Regions and Countries

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p. 4 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2003-2005: Papua New Guinea

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IV. Country Performance and Lending Levels

A. Lending Level Proposed

1. Asian Development Fund Lending Levels

28. After a review in 2000, ADB decided not to graduate PNG from Category B2 to Category C, as had been decided in 1998. Therefore, PNG remains in Category B2, with access to some Asian Development Fund (ADF) loans and a cost-sharing limit of 60%. The situation is to be reviewed during 2002. Since the 2000 review, per capita incomes have continued to decline, which would argue for considering a move to category B1. In 2002, the World Bank decided to allow PNG access to International Development Agency (IDA) resources, after restricting access to only ordinary International Bank for Reconstruction and Development resources since 1982.

29. Consistent with ADB's policy on allocating ADF funding on the basis of performance, the level of ADF funds allocated to PNG is linked to its performance with respect to policy, institutional reform, and portfolio management. The proposed base case 3-year rolling allocation is fixed at $62.8 million for 2003-2005. The actual allocation of ADF funds for PNG will depend on performance against agreed-upon triggers (Appendix 1, Table A1.12) related to economic, governance and public sector reform, and portfolio management. The Government, with ADB assistance, is working to improve performance against each trigger.

30. The key parameters for ADF assistance are the following:

1. Public sector reform, encompassing
1. improving management of the public sector to enhance service delivery;
2. strengthening good-governance institutions; and
3. strengthening capacities of provincial and local governments
2. Economic management, encompassing
1. strengthening of fiscal management, including prioritizing expenditures and linking recurrent and development budgets; and
2. improvement of the environment for private sector activities
3. Portfolio performance, as measured by the proportion of loan projects that are at risk relative to the ADB-wide average

31. The base case assumes that the recent modest pace of improvement in economic management and governance is maintained, with no great acceleration of reforms, and that the "projects at risk" ratio is improving at a reasonable rate toward the ADB-wide average. ADF assistance would then be about $62.8 million in 2003-2005, as determined by the performance-based allocation of ADF lending. The low case assumes that recent gains in economic management and governance have been reversed and that the "at risk" ratio is not improving satisfactorily or is even deteriorating. Clearly, the volume of ADF assistance would depend on the circumstances. However, assuming a modicum of performance, an indicative level of ADF lending under the low scenario would be about $50 million in 2003-2005. In contrast, the high case assumes rapid and successful implementation of the existing reform program and expansion of the reform agenda, together with significant improvement in the "at risk" ratio, with the prospect of exceeding the ADB average. Under the high case, absorptive capacity would slowly increase, justifying a modest increase in assistance. ADF assistance would total about $75 million in 2003-2005. The indicators and triggers will be kept under review.

2. Overall Lending Level

32. Since PNG's absorptive capacity is limited and other sources of external assistance are available, a modest program is envisaged. A total of $142.8 million is envisaged for the 3-year programming period (Appendix 1, Table A1.10), including $80 million ordinary capital resources (OCR), down from $130 million in the CSP Update for 2002-2004, and $62.8 million from ADF (assuming the base case). Significant cofinancing is envisaged. Flexibility will be essential.

B. Nonlending Program

33. The TA pipeline and proposed economic, thematic, and sector work program (Appendix 1, Table A1.11) have been designed to support the main areas of emphasis of the lending program. The indicative TA program for 2003-2005 amounts to $2.5 million each year, or a total of $7.5 million, of which $5.3 million or 70% is for project preparation. The advisory TA and the economic, thematic, and sector work will focus on reducing poverty and improving governance. Given the large needs for capacity building and sector analysis, cofinancing will be sought to ease the constraint of the reduced TA indicative planning figure.

C. Summary of Changes to Lending and Nonlending Program

34. The envisaged program is only slightly different from earlier plans, with the changes primarily affecting timing, reflecting the relative stability of the ADB strategy for PNG. The most significant change is a proposed reduction in the volume of OCR lending, reflecting a reduced assessment of absorptive capacity, as well as ADB administrative capacities. The new CSP, which is being formulated during 2002-2003 for consideration in 2003, may result in more significant adjustments.

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