Completion Report. Project Number: Loan Number: 1768 September PNG: Microfinance and Employment Project

Transcription

1 Completion Report Project Number: Loan Number: 1768 September 2011 PNG: Microfinance and Employment Project

2 CURRENCY EQUIVALENTS Currency Unit kina (K) At Appraisal At Project Completion (15 Sep 2000) (30 Jun 2010) K1.00 = $ $ $1.00 = K2.703 K ABBREVIATIONS ADB Asian Development Bank BPNG Bank of Papua New Guinea IBBM Papua New Guinea Institute of Banking and Business Management MCC Microfinance Competence Centre MFI microfinance institution MIS management information systems NMB Nationwide Microbank PIU project implementation unit PNG Papua New Guinea RFF revolving finance facility NOTES (i) (ii) The fiscal year (FY) of the government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 31 December In this report, "$" refers to US dollars. Vice-President B.N. Lohani, Vice-President-in-Charge, Operations 2 Director General R. Wihtol, Pacific Department (PARD) Director E. Zhukov, Pacific Liaison and Coordination Office, PARD Team leader Team member M. Lucich, Senior Economics Officer, PARD M. de Villa, Associate Project Analyst, PARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page BASIC DATA I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Consultant Recruitment and Procurement 7 I. Performance of Consultants, Contractors, and Suppliers 7 J. Performance of the Borrower and the Executing Agency 8 K. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 11 A. Overall Assessment 11 B. Lessons 12 C. Recommendations Project Related General 13 DESIGN AND MONITORING FRAMEWORK 14 ANNUAL DISBURSEMENTS BY CATEGORY 18 ANNUAL DISBURSEMENTS PROJECTED VS ANNUAL 19 STATUS OF COMPLIANCE WITH LOAN COVENANTS 20 OVERVIEW OF PROCUREMENT OF CONSULTING SERVICES 28 I

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5 BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Original Amount of Loan 7. Net Loan Amount 8. Project Completion Report Number B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Closing Date In Loan Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) Papua New Guinea 1768 Microfinance and Employment Project Independent State of Papua New Guinea Bank of Papua New Guinea SDR7,357,000 ($ 9,600,000) SDR5,686,538 ($ 8,481,768) PCR: PNG June July September September October February May September December November % (grace period) and 1.5% (amortization period) 32 8

6 ii 8. Disbursements a. Dates Initial Disbursement 11 March 2002 Effective Date 20 September 2001 Final Disbursement 22 October 2010 Original Closing Date 31 December 2006 Time Interval 103 months Time Interval 63 months Category No. b. Amount (SDR) Category or Subloan Original Allocation Partial Cancellations Last Revised Allocation Amount Disbursed Undisbursed Balance (1) (2) (3) (4 = 3-5) (5) (6) (7 = 5-6) 01 Vehicles & 503, , , ,001 0 equipment 02A International 1,645,000 (611,016) 2,256,016 2,256,016 0 consultants 02B Domestic 435, , , ,640 0 consultants 03A Trainer upgrading 310, ,670 73,330 73, B In-house training 302,000 (57,509) 359, , C On-the-job 115,000 87,086 27,914 27,914 0 training 04 Networking & 410,000 (87,647) 497, ,647 0 public awareness 05A Office supplies & 109,000 (165,767) 274, ,767 0 communication 05B Travel, steering, & 406,000 (88,098) 494, ,098 0 reporting 06 Review and audit 77,000 47,312 29,688 29, Finance fund 2,146,000 2,146, Pilot microbanking equity 96,000 (836,927) 932, , IDC 184, , , Unallocated 619, , Total 7,357,000 1,670,462 5,686,538 5,686,538 0 Total $ Equivalent ( ) = negative, IDC = interest during construction. 9,600,000 1,118,232 8,481,768 8,481, Local Costs (Financed) - Amount ($) 3,170,877 - Percent of Local Costs 41 - Percent of Total Cost 37

7 iii C. Project Data 1. Project Cost ($ 000) Cost Appraisal Estimate Actual Foreign Exchange Cost 9,133 6,219 Local Currency Cost 11,379 7,690 Total 20,512 13, Financing Plan ($ 000) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 4,669 3,029 ADB Financed 9,595 8,482 Bank of Papua New Guinea IBBM 1, AusAID Sub-total 16,833 13,909 MFIs 3,680 ( ) a Total 20,512 13,909 ( ) = data not available, ADB = Asian Development Bank, AusAID = Australian Agency for International Development, IBBM = Papua New Guinea Institute of Banking & Business Management, MFI = microfinance institutions. a The contribution by MFIs was not measured during project implementation. 3. Cost Breakdown by Project Component ($ 000) Component Appraisal Estimate Actual Microfinance Competence Centre 5,886 7,235 New savings and loan products 3,545 3,886 Revolving finance facility 7,585 0 Project implementation unit 815 2,507 Physical contingencies Price contingencies 1,912 0 Interest during project implementation Total 20,512 13,909 Note: Actual contingency costs have been included in the actual component costs. 4. Project Schedule Item Appraisal Estimate Actual Date of Contract with Consulting Firm Procurement of International Consultants N/A Procurement of Domestic Consultants Procurement of Vehicles Procurement of Equipment Start of Project Activities Training and Workshops Project Completion

