Papua New Guinea - Second Power Project

CIRCULATtNG COPY COPY uTO BE RETURNED TO REPORTS DESK DOCUMEN OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1377-PNG REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PAPUA NEW GUINEA WITH THE GUARANTEE OF AUSTRALIA FOR A SECOND POWER PROJECT May 14, 1974 Thi rpot asprepared for officiat useol yteBank Group iot accepnt bespubohn .qoe or chi5teditot wsBank Group authorization The Bank GrouP does not accept P accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit Australian Dollar (A$) US$1 = A$ 0.675 A$ 1 = US$1.4875 A$ 1,000 = US$1,487.5 A$ 1,000,000 = US$1,487,500 Fiscal Year July 1 to June 30  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PAPUA NEW GUINEA WITH THE GUARANTEE OF AUSTRALIA FOR A SECOND POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Panua New Guinea with the guarantee of Australia for the equivalent of UJSS10.8 million to help finance a second power project. The loan would have a i-erm of 20 years including 5 years of grace with interest at 7-1/4% per annum. The proceeds of the loan would be relent to the Papua New Guinea Electricity Commission (ELCOM) on the same terms as those of the Bank loan. PART I - THE ECONOMY 2. A report "Recent Trends, Problems and Prospects of the Economy of Papua New Guinea" was circulated to the Executive Directors on March 3, 1973. Countrv data for Papua New Guinea are included in Annex I. A basic economic mission is presently in the field. Recent political and economic develoDments are discussed below. 3. New Guinea, a UN Trust Territory and Papua, an Australian depen- dencv which were administered by Australia under an Administrator as one political and economic unit called Papua New Guinea (PNG), achieved internal self-vovernment on December 1, 1973. It is expected to become independent on D)ecember 1, 1974. 4. In recent years constitutional changes have progressively increased the political responsibilities of the local population and given wider power to their representatives. After the general elections in March 1972 a National Coalition Government was formed, headed by Michael Somare, the leader of the progressive Pangu Party, who became the counitry's first Chief Minister. The new Government has asserted its widened consti- tutional powers vigorously and has for the first time established an effec- tive national leadership. Responsibility for public institutions and agencies has been transferred from Australia to the PNG Government. The Government has reorganized public administration and localized high-level positions. At the same time it is making considerable efforts to complete a PNG constitution, to establish a national monetary system independent of Australia's and to prepare a five-year development plan to coincide with the beginning of independence. The Australian Government, now represented by a High Commissioner in PNG, will continue to be responsible for PNG's external relations and defense until achievement of independence. However, the National Coalition Government has already begun to formulate its own defense policy and to establish first diplomatic contacts with other countries in the Asian-Pacific region (Indonesia, New Zealand and Japan) and to find new bilateral aid sources to diversify its foreign relations and future development partners. PNG has become a member of ADB and ECAFE.  -2 - 5. The Government's task to prepare PNG for independence and nation- hood is formidable. Geographic, cultural and ethnic fragmentation of PNG's ponulation contributes to regional differences. Expansion of transportation and cornunications is a slow and costly process, impeded by the country's rugged topography and its multi-insular character. Although the use of Pidgin ,nglish is increasing, the majority of the people still speak only one of the 700 local vernaculars. Literacy is very low and the number of skilled workers, technicians and university graduates has been insufiicient to replace the numerous expatriates who still dominate both the public and private sectors of PNG's economy. Hence, PNG's political future and stability will very much depend on the Government's success in winning not only the confidence of the various PNG ethnic groups, but in particular, in localizing public administration in an orderly and gradual fashion and in providing a favorable investment climate. 