of which US$191 million (25%) was owed to the Bank Group. Debt service payments to the Bank group are only 11% of total debt service payments. PART II - BANK GROUP OPERATIONS 22. As of September 30, 1982, Bank Group assistance to Papua New Guinea consisted of 10 loans and 13 development credits, totalling US$213.9 million. The first operation was a telecommunications loan of US$7.0 million approved in 1968; the most recent, a petroleum exploration technical assistance project of US$3.0 million approved by the Board in July 1982./1 Project implementa- tion has been satisfactory, though the first rural development project in the Southern Highlands is experiencing some difficulties with recruitment of /1 This credit was signed on November 5, 1982, but has not yet become effective due to delays in arrival of Project Manager. - 8 - essential expatriate staff. The rapid turnover of expatriate staff and the transitional problems of recruiting and training their replacements have led to delays in project monitoring and auditing but physical implementation has progressed approximatelvy on schedule. As of September 30, 1982, seven credits and six loans were fully disbursed, and the effective loans and credits to Papua New Guinea held by the Bank and IDA amounted to US$196.6 million. Annex II contains a summary statement of Bank loans and IDA credits as well as notes on the execution of ongoing projects. 23. In more recent years Bank Group lending has emphasized agriculture with strong support in education and transport and some lending for energy. The Bank's strategy for future lending is based on three objectives: (a) support for more growth-oriented policies and institutions; (b) develop- ment of lar-e-scale opportunities for permanent cash economy employment based on the substantial agricultural resources of the country; and (c) promotion of human resource development. In FY83, along with the Petroleum Technical Assistance Project referred to above, a loan for an agriculture support services project is planned. A third agriculture credit project, a secondary education project, and a nucleus estate project are planned for FY84. 24. The Bank's purpose in lending for transport is basically to support agricultural development, for which the physical integration of the country is essential. Bank projects in the sector will strongly emphasize road mainte- nance, development of local contractors and training of PNG civil engineers. The proposed proiect represents the first attempt to improve transport facili- ties at both the national and provincial levels. In addition to increasing rural mobility through rehabilitation and improvement of roads and bridges, the project will assist in (i) establishing an efficient highway maintenance system; (ii) developing the road transport industry; and, (iii) establishing a strategy for transport sector development in PNG. 25. Disbursement performance on Bank Group projects has been extremely varied, ranging between 70% and 21% during the period from FY77-81. Just after independence disbursement rates were unusually high, reflecting the relatively small and simple pre-independence projects and the fact that they were managed by an experienced expatriate civil service. The disbursement rate for FY82 was 11.5%, substantially below the Bank-wide average of 23.9%, and the 26.6% average for other countries in the Region. Disbursement rates for two comparator countries, Columbia and Morrocco, were 32.0% and 13.7% respectively in FY82~ Slow disbursements in PNG reflect current delays in appointment of project accountants, problems with land acquisition and weak project management. Each of these prob7lems is being specifically addressed in the context of project supervisione - 9 - PART IIT - TTE SECTOR 27. PNG is a sparsely populated island nation, with widely scattered centers of economic activity. The transport system reflects the country-s geography, topography and population distribution. It relies heavily on interisland and coastal shipping for freight transport and on air transport for passenger movements. Difficult terrain and a small population in a large area have promoted sea and air transport and have prevented the development of an inter-connected network of national roads. In general, projected traffic between main centers is too low to support the cost of 4 constructing and maintaining high standard roads, with the exception of the Highlands Highway connecting Lae with Mount Hagen and Mendi. The trucking industry is also at an early stage of development, except in the Highlands Highway area. 28. The Government is aware of the inadequacies in the transport system. Tariffs are high, transport operations overregulated, the safety record poor, maintenance expensive, and management of operations largely in the hands of expatriates. Since domestic construction capacity is in its infancy stage, major works require foreign contractors. Provision of improved services to the rural areas, where most of the people live, is a political necessity for the Government, and better land transport has the highest priority. Demands to extend and improve the road network thus exist, but at the same time, there are pressures to reduce the recurrent budget, to limit expatriate recruitment, and to press forward with localization and provincialization. Air Transport 29. Since the 1920-s, air transport has been the principal means of access to the PNG hinterland, and up to 1965, the development of the Central Highlands was entirely dependent on air transport. PNG has 425 operational airports and airstrips; the national airline, Air Niugini, operates scheduled flights to 18 of these airports. Air Niugini has exclusive regional traffic rights under its charter, but it is experiencing managerial and financial difficulties. This monopoly increases air transport costs and inhibits the efficient growth of the air transport industry because small commercial operators are obliged to operate higher-cost, small aircraft and are not allowed to compete either with Air Niugini, or among themselves. Ports and Shipping 30. PNG has some 418 ports of various size in the country, sixteen major ports are managed by the PNG Harbours Board and two by mining companies. In 1980, overseas cargo through the major ports amounted to - 10 - 3.7 million tons and coastal cargo 0.8 million tons. The major ports are well equipped and serviced by 15 expatriate shipping companies. Minor ports are serviced by 176 smaller boats. The proposed poriect will provide for feasibility studies of several boat service projects which are expected to improve access isolated communities. Highways 31. The total road network in PNG comprises about 19,000 km of which about 940 km are sealed. Because of the high construction costs caused by the extremely mountainous terrain and heavy rainfall, the road system is not linked. It consists of a number of regional networks, where roads are divided into three functional categories (arterials, collectors, and locals) and classified into national and provincial roads for administrative purposes. The arterials comprise about 5,000 km, and collectors and locals about 13,000 km. In addition, there are about 1,000 km of urban roads. 32. There is an obvious need to rehabilitate and improve provincial roads linking isolated communities. However, provincial governments, which experience shortages of technical and administrative staff, are unable to undertake expanded road maintenance obligations. The proposed project would not only provide for rehabilitation and improvement of high-priority, provincial roads, but would also include technical assistance to provincial government staffs to address the manpower problem in the provinces. 33. Both passenger and freight traffic volumes are light. The High- lands Highway (600 km) is an exception, it carries a substantial traffic of over 600 vehicles daily, of which more than 40% are trucks and buses. The Highlands Highway serves the predominantly agricultural Central Highlands Region, where about 40% of PNG's population live and its improvement has been the most significant achievement in the transport sector so far. The proposed improvement of the two remaining unsealed sections of the Highlands Highway and the first section of the Enga Highway would result in significant vehicle operating and road maintenance cost savings and would further support the expansion of agricultural production along the Highlands Highway and in Enga Province. 