8 iv 5. Project Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress From 20 Sep 2001 to 30 Sep 2002 S PS From 01 Oct 2002 to 30 Jun 2010 S S PS = partly satisfactory, S = satisfactory. D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person- Days Specialization of Members Appraisal Mission 19 Jun 7 Jul 2000 Inception 5 15 Aug a, b Special Loan Administration Review 30 May 2 Jun c Review Nov a, b Special Loan Administration Review Feb a, b Review 26 Jun a, b Review Nov a Review Apr a Review 5 6 May b Review Sep a, b Review Mar b, d Midterm Review 6 17 Jun b, d Review 6 10 Aug b, d Review 6 16 Oct b, d Special project administration May e Special project administration 31 Aug 4 Sep e Review Nov e Project completion review 9 13 May a, e a = project economist, b = operations officer, c = procurement specialist, d = country programs specialist, e = private sector development specialist.

9 I. PROJECT DESCRIPTION 1. At the time the Microfinance and Employment Project was appraised, the Government of Papua New Guinea (PNG) was increasingly concerned about evidence that the percentage of the population living below the international poverty line of $1 per capita per day was growing. This was largely attributable to an incomplete transition from subsistence to a modern, cashbased economy. Poverty in PNG is directly linked to the inability of families to earn cash income to pay for school fees, health care, and other nonfood items and to save for future needs and hardships. Because the formal sector could provide few jobs, income-earning opportunities for most of the population would have to come from smallholder agriculture and micro and small enterprises in agroprocessing and trading. A limited availability and lack of access to financial services was, however, among the factors inhibiting growth of the micro and small enterprise sector. 2. An institutional gap in PNG s financial system had left micro and small enterprises, semisubsistence farmers, and poor households without any financial services. Microfinance institutions (MFIs) were scattered across PNG and operated in isolation. The knowledge of microfinance best practice was limited and the ability to design savings and loan products appropriate to client needs was nonexistent. None of the existing service providers had the institutional capacity to achieve sustainability in the near to medium term. Support for microfinance initiatives was needed to enhance their institutional capacity, ensure sustainable delivery of microfinance services to a large number of micro and small enterprises, and provide savings facilities for the poor and others who had no access to them. 3. The project was approved by the Board of Directors of the Asian Development Bank (ADB) in October Its overall objective was to contribute to economic growth through private sector development, employment creation, and development of the financial system. Its goal was to reduce poverty and integrate the majority of the poor into the mainstream development process. The project s specific objective was to provide sustainable microfinance services to viable enterprises and savings services to the population at large. It aimed at achieving its specific objective by building the institutional capacity of potentially sustainable MFIs. It comprised three components: (i) (ii) Component A: Microfinance Competence Centre. The project was to help the government establish the Microfinance Competence Centre (MCC) within the PNG Institute of Banking and Business Management (IBBM) to enhance the institutional capacity of MFIs. The MCC was to set up a network linking existing microfinance service providers and thereby creating a forum for policy implementation. Through the MCC, the project was to institutionalize the local capacity building needed to provide the expertise and technical skills to expand microfinance services. Component B: new savings and loan products. This component was to develop and test new loan products and delivery methods for financial services and help MFIs implement them. A microbanking pilot scheme was to be designed, established, and operated in Wau, a remote town in Momase, then the poorest of PNG s four regions. The scheme was to be a replicable institutional model and accelerate growth of the MFI industry through its demonstration effects. 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Papua New Guinea for the Microfinance and Employment Project. Manila.

