Papua New Guinea - Opportunities and challenges for accelerated development

Report No. 77074ING *r- Papua New Guinea Opportunities and Challenges for Accelerated Development April 21,19899 Country Department V Asia Regional Office FOR OFFICIAL USE ONLY ON EP~cunie4theWMd - **J Thi dcuentha aretrite dstrbuio ad my e s' by recpier, *nyino :;j th-efrrd ftWrofca uis It cotet ma- otohews be dktoed ithot Wdd ankat-o zaion  CURRENCY EQUIVALENTS Annual Averapes 1981 R 1.00 - USS 1.49 1982 K 1.00 - USS 1.36 1983 R 1.00 - USS 1.20 1984 K 1.00 w US$ 1.12 1985 K 1.00 - US$ 1.00 1986 K 1.00 - USS 1.03 1987 K 1.00 - US$ 1.10 1988 K 1.00 - US$ 1.15 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ABPNG - Agriculture Bank of Papua New Guinea ADB - Asian Development Bank AIDAB - Australian International Development Assistance Bureau BCL - Bcugainville Copper Limited CDA - Coffee Development Agency CSA - Conwtercial Statutory Authority DAL - Department of Agriculture and Livestock DCA - Department of Civil Aviation DEC - De',artment of Environment and Conservation DFP - Department of Finance and Planning DH - Department of Health DL - Department of Labor DLFP - Department of Land and Physical Planning DHE - Department of Minerals and Energy DPM - Department of Personnel Management DTI - Department of Trade and Industry DW - Department of Works EEC - European Economic Community Elcom - Electricity Commission FIPA - Foreign Investment Promotion Agency GRAC - Government Regulations Advisory Committee IASER - Institute of Applied Social and Economic Research ICO - International Coffee Organization IDICC - Interdepartmental Investment Coordination Committee IFAD - International Fund for Agricultural Development ISIC - International Standard Industrial Classification LMP - Land Mobilization Program EIPWC - Mining and Petroleum Working Committee MRDC - Mineral Resources Development Corporation MRSF - Mineral Resources Stabilization Fund MUG - Mintmum Unconditional Grant MWB - Minimum Wages Board NEC - National Executive Council NES - Nucleus Estate with Smallholders NHS - National High School NIDA - National Investment and Development Authority OEM - Operations and Maintenance OPEC - Organization of Petroleum Exporting Countries OTML - Ok Tedi Mining Company Limited PIP - Public Investment Program PMGH - Port Moresby General Hospital TSC - Teachers' Services Commission UN - United Nations UNCTC - United Nations Center for Transnational Corporations UNDP - United Nations Development Programme UNIDO - United Nations Industrial Development Organization NWSSB - National Water Supply and Sewerage Board  101 OUTriAL US OaNLY TITLE s Papua New Guineas Opportunities and Challenges for Accelerated Developuent COUNTRY s Papua New Guinea REGION s Asia SECTOR s Country Economic REPORT TYPE CLASSIFISCATIN MMIY LANGUAGE 7707-PNG FRA Official Use 4189 English ABSTRAM^T s This Report, part of a series of World Bank Economic Reports on Papua New Guinea, comprises two main elements. First, it updates the analysis of the economic situation, policies and prospects provided in the 1988 Economic Report. In this context, the Report: reviews recent economic developments, with focus on developments in 1987 and 1988; identifies and analyzes related economic and financial policy issues; reviews major elements of the development strategy, taking into account the progress made in implementing the priority policy agenda since the last Report; and makes a fresh assessment of the medium- term economic and financial outlook. Second, the Report addresses a set of special issues selected for more detailed analysis. These include: policies and prospects for the development of mineral resources and the implications of a mineral resource boom; the management of public expenditure, including the management of operations and maintenance expenditure and the strategy and priorities of the Public Investment Program; and some issues in the promotion of private nonmineral investment, including land policy and administration, institutional and regulatory arrangements governing private investment, and wage and exchange rate policies. This document has a rutied distdbution and may be used by recipients only in the perfomance of their oflicial duties. Its contents may not otherise be disclosed without Wodd Bank authoization.  PAPUA NEW GUIN OPPORTUNITIES AND CHALLENGES FOR ACCELERATED DEVELOPMENT Table of Contents Page No. COUNTRY DATA..................... EsuCUTV SVMMARY ............................ *....... i I. REVIEW OF ECONOMIC PERFORMNCE AND STRATEGY ............. 1 A. Introduction and Overview ... .......... .. .......... ... . 1 B. Recent Economic Developments ......................... 2 Economic Growth ............................. .. 2 Employment ............................ 4 Investment .. ...................**..... *# ......... 5 Fiscal Policies .......... .... ...................... ... 7 Financial Sector Policies....................... 10 External Trade and Payments.................... 12 C. Development Strategy and Policy Priorities.......... 14 Development Objectives and Overall Strategy..... 14 Recent Government Development Policy Actions.... 16 Policy Agenda. ............... ....... ... is 18 II. A MINERAL RESOURCE BOOM? PROSPECTS. POLICY ISSUES AND IMPLICATIONS..................... 23 A. Introduction ................. ........... 23 B. Prospects for Mineral Resource Development.......... 23 Investment Activity ......................... 24 Growth in Production and Exports................ 26 C. Some Issues in Managing Mineral Resource Development .... .00* .. . ..... ........... 28 Maintaining a Conducive Environment for Exploration and Development.............. 28 Distribution of Be n e f i ts........................ 29 Government Participation in New Projects........ 31 Tax Regime ................ .. .......... 32 This Report was prepared by a World Bank mission which visited Papua New Guinea from October 24 - November 11, 1988. The mission members were: M. Zia Qureshi (team leader), Emmanuel James, Karl Jechoutek, Salahuddin Xhwaja, Samuel ("too, John Strongman, Chita Tanchoco and Jack Diamond (IMP). Research assistance to the mission was provided by Peter Osei. Others contributing to the Report included Roslyn Rees, Michael Porter, William Rees, Erdmann Zimmer-Vorhaus, Refael Benvenisti (then with IFC), and Klaus Bahr (consultant).  Domestic Utilization of Petroleum Resources ..... 32 Institutional Development ....................... 33 D. Implications of Prospective Resource Developments ... 34 Real and Financial Linkages ..................... 34 Balance of Payments Implications ................ 35 Fiscal Implications ........................... ** .............. 37 Some Alternative Scenarios ...................... 39 Policy Implications ............................ . 39 III. PUBLIC EXPENDITURE MANAGEMENT AND PRIORITIES ............ 43 A. Introduction .. ...................................... 43 B. The Structure of Government Expenditure .. 44 C. Manag8ment of Operations and Maintenance Expenditure ............................ 49 Importance of O&M ................ ............ *. 49 O&M Problems in Maor S Secorrs .. 50 Some General Causes of Inadequacy of O..N.. 53 Toward an O&M Strategy for PNG .................. 59 D. Public Investment Strategy and Priorities: The 1989-93 Public Investment Program . . 64 Program Preparation and Design .................. 64 Size of the Program and Implementation Capacity. '66 Sector Programs and Strategies .................. 69 S. Financing of Government Operations .................. 78 'IV. SELECTED ISSUES IN PROMOTING PRIVATE INESTMENT ......... 82 A. Introduction ............................................... 82 B. Land Policy and Administration .................. #.. 82 Land Resources and Use .......... . ...... 82 Land Tenure and Administration .................. 83 Factors Constraining Land Use for Development ... 84 A Program for Land Mobilization .................