34. For-hire road transport operations are limited to the area of the Highlands Highway and are dominated by several large, expatriate-managed companies which provide an efficient, reliable and well-supported service. According to a recent study, truck freight rates on the Highlands Highway are 40% above the "cost-plus-overhead" total and this is partly due to overregulation of routes, tariffs, and licensing. The scarcity of local entrepreneurs and managerial staff is a constraint to transport development. The proposed project would provide for a study to review the road freight industry in order to increase participation of PNG nationals. Outside the Highlands Highway passengers and freight are mostly carried by privately- owned minibuses, often the property of community groups. Rates are set by negotiation between operators and clients, sometimes mediated by local government councils or by provincial authorities. - 11 - Planning and Administration 35. Responsibility for planning, construction and maintenance of the road network is divided between the national Government and the 19 provincial governments. The national Government's Department of Transport and Civil Aviation (DTCA) is responsible for policy and planning tasks, and the Department of Works and Supply (DWS) handles construction and maintenance of national roads. Despite decentralization, the national Government continues to provide most of the funds for construction and maintenance of national and provincial roads. 36. Most senior and middle-management posts in DTCA and DWS are filled by expatriates engaged on short-term (2-3 years) contracts. Qualified PNG nationals are in extremely short supply in most technical agencies. To fill key positions DTCA and DWS recruit overseas, but the introduction in 1979 of reduced salary scales and revised terms of contract has made recruitment difficult and many positions remain vacant. DWS continues to pursue a training program to accelerate staffing with qualified nationals but, so far, the focus has been on fellowship programs and on training of lower-level technical staff. It will take many years to train local staff for all professional positions. The proposed project will provide technical assistance to help this effort at DWS headquarters and in the provinces. The project also provides for short-term technical assistance and consultant services in order to strengthen the planning and monitoring activities of DTCA and DWS. Engineering, Construction and Maintenance 37. DWS is responsible for the engineering of road works. A large proportion of its road design work is carried out by consultants, most of whom are subsidiaries of foreign firms. Almost all major construction work on national roads has been carried out by foreign contractors. A small percentage of the work has been carried out by force account (day labor) or by its variant, Project Managed Force Account (PMFA), which involves the use of subcontractors, labor, and plant hired under a construction manage- ment team of consultants engaged by DWS. The proposed project will provide technical assistance to aid DWS in making further improvements to its in-house engineering and supervision capabilities. 38. Civil engineering contracts have not been of the scale or frequency to support a comprehensive domestic construction industry. As the Government wishes to promote the industry, the Second Highlands Road Improvement Project (Credit 677-PNG) included a component for technical assistance to domestic civil engineering road contractors. Under this component, a consultant started field training for a small number of domestically owned and managed firms which had a basic equipment fleet and the entrepreneurial spirit necessary for their further development. However, the shortage of suitable small road construction or maintenance contracts hampered the success of - 12 - these training efforts. Under the Third Highway Project (Loan 1856/Credit 1030-PNG) the Government undertook to investigate further ways of promoting the domestic construction industry. Although the results have been dis- appointing, the proposed project contains provisions for reviving previous attempts to develop the industry. During the project period, DWS plans to supply work to small contractors by carefully apportioning small roadworks to be financed under the project. 39. Maintenance of national roads and bridges is carried out by DWS to a generally satisfactory technical standard but the level of maintenance services provided is often inadequate. Adverse topographic and climatic conditions, increased traffic volumes, and inefficiencies in DWS operations all contribute to high maintenance costs.. In the past, adequate funds have been provided by the national Government for maintenance of national roads but some funds have been diverted to road improvement works. DWS intends to establish a central Maintenance Branch at headquarters to plan, direct and monitor maintenance and its cost. Consultants retained under the Third Highway Project (Loan 1856/Credit 1030-PNG) to assist in developing a maintenance program were appointed recently. Efforts to improve maintenance will continue under this project. 40. Maintenance of provincial and local roads is inadequate. While maintenance is the responsibility of provincial governments, in most cases DWS carries out the work on their behalf. The extent of maintenance to be carried out and the allocation of the necessary funds depends entirely on the provincial governments, which sometimes prefer to construct new roads. The proposed project would assist the provincial governments to develop a rational strategy for maintenance on provincial and local roads. Transport Financing 41. Financing for the construction, improvement and maintenance of roads is provided from the national Government-s annual budget. Provincial governments receive funds for provincial and local roads either through untied grants or through tied National Public Expenditure Plan (NPEP) grants. The Government's allocation for roads and bridges was about US$41.4 million in 1982. Of this, US$24.6 million was for construction and US$16.8 million for maintenance. No figures are available for provincial government expenditures on roads. The Asian Development Bank is planning to finance the improvement of about 40 km of national roads together with consulting services and technical assistance. Bank Group Lending for the Sector 42. The Bank Group has assisted the transport sector through three highway and two port projects. Two of the highway projects and both port projects have been satisfactorily completed. The First Highway Project - 13 - (Cr. 204/Loan 693-PNG) in 1970 provided US$9.0 million for improvement of 150 km of the Highlands Highway between Kundiawa and Mendi. Because of high bids, the project showed a cost overrun of 90% which the Bank Group declined to finance. The Performance Audit Report of June 16,1977 concluded that the Bank was unnecessarily harsh in refusing supplementary finance, and that international competitive bidding (ICB) conditions in PNG at the time may have contributed to cost escalation. The Second Highlands Road Improvement Project (Cr. 677-PNG) in 1977 provided US$19.0 million for construction and improvement of 68 km of the Highlands Highway as well as for consultancy services and training. Bids for civil works submitted prior to negotiating the credit exceeded the cost estimates by 75% and rebidding failed to obtain lower prices. The project was scaled down in 1976 from 300 km to the most urgently needed sections (totalling 68 km) and one-third of the work was set aside to be carried out by DWS through PMFA. The project was completed in February 1982, one year behind schedule, with a total cost some 15% above the appraisal estimate. 43. The First Port Project (Cr. 326-PNG) of 1972 provided US$9.2 million for improvements at four main ports, and was completed in 1977. The Second Port Project (Ln. 1551-PNG) of 1978 provided US$3.5 million for a new container berth at Port Moresby, for improvement of a minor port, procurement of launches, and consulting services. The Kuwait Fund co-financed US$3.5 million, and the project was completed in May 1980. 