10 2 (iii) Component C: revolving finance facility. Because expansion of the loan portfolios of MFIs was seen to be an important factor in achieving their sustainability, the project was to establish a revolving finance facility (RFF) that would provide credit lines and equipment loans to eligible MFIs for lending to micro and small enterprises. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. At the time of appraisal, ADB s country operational strategy for PNG emphasized the importance of financial services to the country s economic and social development and recognized the need to improve access to financial services, particularly in rural areas and for the poorer strata of the population. ADB strategy was in line with several of the government s policies at the time, including its Medium Term Development Strategy , which emphasized the importance of private sector development. The design of the project components was also strongly influenced by the lessons learned and insights gained from microfinance schemes supported by the Australian Agency for International Development and the European Union in PNG, ADB s own completed and ongoing microfinance projects in Asia and the Pacific, and current international best practices in microfinance. The project was designed through a project preparatory technical assistance The original project design relied on assumptions about the state of and potential for development in the microfinance industry in PNG that later proved unrealistic. The original estimate was that 40 potentially sustainable existing and new MFIs would participate in project activities. During the appraisal mission, however, fewer than 10 active MFIs were identified and only two were of significant size. These two, Village Finance and Liklik Dinau Arbitore Trust, failed and closed down shortly after project activities began. The potential for either identifying or developing up to 40 MFIs during the 4-year project period turned out to be low. The design also incorrectly assumed that the microbanking pilot scheme would succeed rapidly and that the model would be replicated by new microfinance institutions during the implementation period. 6. The project framework was revised substantially in Based on progress to date and with the agreement of the stakeholders, ADB simplified the performance indicators and set more realistic targets for the components. It was also agreed that the microbanking pilot scheme would be incorporated and divested. New performance indicators were introduced to reflect this new objective. Component C, the RFF, was cancelled during the midterm review. Evidence from the market and the main MFIs indicated that the demand was much greater for savings products than for borrowing. The need for MFIs to refinance their loan portfolios was therefore low. In addition, savings deposits were a less costly source for potential MFI lending than funding from an RFF. The midterm review also found a need for more capacity building to help MFIs intermediate effectively between savers and borrowers. The funds for the cancelled RFF were reallocated to other project components. The government agreed to provide an additional equity contribution to the microbanking pilot scheme from the funds that it had been due to contribute to the RFF. It was also agreed to extend the project by 2 years to 31 December 2008 to finalize all the objectives. 7. In May 2009, ADB approved (i) a government request to extend the project another 18 months to 30 June 2010; (ii) a minor change in scope and implementation arrangements; and (iii) 2 ADB Technical Assistance Report on Papua New Guinea Microfinance and Employment. Manila.

11 3 a reallocation of loan proceeds. At the time, the project had approximately SDR2.7 million ($4.1 million) available for commitment. Out of this amount, SDR1.6 million ($2.4 million) was cancelled, while a budget of SDR1.1 million ($1.7 million) was agreed with the government to complete activities recommended by ADB microfinance consultants. The activities were to build on the successes achieved by the project to date and prepare for a next-phase microfinance project in the country, and included (i) pilot-testing financial education and linkages between microbanks and second-tier (informal) MFIs; (ii) capacity building support to Nationwide Microbank (NMB), which had grown out of the former microbanking pilot scheme, in internal audit and risk management and human resources; and (iii) the funding of a portion of the cost of acquisition of branchless banking technology for NMB. B. Project Outputs 8. The revised design and monitoring framework of the project, including actual achievements, is in Appendix 1. The original project framework at appraisal was changed significantly in 2005 as part of the midterm review. The framework was also updated in 2009 to incorporate performance targets for the activities to be undertaken in 2009 and Several targets that had been achieved by 2008 were discontinued at this time. 9. Overall, the project has been effective in achieving the outcomes and outputs of the revised and updated project framework. Most of the performance targets have been achieved or substantially surpassed, either as originally set or as updated. 1. The Capacity of Microfinance Institutions Strengthened through New Microfinance Competence Centre. 10. The MCC was established within the IBBM in the first 6 months of project operations and training was offered to microfinance practitioners from June The first MCC business plan was drawn up in September 2004 and was reviewed regularly. The business plan prepared in the fourth quarter of 2008 showed it was unlikely that the MCC would be sustainable in the short to medium term. It needed to expand its services and would probably require continued external funding. Under the new ADB-financed Microfinance Expansion Project, the MCC will be replaced by the National Centre for Financial Inclusion to broaden the scope of activities and facilitate sustainability Through the MCC, the project designed more than 10 microfinance training modules, 6 distance learning modules, and a financial literacy program. The MCC delivered more than 9,200 person-days of training to practitioners from 21 formal and informal microfinance institutions during and achieved the original target that an average of 1,500 persondays of training be delivered per year. 4 Since 2009, the IBBM and its trainers continue to provide microfinance training modules on a commercial basis. The MCC also assisted MFIs directly in various aspects of institutional development and had provided more than 15 personmonths of such technical assistance per year by the end of Between 2004 and 2008, the MCC conducted institutional assessments and outlined development plans for improvements for 3 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Papua New Guinea for the Microfinance Expansion Project. Manila. Cofinanced by the Australian Agency for International Development. 4 Institutions that participated in MCC training programs and that continue to offer microfinance services include: East New Britain Savings & Loan Society, Kokopo Microfinance, Manus Savings and Loan Society, Milne Bay Microfinance, National Development Bank, National Farmers Savings and Loan Society, Niu Ailan Savings and Loan Society, NMB, PNG Microfinance, and Sepik Savings and Loan Society.

