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p. 6 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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V. ADB's Assistance Program

A. Overall Assistance Level

100. ADB provides a mixture of lending and non-lending assistance to PNG. Lending to PNG is expected to remain a blend of ADF and ordinary capital resources (OCR) during the CSP period. Access to ADF resources will be determined by ADB’s performance-based allocation policy. Most of the loans will be for specific projects, but one sector program loan (for health) will also be considered. In addition, opportunities will continue to be explored for private sector operations to be initiated in PNG. Financial resources for the initial years of the CSP are estimated to be

     (i) up to $1.5 million for two or three advisory TA grants per annum,

     (ii) $0.5 million–$1.0 million for one or two project preparatory TA grants per annum¹,

     (iii) ADF financing of $33 million in 2006 (following no ADF utilization in 2005) and $43.58 million over the 2 years 2007–2008, and

     (iv) limited additional financing from ADB’s OCR in accordance PNG’s medium-term debt strategy and agreement on priority investment projects.



101. The indicative level of $2.0 million–$2.5 million per annum used for planning both project preparatory and advisory grant TA is modest relative to PNG’s extensive TA and capacity-development needs. It will therefore be carefully focused on CSP priorities, and grant co-financing will be sought where possible. TA for promoting PSD is expected to be supplemented with staff and grant resources from a multi-country Pacific PSD initiative agreed between ADB and AusAID in May 2006². ADB is also working to mobilize supplementary grant financing to address policy, institutional, and investment constraints to the provision of infrastructure and related services across the Pacific. If successful, ADB’s non-lending support for the transport sector in PNG (and potentially for utilities in the future) will be expanded.

B. ADB Assistance for the Strategic Priorities

102. Based upon the operating environment, lessons learned, and agreements outlined above, ADB and the PNG Government propose a measured and focused program of lending and non-lending activities in the four priority strategic areas of the CSP. Lending and non-lending programs for 2006-2008 are set out in Appendix 13, which includes a summary of changes from the 2006 program set out in the PNG CSP Update 2005-2006. Concept papers for unapproved 2006 activities and all 2007 activities are provided or referenced in Appendix 14.



103. OCR lending, estimated at $205 million over the 3 years 2006-2008, comprises one new high-impact project per year: the PNG Gas Project, Lae Port upgrading, and the Highlands Highway and associated feeder roads. To consolidate and build on current successes, three proposals for supplementary financing of existing loans (mostly from ADF) are included for the (i) Highlands feeder roads, (ii) rehabilitation of maritime navigation aids, and (iii) FMIP. Overall, the transport sector will receive the majority of the loan financing provided to PNG during 2006-2008.



104. The non-lending program is tightly focused on priority sectors and themes. In 2006 and 2007, advisory TA will focus on the priority themes of PFM and PSD. It is proposed that, in 2008, advisory TA focus on policy and institutional reforms in tandem with planned lending operations in the two priority sectors of transport and health. As noted above, TA for PSD will be supplemented from the ADB/AusAID PSD initiative for the Pacific, and supplementary grant resources for infrastructure and related services are also being pursued.



105. ADB and the Government have agreed to work toward an environment in which ADB private sector operations can be identified and implemented in PNG. Current involvement consists of ADB co-financing of a Pacific regional investment vehicle (the Kula Fund) and possible support for political risk guarantees for commercial lenders to the PNG Gas Project. PNG is a small and weakly integrated market, but continued economic growth and macroeconomic stability, policy strengthening, and enhanced policy and project implementation may see opportunities emerge. Prospective sectors for ADB private sector operations in PNG are (i) energy (especially, once the PNG Gas Project is operational, for possible downstream activity) or power-supply operations and (ii) transport, such as privatized port operations. Power-supply or transport operations will require new Government policy clarity and commitment to public-private partnerships before they can proceed, while the first requirement for any downstream energy sector investments is successful completion of the PNG Gas Project. TA resources in the CSP for strengthening the enabling environment for PSD and for the power sector will help to create an environment in which ADB private sector operations become feasible.



106. ADB policy advice and dialogue in PNG will emphasize three issues: (i) implementation of the MTDS, including a results framework to track progress; (ii) further strengthening and implementing sector and thematic strategies and programs in CSP priority areas; and (iii) further improvement in program implementation and in development outcomes from the ADB portfolio.



107. Given extensive needs and limited grant TA resources, ADB will take a very focused approach to capacity development using its own resources, concentrating on specific skills and capacities closely tied to specific objectives in the four priority strategic areas. Nevertheless, the existence of program approaches in most of the strategy priority areas means that it will be possible, through coordination with donor partners, to ensure that broader capacity development requirements, along with required policy and institutional reforms, are addressed collectively. The current FMIP, led by ADB, is a good example; AusAID and the United Nations Development Programme support a large program of general capacity development for provincial officials, while ADB efforts are more narrowly focused on requirements for operating information technology. The health sector, with its sector-wide approach, is also conducive to such a division of labor, and similar potential exists in the transport sector, for which AusAID is introducing its Transport Sector Support Program. Public sector capacity to promote PSD will require further assessment and probably input from ADB’s Pacific PSD initiative, but partnership with key grant donors in PNG will also be sought to the extent possible.