6. Economically, Papua New Guinea approaches independence with a basically dual structure consisting of (i) a large indigenous subsistence sector based on traditional agriculture and (ii) a rapidly expanding modern sector, with emphasis on export oriented plantation agri- culture, Government operations, services and, lately, also mining. The economy as a whole has grown satisfactorily during the 1960's. GDP rose by almost 8% a year during 1960/61-1965/66, and more recently by almost 11% a year, owing partly to the implementation of the large Panguna copper mining project on Boougainville Island. This growth was also sustained by a 15% average annual increase in the export-oriented modern agricultural sector, by favorable trends in private non-mining investments and by sharply rising Governmient expenditures, especially for economic development. Since growth has been virtually limited to the monetized sector the share of the traditional subsistence sector, from which the vast majority of the local population still derives the main part of its living, fell from about two- thirds to less than 40% during the sixties. Per capita GNP in Papua New Guinea in 1971 was around US$300, including the high-income expatriate sector: the per capita income of the indigenous population representing 98% of the total population was probably around US$160, or only 14% higher than five years before, underscoring the problems of the country's dual economic structure. 7. Since mid-1971 the economy has been passing through a recession; real GNP has declined by 4%. Main factors were the readjustment of private investment to previous levels after the completion of the construction of the Bougainville copper mining project, and declining world market prices for most of the country's agricultural export commodities (copra, cocoa, rubber and palm oil) as well as temporary marketing difficulties for coffee. In addition, an understandable atmosphere of uncertainty before self-government and independence was also a factor in causing the slowdown. 8. Notwithstanding the temporary recession, the long-term prospects for PNG's economic development are favorable. Export prices for PNG's major tree crops have lately started to recover significantly and are expected to stay at reasonable levels. Furthermore, the country has rich  -3 mineral resources, the exploitation of which has just begun with the Bougainville project. Equally important will be the Government's effort to foster development in all regions of the country through the implementation of its Development Plan. 9. The Government is currently preparing a Second Five-Year Develop- ment Plan for the period 1974-79. A provisional Interim Development Plan for 1973/74 was issued in June 1973. It provides for a greater role of the local population in the economy, greater attention to rural development in a broad sense, more balanced development of the various regions and greater national self-reliance. These objectives reflect to some extent a shift of emphasis as compared to the First Five-Year Development Plan (1969-73) which concentrated on the build-up of infrastructure and the development of the modern sector of the economy. It is, however, recognized that these efforts were necessary to lay the basis for further progress. 10. While there seems to be broad consensus among the new PNG leaders about the necessity to redirect PNG's development priorities, the above- mentioned objectives and in particular the specific measures and ways of how to implement them are still being discussed and are not expected to be finalized before the middle of this year. 11. Government spending is heavily dependent on external sources of finance, mainly Australian assistance. Although tax revenues have almost doubled in the last three years, they and other internal receipts financed onlv about 43% of total AdministratLon outlays (about US$237 million) in 1972. Australian grant assistance (US$83 million) covered about one-third, while the rest was financed through increased borrowing in the Australian capital market and from multilateral aid institutions (IBRD and ADB). In addition, the Australian Government has in the past been directly responsible for certain non-administrative outlays - civil aviation, defence, and some public works, involving gross expenditures in Papua New Guinea of about US$62 million in 1972. The emphasis in the past on basic social and economic infrastructure facilities has resulted in rapidly rising current expendi- tures for maintenance and operations, thus laying a heavy burden on thte Government's current budget. 12. The country's tax base rests on the expatriate community and tax revenue from the local population is still small. Tax rates are fairly low, about half of the Australian level, to attract foreign capital and expertise. Currently tax revenue amounts to 16% of GNP in the monetized sector and about 10% of total GNP. The entire revenue system is presently under review with the aim of imposing higher rates and introducing new taxes. Greater mcobili- zation of internal resources will, in fact, be the most important fi.ancial problem the new Government will have to solve if it wants to balance gradual- ly its current budget with its own resources and make a contribution to public investment financing. 