12 4 eight MFIs. The MFIs were assisted in developing appropriate management information systems (MIS) and business and operational plans. The project also submitted a draft legal microfinance framework to the Bank of Papua New Guinea (BPNG), although it was not adopted. Institutions are currently regulated under the Banks and Financial Institutions Act and the Savings and Loan Society Act. To date, the BPNG has not found the absence of a specific microfinance legal framework to be an obstacle to the development of the sector. In 2008, the BPNG created a microfinance unit within its Banking Supervision Department. Its capacity will be strengthened under the Microfinance Expansion Project (footnote 3). Furthermore, the project supported the establishment of a credit bureau, PNG Credit and Data Bureau, in 2008, which now operates profitably and provides credit information to the financial sector. The project also supported the launch of the PNG Association of Microfinance Institutions in New Savings and Loan Products and Delivery Methods Developed, Tested, and Implemented. 12. The project has helped MFIs to develop innovative and demand-driven new products and to redesign existing products to make them more sustainable and better suited to the needs of customers. During , 30 new savings and loan products were developed and tested and 7 were redesigned. Many of the new products were tested through the microbanking pilot scheme in Wau, with a view to replication by other MFIs. The uptake of new savings products has been particularly good. Loan product uptake has been limited by restrictions under the Savings and Loan Society Act on the types of loans savings and loan societies can offer. The project also launched downscaling pilots with two large licensed finance companies and the National Development Bank (then Rural Development Bank) in These pilots were aimed at introducing a new clientele to the services of institutions that traditionally had not provided microfinance services. The pilots were completed in The National Development Bank continues to deliver microfinance loan products, although with limited results. 13. After some initial tactical adjustments, the microbanking pilot scheme became one of the most visible and successful outputs delivered by the project. When launched in 2004, its main objectives were to (i) attain sustainability, (ii) be a role model for other MFIs, and (iii) act as a greenfield laboratory for testing new savings and loan products. It quickly became apparent that the scheme faced several issues. Whereas sustainability had been expected at appraisal to come in 1 year, the consultants realized that the pilot location in the small, remote township of Wau was a handicap and sustainability would likely not be achieved before the third or fourth year. In addition, the goal of sustainability was not necessarily consistent with the objective of testing new products. The BPNG granted permission for the scheme to expand to Lae, where it would have access to a bigger market. It was agreed with the government, the executing agency and stakeholders during the midterm review that the scheme would be incorporated as Wau Microbank, that the government would provide additional equity funding, and that the bank would be partially divested to the private sector. During project implementation, the bank continued to expand to new areas. It changed its name to NMB in 2008 and was granted a full banking license by the BPNG. Partial privatization was achieved in 2008, when a landowner company became a shareholder in NMB. In 2009 and 2010, the project provided additional capacity building support to NMB in internal audit and risk management and human resources. Approved funding support for a portion of the cost of acquisition of branchless banking technology for NMB did not eventuate before the closing of the project, as NMB was still developing its proposed branchless banking strategy. NMB is now the biggest MFI in PNG and the South Pacific and serves more than 100,000 active customers with savings accounts through 14 branches.

13 5 14. From July 2009 until June 2010, the project supported a pilot program of financial literacy training and linkages between NMB and second-tier MFIs. The second-tier MFIs carried out financial literacy training for potential clients, the majority of whom lived in rural areas. After the training, access to savings services was provided through the MFIs, in partnership with NMB. Pilots were carried out with the Ambumangre Catholic Women s Credit Scheme in Chimbu Province, Bogia Cooperative Society in Madang Province, Sepik Savings and Loan Society in East Sepik Province, and Capital Development Assistance in the Autonomous Region of Bougainville. Overall, more than 7,000 people received financial literacy training and access to financial services. The pilots were considered successful, although the linkages between NMB and the second-tier MFIs could have been strengthened. The lessons learned influenced the design of the Microfinance Expansion Project, which includes a large-scale financial literacy program targeting 120,000 people over 7 years (footnote 3). 3. A Revolving Finance Facility. 15. The RFF that was to be established to provide funding for the growth of MFIs loan portfolios was cancelled following the midterm review. As the demand for savings products in PNG was and continues to be much greater than that for borrowing products, savings deposits were found to be a cheaper source of funds for MFIs than funds supplied through an RFF. C. Project Costs 16. The original project cost estimate and the actual project costs are shown in section C of the Basic Data section, while the breakdown and utilization of loan funds are shown in section B. At appraisal, the project cost was estimated at $20.5 million, including a contribution of $3.7 million by MFIs. The actual cost was $13.9 million, excluding the contribution by MFIs, which was not measured during project implementation. Of the approved ADB loan amount of SDR7.4 million, SDR1.7 million was cancelled. This partial cancellation reflects (i) the lower than expected expenditure financed by ADB, and (ii) an appreciation in the SDR $ exchange rate, which increased the size of the approved loan in US dollars. Actual ADB expenditure was $8.5 million, compared with an estimate of $9.6 million at appraisal. Grant funding by the Australian Agency for International Development of $0.9 million was released in full. The government s counterpart funding contribution was $3.0 million, compared with an estimate of $4.7 million at appraisal, and the difference reflects issues with timely appropriation and release of counterpart funds. The BPNG s actual contribution of $0.6 million was higher than the estimate of $0.4 million at appraisal, which reflects the extended project implementation period. The IBBM s actual contribution of $0.8 million was lower than the estimate of $1.2 million at appraisal but the shortfall is not considered to have negatively impacted project implementation. 17. The cost of component A, the capacity building of MFIs through the MCC, was $7.2 million, compared with an estimate of $5.9 million at appraisal. The increase was for additional capacity building incorporated into the project design following the midterm review. Component B, the development and testing of new products and delivery methods, including the microbanking pilot scheme, is estimated to have cost $3.9 million, compared with an estimate of $3.5 million at appraisal. The higher cost reflects the additional equity contribution to Wau Microbank agreed during the midterm review. The funds for component C, the revolving fund facility that was cancelled at the midterm review, were reallocated to other project components. The cost of the project implementation unit (PIU) was $2.5 million, compared with an estimate of $0.8 million at appraisal. The difference reflects the extended project implementation period. Interest during implementation amounted to $0.3 million.