44. The Third Highway Project (Ln. 1856/Cr. 1030-PNG) of 1980 has provided US$30 million for construction and improvement of 138 km of the Highlands Highway, procurement of traffic counting equipment, consulting services, technical assistance for road maintenance, and training. After a slow start, the rate of progress in implementing this project has improved and civil works are now about 50% complete. Recent civil unrest and a substantial increase in the required earthworks due to unstable slopes are expected to cause further delays. Project completion is expected during 19R4, some twelve months behind the appraisal schedule. Transport Sector Issues 45. The Bank Transport Sector Review of 1979 identified a series of issues: sector planning, efficiency of transport operations, participation of PNG nationals in transport-related activities, and balance between public expenditures for, and public revenues from transport operations. 46. These issues were addressed in the Third Highway Project, however, difficulties in implementing political objectives such as localization and decentralization, scarcity of experienced national staff, and the technical intricacy of issues such as pricing policy and deregulation suggest that much more time than originally envisaged will be needed to appreciably improve transport sector management and operations. During negotiations for the proposed project, the Government agreed to adhere to a timetable for - 14 - addressing the policy and manpower issues, and to prepare a Transport Sector Development Strategy. PART IV - THE PROJECT 47. The proposed project was identified in 1981 and prepared by the Government with the assistance of consultants financed under the Third High- way Project (Ln. 1856/Credit 1030 - PNG). The project was appraised in May 1982. Negotiations were held in Washington from January 31 to February 8, 1983 with a Government team led by Mr. Michael Essex, First Assistant Secretary, Department of Finance. A Staff Appraisal Report (No. 4184-PNG, dated March 8, 1983) is being distributed separately. Supplementary project data are provided in A_nnex III. 48. The project's mairn objectives are to improve both rural mobility through rehabilitation and improvement of roads and bridges, and highway maintenance through the establishment of an efficient management system, and to assist in developing the road transport and construction industries. The project also aims to assist in establishing a strategy for transport sector development leading to policy action plans and associated investment programs. Project Description 49. The proposed project would include: (a) Rehabilitation and Improvement of Provincial Roads About 15 high-priority, provincial road sections (totalling about 277 km) selected from the Rural Transport Works Program would be rehabilitated or improved. These provincial roads are rough and narrow gravel or earth roads, most of them impassable in the rainy season. Lack of maintenance and inadequate original design, have resulted in their rapid deterioration though traffic levels are light. The roads will be improved to an all-weather standard and provided with gravel surfacing; slopes will be stabilized, drainage improved, and bridges strengthened or replaced as needed. (b) Rehabilitation or Replacement of Bridges on National Roads About 32 deteriorated, temporary or unsafe bridges on national roads would be rehabilitated or replaced. These bridges prevent the flow of traffic on otherwise adequate roads and they often generate high maintenance costs. The bridges would be improved to an adequate design standard. - 15 - (c) Improvements to Sections of the Highlands and Enga Highways Three sections totalling 54 km would be improved. Two of these sections, the Kudjip-Minj (13 km) and Watabung-Chuave (16 km) are the remaining unimproved sections of the Highlands Highway, and they now contri- bute to high vehicle operating and road maintenance costs. Improvement of these two sections will provide a paved, all-weather road from the port of Lae to Mount Hagen in the Central Highlands (Map IBRD 16665R1). The third road section, Togoba-Tanbul Turnoff, covers the first 25 km of the Enga Highway, which is the continuation of the Highlands Highway to reach Wabag. The entire length (93 km) is proposed by the Government for improvement over the coming decade. All three road sections have rough and narrow gravel surfaces which have deteriorated due to poor original design, inadequate maintenance and substantial traffic, exacerbated by difficult terrain and heavy rainfall. These sections will be improved, mainly on existing alignments, to double bituminous paved standard, drainage improved, slopes stabilized and bridges strengthened or replaced where necessary. (d) Consulting Services Consultants would be engaged for feasibility studies, preliminary and detailed engineering and construction supervision for project roads and bridges, construction management and monitoring services for works using PMFA (para. 37), and for undertaking feasibility studies and detailed engineering to prepare future projects, including several boat service projects identified by the Provincial Rural Transport Study, which was financed under the Third Highway Project. In addition, consultant services would be provided to carry out transport policy review studies which would cover topics such as: establishment of a data information system (to facilitate transport planning, policy formulation, price controls and tariff-setting and to determine needed policy and regulatory measures); review of the road freight industry (to develop measures for the increased participation of PNG nationals); review of airport user charges; and review of the bus transport systems in Port Moresby and Lae. (e) Technical Assistance and Training Consultants would be engaged to provide technical assistance: q (i) to DTCA to assist in provincial planning and training programs, and in upgrading and localization of DTCA-s capabilities at both the national and provincial levels; and (ii) to DWS to assist in improving its management capabilities and maintenance operations; in instituting a maintenance training program at the national and provincial levels; and in developing the domestic construction industry. Further training would be provided to PNG nationals in construction management and supervision through their secondment to consultant teams, particularly where PMFA operations will be used. - 16 - Hydropower Survey 50. In order to assist the Government in conducting a review of potential hydropower resources as soon as possible, a total of US$1.0 million was added to the proposed loan. The urgency of this survey is that the location and capacity of these sites may be a determining factor in the location of future mining and processing industries. Cost and Financing 51. The total financing required for the project, including the hydro- power survey, contingency allowances, right-of-way acquisition and the front-end fee on the Bank loan, is estimated at US$55.5 million equivalent, with a foreign exchange component of US$37.4 million, representing 67% of total project cost. The proposed loan of US$31.0 million, would finance 56% of total project cost, or 83% of the foreign exchange cost, including the capitalized front-end fee of US$230,769, and about US$580,000 equivalent of local costs incurred in connection with consulting services and technical assistance. The Kuwait Fund has indicated its interest in providing about US$7.0 million to finance on a parallel basis the foreign costs of the provincial roads component, together with the relevant consulting services for design engineering and construction supervision. The balance of the local costs, about US$17.5 million equivalent, would be financed by the Government. Cost estimates are based on February 1983 prices and exclude taxes and duties, from which the project will be exempt. Total cost includes: (a) physical contingencies of 10% to 25% of base cost on all civil works items depending on the status of engineering in each case; and (b) price contingencies amounting to about 21% of base costs (estimated for both foreign and local costs at 8.0% for 1983, 7.5% for 1984, 7.0% for 1985, and 6.0% for 1986 and later years). Overall, physical and price contingencies combined represent about 26% of the total project cost. The project cost includes US$900,000 equivalent of retroactive financing for project preparation work undertaken after July 30, 1982 by DTCA and DWS through consultants (Beca, Carter and Hollings - PNG, Cardno and Davies - PNG and Ove Arup and Partners - UK). 