Regions and Countries

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p. 2 of 8 BACK | NEXT Executive Summary I. Current Development Trends And Issues II. The Government’s Development Strategy III. ADB's Development Experience IV. Strategy For ADB Support To PNG V. ADB's Assistance Program VI. Risks And Performance Monitoring And Evaluation Appendixes [ PDF ]

Country Strategy and Program 2006–2010: Papua New Guinea

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I. Current Development Trends And Issues

1. Papua New Guinea (PNG), an Asian Development Bank (ADB) member since 1971, is a category B2 (blend) borrower. ADB and the PNG Government have agreed to prepare a country strategy and program (CSP) for the period 2006-2010 to set out ADB's role in assisting PNG to implement its Medium-Term Development Strategy (MTDS) 2005-2010. A results framework for the strategy is in Appendix 1.



2. PNG has a rapidly growing population of more than 5 million people dispersed over highland, riverine, coastal, and island environments (see map). PNG has a highly diverse clan- and tribe-based social structure featuring 800 different languages.



3. PNG has enjoyed a period of solid progress in economic management and policy development since 2002, assisted by a supportive external environment and relative political stability. The current government is expected to be the first since PNG's independence in 1975 to serve out its full 5-year term. This recent macroeconomic and political stability compares favorably with trends over the preceding decade, which featured significant instability, low prices for PNG's export commodities, a contracting economy, and a worrying decline in the PNG Government's ability to provide its people with access to markets and basic social services.



4. While PNG has abundant natural resources, it faces many constraints to development, including its imposing geography, frequent natural disasters, ethnic diversity, limited infrastructure, very poor social indicators (including a potentially serious HIV/AIDS epidemic), the failure to sustain broad-based economic growth and job creation in the 1990s, high crime rates, an under-resourced public sector with capacity limitations, and ongoing governance difficulties. Reconciling and adapting to the market economy their strong and diverse customary traditions, including land-tenure arrangements, is an ongoing challenge for Papua New Guineans.



5. Recent progress will need to be sustained and further extended over many years if PNG's significant challenges are to be overcome and poverty defeated. Appendix 2 indicates PNG's status in terms of the Millennium Development Goals (MDGs) and provides key PNG economic, social, and environmental indicators. Based on present trends, PNG is not on track to achieve most of the MDGs, having shown limited progress against some indicators in the past decade and regression in others, including poverty rates. As discussed below, this poor performance is due to failures of economic growth and rural service delivery in the 1990s and early part of this decade. Expanded access to basic education was one bright spot in PNG's performance during the 1990s, but even here improvement has recently slowed, and further improvements will prove challenging.



6. Three broad development challenges face PNG if it is to arrest declines in MDG indicators and reduce poverty: (i) to convert natural resource revenues into sustainable development outcomes, (ii) to broaden the base of the economy and the basis for economic growth and job creation, and (iii) to tackle very poor health and education standards. Quality of governance and public sector capacity limits are binding constraints, and addressing them underpins efforts to meet each of these challenges. Strengthening public financial management (PFM) is a key step. The Government recognizes and is taking steps on each of these issues.

A. Economic Growth

7. PNG recorded gross domestic product (GDP) growth on the order of 3% annually from 2003 to 2005, and similar growth is forecast for 2006 and 2007, assuming continued high world commodity prices. This growth compares favorably with PNG’s volatile performance during the 1990s and negative growth during the period 2000-2002. However, recent GDP growth barely exceeds population growth of 2.3% per annum and has been supported by highly favorable external conditions. PNG’s economic challenge, if it is to increase living standards and reduce poverty, is to make its economy more diverse and robust. In the first instance, this will require continuing and consolidating the current sound macroeconomic and fiscal management, as well as new policies and structural reforms to unleash PNG’s potential for greater entrepreneurship and private sector–led development. Deteriorating transport infrastructure and services prompt many businesses to list improving access to markets as their first priority, along with improved law and order. Addressing these challenges will require consistent, long-term attention, given the severity of the problems and weak state capacity.



8. Macroeconomic management by PNG’s succession of governments was highly inconsistent during the 1990s but, since 2003, has made real progress, showing low inflation and interest rates, surpluses in trade and the current account, adequate foreign currency reserves, and a moderately appreciating local currency. PNG’s fiscal position is also sound and has contributed to reducing public sector debt. The Government therefore has the scope, and has stated its commitment, to increase its own contribution to development expenditure in priority areas; recent funding for rehabilitating key sections of the Highlands Highway provides a practical example. However, the structure and openness of the PNG economy creates sensitivities, particularly to swings in international commodity prices. Therefore, a measured and cautious approach to economic management is appropriate.