14 6 D. Disbursements 18. Annual disbursements are listed in Appendix 2. They changed considerably from the original estimates, as shown in Appendix 3. Loan effectiveness was delayed until September 2001, 11 months after loan approval. Due to the delayed release of ADB loan funds, the IBBM financed initial project operations until the first disbursement in March Disbursements were further delayed because assumptions at project design proved to be overly optimistic and project implementation was slower than anticipated. The revised design following the midterm review led to a substantial reallocation of loan funds. Disbursements subsequently improved, although SDR1.6 million was cancelled in 2009 and SDR0.1 million was cancelled in The final disbursement was in October An imprest account was in use until the end of 2008 to ensure the timely availability of funds. In 2009 and 2010, the imprest account was closed and some project expenses were paid directly out of government counterpart funds and reimbursed by ADB. E. Project Schedule 19. The loan was approved on 19 October 2000 and the loan agreement was signed on 26 February The loan was declared effective on 20 September 2001, following a delay in the submission of the legal opinion from the state solicitor. Recruitment of the consulting firm was delayed and consultants were not fielded until September 2002, 18 months later than originally anticipated. The original loan closing date of 31 December 2006 was extended to 31 December 2008 after the midterm review and ultimately extended to 30 June Implementation took 106 months in total, or 46 months longer than planned at appraisal. F. Implementation Arrangements 20. The BPNG was the executing agency and was responsible for the overall coordination and implementation of the project. It established a PIU to enhance project coordination and management. A microfinance steering committee, chaired by the BPNG and with broad stakeholder representation, oversaw project planning, organization, administration, implementation, and monitoring. Components A and B were to be implemented by the IBBM with support from project consultants and trainers. Component C was to be implemented by the BPNG, with the management of the RFF (later cancelled) to be contracted out to a private financial institution. In 2009, an approved minor change in implementation arrangements moved responsibility for project activities in 2009 and 2010 from the IBBM to the MCC, its subsidiary. The IBBM continued to be represented on the microfinance steering committee until the close of the project. 21. The implementation arrangements were satisfactory overall. Locating the PIU at the IBBM weakened the oversight role of the BPNG, however. The microfinance steering committee proved to be effective, although the representation by some government agencies on the committee was irregular. G. Conditions and Covenants 22. Appendix 4 shows the degree of compliance with loan covenants. Generally, compliance with covenants was satisfactory and most of the covenants of the loan and project agreements have been complied with. The state solicitor s delay in submitting the legal opinion postponed loan effectiveness and project implementation. Partial compliance recorded for some covenants related to (i) delays in reporting by the PIU and some lack of oversight by the BPNG, (ii)