52. The road rehabilitation and improvement costs, including contin- gencies and rights-of-way, vary from about US$40,000 per km for provincial roads to approximately US$475,000 per km for sections of the Highlands and Enga Highways. These costs are reasonable. However, for the two sections on the Highlands Highway (representing about 25% of the total project cost), the cost estimates are tentative because detailed engineering is still to be done. A total of 788 man-months of consulting and technical assistance services would be provided at a total cost of US$8.6 million equivalent (contingencies not included). An additional 75 man-months of consultants services for construction management of PMFA works, estimated at US$800,000, is included in the construction cost for the works involved. The cost of consulting services for detailed engineering and construction supervision for project roads and bridges is estimated at about 12% of the construction cost. Average man-month costs for consulting services and technical assistance, including travel and allowances, are estimated at US$9,500 equivalent. In - 17 - addition, local facilities, equipment, administrative costs, vehicles and materials are estimated to cost about US$1,500 equivalent per man-month. For the hydropower survey 84 manmonths of consultants services are required, at an average cost of about $10,000 per man-month. Implementation Arrangements 53. In accordance with the Government's decentralization policy, the project extends the assistance of previous transport projects from the national to the provincial government level by financing rehabilitation and improvement of provincial roads. Because of lack of management capabilities and technical expertise in the provinces, the provincial road component would be implemented by DWS. DWS would thus be the executing agency for all civil works to be carried out under the project, for consulting services for construction management, detailed engineering and construction supervision, and for technical assistance for maintenance, highway management and train- ing. DTCA will be responsible for the consulting services for transport policy review studies, including the boat services feasibility studies, and for the technical assistance for transport planning and programming at national and provincial levels. As DWS and DTCA have been responsible for two previous Bank projects and technical assistance would be provided, no administrative difficulties are anticipated. 54. As the project consists of many small components scattered over the country, preparation has been difficult, time consuming and costly. The feasibility studies and economic analysis for the project roads and bridges were carried out under DTCA supervision, through its Project and Planning Divisions. DWS supervised the execution of the preliminary and detailed engineering for the roads and bridges; some of this work is ongoing. Consultants would be engaged under the project to provide construction management, monitoring and supervision, to carry out studies and detailed engineering, and to provide technical assistance. 55. The project will be implemented over a five-year period. Civil works will begin during 1983 and should be completed by mid-1988. Upon completion, DWS will be responsible for maintenance of all project roads and bridges, including the provincial roads which will be maintained with the use of DWS's financial resources. In the long term, when provincial capabilities reach a satisfactory level, the responsibility for maintaining these roads will be transferred to provincial governments. During negotiations, assurances were obtained that the Government will: (a) by October 31 of each year during project implementation furnish to the Bank for its approval a program of civil works to be carried out during the next calendar year (Section 3.07 of the Loan Agreement); and (b) by July 1, 1985 prepare and furnish to the Bank for review a Transport Sector Development Strategy and, after taking into account the Bank's comments, submit it to the National Executive Council for consideration (Sections 3.08(a) and (b) of the draft Loan Agreement). 56. In addition, the Government agreed to an action program in the form of a Side Letter, which supplements Section 3.01(b) of the draft Loan Agreement and includes agreement that: (i) an agreed timetable for - 18 - addressing transport sector issues, namely transport planning, modal deregulation, user charges, and development of domestic contractors would be adhered to; (ii) DWS would submit to the Bank for comments by March 31, 1984, and subsequently implement, an action program for improvement of maintenance operations satisfactory to the Bank; (iii) DWS would establish a Maintenance Branch and would appoint national staff for training, not later than December 31, 1983; (iv) DWS would submit to the Bank for comments by September 30, 1983 an action program for implementation of a road mainte- nance training program and subsequently implement a training program for its maintenance staff; (v) Government would continue to review transport user charges with a view towards increasing them appropriately to recapture a larger share of the costs, maintenance and administration of transport infra- structure; and (vi) Government would continue to evaluate modal regulations with a view to applying regulations which will promote an economic and efficient transport system. Procurement 57. Civil works totalling about US$15.0 million equivalent (including contingencies) for the Togoba-Tanbul Turnoff and Kudjip-Minj sections on the Highlands and Enga Highways will be procured through ICB following standard Bank guidelines. During project appraisal the possibility of constructing the Togoba-Tanbul Turnoff using a modified version of force account (PMFA) administered by a consultant management team was evaluated and rejected in favor of ICB for the following reasons: (a) even allowing for local security problems, contractor prices and schedules would probably not exceed PMFA estimates; (b) there would appear to be sufficient interest among international contractors to assure responsive bidding under ICB; and, (c) the Government could promote the domestic construction industry and extend its training efforts by using PMFA for other more suitable project works. In order to measure the cost effectiveness of carrying out road works by PMFA as contrasted with using ICB, consultants will be retained to establish an appropriate monitoring system. Civil works totalling US$17.0 million equivalent (including contingencies) for paving and bridges on the Watabung-Chuave section of the Highlands Highway, for selected provincial roads and for parts of the bridge program will be procured under contracts (value of each package not exceeding US$1.0 million) awarded through local competitive bidding (LCB) procedures which are satisfactory. 58. The balance of the improvement works for the Watabung-Chuave section and the rest of the provincial roads and bridge program works, totalling about US$9.7 million equivalent (including contingencies), will be carried out by DWS, partly by force account and partly through PMFA, in packages not exceeding US$750,000. For works to be undertaken in the first two years, the form of procurement is outlined in Schedule 4 of the draft Loan Agreement. The specific form of procurement for remaining works will be agreed with the Bank. LCB contracts and PMFA works will be based on unit prices applied to bills of quantities with monthly invoices certified by a supervising consulting engineer. Opportunities will be provided to domestic contractors, primarily through subcontracting portions of larger contracts and on PMFA and force account works. - 19 - 59. All consulting services and technical assistance will be procured in accordance with the relevant Bank guidelines. Outline terms of reference for consulting services have been agreed upon between Government and the Bank. Contractors would be pre-qualified to bid for works to be tendered through ICB. Where LCB is to be used, foreign contractors operating in the country would also be allowed to submit bids. All bidding packages for civil works estimated to cost the equivalent of US$500,000 or more will be subject to the Bank's prior review of procurement documentation. 