Papua New Guinea - Highway Project

FILE COPY ~RESTRICTED FILE COPY Report No. P-828 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be' quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE TERRITORY OF PAPUA AND NEW GUINEA FOR A PROPOSED HIGHWAY PROJECT May 26, 1970  INTlERNATIONAL BANK FOR RECONSTRUCTICN ANI DEVELOPIThIT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECONDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE TERRITORY OF PAPUA AND NEW GUINEA 1. I submit the following report and recommendation on a proposed loan and credit, in various currencies, equivalent to US$4.5 million each to the Administration of the Territory of Papua and New Guinea. PART I - HISTORICAL 2. Following a suggestion by an economic mission in 1967, a trans- port survey of the Territory financed by the UNDP for which the Bank was executing agency was carried out. Part I of the report of the consultants endorsed the Adndnistration's investment program in transport contained in the Territory's Development Plan for the five years to 1972/73. The investment program of A$157 million includes A$109 million for highways. The proposed Bank loan and IDA credit, which would be the first Bank group assistance for transport in the Territory would finance the highest priority roads identified in the transport survey. 3. Negotiations were held in Washington from May 7 to May 15, 1970. The Government of the Commonwealth of Australia, the Guarantor, was represented by Mr. F.G.H. Pooley, Counselor (Financial) of the Australian Embassy and Mr. D. Mentz, Assistant Secretary, Department of External Territories. The Administration of the Territory of Papua and New Guinea, which is the Borrower, was represented by Mr. Joseph A. Lue, Assistant Ministerial member for transport in the Territory House of Assembly and Mr. Tom Crotty, Director of the Department of Public Works. 4. The Territor-y has received one Bank loan and two IDA credits to date. The following is a summary statement relating to them as of April 30, 1970.  -2- Loan or Amount (US$ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 546-PNG 1968 Administration of the Telecommu- 7.0 6.9 Territory of Papua and nications New Guinea 137-PNG 1969 Administration of the Agriculture 1.5 1.4 Territory of Papua and New Guinea 1/ 175-PNG 1970 Administration of the Agriculture 5.0 5.0 Territory of Papua and New Guinea Total now outstanding 7.0 6.5 Amount sold 0.2 Total now held by Bank and IDA 6.8 6.5 Total undisbursed 6.9 6.4 13.3 1/ Not yet effective. 5. A supervision mission reported in May 1970 that progress on the telecommunications project is generally on schedule and, orders having been placed, substantial disbursements should start soon. Progress on the first agricultural project has been impressive although disbursements have been slow due to administrative delays in the Territory which will be investigated by a supervision mission due to visit the Territory later this month. A mission is scheduled to visit the Territory later this year to review a hydro-electric power project for which the Administra- tion has requested a Bank loan. PART II - DESCRIPTION OF THE PROPOSED LOAN AND CREDIT 6. Borrower: The Administration of the Territory of Papua and New Guinea. Guarantor: The Government of the Commonwealth of Australia.  - 3 - Amount: The equivalent in various currencies of US$9.0 million of which US.$4.5 million each for the Loan and the Credit. Purpose: To help finance engineering and construction of about 93 miles of highways and engineering of a further 134 miles of highways as well as technical assistance. Amortization: IDA credit: in fifty years including a ten-year period of grace, through semi-annual instalments of one-half of 1% from December 15, 1980 to June 15, 1990 and 114 from December 15, 1990 through June 15, 2020. Bank loan: in twenty four years including a four year period of grace, payable in semi-annual instalments beginning December 15, 1974 and ending June 15, 1994. Interest Rate on Bank loan: 7% per annum Commitment Charge on Bank loan: 3/4 of 1% per annum. Service Charge on IDA credit: 3/4 of 1% per annum. PART III - THE PROJECT 7. A report entitled "Territory of Papua and New Guinea - Appraisal of a Highway Project" (PTR 51a) dated May 27, 1970 is .attached.- 8. About one million of the Territory's 2.3 million population is concentrated in the highlands of the main island, an area of potential agricultural growth. The development of the coast was made possible by shipping, but the interior, mountainous and densely forested over much of its area, was, until the opening of the Highland Highway in 1966 accessible only by air. The Highlands Highway from Lae, on the coast, to Mt. Hagen in the Highlands is the only road at present and although this is in many places an appalling road, subject to landslides, it has had a significant influence in stimulating economic actitivty in the area through which it passes. 