9. PNG’s economy is highly dualistic. On the one hand, an enclave (large-scale but isolated) export sector based on natural resources (minerals, petroleum, timber, fish, and plantation tree crops) provides revenue to support a small, urban formal sector and the public sector. On the other hand, a subsistence or semi-subsistence rural economy supports more than 80% of the population. This distinction has blurred in some places over time, as smallholders increase their participation in commercial agriculture and fisheries, and as opportunities for downstream processing of PNG’s natural resources gradually emerge. These developments need to be further encouraged if widespread, inclusive growth is to be achieved and poverty reduced. The rural economy is critical, and creating supportive conditions for rural entrepreneurship a key need.



10. Continued new investment in its minerals and petroleum sectors, and sustainable harvesting of its forests and fisheries, will be important for overall economic growth in PNG. An immediate priority for the Government is to secure the PNG Gas Project, a project with long-term revenue prospects that promises to largely offset projected falls in Government revenue from mining and petroleum projects. A more detailed discussion of PNG’s economic characteristics and recent performance is in Appendix 3.

B. Poverty

11. Poverty analysis in PNG is constrained by weak and dated data¹. This constraint will be partly addressed by a demographic and health survey in 2006, conducted by the Government and supported by many of PNG’s development partners, including ADB, which is coordinating the survey. A separate household income and expenditure survey is also under consideration. The most recent and comprehensive projection and analysis of the existing data is provided by a World Bank poverty assessment completed in 2004.



12. The World Bank assessment estimates that PNG’s poor economic and service-delivery performance during the 1990s, combined with high population growth, has brought a significant increase in poverty in PNG. It estimates that the proportion of the population in poverty escalated from 37.5% in 1996 to 54% in 2003². The recent economic stability described above is likely to have stabilized the incidence of poverty but not to have significantly improved it. The assessment also highlights provincial and district variation in the incidence of poverty, with remote districts of the northern mainland provinces of Sandaun, East Sepik, and Madang, and the Highlands’ Enga Province, the most disadvantaged. More generally, the incidence of poverty in PNG is greatest in the most inaccessible rural areas.



13. The policy recommendations arising from the World Bank assessment focus on both income and other dimensions. The challenge of restoring economic growth, and of doing so in a broad-based manner focused on rural areas, is noted as being paramount. Restoring infrastructure and strengthening law and order are highlighted as prerequisites to addressing this challenge. Improving the business environment, especially for small enterprises, and promoting agricultural diversification are also recommended.



14. The assessment highlights the deteriorated provision by the Government of social services to the people during the 1990s and the first half of this decade, in terms of both availability and quality, especially in the remotest and most disadvantaged districts. Challenges to service delivery in PNG include its dispersed population, difficult geography, deteriorating transport infrastructure and services, law and order problems, problems with the workings of provincial and district administrations, and the inability of the Government to maintain adequate fiscal allocations for these services. Improvements in the various aspects of PNG’s governance agenda, including public sector and public financial management, are highlighted in the assessment as being critical to progress in overcoming these significant constraints. Additional resources will also be necessary if improved service delivery performance is to be achieved and maintained.



15. The twin issues of (i) creating jobs and income-earning opportunities and (ii) rebuilding service delivery also emerge clearly from participatory surveys of the poor, conducted across both rural and urban PNG by the Government in 2002 with ADB support. The rural poor also highlight deteriorating transport infrastructure as a major impediment.

C. Political Environment

16. PNG is a robust democracy but one that operates in a manner that often presents challenges to sustained policy development and implementation. In PNG’s Westminster-style democracy, the Prime Minster is elected by Parliament and appointed by the governor general. However, the workings of the political system are unique to Melanesia, featuring a very weak party system, strong emphasis on the personal standing of key leaders, and an overwhelming focus by members of Parliament (MPs) on directly delivering goods and services to constituents. These characteristics have led to a very high turnover of MPs at each election, shifting coalitions of MPs, and constant threats to the stability of the ruling government. This instability has traditionally made it difficult for governments to maintain policy coherence and take a sustained approach to policy implementation. The strong incentives for MPs to accrue and dispense largesse to constituents also work against policymaking for the long term and in the national interest. The political instability of the 1990s spilled over into an increasingly unstable and politicized bureaucracy.



17. To their credit, PNG leaders recognize that political stability and leadership, often absent in PNG’s recent past, will be essential to its economic and social development prospects. The previous and present governments have introduced reforms to electoral and political party rules. The Integrity of Political Parties Act (2002) appears to have allowed some progress during the operations of the current Government, which is expected to be the first since PNG’s independence to serve a full 5-year term. A new electoral system of limited preferential voting, to be introduced in 2007, also seeks to promote greater political stability.



18. Next year, 2007, will be an election year, and a key challenge for the Government will be to avoid the mistakes of previous governments, i.e., sacrificing sound economic management in the hope of spending its way to a renewed mandate. This is especially important now, as the current Government has laid a sound macroeconomic platform for national development.