15 7 concerns about the performance of PIU consultants from 2006, and (iii) delays in the appropriation and release of counterpart funds, resulting in a shortfall in government counterpart funding. Covenants concerned with the implementation and monitoring of the RFF are not applicable due to the cancellation of component C in June A key outstanding requirement under the covenants is the preparation of the 2010 audit report, which is expected to be completed by October H. Consultant Recruitment and Procurement 23. The appraisal estimated that the project would require 144 person-months of international consulting services and 240 person-months of domestic consultants. The recruitment of all consultants followed ADB s Guidelines on the Use of Consultants (October 1998, as amended from time to time). An international consulting firm was recruited to provide the international consulting services. Although advance action for the selection of consulting services was approved by ADB, consultant recruitment did not start until after loan effectiveness, which was delayed by 11 months. Due to subsequent delays in recruiting the consulting firm, consultants were not fielded until September 2002, 18 months later than planned. After loan closing was extended from the end of 2006 to the end of 2008, the BPNG negotiated for but ultimately decided against a contract extension. Several consultants previously engaged through the consulting firm were subsequently engaged as individual consultants by ADB. Actual consulting input during project implementation totaled 255 person-months of international services, and 700 person-months of domestic services. The domestic consulting services included 360 person-months of input by staff of the microbanking pilot scheme in Wau and Lae, who were contracted through the project for They were later contracted by NMB directly. The actual cost of consulting inputs through the ADB loan was $3.3 million for international consultants and $0.5 million for domestic consultants, compared with the $2.4 million and $0.7 million estimates, respectively, at appraisal. This reflects the increase in the person-months for international and domestic consulting services agreed with the executing agency and stakeholders during the midterm review and subsequent review missions. An overview of the procurement of consulting services and contracts awarded is in Appendix All procurement under the project was in accordance with ADB s Guidelines for Procurement (February 1999, as amended from time to time). Supply contracts for vehicles, computer equipment, and other office equipment needed for the establishment and operation of the PIU were awarded using international shopping procedures. Supply contracts for training and related services, each below the equivalent of $100,000, used direct purchase procedures. I. Performance of Consultants, Contractors, and Suppliers 25. In general, the performance of the consultants and contractors engaged through the project was satisfactory. Stakeholders did raise concerns about the performance of the international consulting firm at the start of the project. Several consultants included in the firm s proposal were replaced and some replacements were not considered satisfactory by the executing and implementing agencies. The firm s team leader resigned in December 2002, less than 3 months after being fielded, and was replaced in that role by the firm s institutional development specialist. In addition, while many of the firm s consultants carried out their duties competently, the firm did not provide sufficient oversight. A dispute also arose between the firm and its consultants over remuneration, particularly for housing allowances. The firm s contract was not renewed when the loan project was extended from the end of 2006 to the end of 2008.

16 8 26. The PIU was established in 2001 with support from a project manager and a project assistant. The performance of the domestic consultants in the PIU was satisfactory between 2001 and June 2006, when the project manager passed away suddenly. Despite efforts by the microfinance steering committee, no suitable replacement was found. The project assistant was promoted to the vacant position, but the performance of the acting project manager between 2006 and 2010 was unsatisfactory. Reporting and submission of withdrawal applications were delayed and concerns arose about the accuracy of records. Due to uncertainty about whether the project would be extended beyond the end of 2008, the microfinance steering committee decided not to replace the acting project manager. J. Performance of the Borrower and the Executing Agency 27. The performance of the BPNG and IBBM was satisfactory. The BPNG, the country s central bank, was selected as the executing agency because it was the institution best placed to fulfill that role for the project. The BPNG has become a strong advocate for microfinance development in PNG and played an important role in chairing the microfinance steering committee. The selection of a private organization such as the IBBM to implement the majority of the project s components was innovative and the IBBM contributed greatly to the project s success. Locating the PIU at the IBBM, however, weakened oversight by the BPNG (para. 21). This resulted in delays in reporting and the submission of withdrawal applications. K. Performance of the Asian Development Bank 28. ADB s performance during implementation was satisfactory. An important intervention by ADB was the major project redesign during midterm review, which successfully adapted the project to the circumstances facing the microfinance industry at the time. Nonetheless, stakeholders noted that this intervention would have been more effective if it had come earlier in the project rather than in 2005, 1 year before the original closing date. Stakeholders indicated that it had already become apparent in , the first 2 years of implementation that the RFF would not be needed and that the project would have to be redesigned. Stakeholders also reported that the performance of ADB improved when staff members with expertise in the microfinance sector were actively involved in implementation. Responsibility for project administration was transferred twice, first from ADB headquarters to the PNG resident mission in 2006 and from the PNG resident mission to the Pacific Liaison and Coordination Office in III. EVALUATION OF PERFORMANCE A. Relevance 29. The project is rated relevant. The project was in consonance with the government and ADB priorities to improve access to financial services, particularly in rural areas and for the poorer strata of the population (para. 4). The goal and objectives of the project were highly relevant although the original project design relied on unrealistic assumptions about the state of development in the industry. The estimate that 40 MFIs would participate in project activities was overly optimistic. The design also assumed incorrectly that the microbanking pilot scheme would succeed rapidly and that the model would be replicated by new MFIs during the 4-year project period without specific support from the project. 30. While the project needed to be redesigned at the midterm review to reflect the actual conditions and requirements for support in the microfinance sector, this process proved effective.