60.- Assurances were obtained that the Government will take the steps necessary to acquire land, including rights-of-way, prior to awarding contracts, and would furnish evidence of such acquisition to the Bank (Section 3.05 of the draft Loan Agreement). During negotiations the Government confirmed that necessary arrangements for acquiring rights-of way are well underway and that all necessary rights-of-way for roads and bridges to be undertaken during the first year of the project period have been obtained. Disbursements 61. Disbursements of the loan proceeds would be made against normal documentation over a six-year period /1 on the following basis: (a) 65% of total expenditures for civil works; and (b) 100% of total actual expenditures for consulting services, technical assistance and training. All expenditures would be fully documented except those for civil works carried out by DWS through force account, which would be reimbursed on the basis of statements of expenditure certified by DWS in accordance with previously agreed total estimated costs for each road or bridge. Supporting documentation would be retained by DWS and made available for review by supervision missions. Payments will be subject to internal audit by DWS and to audit by the Auditor-General's office (Section 4.02 (c) of the draft Loan Agreement). Disbursements, up to an aggregate total of US$900,000, may be made for project preparation costs incurred after July 30, 1982 and prior to loan signature. Assurances were received that disbursements for the two Highlands Highway sections would not be made until their detailed engineering is completed to the satisfaction of the Bank (Schedule 1, para. 3(b) of the draft Loan Agreement). The closing date for the proposed loan would be June 30, 1989. /1 This disbursement schedule, with some minor modifications, follows the regional profile in order to provide for unexpected delays in implementation. - 20 - Project Benefits, Justification, and Risks 62. Rehabilitation and improvement of the provincial roads included in the project would provide increased rural mobility. Improved access would benefit the rural population by promoting economic activity, reducing transport cost and providing better access to government health and education services. Rehabilitation and replacement of deteriorated bridges on national roads would provide safe, economical and efficient means of transport among districts, regions and provinces. Improvement of the two Highlands Highway sections would complete a paved road from the port of Lae to Mount Hagen, providing lower cost, safer and speedier access between the coastal area and the Central Highlands. Improvement of the first section of the Enga Highway would extend this improved, lower cost access towards Wabag, assisting the process of economic development in Enga Province. On all these roads, the currently high maintenance costs would be reduced and road safety improved. 63. The technical assistance component of the project would improve maintenance operations, help rationalize transport planning and upgrade capabilities to administer and operate transport infrastructure. The training component would reduce dependence on expatriates and enhance the capability of PNG national staff. The various studies and the resulting policy measures would help place the management of the country's transport assets on a sounder financial and technical basis, encourage development of the domestic construction industry and promote increased participation by PNG nationals in the road transport industry. 64. Based on vehicle operating cost savings and on savings due to reduced maintenance costs, the estimated economic rate of return (ERR) for the project items whose economic justification has been established (four provincial roads, eight bridges, the Kudjip-Minj section of the Highlands Highway and the Togoba-Tanbul section of the Enga Highway section) is 33.2%. Sensitivity analysis for these initial phase project components (representing about 49% of the total project cost) shows, in the worst case of a 10% increase in costs and a 10% decrease in benefits, an ERR of 28.3%. Under agreed criteria, the project items under preparation ought to show a minimum ERR of 10%; the project as a whole ought thus to show an ERR of 20% or better. 65. The risk of major cost increases is not substantial. Potential difficulties over right-of-way acquisition have been dealt with by extending construction schedules to allow for protracted negotiations; and Government has confirmed that no right-of-way problems exist for the civil works to be started in the first year of the project period (para. 60). The possibility that provincial roads may not be properly maintained after completion has been reduced by arranging for DWS to undertake maintenance of all project - 21 - components. The risk that policy and institutional objectives would not be met because of delays in recruiting expatriate staff, or because Government would not assign enough national officers to work with the foreign experts, has been reduced by agreeing with Government on a detailed action program for implementing the technical assistance components for transport planning, highway maintenance improvement, and staff training (para. 56). Environmental Aspects 66. The project is not expected to cause any environmental or ecological problems. No major changes in the alignment of project roads will be made. Wider and better constructed shoulders will contribute to road safety. Suitable design of drainage and slope stabilization will ensure that the works will not cause or aggravate flooding, erosion or land slides. Paving the road sections on the Highlands and Enga Highways will eliminate the present danger caused by dusty, slippery and muddy surfaces. PART V - LEGAL INSTRUMENTS AND AUTHORITY 67. The draft Loan Agreement between the Independent State of Papua New Guinea and the Bank and the Report provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed separately to the Executive Directors. 68. A special condition of disbursement for the two Highland Highway sections is that the detailed engineering be completed to the satisfaction of the Bank (para. 61). Special conditions of the loan are listed in Section III of Annex III. 69. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 70. I recommend that the Executive Directors approve the proposed loan. ( A. W. Clausen President Attachments Washington, D.C. March 3, 1983 - 22 - ANNEX I Page 1 of 5 TABLE 3A PAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET PAPUA NEW GUINEA REFERENCE GROUPS (WEIGHTED AVERAGES AREA (TROUSANI SQ. KH.) - MOST RECENT ESTIMATE)- TOTAL 461.7 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 4.7 1960 /b 1970 /b ESTIMATE /b ASIA 6 PACIFIC LATIN AMERICA & CARIBBEAN GNP PER CAPITA (US) 190.0 390.0 820.0 890.1 1902.0 ENERGY CONSUMPTION PER CAPITA (kILOCRAMS OF COAL EQUIVALENT) 51.0 146.0 299.0 701.7 1259.9 POPULATION AND VITAL STATISTICS POPULAIION, MID-YEAR (THOUSANDS) 1932.0 2394.0 3007.0 URBAN POPULATION (PERCENT CF TOTAL) 2.7 9.8 17.9 32.4 65.7 PPOULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 4.5 STATIONARY POPULATION (MILLIONS) 9.4 YEAR STATIONARY POPULATION IS REACHED 2125 POPULATION DENSITY PER SQ. RIM. 4.2 5.2 6.4 255.4 35.2 PER SQ. P;1.. AGRICULTURAL LAND 508.4 546.6 625.3 1748.0 92.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 40.5 42.0 42.0 39.9 39.7 15-64 YRS. 56.6 55.0 54.8 56.8 56.1 65 YRS. AND ABOVE 2.9 3.0 3.3 3.3 4.2 POPULATION GROWTH RATE (PERCENT) TOTAL 1.8 2.1 2.3/c 2.3 2.4 URBAN 15.3 15.1 8.3 3.9 3.8 CRUDE BIRTH RATE (PER THOUSAND) 44.0 41.5 36.8 35.8 31.4 CRUDE DEATS. RATE (PER THOUSAND) 23.2 18.1 15.1 9.8 8.4 GROSS REPRODUCTION RATE .. 2.9 2.6 2.0 2.1 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. USERS (PERCENT OF HARRIED WOMEN) .. .. 3.0/d 36.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 100.0 100.0 105.0 115.6 110.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 79.3 83.6 86.7/e 106.4 108.4 PROTEINS (GRAMS PER DAY) 41.9 46.4 47.0/e 54.4 66.0 OF WHICH ANIMAL AND PULSE 16.7 19.9 19.97e 13.9 34.0 ChILD (AGES 1-4) MORTALITY RATE 26.2 19.3 13.6 6.7 5.6 HEALTH LTFF FXPECTANCY AT BIRTH (YEABS) 40.6 46.4 50.6 59.8 64.2 INFANT MORTALITY RATE (PER TrHOUSAND) 165.0 133.0 104.5 63.7 64.