9. The Territory's Department of Public Works (PUD) will be res- ponsible for executing the project, for which it has a suitably quali- fied staff. This staff is, however, at present entirely expatriate and  - 4 - the proposed loan and credit include an amount for fellowships for over- seas training of Papuans and New Guineans. The report of the UNDP financed consultants recommended certain organizational changes in the PWD and provision has been made for management consultants' services in implementing these changes. The Commonwealth Government is currently carrying out a program for the reorganization of the PWDI, taking into account the report by the UNDP financed consultants and will keep the Bank informed on its progress. 10. The highway construction to be financed under the project consists of the improvement of existing stretches of the Highlands Highway (from Kundiawa to Minj and from Kudjip to Mount Hagen) and an extension of the highway southwards into the Southern Highlands an area at present largely inaccessible by road. Finance would also be provided for the detailed engineering of a second access road from the coast to the Highlands, along a route recormmended by the UNDP financed consultants and approved by the Territory House of Assembly. The Administration is expected to request Bank assistance for the construction of this second access road in due course, which would provide the Highlands Highway with a link northwards to the coast at Madang. 11. The project is estimated to cost a total of US$13.14 million of -shich wqorkcs by contractors,together with engineering and supervision of roads to be reconstructed and contingencies, account for us$11.61 million, consultants: services for engineering further roads US$1.47 million, and overseas fellowships US$60,000. As in previous loans and credits to the Territory, the Bank group would finance the "offshore component" of the project, which, since the Territory has the same currency as Australia, includes costs originating in Australia and other overseas countries. The "offshore component" of the civil works contracts is estimated at 67 percent (US$7.76 million) and of the consultants' services at 80 per- cent (US$1.18 million). The cost of the fellowships would be wholly "offshore". Expenditure amounting to US$540,000 has been incurred since April 1969 on detailed engineering of the roads to be constructed and I recommend that the "offshore component" of this amounting to US$430,000 be financed out of the proceeds of the Credit. The Credit would be dis- bursed first. 12. The proposed loan and credit would be in addition to, and not in substitution for Australian budgetary aid which will amount to A$96 million in 1969/70 and is expected to rise to A$120 million by 1970/71. It may be added that the Administration has also tried to raise funds for development work by borrowing on the Australian capital market, but recent offering of bonds there at rates above those prevailing for Commonwealth and States issues resulted in the bulk of the issue being left with the underwriters.  13. The Project is economically justified. The high cost of trans- port, whether by air or by inadequate roads, is holding back the develop- ment of successful cash crops in otherwise suitable areas. Tourism and light manufacturing would also be encouraged. Savings both in transport costs and road maintenance would result from the proposed improvements in the highways and, using a conservative basis of forecasting the economic returns on the improvement of the highways, range from 15 percent to 40 percent. The second access road to the highlands, for which detailed engineering is to be carried out, passes through an area of relatively dense population and land shortage and will likewise stimulate the economy there. In addition to the economic benefits of the project, its execution would promote political and social cohesion in a country divided by geo- graphical and language barriers. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 14. The draft Development Credit Agreement between the Association and the Administration of the Territory of Papua and New Guinea, the draft Loan Agreement between the Bank and the Administration of the Territory, the draft Guarantee Agreement between the Commonwealth of Australia and the Bank, the Recommendation of the Ccmmittee required by Article V Section 1 (d) of the Articles of Agreement of the Association, the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement of the Bank and the text of Resolutions approving the proposed Credit and Loan are being distributed separately. Necessary modifications have been made to General Conditions applicable to Develop- ment Credit