Papua New Guinea - Special Interventions Project

Document of The World Bank FOR OFFICIAL USE ONLY L/~A/ 32 ?9-PA14 Report No. P-5426-PNG MEMORANDUM AND RECOMMENDATION 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$30.0 MILLION TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A SPECIAL INTERVENTIONS PROJECT 4 JANUARY 4, 1991 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 EQUIVALENT (As of January 1991) Currency Unit Papua New Guinea Kina (K) US$1.00 K 0.96 K 1.00 US$1.04 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer - 0.62 miles (ml) 1 cubic meter (m8) = 35.31 cubic feet (cu ft) 1 metric ton (mton) - 2,204.62 pounds (lbs) ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank AIDAB - Australian International Development Assistance Bureau BCL - Bougainville Copper Limited BPNG - Central Bank of Papua New Guinea CG - Consultative Group DFP - Department of Finance and Planning EEC - European Economic Community GDP - Gross Domestic Product HRF - Housing Refinancing Facility LCB - Local Competitive Bidding IMF - International Monetary Fund NHC - NatioDal Housing Corporation SAC - Structural Adjustment Committee SAL - Structural Adjustment Loan SBDC - Small Business Development Corporation SIP - Special Interventions Project  FOR OFFICIAL USE ONLY PAPUA NEW GUINEA SPECIAL INTERVENTIONS PROJECT Loan and Proiect Summary Borrower: The Independent State of Papua New Guinea Beneficiaries: National Housing Corporation, National Capital District Interim Commission, Small Business Development Corporation. Amounts $30.0 million equivalent Terms: Twenty years, including five years of grace, at the standard variable interest rate. Onlending Terms: Part of the proceeds of the loan, equivalent to $12.0 million, would be onlent at the Central Bank's variable discount facility rate (currently 10.3 percent) for periods of 10 to 20 years to refinance mortgage loans made at market interest rates by commercial banks to eligible purchasers of serviced lots and houses. Financing Plan: Government $0.99 million Participating Banks 4.00 million Homeowners 5.34 million IBRD 30.00 million Total $40.33 million Economic Rate of Return: Estimated at 35 percent for the housing component and, based on the typical rates of return associated with road maintenance projects in PNG, at about the same for the project as a whole. Staff Appraisal Report: No. 9139-PNG MLap: IBRD 22612--Special Interventions Project 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 discksed without World Sank authoniation.  MEMORANDUM 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 SPECIAL INTERVENTIONS PROJECT 1. The following memorandum and recommendation on a proposed loan to the Independent State of Papua New Guinea for $30.0 million equivalent is submitted for approval. It would help to finance a Special Interventions Project which is intended to assist in mitigating the social costs of the Government's ongoing adjustment program. The proposed loan would be at the Bank's standard variable rate with a twenty year maturity including five years of grace. Part of the proceeds of the loan ($12.0 million equivalent) would be onlent at the Central Bank's variable discount facility rate (currently 10.3 percent) for periods of 10 to 20 years to refinance mortgage loans made by commercia tanks at market rates. The Government of Papua New Guinea would bear the foreign exchange risk. 2. Background. After having deteriorated during the-first part of the 1980s, the overall economic performance of Papua New Guinea vPNG) improved substantially in the second half. However the recovery came to a halt in late 1989 primarily because of (a) the indefinite closure of the Bougainville copper and gold mine (BCL) which resulted from the actions of militant landowners in the North Solomons province and (b) sharp falls in PNG's commodity exports (coffee, cocoa, oil palm). Until its closure, BCL had contributed about 35 percent of export earnings and 15 percent of government revenue. Also, the adverse security situation in the North Solomons disrupted other important economic activities, especially the production of cocoa, which is the third most important non-mineral export item of PNG. These developments entail severe implications for economic activity in PNG. It is estimated that. during 1991, they will have a net negative effect on the balance of payments of about 12 percent of GDP and cause a loss of fiscal revenues equivalent to 4 percent of GDP. The estimated impact of these shocks to the economy places PNG close to the upper end of the magnitude of shocks sustained by countries undertaking adjustment programs in the 1980s. 3. Government Strategy. The Government recognized that shocks of this magnitude called for prompt stabilization measures. The Government also recognized that the shocks underscored the need, and provided an opportunity, to undertake more fundamental structural adjustments to accelerate the