13. PNG's external position depends to a great extent on private and public canital inflows. In spite of a rapid growth of exports during the latter half of the sixties, there continued to be a large deficit in PNG's  - 4 - external account which was covered by Australian assistance and private capital inflows mainly for the construction of the Bougainville copper mine. Besides the import requirements for this enclave project, the current account has been affected by increasing import prices, a general rise in inrorts of capital goods, due to stenped-up development works, and a growing demaid for consumer goods imports. The services account has lately been affected by the sharp increase in international shipping freight rates. 14. Petroleum imports accounted for about 4% of PNG's total imports in 1972/73 and are estimated to have increased recently to about 10% due to the rise in petroleum prices. However, the commencement of large copper and gold exports from the Bougainville copper mine and the favorable export prices for these products have more than offset these increases. In fact, the deficit on the current account of the balance of payments is being reduced significantly. The Bougainville copper mining project, the second largest of its kind in the world, produced about 183,000 tons of copper ore in 1973 representing net profits of about A$ 158 million. Since the company under the present contract enjoys a fairly generous tax holiday and depreciation concessions, the benefits for the Government budget will remain rather limited until 1980. It is expected, however, that the Bougainville copper agreement will be renegotiated so that the Government will receive greater benefits at an earlier date. Total external public debt outstanding as of December 31, 1972 amounted to US$177.6 million of which US$56.3 million (or 31%) was owed to the Bank Group. Debt service payments in 1972 represented 3.9% of exports of goods and non-factor services. Debt payments to the Bank Group were very small amounting to only 6% of total debt service payments. Because of the many uncertainties any projection of PNG's future debt service situation is very difficult to make. Neither the amounts nor the terms of future borrowing from bilateral as well as multilateral sources can at present be forecast with precision. 15. Australia has given an assurance of continuing aid over the three year period beginning in FY1975 for a total of A$ 500 million. Other new bilateral sources (Japan and New Zealand) are also expected to make aid funds available in the near future. ADB has so far extended two loans to PNG from its Special Fund: a US$4.8 million loan to the PNG Development Banl in 1971 (3% interest, 15 vears repayment, including 3 years grace) and a US$9.8 million loan for two road projects in 1972 (3% interest, 24-1/2 years repayment, including 4-1/2 years grace). PART II - BANK GROUP OPERATIONS IN PNG 16. The Bank Group's association with Papua New Guinea began with a general survey mission in 1963. Its report provided the framework for the country's First Five-Year Development Program, 1969-73. In 1972 the Bank acted as executing agency for a study, financed by UNDP, to advise on possible strategies for the Second Five-Year Development Program.  -5- 17. The Bank has made four loans to PNG for a total of US$44.7 million and i:he Association four development credits amounting to US$25.2 million. The largest single loan was US$23.2 million for a hydroelectric project, which was needed to provide power for one of the most rapidly developing areas of the country. The remainder of Bank Group lending has been for telecommunications, highways, ports and agricultural development. These projects were selected for their high economic priority in helping to open up the country, to provide basic infrastructure facilities and to bring the local population into the cash economy. Annex II contains a summary statement of Bank' loans and IDA credits as of March 31, 1974 and notes on the execution of on-going projects. 