Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: October 2011 Proposed Loans for Additional Financing: Papua New Guinea: Lae Port Development Project

2 CURRENCY EQUIVALENTS (as of 11 October 2011) Currency Unit kina (K) K1.00 = $0.450 $1.00 = K2.221 ABBREVIATIONS ADB Asian Development Bank IPBC Independent Public Business Corporation LIBOR London interbank offered rate m meter PAM project administration manual PMU project management unit PNG Papua New Guinea PPCL PNG Ports Corporation Limited PPP public private partnership RRP report and recommendation of the President NOTES (i) (ii) The fiscal year (FY) of the Government of Papua New Guinea ends on 31 December. In this report, $ refers to US dollars. Vice-President S. Groff, Operations 2 Director General R. Wihtol, Pacific Department (PARD) Country Director C. Andrews, Papua New Guinea Resident Mission (PNRM), PARD Team leader Team members Peer reviewer A. Lee, Lead Portfolio Management Specialist, PNRM, PARD C. Edmonds, Senior Economist, PARD H. Everett, Financial Sector Specialist (Public Finance), PARD P. Nagum, Project Implementation Officer, PNRM, PARD J. Peththawadu, Portfolio Management Specialist, PNRM, PARD J. Roop, Senior Environment Specialist, PARD N. Sapkota, Safeguards Specialist, PARD A. Syed, Counsel, Office of the General Counsel C. Chen, Transport Specialist, South Asia Department 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 PROJECT AT A GLANCE Page I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 5 C. Outputs 5 D. Investment and Financing Plan 5 E. Implementation Arrangements 7 III. DUE DILIGENCE 8 A. Technical 8 B. Economic, Financial, and Public Private Partnership Opportunities 8 C. Governance 9 D. Poverty and Social Safeguards 9 E. Environmental Safeguards 9 F. Risks and Mitigating Measures 9 IV. ASSURANCES AND CONDITIONS 10 V. RECOMMENDATION 10 APPENDIXES 1. Revised Design and Monitoring Framework List of Linked Documents 13

4 PROJECT AT A GLANCE 1. Project Name: Lae Port Development Project Additional Finance 2. Project Number: Country: Papua New Guinea 4. Department/Division: Pacific Department/Papua New Guinea Resident Mission 5. Sector Classification: Sectors Primary Subsectors Transport, and information and communication technology Water Transport 6. Thematic Classification: 6a. Climate Change Impact No Climate Change Indicator available. 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth 9. Project Risk Categorization: Low Themes Primary Subthemes Economic growth Promoting economic efficiency and enabling business environment. 6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE) 8. Location Impact: Targeted Intervention Millennium development goals Income poverty at household level National (High) 10. Safeguards Categorization: Environment Category B, Involuntary Resettlement- Category C, Indigenous Peoples- Category C. 11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project loan Asian Development Fund Sovereign Project loan Ordinary Capital Resources Total Cofinancing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project loan OPEC Fund for International Development 6.00 Sovereign Project grant Japan Fund for Poverty Reduction 1.50 Sovereign Project grant HIV/AIDS Cooperation Fund a 0.75 Total Counterpart Financing: Source Amount ($ Million) Government Total Aid Effectiveness: No Aid Effectiveness available. HIV/AIDS Cooperation Fund = Cooperation Fund for Fighting HIV/AIDS in Asia and the Pacific a Contributor: Government of Sweden.