19. As noted above, PNG is a geographically and ethnically diverse and segmented country, with weak internal transport and communication links. This suggests that a decentralized approach to governing is sensible, and indeed provinces and districts have assumed over time virtually all responsibility for service delivery on the ground. However, generally low capacity and limited national support have meant that provincial and local governments have failed to deliver essential public goods and services in many parts of PNG. There is now a widespread acceptance in PNG that the 1995 Organic Law on Provincial and Local Level Governments, which promoted decentralization and lower-level political structures, has exacerbated rather than addressed failures in rural service delivery. Options for amendment are under discussion but unlikely to progress before the national elections in 2007.

D. Governance and Institutional Capacity

20. The Government has recognized improved governance as a critical requirement if PNG is to address its development challenges. An ongoing public sector reform program has made some progress. Sound PFM is both a prerequisite for good governance and a driver of change, with good progress made in recent years on the Financial Management Improvement Program (FMIP), which seeks to restore financial integrity, and the Public Expenditure Review and Rationalization (PERR) Program, which is helping the Government to redirect its resources to priority areas. Nevertheless, problems remain regarding poor compliance by public officials with the requirements of the Public Finances Management Act and insufficient sanctions for noncompliance. Addressing this sustainably will require ongoing efforts.



21. Corruption is increasingly acknowledged to be a problem in PNG; the Government is preparing an anticorruption action plan and will work with Australia on its delivery. Agreement with Australia to an enhanced cooperation program, which features Australian personnel advising on key processes for financial management, integrity, and law and justice, has been an important recent initiative to strengthen PNG’s capacity for good governance.



22. An ADB governance assessment (2005) highlights, in Appendix 4, the priority governance challenges as the following:

    (i) strengthening PFM, through both the PERR process and the FMIP;

    (ii) public administration reform, including right-sizing and focusing the public sector on priority sectors and service delivery;

    (iii) improving the management, governance, and accountability of state-owned enterprises and statutory authorities;

    (iv) strengthening anticorruption and accountability measures;

    (v) developing more effective political and democratic processes; and

    (vi) improving the effectiveness of government operations provincially and locally, as well as improving relations among the three levels of government.




23. Capacity constraints significantly affect the PNG Government’s ability to strengthen government and deliver public goods and services. Of concern to the Government and its development partners is that overall public sector capacity appears not to have improved in the past 2 decades—and many observers would argue that it has declined. The causes for this failure of capacity development are many and complex but include spillover from the political instability described above and the fact that inadequate fiscal allocations have left many public servants with a salary but no operating budget, causing their skills to atrophy and morale to fall. Effective public sector leadership and management based on merit has also proven challenging to maintain. The current Government is seeking to address these issues through a workforce development initiative, with support expected from Australia. In addition, a range of service-delivery approaches will need to be considered moving forward, with a view to getting better results from necessarily limited resources.

E. Private Sector

24. Given that the economy has not grown sustainably until recently and that job creation has been virtually nonexistent, the current Government has stated its commitment to private sector–led growth through its Export-Driven Recovery Strategy, the policy platform for the current Government and the basis for the MTDS and recent budget statements. Creating a more stable economy has been a priority. The Government has also adjusted incentives and reduced taxes to create improved conditions for mineral exploration and tourism. Another initiative of the Government has been to create its Working Group on Impediments to Business and Investment, which is addressing some specific issues in the business environment (e.g., on work permits for foreigners) but so far making only slow progress.



25. Notwithstanding recent Government efforts, PNG is a challenging environment in which to do business and is likely to remain so for some time. Many of the most important constraints cited by businesses themselves³, such as the poor condition of transport and communications infrastructure, law and order problems, corruption, and administrative inefficiency, will require years of sustained effort to overcome. Improved systems for the economic use of customary land, another issue highlighted in ADB’s private sector assessment, can proceed only slowly on the basis of focused PNG leadership and extensive consultation. Nevertheless, specific reforms to the business environment can have a material impact in the short term, as shown by the reforms to PNG’s financial sector in 2000, which improved commercial bank performance and expanded credit to the business sector. Further specific reforms-for example, creating a commercial arbitration system-could make a positive impact.



26. A future challenge for the Government is therefore to set out and implement a medium-term roadmap for improving PNG’s business environment, with development partner support as necessary. Clearly assigning responsibilities across the relevant public sector agencies will be important. This should occur simultaneously with consistent Government attention to the broader constraints, such as infrastructure and law and order. Creating supportive conditions for small-scale rural entrepreneurship is key, alongside improved conditions for larger domestic or foreign investment in agriculture, tourism, mining, and natural resource projects.