18. The IFC has made no investments in Papua New Guinea but is explor- ing the possibility of doing so. 19. UJntil the new Papua New Guinea Government has formulated its development policy in the Second Five-Year Development Program, the appropriate size and nature of future Bank Group assistance cannot be determined with precision. However, it is likely that agriculture, education and training will become the priority sectors in future lending. Since Government's capa- city to identify and prepare projects will probably remain limited in the forseeable future, the Bank will help the Government to prepare projects and strengthen new public development agencies either in the course of its lending operations or acting together with other aid donors. PART III - THiE POWER SECTOR on. Virtually all power facilities were destroyed during World War II. The Australian Commonwealth Department of Works (COMWORKS) was made respon- sible for reconstruction, and in 1957 the Territory Administration accepted this responsibility by creating the Electrical Undertaking Branch. Since 1963, planning and coordination of the electricity supply is performed by the Paptua New Cuinea Electricity Commission (ELCOM). ELCOM has specific responsibility for the generation, transmission and distribution of elec- tricity in and to major townships (now 10). In addition, it operates 148 minor center power stations owned by the Administration. Established as a Statutory Corporation, ELCOM was directly responsible to the Australian Minister of External Territories before achievement of self-government on December 1, 1973. Since then, ELCOM reports to the Minister of Mines and Energy and its Ordinance was changed accordingly. Outside the centers served by ELCOM private generating equipment is generally installed by missions and plantations. The largest private generating facility is owned bv the Bougainville Copper Company (135 MW), which also sells power to ELCOM for distribution in Kieta. As of June 30, 1973, total installed generating capacity in PNG amounted to 223 Mega Watt (MW) (43 MW hydro-180 NW thermal), of which about one-third (70 MW) was owned by ELCOM.  - 6 - 21. A major power project - the Upper Ramu Hydroelectric Scheme - is presently under construction in the Highlands (New Guinea) by ELCOM. Total cost of the first phase of this project was estimated at US$33.4 million, of which the Bank financed US$23.2 million or 68% of the total (Loan 737-PNG). The project consists of a run-of-the-river underground power station with an initial installed canacity of 45 MW. Included in the project are 320 miles of transmission lines linking centers previously served bv small diesel units. At the beginning of 1976 the project will provide electricity for the favorably endowed Highland Regions and constitute a major element in ELCOM's plan to establish a national transmission grid. ITnplenentation of the project is proceeding without major difficulties. All contracts have now been awarded and it is expected that construction will be completed by the end of 1975. However, total project cost, when expressed in US$ are presently estimated to be about 28% higher due to recent currency exchange rate adjustments. (See # 31). 22. Reflecting the rapid growth of the modern sectors of PNG's economy, ELCOM's power generation and sales rose substantially, recording annual average growth rates of 17% and 18% respectively during the period 1963/64- 1972/73. The booming power market was also reflected in the tripling of ELCOM's consumers during the ten year period of its existence. In fact, when ELCOM was established in 1963, it was serving 7,410 consumers, and annual consumption per consumer was about 6,270 kWh. At June 30, 1973, the number of consumers served had increased to 22,853 and consumption averaged 9,050 kWh/consumer. Thus, the average annual growth rate of consumers was 13.2% for the period and of consumption per consumer about 4.2%'. In 1973, of total sales of 204.8 Gigawatt hours (Gwh) 26.5% was for domestic purposes; 56.2% for conmmercial and small industrial enterprises, 17.0% for larger industries, and about 0.3% for public lighting. To meet the ranid increase in demand, ELCOM almost doubled its generating capacity during the period reaching 70 MW in 1973, of which 36 MW was hydro and 34 MJ diesel. With the completion of the Upper Ramu Hydroelectric Scheme in 1976 flcom's generating capacity will reach 115 MW of which 34 MW diesel and 81 MW hv7dro. Considering the rapidly rising fuel prices the greater reliance on hydro-electric power will have a favorable impact on Elcom's cost structure. 23. Growth rates achieved during past years are not expected to continue during the coming years. In fact, as a result of the recent slowdown In business activities, ELCOM's energy sales have substantially fallen below projections. ELCOM's current sales growth projections average 8.5% per year for the period 1974-80 as against 20.9% forecast in 1970 for 1969-78. Actual results in 1973 were about 25% below the 1970 forecast. The revised projections of ELCOM's power market reflect mainly PNG's transient political situation and the uncertainties of the near future. It is ik-;elv, therefore, that once the political situation has stabilized, power cenmand will step up again during the second half of the seventies. 