17 9 The redesigned project has been effectively implemented and has been recognized by stakeholders as having played a key role in the establishment of a microfinance industry in PNG. B. Effectiveness in Achieving Outcome 31. The project has been highly effective in achieving its outcomes with respect to outreach, and partially effective in achieving its outcomes with respect to improving the sustainability of the microfinance industry. Overall, the project is rated effective in achieving its outcomes. 1. Outcome: Formal and semiformal microfinance institutions provide sustainable microfinance services to viable formal and informal enterprises of all sectors and savings services to the population at large 32. During project implementation, the outreach of both formal and semiformal MFIs increased rapidly. The emergence of two licensed microbanks, NMB and PNG Microfinance, provided for a large portion of this growth. Together they now have 23 branches throughout the country. NMB was established through the project s microbanking pilot scheme. The International Finance Corporation is a founding shareholder of PNG Microfinance and has provided significant technical assistance to this institution. In addition, about 20 savings and loan societies, the National Development Bank, and a number of small community-based nongovernment organizations, provide or used to provide microfinance services, although many are inactive. 33. Targets exceeded. In September 2002, the cumulative outreach by MFIs was estimated at approximately 20,000 borrowers and 45,000 depositors. Following the midterm review, a target was set for MFIs to increase the number of borrowers by 30,000 to 50,000 and the number of depositors by 40,000 to 85,000 by the end of the project. As of December 2008, the actual MFI outreach was estimated at 145,000 borrowers and 312,000 depositors, an increase of 125,000 borrowers (417% of the targeted increase) and 267,000 depositors (668% of the targeted increase), respectively. These figures exclude many non-regulated MFIs for which data is difficult to collect and so likely underestimate growth of the overall microfinance sector. In 2009, the design and monitoring framework was reviewed and a new project target for outreach was set, with MFIs expected to increase their outreach to 370,000 depositors and 170,000 borrowers by June Actual data as of June 2010 indicate that cumulative MFI depositors had increased to 509,000 (138% of the target), while the number of borrowers had increased to 184,000 (108% of the target). 34. Sustainability of the microfinance industry. Despite strong growth in outreach, concerns remain about the sustainability of the MFIs and the performance indicators on sustainability were only partly achieved. At the end of 2008, eight MFIs that were reportedly close to breakeven point and improving results annually were considered sustainable (including NMB and a number of savings and loan societies and semiformal MFIs). Since then, however, the effects of the global financial crisis and rising domestic operating costs have led to renewed losses in the industry. The microfinance sector in PNG faces a much higher demand for savings products than loan products. While this is not unique in the Pacific, it results in a significant structural weakness. 35. Faced with low loan demand, MFIs have invested surplus funds from high savings deposits in government securities and treasury bills. In the early 2000s, the returns on 182-day treasury bills in PNG were about 10% 22% per annum but these annual returns dropped from mid-2004 on and have settled at 3% 4%. Meanwhile, the MFIs have faced growing operating

18 10 expenses, including rising costs of hiring qualified staff, as a result of the mineral boom and global conditions. These factors significantly hampered the efforts of MFIs to attain operational and financial self-sufficiency in 2009 and 2010, although they continue to make progress. Some of the biggest MFIs, including NMB and East New Britain Savings & Loan, are now close to reaching or have reached operational self-sufficiency. Although PNG Microfinance, one of the two licensed microbanks, has struggled with large losses in the past, they are declining and it may break even in Financial data on some of the smaller and informal MFIs are not currently available. C. Efficiency in Achieving Outcome and Outputs 36. Overall, the project is rated less efficient. The project was extended twice, part of the ADB loan was cancelled, and final project cost was lower than estimated at appraisal. In mid- 2010, the project closed with cancelled funds of SDR1.7 million ($2.4 million), although the US dollar value of the loan rose substantially during the implementation period due to exchange rate movements. The project did not suffer significant delays in funds transfers. The project activities were not capital intensive in nature. The main expenditures reflected the focus on capacity building for MFIs and, other than the equity contribution for the pilot microbanking scheme, were for consulting and training expenses. Submission of withdrawal applications and claim forms were delayed from While the project was eventually effective in achieving its outcomes and outputs and has had a significant impact on the development of the microfinance sector in PNG, more might have been achieved in a shorter time if the midterm review had been carried out earlier in the project s life. The extended implementation period made the PIU costs significantly higher than estimated at appraisal. Unsatisfactory record keeping and data collection also reduced the efficiency of the project. D. Preliminary Assessment of Sustainability 37. The sustainability of the project is rated likely. The project has developed significant expertise within multiple institutions in the delivery of microfinance services. The microfinance training resources in material and expertise developed through the IBBM and the MCC are also expected to be sustainable. Since project completion, the IBBM has offered the training services on a commercial basis. The MCC will be succeeded by the National Centre for Financial Inclusion under ADB s new Microfinance Expansion Project to broaden the scope of activities and facilitate sustainability (footnote 3). 38. The project subsidized the delivery of MCC training courses to MFIs during implementation. The contributions made by MFIs for their training were accumulated in a capacity development fund established by the MCC in The MFIs contribution was to increase gradually as the number of MFI person-training-days grew. The fund had accumulated approximately K0.8 million by the end of the project, which can be used to continue to subsidize the training provided to MFIs that cannot bear the full training costs and thus guarantee a certain volume of training will be carried out by the IBBM. 39. The microbank established under the project pilot scheme has been sustainable since the end of Wau Microbank changed its name to NMB in June 2008, was granted a new license from the BPNG, and now operates on a commercial basis. NMB embarked on a large expansion plan and, despite deficits generated in new branches, managed to be profitable each year during before making a loss in It has 14 branches across the country, more than 100,000 active clients, and is one of the leaders in the industry. During the project, the emergence of another large microfinance institution, PNG Microfinance, with support from