27. Scope for private sector participation in delivering public goods and services is limited at present, except in association with enclave industries such as mining. Policy in this area is somewhat unclear, as are plans for the future ownership, investment, and management arrangements for PNG’s major utilities. Road maintenance is one area that is expected to make available to private sector contractors increased finance and more regular programs.

F. Gender Assessment

28. PNG’s political, social, and economic institutions and customs have created varied and complex gender systems in many isolated communities over thousands of years. This history, combined with the uneven colonial and modern experience of some 800 isolated cultural groups, disallows a single characterization of gender issues in PNG. Nevertheless, despite the existence of some matrilineal cultural practices, PNG can be described as a largely patriarchal society, in which women continue to face severe inequality at times in all spheres of life: social, cultural, economic, and political. The unequal status of women in PNG is perhaps most graphically illustrated by personal insecurity, as women and girls face high rates of gender-based violence, including domestic violence and rape. In general, significant constraints impede moving forward on gender equality objectives. A summary of ADB’s Country Gender Assessment and Strategy is in Appendix 5.



29. Institutional structures consisting of gender focal points and gender units have generally weakened due to a lack of resources. The Government has endorsed a proposal for an office for the development of women, to be situated in the Department of the Prime Minister and National Executive Council, led by a minister assisting the Prime Minister, but it has yet to be established.

G. HIV/AIDS

30. PNG has a generalized HIV/AIDS epidemic. With many of the conditions for a rapid spread of the virus in place, but most of the conditions required to prevent it not in place, HIV/AIDS poses as an enormous threat to PNG’s development. The PNG Government has shown limited and belated leadership on the issue. The national HIV/AIDS strategy lacks priority and is not being implemented in full. Donor funding, especially from Australia and potentially from the Global Fund, is significant, but inadequate PNG leadership and capacity to manage programs, rather than money, is the key constraint to better addressing this serious problem.

H. Environment

31. PNG's geography underscores its potential for natural hazards. The country is situated along the so-called Pacific Ring of Fire, has active volcanism, and is subjected to frequent and often significant earthquakes, mudslides, and flash-flooding. Its coastal areas are prone to erosion and tsunamis, while the interior highlands have severe frost. Drought is another issue. This inhospitable natural environment, in associated with the relative isolation of many social and economic activities, increases the overall development challenge.



32. Papua New Guineans are heavily reliant on their environment, with 80% living by subsistence or semi-subsistence farming. Participatory consultations during ADB’s Country Environment Assessment, supported by studies of relevant policy and technical documents, suggest that major environmental issues include
    • inappropriate land-use practices as intensified farming systems accelerate land degradation,
    • unsustainable logging practices,
    • destructive fishing practices and coastal pollution,
    • environmental impacts from large-scale mining operations (e.g., the discharge of heavy metals, cyanide, and acids into rivers), and
    • increased extreme weather events that worsen vulnerability to impacts of natural disasters.

    Country environment indicators are in Appendix 2. The analysis (summarized in Appendix 6) identified six constraints to effective environmental management and mainstreaming in PNG:

    • institutional weaknesses nationally and locally,
    • a traditional land-tenure system that constrains integrated land-use management and planning,
    • the need for greater appreciation of environmental values as the basis of sustainable economic growth,
    • growing population pressure,
    • data gaps, and
    • governance issues that lead to overexploitation of resources.

I. Regional Cooperation

33. PNG is the largest developing member of the Pacific Islands Forum. Forum leaders took a step forward for Pacific regionalism in Port Moresby in 2005, agreeing on the Pacific Plan for Strengthening Regional Cooperation and Integration. PNG is particularly interested in creating increased economic opportunities through the forum, especially in terms of labor mobility focused on the largest labor markets in the forum: Australia and New Zealand.



34. PNG also has a long land border with Indonesia and is interested in exploring possible upgraded road connectivity with that country. More broadly, PNG, a member of the Asian Pacific Economic Cooperation (APEC) forum, seeks to deepen its economic relations with East Asia, and PNG’s natural resources are of interest to its East Asian neighbors.

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1. The most recent household data was collected through the National Household Survey and the Demographic and Health Survey in 1996. The 2000 census provides some additional information, as do limited economic and social statistics regularly collected by the Government.
2. In this case, poverty is defined by a poverty line that allows for 2,200 calories per adult equivalent per day and an allowance for basic nonfood expenditure. The trends are no different using the international poverty line of $1/day, under which the incidence of poverty is estimated to have risen from 25% to just under 40% over the same period.
3. Sources for this information include a 1999 Institute of National Affairs survey of 133 PNG businesses and consultations during the preparation of ADB. 2002. Private Sector Assessment for Papua New Guinea. Manila. Both sources are dated, but conditions for business appear not to have changed significantly in the interim, so priorities are likely to be similar. ADB will support further assessment of priority issues for business in 2006–2007.

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