24. Because of this situation ELCOM has eliminated all generation exnnnsion projects from its 1974-80 investment program since available capacitv will meet forecast demand. Its expartsion program, therefore, includes only the Upper Ramu No. 1 project under construction and distribu- tion requirements. However, investigations are proceeding on a continual  - 7 - basis to ensure that when the need arises, new generating facilities can be built economically and with the least possible delay. ELCOM is currently investigating several alternative hydro sites which could supplement the Upper Ramu Project should ELCOM be called upon to serve the demand of poten- tial mining development in New Guinea. 25. Papua New Guinea has a vast hydro potential totalling some 11,000 MW at sites each capable of producing 300 MW or more. Recent investigations have concentrated on two rivers: (i) Purari River flowing into the Gulf of Papua (potential 7,200 MW firm; and about 53,000 GWh per annum), and (ii) Musa River flowing into Oro Bay in NE Papua (potential of 400 MW and about 2,800 GWh per annum). In addition, prospects for oil and gas of commercial value are considered favorable following an off-shore gas strike in the Gulf of Papua. Exploitation of these considerable energy resources, offers favorable prospects for the long-term development of PNC's economy. Supply of low cost power will not only allow the establishment of energy based industries, but in the long run also foster the development of all sectors of PNG's economy. PART IV - THE PROJECT 26. Since the early 1970's the Bank has assisted PNG in developing its power sector by providing financing for ELCOM's investment program (Upper Ramu Hydroelectric Project, Loan 737-PNG) and advising on organiza- tion and management problems. The proposed loan reflects our continuing involvement in the development of this sector. The loan has unusual features in that the main component of the project provides financing for training of ELCOM staff. The project was appraised in July 1973. Loan negotiations were held in March, 1974 with a delegation led by Mr. K. Woodward (PNG Treasury). A loan and project summary is included in Annex III. The Appraisal Report No. 327-a dated April 8, 1974 is being circulated separately. Description 27. The proposed project aims at helping PNG to strengthen and localize ELCOM and consists of two main items: (a) technical assistance for ELCOM's in-service training program during the period 1974-79, and (b) expansion of ELCOM's distribution network. The project would also include financing to cover the cost over-run under the first power project (Loan 737-PNG) which is attributable to exchange rate adjustments. 28. ELCOM has an able management and its present staff is competent. The training part of the proposed project is designed to maintain this level of competency, while substantially increasing the degree of localization. ELCOM was one of the first organizations in PNG to appreciate the need to train local staff. It has had a training program in operation since 1964. At June 30, 1973, its operating staff totalled 1,247 of which 264 were expatriates. In addition, it had 365 local apprentices, trainees and cadets  Linder training. The degree of indigenization (excluding apprentices, etc.) is now 79% as against 64% in 1970, with a target set for 1980 of about 98%. To achieve this objective which is in line with the new Government's policy of accelerated localization, ELCOM wants to establish an in-service training program o' local staff to provide assistance to local graduates during their first years of practical working life. ELCOM has, in fact, decided to give graduate engineers, for instance, full responsibility of operating small diesel centers with an expatriate supervising and providing guidance and training at more than one such center for a limited period of time, 29. The in-service training envisaged under the proposed project would cover a period of five years. The program provides for 385 trainer man- vears and 1,038 trainee man-years involving a total of 528 locals. Thus, bv 1980 about one-third of local staff will have benefitted from the in- service training program. The ratio of trainers to locals would be about l 3. The necessary supervision and training would be provided by selected expatriates administratively attached to ELCOM's Education and Training Branch. The training _would be completed by July 1980 and only 25 expatriates would then remain in ELCOM's service in senior positions. 