19 11 the International Finance Corporation added extra depth to the sustainability of the microfinance sector. A credit information bureau established in 2008 with support from the MCC is now profitable and considered sustainable. E. Impact 40. The overall objective of the project was to contribute to economic growth through private sector development, employment creation, and deepening of the financial system. The goal of the project was to reduce poverty and integrate the majority of the poor into the mainstream development process. The deepening of the financial system is easily evidenced by (i) the emergence during the project implementation period of two licensed microbanks with a growing branch network; (ii) multiple strengthened savings and loan societies, which are also slowly expanding their branch networks and customer bases; and (iii) the expansion of the National Development Bank into microfinance products. Since project inception, a regulated microfinance industry has emerged that is increasing its outreach and capacity to serve the population at large. Nominal domestic credit to the private sector, the performance indicator included in the design and monitoring framework, has increased from K1.8 billion at the end of 2001 to K6.5 billion in June 2010, a compounded average annual growth rate of approximately 18%. The ratio of private sector credit to gross domestic product has increased from less than 15% in 2005 to 27% in The project has had a significant impact on the strong growth recorded in the microfinance industry in PNG. It has changed the perception and thinking of all stakeholders, practitioners, and the regulators. At the start of the project, the microfinance industry was nascent and most microfinance initiatives had failed. The project has laid a solid foundation for the future growth of the industry and has developed microfinance as a suitable tool for rural development in the country. It has facilitated the integration of people into the financial sector who had never had access to appropriate financial services. The microfinance institutions and savings and loan societies had extended their outreach to more than 500,000 clients by end of June The social impact of the project, with respect to poverty alleviation and increased employment, cannot be reliably assessed. No social impact indicators were incorporated into the project framework at project design and, as a result, no data have been recorded. The Government of PNG does not regularly collect or report on poverty and employment statistics. The last official estimates of the percentage of households living below the poverty line are based on data from No data on formal and informal employment in the country is available. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 43. The project is rated successful. The project was completed with nearly all outcome and output indicators or targets met or surpassed. A structured and sustainable microfinance industry has emerged where none previously existed. The project has achieved more than anticipated and has managed its limitations, delays, and obstacles effectively. Flaws in the initial design and some delays in implementation were ultimately resolved through flexibility in project administration that resulted in a major redesign of the project after the midterm review. To build on the achievements of the project, ADB will provide continued support to the microfinance industry through the Microfinance Expansion Project (footnote 3).

20 12 B. Lessons 44. The following lessons can be drawn: (i) (ii) (iii) (iv) Realistic design key in conditions of uncertainty. When a project seeks to develop a nascent industry in a challenging environment, outputs need to be realistic. The project design relied on assumptions about the state of and potential for development in the microfinance industry that proved to be unrealistic. The project redesign highlights the need to be flexible in adapting the project to emerging realities and experiences in the industry. Efficient reporting and data collection essential. The PIU did not allocate sufficient time to reporting and data collection during implementation, which impacted negatively on the ability of ADB and the microfinance steering committee to administer the project effectively. Not housing the PIU within the executing agency reduced oversight and transparency. Timely reviews, earlier solutions, lower costs. A major project redesign followed a midterm review. While the changes contributed significantly to the success of the project, this review occurred came fairly late in 2005, compared with the original closing date of Had this review taken place earlier, the project might have been able to achieve its outcomes earlier and at lower cost. Match ADB staff skills to specific project needs. When supporting the development of a new industry in a challenging environment, project administration needs to be particularly vigilant and carried out by ADB officers with strong expertise in the area. Stakeholders noted that the performance of ADB improved when staff had expertise in the microfinance sector and were actively involved in the implementation of the project. C. Recommendations 1. Project Related 45. Future monitoring. Monitoring of the microfinance sector in PNG should take place as part of ADB s Microfinance Expansion Project (footnote 3). This project is currently under implementation and will extend and build on the experiences and lessons learned from the Microfinance and Employment Project. To support the further development of the microfinance sector, it will (i) strengthen the capacity of the microfinance industry to provide financial services to a broader cross-section of the community and strengthen the capacity of its clients and potential clients to utilize these services; (ii) provide appropriate regulation for, and supervision of, MFIs and savings and loan societies through the BPNG; and (iii) increase lending to micro and small enterprises. 46. Covenants. The key outstanding item under the project covenants is the preparation of the final audit report. The report is expected to be completed by October Compliance with several covenants has been partial (para. 22). It is recommended that all remaining project covenants be waived, as these have been superseded by the covenants of the Microfinance Expansion Project.