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. 20.0/f 32.0 65.6 URBAN .. .. 30.071 51.9 78.9 RURAL I- *- 19.0/f 20.5 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL *- 14.0 18.0/f 37.7 59.3 URBAN .. .. .. 65.7 75.3 RURAL .. 5.0 5.0/f 24.0 30.0 POPULATION PER PHYSICIAN 14390.0/g 11509.6 14040.0/e 8540.4 1617.3 POPULATION PER NURSING PERSON 2450.07T 2347.1 1585.57ie 4829.4 1063.5 POPULATION PER HOSPITAL BED TOTAL 170.0/g 150.5/g 214.9/e 1047.5 477.4 URBAN .. 52.1/i 96.77T 651.6 679.8 RURAL .. .. 272.7/e 2597.6 1903.4 ADMISSIONS PER HOSPITAL BED .. .. .. 27.0 27.3 HOUSING AVERAGU SIZE OF HOUSEHOLD TOTAL 3.1 .. 'RBAN .. .. RURAL .. .. AVERAGE NLMBER OF PERSONS PER ROOM TOTAL .. .. URBAN .. .. RURAL ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 80.0 .. URBAN .. .. RURAL .. .. - 23 - N8eTkf 5 TABLE 3A PAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET PAPUA NEW GUINEA REFERENCE GROUPS (VEIGHTED AVER/AGES - MOST RECENT ESTIMATE) a MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 32.0 52.0 64.0 96.2 104.3 MALE 59.0 64.0 73.0 99.8 106.4 FEMALE 7.0 39.0 55.0 92.1 103.3 SECONDARY: TOTAL 1.0 8.0 12.0 37.6 41.3 MALE 2.0 11.0 17.0 41.1 40.4 FEMALE 0.5 4.0 8.0 34.1 41.8 VOCATIONAL ENROL. (X OF SECONDARY) 16.0 19.4 22.3/h 20.8 33.7 PUPIL-TEACHER RATIO PRIMARY 35.0 29.7 30.5 35.5 29.9 SECONDARY 18.0 23.0 22.9/h 25.0 16.7 ADULT LITERACY RATE (PERCENT) 29.4 32.1 32.0/f 73.1 79.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 2.0 7.3 6.4/h 9.8 42.8 RADIO RECEIVERS PER THOUSAND POPULATION *- *- 54.4 116.5 270.5 TV RECEIVERS PER THOUSAND POPULATION .. .. .. 37.6 107.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. .. 6.5 53.7 63.7 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 2.8 2.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1058.4 1244.9 1492.0 FEMALE (PERCENT) 41.4 41.3 40.6 33.6 24.4 AGRICULTURE (PERCENT) 89.0 86.0 82.1 52.2 31.3 INDUSTRY (PERCENT) 4.3 5.8 7.7 17.9 23.9 PARTICIPATION RATE (PERCENT) TOTAL 54.8 52.0 49.6 38.5 33.6 MALE 61.2 58.5 56.4 50.5 50.4 FEMALE 47.7 44.9 42.2 26.6 16.8 ECONOMIC DEPENDENCY RATIO 0.8 0.9 0.9 1.1 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS HIGHEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 40 PERCENT OF HOUSEHOLDS .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 400.0 194.7 RURAL .. .. 275.0 155.1 184.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 178.2 518.0 RURAL .. .. .. 164.9 371.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 10.0 24.4 RURAL .. .. 75.0 41.1 Not available Not applicable. NOTES /a The group averages for each indicator are populationweighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c Indigenous population growth rate is 2.8x; /d 1974; /e 1977; /f 1975; /g 1964; /h 1976. May, 1982 - 24 - ANNEX I D-"T ON F SIALOd MItttAWO Page 3 of 5 Ntteies Aliorogrlh the daca-odre-ote 9ouhe g-11ri jodged the eta h,htiai-i- aod rtalieb., Iosrao - too htteotha,rrht -roeb oa toter- _hlsa aeo to desretir, order of egoroa. idt-atorads, _od Tha..reert cc trer-i majo dfrrtr_ s teo-- oot sot-otoa f fiecltoe) Ia he or.f...o.r gro.p datth a a age are -ottt wighted -cish-ic as hd for -ah i,,dot oto hort - hr aoooo h oce.stdeL a dt o httdttor L-Stor the oreae frtore ceogha okaoadooetd Iohe,~*thtIooo - hi--at attierawc.grtha-oorreo aidreferecte aLIora 05th (ehoacaodaoea.) Popoterter~~~~~~~~~~~~97 d,a.h,ah phee idaca d bto heti eo br ort- PF h.t-ttoo (ros ec t-ecalsorf -r -Vrreo irmoe -drgiaeooaaadtotlaedee--;td -a.oto so a) dioieh hi eaecocae-othoaoteathcdoi toe -oop, Pa.cec-., market a-d totohem gardeo or to toe li tom 1979 dara- tattlir taooi teer- topoto are - achthmata per--eoLt o -fod trcfas t p-IEet sahts heeoe,rooa'daeg prorripatJorat.to tsr PRg OAFItt (fit$) - taroc tarra soata -i at - rcr...earte potoes. a: dt-l oare ace _o Lo'oe ac ptt h-e.trI - trAsde he tot rotated 7o.a.e.creeaet oehooata..rfdfwatkdtt1t (tol8-d0 hosts); 1Oil, aodcedatatrceeetaro-e 1I peeoottrffeah ph tta o t rIs,. aod t9d0 d-ca. eoataaeae trc wdtt.et) ohot, otter to-patter ac-rt- grteeaotafttfetoPehoifto troet- aoaoapeoooo rcaoateoetP (root1 -- ortap aeartetareaafloettar litese.tr-ttF c,t adttte,teteo""e. 1- r gsaedtgaaaedtrf -1-1oterad oteodt -e acdeaeatroth-piatI,trr- oeatc-t asratats dr tdiedaratsd -e-eiey trti Ita kttogr-so ro.at qooe-o a 1960 ; ri, tOld, eat 1979 z-ethers tp,ootiteed e eta dt. totoded ootp toertoet dat- Adoisetoos go ota ted - fI--- aha ofb. sC tatoos-- to Lt daohda- f.o. hoapitaft daoader to the -tte of toSs. PtPtL.ATION 0th fTAI STttifTlCS Tetta raetstafaoo. Ott-Year lrhoosaads) t~~AI of Jolt, tdt 16, 1970, sed d80 HOtUtING difflrce defirii-tesr o-haror-as- matlft- r aahleyo data ord -heir etmat Ahade tdre ap-ao o etrac actt9otoe; r 0,tO, -tt tOri dat- ehe hras-hotIdoraaae tproe to-at poPtt-aase-yh0 9O dd se oar OiOeraooto std feettta, eae detos,rse aep fte -toettddtrroaet 5erte Peefj-aeinaaeet omeati-ae --pcieaItehteateostsa as-c-ato ird 0t-- t-tdtaftepeao tsotttttstgah -ot-toa potgat toooi. -e- - d teioaeatttotere~odetttt)t_t,"a.sdo teoe,at Id f-oatetafeetpet-toyi,aht 7atfa Of-tocrs Thr pa- "'hteod tettosaoeeoehttaitolitit ra--c as asdfrt-ititooreedaAitrpeojrtoe-ri petiAdj.aecdtootteot ioa toeriatara Iror..atar,.Itorlb" 1 tattero osttoteei-oo"..,tOosto- Prieayooo-at, Ihwa--l tetd feelteh-do ortaeo f...s mtd hs oootah -- iho t0,I athtoedbaolr aftr foit-c rate de,Ittocho poaaaeo hoe-se aethaea pt--tstl te-ttea..ttdo..at . t _ofatecorelarstse0 ore Th ecii-bd byaf- fteta lYp ttataa saceeLo taaoteteaateh ottoesa edra1,ad oeto ilcw0eoerttf1e ohI -ctpadt . asdhesedetoofottprtteta- a detriotte-oeot,aateaedteotI -tehocooeed- aadt...;seroodI t sue attt trer-rid. -saatt of too. to fe1ar of sse;rorrc1aosdba-rroa aaee g9-b-1t Meiht tdotarropttoafo- paes,-e krlo-tter(W0 ter -sr (of Voa ooatoteolerer feoosef fo IoatoIllote, otstaleea; t9t0, 19r0taodt1979taca i-tid~ ticohotrati. dacroit , _o or toaiooa-Lroooeidapood- pcosohaarroootoooottao ---ouridaaho facgeroao -tAd ctetraratdoewtcfta-r dootsfifio toip; trio. tr7O had t97r dtaea PFaott-esheroacio o a --esseoda-r - foos1 -hd-ofa er iita PooJs-~oo..t tirotoee torreot -hildee-, to-fa --er), oe-tttg- ge (t- prtary aed ter-sary to..ctadooidot ip -reo-r at It-h-bo ar~ tO taerlad te Ilelh Ye...a-det(a rereatt ad pytro-pt- ....es--oateet-tet. Poeotoaomtrass eae (persts)- toat - tosa getet ra,s- a to-a ead- -aae -eodi 0 totat edtt1eortatoagd 15 -et bad otto. -0popo-atto foe tASaht. ldit-7t, ard tht-ht. Po0stafioe tretath Rate (br-rot) - ohao-aooasl ocoart rates at-ar hat. rpo-~ f5ittTtlt aeosfor -d950-60. t96O-70, ard trt9o7Pa0ege tart(oa thuatst tepta -ot - la..rge are ..i .. tooe ieaiae rerohtatd)- oot a- tooths per th-osad of ta-ea ao ea in lesta f0etest; o oe ag latt h re t papata toe;-- - h-- -- rst i-balt -Itatd trrdt did- radatseatrt- Atleelroaodo ypoO Oo ter"ode to trots tcidteeao gar-Oeras-rrhd oada1tee atmteel wooo -tesereeoersrras,teeI to aae1,-e-statiofdL tee Rso-eobi oap "'aoo-e peeto h roretareetseseat e-teeheat eI.r- d-- or-erata year wlay oaf o oi-cti. Otiadia thb dOtt atptoeoaoac ioad-5i dt tOYi, sod tOt, as athoe attt%a tI.oe.ttyOt- .. oawholaootg-drercll' -Oooset(fhos.a.d.(- d.at..soatetc _ieeiet (t-eoIosodportoto-mee__ea orrgdds of hltiochl,,,,AL~, ~ ~L-raeofcaeooe eoe taia_fatoaaoort rtI i-oetatoit Pttoatdttfe.ooeraittepieeoo Pahad hhTttiet it dety if aesleara at atti -to [ode of-ied -cedoooo per hapt ha. ftk-ttO ow fpoateama ita tt iedail e oc aro per aeae-iastdfmmetoahe ofida is 00 tateedar peat haaia- htmaadtebtsioaei-pdi-acd goads r__disrtaroa-e aid oahtte-tia-ad ice. ar terd t-d-d) t"gpetate dOOdfOtia- - t wart oso-ro ts hated at tA-OO-F-dt oaiea tecge p-ad--r pL_t _eigtt; ldt-ti, 1017(. a-d t(R5 dafa. floea1 Later F...e (oho--eam) -ttEma-ra-(to etara p-osha, - otttofo Peetacfsasopearofoato-Kes(etotettofraoaieeae-ttsla)-roeeacrtdto sowe1:d I IoeadattepIapyd baoteettodfthteeoo,atati,t crero etrcaeco te food -sa50ttes .bl toattit ..et .ote retaih LIeee etra aitto h ots ohtiLottOtatOohtt c re- dap- tA-lotie sspiietowrotdo-teit prood-riae - tre-s et to196aa 0e t . i970 ecd t9ti data. roparts. at hod-tics a atook me soon aes ettoaw aitat toed, sadsd. O~eaet (eooo - Female is1io fooe at ceetas t Its tto ftore vtlyshtd tett,rl tti _rl ard ttl d_f,- arts , ~ In. idlO-aodifS daIa recoepatasapot-iof 0ooort,t ( -oar d Ier dat. 0 -Pott-riet of.7c - e1aia Paiitdt eat --otot -A a ae a ed fet .al- Pa -cbpst; oetaaphptyJ_ffo 19d6eod 1y 7 iespt 9 fatdeteaaho 7e-daraooio6 rate sootpaeasael..taaos...tt.fer pois Ipcttt o sio 1 grae atoi hePI aoied pooteo - Tes aia - refit-l fiotat a-te sf-00 -tor tth prptotea od fl e iat, tf od hA aoo tedtaoc; tttt 170at aOldart-. t20eaaaa ...... rIar et--- issdpossh traa6otodarttoi-h_ tr(t af fiYf Idaa ttsstdh iftootgspaptr ii I" hhtd(- f-oteahwh 10 Iraotoheoaded(eaoiaade-ft- etehs-I-dia Part-ateof peita- aaotee_ (hot -tsatttdl- tetoihy-dteA ociat Oafs dfatsft tethe;ta,ll aod iri data. ef-h-ost-fd65 .