30. The modest distribution program covering the 13 centers ELCOM will be serving after July 1975, is sufficient to meet ELCOM's needs through 1979. This element of the project is for rehabilitation, strengthening of existing systems and expansion. Because any allocation of incremental revenues to existing and new facilities would be entirely arbitrary no rate of return on this investment was calculated. 31. The Upper Ramu hydroelectric project financed by Loan 737-PNG (US$23.2 million equivalent) is still within the original cost estimate as expressed in current A$ or in US$ using pre-March 1971 exchange rates. However, foreign exchange requirements, expressed in US$ at current exchange rates, are now estimated at US$27.1 million equivalent, an increase of about US$3.9 million of which about US$3.8 million is directly attributable to exchange rate variations. While the existing loan agreement provides that any funds needed to complete the project would be provided by Australia, application of this undertaking would create difficulties for the new Government since the level of assistance given by Australia is limited and diversion of funds to the Ramu Project would mean a shortfall elsewhere. 32. Despite increased construction costs (expressed in US$) of the Upper Ramu project, its differential rate of return (18.8%) is higher than that calculated three years ago (17.6%) comparing it with the most eco- nomical thermal alternative. This result is mainly due to the fact that fuel costs for the thermal alternatives in September 1973 were much higher than the most probable value assumed in the 1970 analysis. In addition, because of the lower load forecast, there is now no immediate need for existing diesel equipment to firm up output, thus saving fuel expenses in the earlier years which originally had to be allocated to the hydro cost stream. If today's fuel costs were introduced into the analysis the rate of return would be at least 25%.  -9- Financial Position 33. ELCOM has a good record for reliable supply and service, and its financial position has been sound. When ELCOM was established in July 1963, it became responsible for nine separate systems. Its revenues are based on tariffs whose structure closely reflects the costs at each center. Due to substantial increases in expatriate staff for operations and local staff training, ELCOM's rate of return fell from 8.4% in 1968 to 4.7% in 1969. The cost of training, for instance, reached a high of A$ 670,000 in 1970, representing nearly 15% Df revenues. This low return continued until a 5% tariff increase became operative in November 1970. On the basis of forecasts which incorporated this tariff increase, ELCOM agreed, in connection with the Loan 737-PNG, to maintain tariffs suf- ficient to produce an annual return of not less than 9% on its average net fixed assets in service in fiscal years 1972 through 1976 and not less than 10% thereafter. However, the slowdown in business and industrial activity starting in 1971 resulted in a rate of return of 7.3% for FY 1972 and 8.7% for FY 1973, compared to the 9% required by the IJpper Ramu Loan Agreement (737-PNG). 34. Future revenues are based on forecast sales growth of 8.5% per annum through 1980. Projected operating expenses assume that the cost of those exnatriates whollv engaged in training during the five year period from mid-1974 through mid-1979 would be deferred and written off over ten years. On this basis, the 9% return required by the existing loan agree- ment would be achieved in FY 1974 and FY 1975. Subsequently, rates of return for FY 1976 through FY 1980 would be slightly below the targets of 9% in FY 1976 and 10% thereafter as set forth in the existing covenant. Primarilv, this is due to the projected low market growth. However, since ELCOM's financial position is forecast to remain satisfactory with internally generated funds, after debt service, financing 35% of capital requirements during FY 1974-79, the achievement of the 10% rate of return for FY 1977-80 is not essential. Under present PNG circumstances it is very difficult to provide a clear assessment of ELCOM's investment needs and to forecast additional loads associated with the implementation of new industrial projects. The existing rate of return covenant has, there- fore, been repeated in the new project agreement. However, the Bank would review ELCOM's financial results each year and would be willing to waive the covenanted target for a certain year provided ELCOM's internally generated funds would be maintained at a satisfactory level, i.e. to meet its annual debt service and a reasonable proportion of its investment program. 