Agreements and Loan Agreements to take into account the fact that the Borrower is not a member and that the Guarantor's currency is the same as that of the Borrower. The Credit Agreement contains the usual provisions for highway projects and these are incorporated by reference in the Loan Agreement. A draft of a letter from the Commonwealth giving, inter-ali, certain assurancoz on the status of the Credit is also being distributed. PART V - THE ECONOMY 15. A report "Current Economic Position and Prospects of the Terri- tory of Papua and New Guinea" (EAP-8a) was circulated to the Executive Directors on September 9, 1969. The Territory's economy, of which agri- culture is the mainstay, has made steady progress in several respects during the last decade. The monetized sector's contribution to GNP has been growing at the rate of 10 percent annually; GNP, as a whole, has risen by about 5-6 percent per annum. 16. Exports (including re-exports) expanded in FY 1967/68 (July 1 - June 30)by 32 percent because of the buoyant world market demand for copra, cocoa and coffee - the Territory's major export commodities. In FY 1968/69 there was a more normal export grouth of about 7 percent. The percentage of imports financed by exports increased from 48 percent in  FY 1967/68 to 51 percent in FY 1968/69 and the merchandise trade gap in absolute terms narrowed slightly. For the first seven months of FY 1969/70 the trade gap, despite a satisfactory development of exports, widened to A$62 million (A$40 million during the comparable period of FY 1968/69) as a result of a 42 percent rise in imports, largely for the Bougainville Copper Project. The trade deficits, together with the deficits on invisi- ble account, were largely financed by Australian grants which amounted to A$78 million in FY 1967/68 and A$87 million in FY 1968/69; an A$96 million grant was budgeted for FY 1969/70. 17. The Administration's total expenditure for FY 1968/69 increased by 12 percent over the previous year and is budgeted to rise by 18 percent in FY 1969/70, as the development program gets underway. Capital expendi- ture as a percentage of total public expenditure increased from 28 percent during the early sixties to 33 percent during FY 1964/65 - 1967/68. Within current expenditure, outlays for social and economic development have recently been increasing. Internal revenue collection continued to increase fast - it rose by 15 percent in FY 1968/69 and is expected to increase by 23 percent in FY 1969/70. It amounted, however, to only 37 percent of the total expenditure and around 55 percent of current expenditure in FY 1968/ 69. Domestic revenue as a percentage of the public sector's total finan- cial resources has been rising only slowly. The budget deficit has been almost entirely financed by Australian grants. In addition, the Terri- tory has raised some funds through borrowing in the Territory and in Australia. However, as mentioned in paragraph 12, the Territory has recently encountered difficulties in raising sufficient funds in the Australian market. 18. The Territory's first development program (FYs 1968/69-1972/73) incorporated many recommendations of the Bank's 1963 survey mission and its 1967 economic mission. The principal objective of the program is the expansion of production with greater participation of the indigenous population. The financing of the program is based on assurances of the continuation of substantial financial support from the Australian Common- wealth Government and intensified efforts to mobilize local resources. 19. The start of copper ore exploitation on Bougainville Island will bring substantial increases in the Territory's export earnings and public revenues, but the Territory will continue to be dependent on large scale external assistance, especially Australian Government grants, for imple- menting the development program. 20. The Territory - a separate political entity under Australian administration but moving towards independence - qualifies for IDA assistance on grounds of the low per capita income of the indigenous population (about US$100 per year), limited capacity to save and weak balance of payments. On its own, the Territory is not creditworthy for Bank loans, and in lending to it the Bank would be relying on the guarantee of the Government of Australia* Considering the current  - 7 - strength and good prospects of the Australian economny, there is no doubt that Australia is a sound guarantor. PART VI - CQMPLIANCE WITH ARTICLES OF AGREEMNT 21. I am satisfied that the proposed Development Credit and Loan Agreements would comply with the Articles of Agreement of the Associa- tion and the Banlc. PART VII - RECCGIEINDATION 22. I recommend that the Executive Directors approve the proposed credit and loan. Robert S. McNamara President Washington, D.C. May 26, 1970