-ta-tooo16165a97 Po7 ~.tio taoit te1oi.b - age p to shaaatd thee hirsa; -ti It..tO I so d,ihdat -th.ad1 fhott pooeip to- teecthO th-athiosd icoe -eo whtirhd a, ltem- her ofpea I catat- acat aid,-a at) with.9 ocsethicteeo gt af-tscdahte. art 0 .d- -4 eate sapo tttdi-tItaaea bl.;190 coe9d7rfreae badaoeeid19 atti0etaedaaitaaaettiepttt htoe... ( pe ahoa o1drsdset eses- hsta re raeidhchPe,sees.iaatiepett TrARGETatoGeocpiaamaoti meetd fatrg rec-wcmah.ie tetwat a ihsi ihe -heaaathet a hesc ef.dtc ssht - amdicartd A l- Pe.eis, rrtca IIItadeaa)wear sats If two pcoe it apsd aL airthoap 1960sca 97 parsde ihe dwpib eeheat poetlt . .. yL - ata h - b-h~ ii gahcatp_ tetet P, arham.-aod eaat - -ecoed ip es-are-is dispe-satawt- pecereagecat ehtorepeetiow pbpa-hcat-, iptitefe h Steecitcap itriL_ade. .,-pt th -etitec cad t icpscRIesalweef c ca-cepimet,lcyiia eccc asd w-cie-eaee Iywter-dae cpcec or, ihed awe a r.ate hcoia sm sief-ihd--h -hih a . ihiL r.ises h qa tif. tehawdla ec a-t tieetip tweet getomrhic.cc,sdh.aetisc-epceac focatlyte --c (tcss ce_ eaattsdmde ytwe a reiiasHPt mAte. ma--cegaaseomc,esstt awe oastt w sa wteet-cg acathicciyec. d.p .. -25 - ANNEX 1 Page 4 of 5 COUNTRY DATA - PAPUA NEW GUINEA /a GROSS NATIONAL PRODUCT IN 1981 /b ANNUAL RATE OF GROWTH (at current prices) 1960- 1970- 1975- US$ 1969 1974 1980 Million % ------(Constant prices) -------- GNP at Market Prices 2,486.7 100.0 6.5/c 5.2/c 1.0/c Gross Domestic Investment 707.3 28.4 19.2 8.1 6.8 Gross National Saving 446.9 18.0 .. .. Current Account Balance 542.9 -21.8 Exports of Goods, NFS 875.0 35.2 9.9 25.3 -0.3 Imports of Goods, NFS 1,237.0 49.7 16.5 -2.9 3.6 OUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1979 Value Added /d Employment V.A. Per Worker US$ Million % '000 % US$ % of National Ave rage Agriculture 659.4 32.1 996 87.6 774 39.9 Industry 699.0 34.1 27 2.4 25,141 1,295.3 Services 696.3 33.9 114 10.0 6,642 342.2 Total/Average 2,054.7 100.0 1,137 100.0 1,941 100.0 GOVERNMENT FINANCE Central Government (K Million) % of GDP 1981 1981 1976-1978 Current Domestic Receipts 374.0 18.2 19.7 Current Expenditures 589.1 28.7 32.2 Current Deficit 195.1 9.5 12.4 Capital Expenditures 55.9 2.7 4.5 External Assistance (net) 184.0 9.0 13.5 /a As of January 1, 1978, PNG changed its fiscal year from July 1 - June 30 to January 1 - December 31. All data have been adjusted to a calendar year basis. /b National accounts and balance of payments figures differ, since the first is on a flow and the second on a payments basis. /c Growth rates are calculated in line at end-points. /d At factor cost. These figures are for 1981. /e Preliminary. not applicable November 1982 -. 26 - ANNEX 1 Page 5 of 5 COUNTRY DATA - PAPIJA NEW GUINEA March March MONEY, CREDIT AND PRICES 1978 1979 1980 1981 1981 1982 (Million v outstanding at end of period) Money and Quasi Money 449.0 571.7 553.1 554.7 545.7 553.9 Bank Credit to Public Sector, net 13.5 35.0 15.0 42.3 55.8 70.5 Bank Credit to Private Sector, net 193.8 227.5 301.9 342.6 308.0 350.7 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 31.4 35.3 31.9 33.5 Consumer Price Index (1977 = 100) 105.8 111.9 125.4 138.7 134.3 140.6 Annual Percentage Changes in: Consumer Price Index 5.8 5.8 12.1 10.6 11.0 4.7 Bank Credit to Private Sector 41.8 17.4 32.7 13.5 24.9 13.9 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1978-1981) 1979 1980 1981 /a US$ (US$ Million) Million z Exports of Goods, NFS 1,058.6 1,038.9 875.0 Coffee 168.2 18.8 Imports of Goods, NFS 1,028.5 1,288.4 1,237.0 Cocoa 80.2 9.0 Resource Gap (Deficit = -) 30.1 -249.5 -362.0 Copra & Copra Products 68.3 7.7 Timber & Timber Products 52.1 5.8 Factor Services (net) -109.8 -175.7 -88.6 Copper Concentrates 226.7 25.4 Transfers (net) 157.9 162.0 190.3 Gold 212.1 23.8 Balance on Current Account 78.1 -263.3 -260.3 All Other Commodities 85.2 9.5 Private Capital (net) 15.7 27.9 155.7 Total 892.7 100.0 Public MLT Loans (net) 37.5 68.9 137.9 Errors and Omissions /b -21.7 85.7 4.0 EXTERNAL DEBT, DECEMBER 31, 1981 Increase in Reserves 109.6 -80.7 37.3 US$ Million Imports of fuel and related Public Debt, incl. Guaranteed 757.0 materials 76.4 108.7 183.3 Nonguaranteed Private Debt Total Outstanding & Disbursed 757.0 PUBLIC DEBT SERVICE RATIO FOR 1981 /c RATE OF EXCHANGE Public Debt, incl. Guaranteed 7.0 1977 1980 Nonguaranteed private Debt US$1.00 = K 0.79 US$1.00 = K 0.67 Total Outstanding & Disbursed 7.0 K 1.00 = USS1.26 K 1.00 = US$1.49 1978-1979 1981 IBRD/IDA LENDING (AS OF 09/30/82) US$1.00 = K 0.71 US$1.00 = K 0.67 US$ Million K 1.00 =uS$1.41 K 1.00 = US$1.49 IBRD IDA 1982 Jan-June Outstanding & Disbursed 52.0 71.0 US$1 = K 0.72 Undisbursed 33.5 43.1 K 1.00 = US$1.39 Outstanding incl. Undisbursed 85.5 114.1 /a Preliminary. Tb Including capital n.e.i. /c Ratio of debt service to exports of goods and nonfactor services. not available January 1983 - 27 - ANNEX II Page 1 of 5 THE STATUS OF BANK GROUP OPERATIONS IN PNG A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1982) Loan or Amounts (US$ millions) Credit (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed Seven credits and six loans fully disbursed 58.5 49.4 - 1333-PNG 1976 PNG Agriculture 12.0 4.49 841-PNG 1978 PNG Rural Development 20.0 10.89 1856-PNG 1980 PNG Third Highways 17.0 17.00 1030-PNG 1980 PNG Third Highways 13.0 2.34 1934-PNG 1981 PNG Primary Education 6.0 6.00 1087-PNG 1981 PNG Primary Education 12.0/a 11.78/b 1149-PNG 1981 PNG Second Agric. Credit 15.o70 13.117T 2125-PNG 1982 PNG Enga Provincial Dev. 6.0 6.00 1227-PNG 1982 PNG Enga Provincial Dev. 2.0/d 2.00/b 1279-PNG/e 1983 PNG Technical Assistance 3.07f 3.00M7 Total 99.5 114.4 76.61 of which has been repaid 13.3 0.3 Total now outstanding 86.2 114.1 Amount sold 8.1 Repaid 7.4 0.7 Total now held by Bank and IDA 85.5 114.1 Total undisbursed 33.5 43.1 76.61 /a Credit amount is SDR 9.4 million (equivalent of US$12.0 million at time of commitment). /b Amount expressed here is US$ equivalent of undisbursed SDR amount in terms of US$ commitment. /c Credit amount is SDR 12.3 million (equivalent of US$15.0 million at time of commitment). /d Credit amount is SDR 1.7 million (equivalent of US$2.0 million at time of commitment). /e Signed on November 5, 1982, but not yet effective. /f Credit amount is SDR 2.7 million (equivalent of US$3.0 million at time of commitment). - 28 - ANNEX II Page 2 of 5 B. PROJECTS IN EXECUTION /1 Loan No. 1333 Popondetta Smallholder Oil Palm Development Project; US$12.0 Million Loan of November 19, 1976; Effective Date: January 6, 1977; Closing Date: December 31, 1984. The project is designed to establish 9,600 ha of oil palms with processing facilities around Popondetta. -It includes a 4,200 ha nucleus estate and a factory to serve both estate and smallholders, developed as a joint venture between the Government and the Commonwealth Development Corporation. The Bank-financed portion of the project includes: 5,600 ha of oil palm plantings, subdivided into, 1,400 smallholder plots; long-term credit facilities for smallholders to be provided through the PNGDB; extension and visiting inspection services; and technical assistance for project management; social infrastructure and improvement of the road network. All civil works have been completed. About 80% of the smallholder plantings have been undertaken, and 95% of the families are on site. The recent introduction of the oil palm weevil for pollination has led to a significant decrease in labor inputs and boosted production. The project is expected to be essentially completed by the end of 1983, in line with the appraisal estimate. Credit No. 841 Rural Development Project I; US$20.0 Million Credit of September 7, 1978; Effective Date: February 26, 1979; Closing