35. ELCOM's capital requirements covering the period FY 1974-79 would amount to about A$ 45.5 million. Net internal cash generation would finance about A$ 16.1 million or about 35% of these requirements while borrowing would finance the remaining A$ 29.4 million or about 65%. Loan funds would consist of the balance of Bank Loan 737-PNG (A$ 12.4 million), the proposed Bank loan of A$ 7.2 million (equivalent to US$10.8 million) and local loans of A$ 9.8 million (25 years at 6.55% interest.) ELCOM has agreed to seek Bank approval before incurring any further debt if by doing so actual net revenues would fail to provide 1.5 times coverage of future maximum debt  - 10 - service. ELCOM must also obtain the Bank's agreement of financing plans for Drojects estimated to cost over A$ 10 million. Furthermore, ELCOM has agreed not to pay dividends before July 1, 1978. Project Cost 36. The total cost of the project is estimated at US$17.3 million of which the Bank would finance the off-shore component1/ of US$10.8 million or 62.6%. Local expenditures of US$6.5 million will be covered by ELCOM's own resources and Government loans. The technical assistance component will cost about US$7.8 million, of which the Bank would finance the off- shore element of expatriates' salaries (US$4.7 million). This off-shore element is about 60% of gross salary including benefits and corresponds to that part of gross salaries and benefits that would remain in expatriate hands after expenditures in PNG for subsistence, housing, local taxes, etc. The total cost of the distribution element including physical contingencies (10%) and price increases of 5% per annum for local expenditures and imported materials is estimated at US$5.7 million, of which the Bank would finance US$2.3 million. The Ramu project shortfall amounts to US$3.8 million. Procurement and Disbursement 37. All procurement for equipment and materials (distribution component) to be financed under the proposed project would be on the basis of interna- tional competitive bidding in accordance with the Bank's guidelines. Distri- bution construction would be engineered and carried out by ELCOM whose own work force is capable of carrying out work of this nature. All contracts in respect to the Upper Ramu Hydroelectric Project (Loan 737-PNG), tendered under international competitive bidding, have already been awarded. Finan- cing of the shortfall in foreign exchange of US$3.8 million for the Ramu Project would cover civil works (US$2.1 million) and transmission equipment (TJSS1.7 million). Disbursements for the above and the distribution element of the proposed project would be made only for actual c.i.f. cost of equipment and materials and for the off-shore cost of services. The number, qualification and selection of technical assistance personnel for the training part of the project will be by mutual agreement between ELCOM and the Bank. Sixty percent of expenditures on gross salary and benefits of expatriate trainer staff, including a similar proportion of such payments made after January 1, 1974, up to US$300,000 equivalent, would be reimbursed from the Loan. Economic Evaluation 38. The proposed project will allow ELCOM to meet modestly projected increased power demands during the next five years and provide for satis- factory and acceptable staff localization. The loan will provide funds 1/ The term "offshore comDonent" includes payments in Australia. Once PNG has established its own currency, expected during next year, expenditures in A$ for goods and services procured in Australia will be foreign exchange expenditures.  - 11 - necessarv to support ELCOM's expenditure plans, funds which the new Govern- ment does not have and which Australia could not provide without curtailing its aid to Papua New Guinea earmarked for other vital purposes. On the eve of independence, PNG is faced with numerous problems and constraints on its future development. Among these, the lack of skilled manpower and professional training is probably the most important one the new Government will have to cope with. The main purpose of the proposed loan is to help alleviate this problem in a vital sector of PNG's economy and, thus, by assisting the country in developing its human resources, contribute to its independence and future economic and social development. 