Regions and Countries

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p. 1 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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Executive Summary

Papua New Guinea (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. 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.

PNG has potential for development, being rich in natural resources, but it also faces many long-standing and significant constraints to development. Three broad development challenges face the country: (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 is the binding constraint that heightens each of these challenges.

Gross domestic product growth of 3% from 2003 to 2005, and similar growth forecast for 2006 and 2007, barely exceeds population growth (estimated at 2.3% per annum) and has been supported by highly favorable external conditions. If it is to increase living standards and reduce poverty, PNG will need to make economic growth more sustainable by making the economy more diverse and robust. This will require the consolidation of the Government’s sound macroeconomic and fiscal management, accompanied by policies and structural reforms to unleash PNG’s potential for greater entrepreneurship and private sector–led development.

PNG’s poor performance during the 1990s has led to a significant increase in the poverty rate, from 37.5% of the population in 1996 to 54% in 2003. Participatory surveys across both rural and urban PNG highlight the twin priorities of the poor as (i) creating jobs and income-earning opportunities and (ii) rebuilding service delivery. The rural poor also highlight deteriorating transport infrastructure as a major impediment.

PNG has a generalized HIV/AIDS epidemic. With many of the conditions for a rapid spread of the virus in place, HIV/AIDS poses as an enormous threat to PNG’s development.

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. Public financial management is serving as a key driver of improved governance, showing good progress in recent years. Nevertheless, a major ongoing constraint has been poor compliance with the requirements of the Public Finances Management Act and insufficient sanctions for noncompliance. Corruption is acknowledged to be a problem, and the Government is preparing an anticorruption action plan.

In response to these challenges, the Government has put in place its Medium-Term Development Strategy (MTDS) 2005-2010, which has widespread internal and external support, sound expenditure priorities, and an ambitious but appropriate governance agenda. MTDS objectives will be achieved through seven expenditure priorities for

(i) rehabilitating and maintaining transport infrastructure,

(ii) promoting income-earning opportunities,

(iii) basic education,

(iv) development-oriented informal adult education,

(v) primary healthcare,

(vi) HIV/AIDS prevention, and

(vii) law and justice.

PNG’s development partners endorse and support the MTDS. External assistance plays a very important role in PNG, both in financial terms and in helping PNG to address its institutional and capacity weaknesses. Grant-financed assistance predominates in PNG’s total external assistance, with Australia as the largest donor. With the MTDS in place, PNG’s key development partners are currently implementing new country strategies, and opportunities for enhanced coordination and harmonization are emerging.

The PNG Country Assistance Program Evaluation (CAPE), conducted by the Asian Development Bank (ADB) in 2003, concludes that ADB has supported the right development areas in PNG, but failed, due to fragmented programs, to deliver development outcomes at the sector level. In response, country strategy and program (CSP) updates prepared in 2004 and 2005 emphasized consolidating the program, narrowing ADB’s sector focus, and proactively addressing portfolio performance problems. Encouragingly, the 2006 Country Portfolio Review Mission found improved portfolio performance. Improved provision of counterpart finance and better performance of executing agency personnel were noted, as was the advantage of the proximity and enhanced mandate of ADB’s PNG Resident Mission.

The CAPE and lessons learned from the portfolio suggest that continuing the recent approach of consolidation and more intensive management of a modest portfolio of projects and programs are appropriate in the current circumstances of PNG. In addition, good recent progress in priority areas (road transport, public financial management, and commercial agriculture) provides a valuable platform of success upon which to build.

Proposed ADB support for the PNG Gas Project would be one of ADB’s most significant investments in PNG, presuming the project proceeds on a commercial basis. The investment is being prepared in parallel with this CSP and is consistent with it.

ADB and the PNG Government have agreed to apply the following principles, consistent with the Paris Declaration on Aid Effectiveness, to selecting the elements of the CSP for PNG:

(i) Support implementation of PNG’s MTDS.

(ii) Tighten the focus of ADB’s strategy and program to maximize impact in priority areas.

(iii) Focus on areas of ADB comparative advantage and remain engaged.

(iv) Develop appropriate relationships with PNG’s other development partners.

(v) Manage for development results.

Strategic areas that clearly satisfy the principles and lessons outlined above are

(i) public financial management,

(ii) private sector development,

(iii) the transport sector, and

(iv) health and HIV/AIDS.

In addition, reforming public enterprises and utilities is a key issue for PNG, which ADB will initially help the Government address with technical assistance (TA) under the public financial management roadmap, keeping open the option of further involvement at a later stage.

Sector and thematic roadmaps will guide ADB operations in the four priority strategic areas. They are based on PNG policies and strategies to the extent possible. Recognizing that ADB is by no means the largest of PNG’s development partners, strong donor partnerships have been and will continue to be a feature, making appropriate partnerships and ADB’s comparative advantage prominent considerations in developing the roadmaps. Effective coordination approaches are already in place for the health sector and public financial management. Regular communication among partners in the transport sector will be upgraded, starting with a planned harmonization study. ADB will work with the Government in a lead role to develop a coordinated approach to private sector development (PSD) in PNG. Capacity development is a vital challenge in which ADB plans to play a focused role, working closely with Australia and other grant donors to ensure that broader needs are addressed.

In line with the Government’s commitment to developing its own results-management framework during 2006, ADB will support and adopt PNG Government performance targets and indicators where possible. Harmonization of approaches with PNG’s other development partners is also a priority. Equally important will be establishing a Government-led dialogue on emerging lessons and opportunities. Pending the establishment of PNG’s approach, an interim CSP results framework is presented.

ADB lending to PNG is expected to remain a blend from the Asian Development Fund, totaling $77 million in 2006-2008, and ordinary capital resources. Financing from the latter is expected to be modest, at $205 million over the 3 years 2006-2008, in accordance with PNG’s medium-term debt strategy, and carefully focused on one new priority investment project per year: (i) the PNG Gas Project, (ii) Lae Port upgrading, and (iii) upgrading the Highlands Highway and associated feeder roads. Supplementary financing will consolidate and extend three currently successful projects. Opportunities for ADB private sector operations in PNG will continue to be explored, focusing on the energy and transport sectors, and will be promoted by TA support for improving the business environment and the power sector.

The indicative level of $2.0-2.5 million per annum for project preparatory and advisory grant TA is small relative to PNG’s extensive TA and capacity-development needs, and will be carefully focused on CSP priorities. Grant cofinancing will be utilized where possible to maximize the impact of ADB’s policy and technical assistance.

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 constraints to project implementation have been prepared and will be applied during the CSP period. Proposed actions prioritize strengthening project design toward more timely project implementation.