development of the non-mining economy and diversify the productive base. Consequently, in consultation with the IMF and the Bank, it decided to embark on a stabilization and structural adjustment program and asked both institutions to provide financial support. In response, a stand-by arrangement was concluded with the IMF in April 1990 and subsequently a Structural Adjustment Loan (SAL) was approved by the Bank in June 1990. While the Government is making good progress in implementing the adjustment program, the accrual of the full benefits of the program will take time. During this transitional period some components of the program would, in the short run, affect particularly urban residents negatively which could endanger the sustainability of the program. The Government has therefore approached the donors to support, as a complement to the SAL and the IMF stand-by arrangement, a program of special interventions to help mitigate the short- term social costs of economic adjustments. However, other than this complementary feature, the SAL conditionality does not include any actions directly related to the program of special interventions.  - 2 - 4. Objectives. For the overall program of special interventions, the main objectives include (a) addressing the more urgent social needs arising from PNG's ongoing economic adjustments by enhancing employment opportunities among low income, unemployed and underemployed urban workers; and (b) strengthening the institutional capacity of the Government to better formulate and implement projects. Also, if the structural adjustment program as agreed can be sustained and the public and private flow of external funds is maintained it should be possible for econon'&c growth to resume in the medium term. The program of special interventions would make an important contribution to this effort. S. Program of Special Interventions. Based on the foregoing, a multisector program consisting of investments in health, water supply, agriculture, housing, industry and road drainage was identified by the Bank in March 1990. These components are all ready for implementation and have a high priority in the Public Investment Program which was reviewed by the Bank during the preparation of the SAL operation. The program, including the components financed by the Bank, is expected to provide about 10,000 person- years of productive jobs over a two- to three-year period beginning January 1991 and thus help to alleviate urban and rural poverty and cushion the effects of layoffs in the public sector. The program is therefore timely as it will be implemented during the very difficult, initial years of adjustments in the economy. 6. The Government wished to finance the program (estimated cost of $76.8 million) using grant and/or concessionary funding as much as possible. As a result of consultation among the donors and with the Government, it was agreed to separate the program into components of interest to the donors. Specifically, this meant that (a) ADB would provide concessional funds for the health, water supply and agriculture components, (b) the Bank would finance housing, industry, and most of the drainage component, and (c) the EEC would provide concessional funding for the remainder of the drainage component. In total, the Bank and the donors are expected to provide $60.8 millIon or about 79 percent of the estimated cost of the program of special interventions. The Department of Finance and Planning (DFP), through the Structural Adjustment Committee (SAC), would provide a management umbrella for the components, and monitor the performance of the program, particularly employment generation and the rate of program implementation. 7. Donors subsequent actions have so far been satisfactory. The Government and the ADB have completed negotiations for $10.6 million on concessionary terms for a Health and Water Supply project ($13.2 million cost). A separate Agriculture Project ($15.6 million tentative cost) is scheduled for ADB's approval in early 1991. Funds ($3.5 million) were also reallocated from an ongoing ADB project to be used for the purchase of medical supplies. Taken together, these projects are estimated to cost a total of $32.4 million and will provide for (a) Water supply: minor but urgently required extensions to water supply systems; (b) Health: construction of urban clinics, health posts, hospital expansion, staff housing and the provision of medical supplies; and (c) Agriculture: equipment and operational support for coffee research and extension activities. As for its road drainage works ($4.1 million total cost) the EEC has already hired consultants to prepare dossiers (similar to preliminary engineering). It will fund 100 percent of contracts awarded through Local Competitive Bidding (LCB) for drainage works and is on schedule for implementation start-up in the second quarter of 1992.  -3- 8. Rationale for Bank Involvement. Due to its long association with the key sectors of the economy, in the form of sector work and lending and also its chairmanship responsibility for the Consultative Group (CG) for PNG, the Bank is well placed both to help formulate the program of special interventions and to act as a catalyst in coordinating donors' support for it. Although some of this program's components may have a lasting impact on the endemic problems facing the unemployed and underemployed, they have been designed to address largely the more pressing short-term challenges presented by the adjustment program. While the Bank continues to perform a catalytic role and assists PNG through its first adjustment program, Bank involvement is also needed to fill the financing gap and to help strengthen program management. In addition PNG faces the combined challenges of undertaking structural reform and managing the adjustment process while laying the foundations for sustainable growth. Hence the inclusion of a component such as housing which will provide both an immediate employment impact and will also begin institutional reforms and encourage the financial sector to participate more fully in housing finance. This will help to lay the foundation for sustainable housing development in PNG. 9. Project Description. As mentioned earlier, the components of the program of special interventions supported by the Bank under the proposed project consist of the following: (a) Housing ($23.7 million): a line of credit for refinancing housing mortgages made by Commercial Banks, and technical assistance for the National Housing Corporation (NHC), (b) Road drainage ($11.3 million): provision of earth and concrete drains, including culverts, at road sections where pavement failure due to saturated soils is a threat, and (c) Small industry development ($2.6 million): provision of technical assistance to the Small Business Development Corporation (SBDC) for the development of small contractors and entrepreneurs. The Bank will also fund technical assistance for project management, monitoring, and studies ($2.7 million). Where required, designs and documentation for this proposed Special Interventions Project (SIP) have been substantially completed and it is ready for implementation. 10. The total cost of the project is estimated to be $40.3 million in December 1990 prices, including foreign exchange costs of $26.1 million. Details of costs and financing are shown in Schedule A. The proposed Bank loan of $30.0 million would finance 75 percent of project costs, net of taxes and duties. The Government, commercial banks and the beneficiaries will fund the remainder ($10.3 million). Retroactive financing in an amount not exceeding $3.0 million is proposed for expenditures incurred on civil works, equipment, incremental operating costs, and consultants services after July 1, 1990. 11. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank operations in Papua New Guinea are given in Schedule C and D. A map is also attached. A Staff Appraisal report, No. 9139-PNG dated January 3, 1991 is being distributed separately. 12. Actions Agreed. At negotiations, the Government agreed mainly on: (a) the basic principles for the operation of the housing refinancing facility (HRF); and (b) a timetable for the strengthening of the NHC. Conditions of effectiveness are the (i) signing of a subsidiary agreement with the Central Bank (BPNG); (ii) hiring of an expert to assist in operating the HRF; and (iii) employment of a project manager acceptable to the Bank. Finrlly, for the housing component it was agreed that the condition of disbursement will be  - 4 - the signing of participating agreements between the BPNG and the eligible commercial banks. 13. Benefits. The new employment opportunities and increases in urban income would help the Government maintain the adjustment process while at the same time laying the foundation for progress on social objectives. Improvements in road drainage would help protect costly investments and extend the useable life of the roads. The provision of long-term financing, and associated policy and institutional development, would meet part of the critical needs for housing, and lay the foundation for sustainable housing development. Technical assistance to small businesses would help them to develop the capacity that is essential to their growth prospects and to employment generation in the future. 14. Risks. The main risk is that project implementation could be slow due to inadequate managerial capacity particularly in NHC and DFP. To alleviate this risk, Government has established, and will retain, a special committee in DFP for overseeing project implementation. Also institutional strengthening will be provided for NHC. Delays in land titling could also adversely affect new housing sites development. However, this will not delay the project much since the project depends mainly on the sale of existing serviced plots. Finally, their assurances notwithstanding, Commercial Banks could be slow or reluctant to finance mortgages for low- and middle-income applicants. This is mitigated by the fact that house and plot buyers will be allowed to use their accumulated savings in the Provident (pension) funds for their downpayments and that payroll deductions will be permitted for periodic payments. Government determination to improve housing must also be considered to be an overall risk mitigating factor. 