Date: June 30, 1984. Within the Southern Highlands Province, the project would provide for research into subsistence crops, nutrition and health of the people, expand coffee, tea, silk and cardamom production, build roads, schools and health subcenters; support adult education and agricultural extension services; and contribute to the general development of the province's people and economy. /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 29 - ANNEX II Page 3 of 5 Most of the civil works under the project have been completed, and staff recruitment has made good progress. This should permit an accelerated implementation of components which so far have been lagging (e.g., coffee clan blocks). Nurse training is expected to start in early 1983. Loan No. 1856 Third Highway Project; US$13.0 Million Credit and and US$17.0 Million Loan of September 16, 1980; Credit No. 1030 Effective Date: November 6, 1980; Closing Date: December 31, 1984 The project will assist the Government in completing its program to improve and pave the Highlands Highway from the main port at Lae through the Highlands region up to Togoba. It will, further, help strengthen central and provincial governments by assistance in formulating, through the help of consultants, a strategy for maintenance of national, provincial and village roads. The project also provides additional assistance for transport planning and project identification, preparation and implementation at the national and provincial levels. The civil works have been successfully tendered and construction is underway. Civil works are now about 50% complete with the work scheduled to be completed in June 1984, a delay of about 12 months beyond the appraisal estimate. The consultants' work on rural transport studies has been completed. Consultants to assist the improvement of road maintenance procedures and practices have been appointed after protracted delays. Tribal fighting, social unrest and poor security continue to cause delays and difficulties in the area. Loan No. 1934 Primary Education; US$6.0 Million Loan and and US$12.0 Million Credit of May 11, 1981; Credit No. 1087 Effective Date: August 28, 1981; Closing Date: December 31, 1987 The project is designed to assist the primary education system through (a) improving education management; (b) raising quality through improved textbooks, materials and teacher training; and (c) increasing access by assisting the provinces to expand and improve existing schools and to establish new schools. Initial implementation in civil works and recruitment of experts is progressing satisfactorily. Activities have commenced to strengthen provincial education planning in preparation for implementation of the provincial fund. No applications for reimbursement have been submitted due to the delay in recruitment of a project accountant. -30 - YNEX II Page 4 of 5 Credit 1149 Second Agricultural Credit Project; US$15.0 Million Credit of December 7, 1981; Effective Date: May 26, 1982 Closing Date: June 30, 1984. The project would finance over a period of three years a share of PNGDB's planned agricultural lending and also support the expansion of related agricultural services. The project has two principal components: (a) field development of about 8,000 ha of coffee, cocoa, oil palms and rubber, and establishment of piggery and poultry enterprises through subloans made by PNGDB; and (b) expansion of hybrid coconut planting materials supplies, and of other support services to agriculture, such as crop development teams, consultants and studies. Although disbursement from IDA Credit has been slow due partly to the delay in loan effectiveness, the project is progressing satisfactorily in terms of subloan disbursements, estimated project cost, management performance and compliance with loan conditions. Loan 2125 and Enga Provincial Development Project: US$6.0 Million Loan Credit 1227 and US$2.0 Million Credit of June 28, 1982; Effective Date: September 16, 1982; Closing Date: September 30, 1986 The proposed project constitutes the first four-year phase of the Government's eight-year plan to accelerate social and economic development in the Enga province. Specifically, the project would: (a) help to maintain food production and improve nutrition by promoting growth in the subsistence system through the introduction of improved agricultural tech- nologies and practices to farmers; (b) support low-cost income-generating activities, e.g., cash crops and small-scale enterprises; (c) improve provicial roads, facilities for health care, and government services; (d) increase the coverage of the formal and vocational education systems; (e) support community development activities to promote inter-clan cooperation, thus creating conditions conducive to development; and (f) strengthen the provincial government, local and social services and the availability of trained manpower through technical assistance, training and local participation. The project became effective on September 16, 1982. Most of the expatriate and counterpart staff planned for recruitment in the first year are already in place. Civil works program has been delayed due to lack of funds. The 1983 budget contains adequate funds to cover the 1982 and 1983 works program. Credit 1279 Petroleum Exploration Technical Assistance Project: US$3.0 Million Credit of November 5, 1982; Effective Date: Not yet effective; Closing Date: December 31, 1986 The project comprises (i) a geological/geophysical reassessment of past exploration data with the objective of preparing reports designed to generate interest in PNG's prospects by the oil industry; (ii) strengthen- ing of the Geological Survey Division of the Department of Minerals and - 31 - ANNEX II Page 5 of 5 Energy by the provision of technical assistance, the acquisition of essential office facilities where all past exploration data would be assembled, and the training of PNG nationals; (iii) a promotional effort aimed at inducing oil companies to seek exploration licenses in PNG; (iv) a prefeasibility study of the development of a small gas-condensate field in PNG and a re-evaluation of the gas reserves from five earlier discoveries; and (v) other studies, the scope of which remains to be determined. The appointments of project manager and consultants are being processed and the first contracts are being prepared. - 32 - ANNEX III Page 1 of 2 PAPUA NEW GUINEA ROAD IMPROVEMENT PROJECT Supplementary Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to prepare the project: 24 months (b) Project prepared by: DTCA and DWS (c) First Bank mission to consider the project: July 1980 (d) Departure of appraisal mission: April 27, 1982 (e) Completion of negotiations: February 8, 1983 (f) Planned date of effectiveness: July 31, 1983 Section II: Special Bank Implementation Actions (a) Bank will review the composition and scheduling of each year's program of civil works (para. 55); and (b) a supervision mission will be sent immediately after the loan becomes effective to assist in expediting the initial project implementation activities. Section III: Special Conditions (a) Condition of Disbursement: A condition of disbursement for the two Highland Highway sections is that detailed engineering has been completed to the satisfaction of the Bank (para. 61). (b) Other Conditions: (i) The Government will by October 31 of each year during project implementation submit to the Bank for approval its program of civil works for next calendar year (para. 55); - 33 - ANNEX III Page 2 of 2 (ii) By July 1, 1985, the Government will furnish to the Bank for its review a Transport Sector Development Strategy, and subsequently submit it to NEC (para. 55); and (iii) The Government will take the necessary steps to acquire land, including rights-of-way prior to award of contracts and will furnish evidence of acquisition to the Bank (para. 60). ;=~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IR 1666 R )?5 W4f8S0Tit iE5;ii; ' t i;52 i ; ii9\0(15 ; :ffRQD i iIM#RttE:MEi9T:::PrRQJ;ELCTEdi;2: CeN°A!K@jenC i '5'@ i 1 ' L ; EE3i ARY ; 9it t:iiS P0<;290 1 f(:X5( S;StiKi;2;i;; 0 J;05 ; Oti PROAECT WO PONN5 G:j ; pit:Ll .AtA fLiNs X;0 t ii V - f r AVONGAI:|t i620 0 (i \ - : \t :: : ; 6X0 : i0 :3;;\ 2i :\::z\ ; :fti::5z :E::(yEE fB f 9f \ Sf: ; : 9 1 ;>Sii U;::: : f T ! 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