39. Accelerated localization is, in fact, a prime objective of the new Government to enable the local population to play a greater part in the economy and to encourage greater self-reliance. While the economic benefits of this policy are difficult to quantify, the rapid localization of ELCOM staff has distinct financial advantages. Indeed, the financial justification for training is based on savings due to the salary differen- tial between expatriate and local staff of equivalent grade and iesponsi- bilitv. To test this a discounted cash flow analysis of two cost streams was carried out over a period of 20 years: one representing ELCOM's cost without the proposed training (continued employment of expatriates) and the second representing ELCOM's costs with in-service training which reduces the number of expatriates over time as local staff can accept full opera- tional responsibility. The discount rate which equalized the two streams ,'as found to be in excess of 48%, reflecting the advantages of the training scheme. PART V - LEGAL INSTRUMENTS AND AUTHORITY 40. The draft Loan Agreement between the Papua New Guinea Government and the Bank, the draft Guarantee Agreement between Australia and the Bank, and the draft Project Agreement between the Bank and ELCOM, the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are heing distributed to the Executive Directors separately. The draft agreee- ments conform to the pattern normally used by the Bank for power projects. 41. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 12 - PART VI - RECOMMENDATION 42. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Washington, D. C. May 14, 1974  ANW I Page 1 of 3 poeee O0DNTRY DATA - PAPUA NB?1 GUINEA ARL POPVLATIrJ f;,r )!t kal 277;ifllion (did-1971) 5 Per kal Was 2oaf arable lad SOCIAL IIgICATORS Reference Countries Tr inidad Papua Ne" Cuinea Ivoe &os T bS GO1 PER CAPITA USv (ATLAS BASIS) / 300 430 330 8Go DEM0O;RAAP!55 Cruds=rth rate (per thousand) 30 /a 46 24 Crude death rate (per thousand) 57b 22 7 Infant mortality rate (per thousand live births) 140 40 Life expectancy at birth (years) 47 68 42 67 irons reproduction rate LQ 2,9 2.4 3.0 2.0 Population growth rate U 2.1 2.3 218 3.3 2.1 PPoulation groWth rate - urban 2/c G /c 92 9/d 4 Agn structure (percent) Oil6h 43/eA 47 /e 42 41 65 and over 17;-/ 2.7; 3 4 Ds-andency ratio . 0.7 7 1.9 a 1.0 Li 1.3 Urban population as percent of total 0. 7 /c 1.0 /c 23 /c 28 /d 50 Family planning, No of acceptors cumulative (thous.) 49 No. of users (% of married womeen) Total bour force (thousandda) 1,(14 1,260 /h 2.30C 363 Percentage emrployed in agriculture 89 ,2 5S 20 363 Percentage unemployed 4. 82( 9 13 INCOMES DISTRIBU71ON Percent of national income received by highest 5% 27 Percent of national income received by highest 20% Percent of national income received by lowest 20% 4 Percent of national income received by lowest 40% DISTRIBUTION OF LAND OWNBRShIP % owed by top OS of owrners % o-ned by smallest 10% of owners HEALTH AND NUTRITION Population per phdyasian 1 360 /3 13 690 /S 2,400 /.1 17,980 9 m2,310 Population per cursing Person ..3,190 k~j 700 41 2,240 7W n 3 6C Population per hospital bed 270 73 350 E 510 7; 210 Per capita calorie supply as % of requirements ,5 50/ 98 Per capita protein supply, total (grams per day7. 59 7 63 Of which, animal and pulse 18 i8 34 Death rate 1-4 years k . .. .. .. 1.9 EDWCATION Adjusted /8 primary school enrollment ratio b2/c tS /c _ 72/i 95 Adjusted secondary school enrollment ratio I 6 10 1 49 Tears of schooling provided, first and second level 10 IC 13 - 14 Vocational enrollment as % of sec. school enrollment 1b /q 19 /1" . o/1 11 Adult literacy rate % 2 20 7s 90 HOUSING Average No. of persons per room (urban) Percent of ocmupied unite without piped water Access to electricity (as % of total population) *. .. Percent of tural population conneeted to electricity CONSUHP ION R dio receivers per 1000 population 9, 17 281 Passenger care per 1000 populatimn 2 7 23 /t 11 66 Electric power consumption (kwh p.C.) 31 /u 74 304 102 1.166 New sprint consumption p.c. kg per year 0.04 - O.0 O 8 0.2 5.9 Note,, Figures refer either to the latest periods or to acounot of enviromnental temperature, body l.ie, No the lteo.t years. Latest periode refer in principle to distribution by age asn pa of national poplaations. the yearn 1956-60 or 1966-70; the latest years in pr0in- /6 Protein standards (requirements) for all countries as eatab- ciple to 1960 and 1970. lished by USDA lEonomic Researoh Service provide for a lnimam / The Per Capita C6AP elimLate is at market pric-s for allowamnce of 60 grsm of total protein per day. and 20 gram of y-ars othl-r than 1960, calculated by the came conversion animal aud puloo protein, of which 10 grams should be animl technique as the 1972 World Jank Atla.. protein. Thmese standards are o rmbat lower than tbheo of 75 I Average number of daughters per womean of reproduotive grams of total Protein a 23 parws of animal protein as an oge. average for the world, proposed by FAO in the fTird World Yoo-d U Populatton growth rater are for the decades cnding in Surtr. 1960 -nd 1970. SBoe studies have eugpeted that orude death rates of childron LL RatiO of onder 15 nd 65 and over age brackets to ago0 1 through 4 may be used as a first appromination index of those in labor force breket of ages 15 through 64. malnutrition. / FAO reference rtandarda repreaent physiological re- L