15. Environment. The environmental aspects of the project have been reviewed and the findings are summarized in a brief report. The project would not have any adverse impact on the environment; it would improve on the contrary, living conditions of the vulnerable groups. Major physical components such as housing and drainage, are dispersed over several provinces and would follow Bank approved design standards. Design standards for the housing component will also incorporate appropriate safeguards for water disposal. Although the Bank is not financing sites development, and NHC will not accept a site for development if there are environmental or resettlement issues, the NHC policy statement does include adequate provisions for handling these issues whenever they should arise. 16. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. I recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington D.C. January 4, 1991  - 5 - Schedula A PAPUA NEW GUINEA SPECIAL INTERVENTIONS PROJECT Estimated Costs and Financing Plan (in $ million) Estimated Project Costs: Local Foreign Total Housing 8.93 14.17 23.10 Drainage 3.27 6.06 9.33 Industry 0.55 1.87 2.42 Management and Monitoring 0.37 2.13 2.50 Base Cost 13.12 24.23 37.35 Physical Contingencies 0.51 0.90 1.41 Price Contingencies 0.60 0.97 1.57 Total Project Cost /a 14.23 26.10 40.33 Financing Plan: Local Foreign Total Government 0.99 - 0.99 Participating Banks 4.00 - 4.00 Beneficiaries 5.34 - 5.34 IBRD /b 3.90 26.10 30.00 Total 14.23 26.10 40.33 La Includes taxes and duties estimated at $0.5 million equivalent. /b IBRD's share of total costs would be about 75 percent, net of taxes and duties.  -6 Schedule B PAPUA NEW GUINEA SPECIAL INTERVENTIONS PROJECT Procurement Methods and Disbursements (in $ million) Procurement Method Force Project element LCB account Other/a N.A. Total Housing 2.3 21.4 23.7 (2.3) (12.0) (14.3) Drainage 2.5 5.5 3.4 11.4 (2.2) (5.1) (3.2) (10.5) Industry 2.0 0.6 2.6 (2.0) (0.5) (2.5) Monitoring and management 2.1 2.1 (2.1) (2.1) Equipment 0.2 0.3 0.3 (0.2) (0.3) (0.3) Total 2.7 5.5 10.1 22.0 40.3 (2.4) (5.1) (9.9) (12.5) (30.0) /a 'Other includes prudent shopping, direct contracting, and the Bank's consultant sele.tion procedures. Note: Figures include contingencies and those in parentheses are the respective amounts financed by the Bank. Due to rounding, they may not add. Estimated Bank Disbursements (S million) Bank Fiscal Year 1991 1992 1993 Annual 8.0 12.0 10.0 Cumulative 8.0 20.0 30.0 Disbursements Category Amount Z of Expenditures 1. HRF mortgages 12.00 75Z of subloans 2. Civil works 8.50 90o 3. Equipment 0.50 10OZ for directly imported and for ex-factory costs of locally manufact-red goods, 852 for items -,r<-.ured locally 4. Incremental Operating Costs 0.50 90S cx total expenditure in FY91 and 92, iOZ thereafter 5. Consultants services & studies 7.40 100o 6. Unallocated 1.10 Total 30.00  - 7 - Schedule C PAPUA NEW GUINEA SPECIAL INTERVENTIONS PROJECT Timetable of Key Project Housing Events (a) Time taken to prepare: Six mont;se (b) Prepared bys Government in collaboration with IBRD and AIDAB (c) First Bank mission: March 1990 (d) Appraisal mission: September 1990 (e) Negotiationst December 1990 (f) Planned date of effectiveness: February 1991 (g) List of relevant PCks and PPARs: Not applieable.  -8- Schedule D THE STATUS OF BANK GROUP OPERATIONS IN PAPUA NEW GUINEA A. STATEMENT OF BANK LOANS AND IDA CREDITS /a /b (as of September 30, 1990) Loan/ Amount (US$ million) Credit Fiscal (less cancellations) number year Borrower Purpose Bank IDA Undisbursed Twelve loans and thirteen credits fully 125.72 113.77 - disbursed 2265-PNG 1983 PNG Road Improvement 31.00 - 5.44 2395-PNG 1984 PNG Secondary Education 49.30 - 1.18 2475-PNG 1985 PNG West Sepik Provincial 9.70 - 3.93 2608-PNG 1986 PNG Nucleus Estate & Smallholder 27.60 - 8.41 2722-PNG 1986 PNG Yonki Hydroelectric 28.50 - 7.60 2742-PNG 1987 PNG Transport Improvement 45.50 - 32.84 3051-PNG 1989 PNG Land Mobilization 19.60 - 18.00 3154-PNG 1990 PNG Third Telecommunications 17.20 - 17.20 3218-PNG 1990 PNG Structural Adjustment 50.00 - 50.00 Total 404.12 113.77 144.59 Of which has been repaid 80.47 3.90 Total now held by Bank and IDA 323.65 109.86 Amount sold 15.39 of which repaid 14.83 Total Undisbursed 144.59 B. STATEMENT OF IFC INVESTMENTS (as of Segtember 30. 1990) None La The status of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. 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