C. Financing Parameters and ADB Loan Products

108. PNG has, in the recent past, often had difficulty providing agreed counterpart finances in full and in a timely manner. However, in light of (i) recent improvements in PNG’s capacity to meet its contribution to ADB-financed projects and programs, (ii) the planned ADB programs’ focus on identified priority expenditure areas for PNG, and (iii) the advantages of crowding in expenditures to agreed programs, it has been agreed that a maximum ADB contribution of 70% of total project cost will continue to be applied across the program³. Given the 2006-2008 ADB lending program of $282 million outlined above, this cost-sharing arrangement requires a corresponding PNG Government contribution of $120 million during the same period. This contribution is considered by ADB and the Government to be both feasible and desirable under present macroeconomic and fiscal conditions.



109. In that ADB does not consider any specific PNG Government taxes or duties excessive relative to project costs⁴, ADB and the Government have agreed that PNG Government taxes and duties will be considered eligible expenditures for ADB loans. The practice of allowing ADB funds to finance recurrent costs will continue but be applied in moderation. ADB will not finance costs associated with land acquisition or rights of way for ADB financed projects. A summary of the financing arrangements approved by the ADB President is in Appendix 15.



110. ADB has increased the flexibility of the loan products available to its borrowers, in terms of setting interest rates, currency swaps, and the option of local currency financing—this last option linked to ADB’s issuing local currency bonds in the domestic market. The PNG Government has expressed strong interest in (i) borrowing or swaps in Australian dollars, should this option become available later in 2006, and (ii) the possibility of ADB undertaking a kina-denominated bond issue. The PNG Government and ADB’s Treasury Department will undertake a market assessment to test the viability of the latter option.

D. External Funding Coordination and Partnership Arrangements

111. Recognizing that ADB is by no means the largest of PNG’s development partners and that there are limits to PNG’s capacity to borrow externally, strong donor partnerships have been and will continue to be a feature of ADB’s PNG program. Indeed, the sector and thematic focus described above has been determined with appropriate partnerships prominent in the considerations of the Government and ADB. For example, as described above, grant donors, especially AusAID, are better placed than ADB to help address PNG’s extensive capacity-development needs. Consultation among PNG’s main development partners (notably AusAID, EU, ADB, World Bank, and UN system) on their PNG strategies is allowing these relationships to be more clearly articulated. Given these conditions, there is scope in PNG for the Government to consider moving toward some form of donor roundtable process to support MTDS implementation.



112. More generally, and as indicated in Table 2, sector and thematic program partnerships in particular are progressively strengthening PNG’s engagement with its development partners and the development effectiveness of external assistance to PNG. Examples include the health sector, where donors have a formal cooperation arrangement, and work on public financial management, where both the PERR process and the FMIP involve an expanding group of development partners working jointly in support of Government objectives.



113. Further broadening and deepening of partnerships is essential to development effectiveness in a country with internal capacity limitations and significant external assistance. In areas of ongoing partnerships, logical next steps may include (i) further progress toward sector approaches, (ii) developing common diagnostic and performance-assessment platforms, and (iii) practical steps toward harmonizing processes and procedures. New areas for collaboration should be identified and pursued, with the transport sector an obvious priority, based on the recent updating of PNG’s NTDP. A study on transport sector harmonization involving the Government, ADB, AusAID, and World Bank is therefore being prepared. Management arrangements for sector and thematic programs can be further strengthened across all priority sectors and themes to promote PNG Government leadership and build agreement on performance frameworks and indicators.



114. ADB has an extensive cofinancing relationship with AusAID, PNG’s largest development partner, comprising three current ADB loans, in addition to close thematic- and sector-level coordination in the health and transport sectors and on PFM. Australia provides extensive technical assistance to the PNG Government, so close relations are especially important to shared capacity-development objectives. Grant cofinancing, both for projects and for multiyear sector programs, will therefore continue to be further developed. More broadly, ADB is seeking a closer relationship with AusAID across its Pacific operations in regard to PSD and infrastructure development and management. The recently announced Pacific PSD initiative is an example that will benefit PNG.



115. ADB will continue to pursue partnerships with a range of key stakeholders within PNG, supported by ADB’s PNG Resident Mission. Given the focus of the CSP on promoting private sector–led growth, relations with private sector stakeholders, already strong, will continue to be a key feature of ADB’s presence in PNG. Grassroots feedback and participation through consultation with civil society will continue to be a feature. The Consultative Implementation and Monitoring Committee plays an especially useful coordinating role in PNG and will be an important entry point for dialogue with civil society. Relationships with provincial and local governments are crucial in the areas in which projects are being prepared and implemented. ADB will monitor developments regarding decentralization and inter-governmental relations in PNG during the CSP period, as changes are likely and could have a significant impact on the operating environment.

E. Strengthening Project Implementation and Overall Portfolio Performance

116. The Government and ADB have agreed that there are valuable lessons to be learned and applied from recent experience in implementing ADB-financed projects in PNG. To this end, project implementation guidelines addressing the assessed priority constraints have been prepared and will be applied during the CSP period. They are outlined in Appendix 16. The proposed actions, applicable by both ADB and the Government, prioritize measures for strengthening project design and moving toward more timely project implementation.

F. Indicative Internal Resource Requirements

117. The tight sector focus and compact operational program are intended to be more readily manageable for both the Government and ADB, allowing a stronger focus on policy dialogue, sector and thematic coordination, and portfolio performance. Key to ADB’s performance in delivering this CSP will be the effective operation of its PNG Resident Mission, which will have responsibility for programming and most program administration. Established in early 2004, the office is still developing and consolidating its capacities. Adequate financial and human resources will be key requirements. Important back-up to the PNG Resident Mission will be provided, on a part-time basis, by specialists in the four sector and thematic priority areas from the Pacific Department at ADB headquarters. These positions are currently staffed by specialists with experience of the PNG environment and program.

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