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on proposed loans to Papua New Guinea (PNG) for the additional financing of the Lae Port Development Project The overall project will expand the cargo handling capacity of PNG s largest sea port at Lae, the capital of Morobe province. The overall project will also help improve the livelihood of projectaffected people and reduce the prevalence of HIV in Lae and surrounding localities. This involves financing (i) construction of port facilities including a tidal basin, a multipurpose berth, and terminal works; (ii) resettlement and livelihood improvement and social improvement for affected people; (iii) consulting services for project management, construction supervision, financial management, resettlement, and socioeconomic monitoring; and (iv) gender-responsive programs for HIV awareness and prevention. Current project implementation preconstruction activities are mostly complete, including the relocation of 3,200 people from the project site As a result of input price increases, the devaluation of the US dollar against the kina, and design modifications, the total current project cost has increased from $154.0 million at appraisal in 2007 to $291.4 million in The current project rationale is valid and remains applicable. The current project scope has been revised to include some improvements to construction solutions. Additional financing is requested for 65% of the total overall project cost increase, the balance to be provided from government resources. II. THE PROJECT A. Rationale 1. Development Need 4. Lae port is PNG s largest, busiest, and most important port. It is a gateway linking world markets with PNG and a large hinterland containing 40% of PNG s population and half of PNG s economic capacity, including hydrocarbon and mineral resources. Lae port s cargo throughput has increased by 7.8% annually since In 2011, the cargo through Lae port is estimated to reach 3.3 million revenue tons, stretching the port to the limit of its capacity. PNG Ports Corporation Limited (PPCL) is increasing the operational efficiency of Lae port, which will help cope with the existing cargo traffic. However, the need for additional berth space is now critical. A larger and more efficient Lae port will ease a nationally significant infrastructure bottleneck that is impeding economic growth. The overall project is a high priority of the Government of PNG The Current Project 5. The overall project will expand the capacity of Lae port by building a tidal basin (700 x 400 meters [m]) northwest of the present port facilities with a dredged depth of 13 m below sea level, a multipurpose berth (240 m long and m wide), and terminal works including all buildings, storage areas, roads, drainage, water, electricity, and sewerage services. The tidal basin and berth are designed to accommodate vessels with an overall length of 200 m, beam of 32.2 m, and fully laden draft of 12 m. The procurement of these works is at an advanced stage. 1 Asian Development Bank (ADB) Report and Recommendation of the President to the Board of Directors on Proposed Loans, Administration of a Loan from the OPEC Fund for International Development, and Administration of a Grant from the Cooperation Fund for Fighting HIV/AIDS in Asia and the Pacific to Papua New Guinea for the Lae Port Development Project. Manila (Loan nos PNG and 2399-PNG) (accessible from the list of linked supplementary documents in Appendix 2). 2 The revised design and monitoring framework is in Appendix 1. 3 Update of the Port Sector Analysis (accessible from the list of linked supplementary documents in Appendix 2).

6 2 6. The overall project involves the relocation and livelihood and social improvement of about 3,200 people living on the project site. The government has financed and completed the relocation, and a Japan Fund for Poverty Reduction 4 grant is now financing the livelihood and social improvement program (footnote 1). To minimize the potential risk of new HIV infections, the overall project includes support for an effective and sustainable response to the HIV epidemic in and around Lae port and Morobe province. The Lae Chamber of Commerce is the implementing agency and activities include (i) developing an HIV and AIDS code of conduct for businesses; (ii) improving seafarers facilities; (iii) strengthening clinical institutional structures; (iv) strengthening nongovernment organizations, AIDS site committees, and the Lae police; and (v) caring for people with HIV Additional Financing Required and Eligibility 7. Additional financing: The required additional financing results from cost overruns (input price increases and US dollar depreciation) and from design modifications to the current project. The total cost of the overall project has increased by $137.4 million, from $154.0 million in 2007 to $291.4 million in 2010 (89%). The increase comprises $ million relating to civil and other works, $9.33 million for contingencies, and $3.63 million for financial charges. The cost of civil and related works has increased from $109.4 million in 2007 to $233.7 million in The 2010 costs have been confirmed by the four conforming tender bids received and evaluated by the project executing agency, the Independent Public Business Corporation (IPBC). The cost increases excluding contingencies and financial charges result from several factors, as summarized in Table 1. 6 Table 1: Cost Increase Factors ($ million) Factors Amount Percent Input price increases a US dollar depreciation b Design modifications Total a Design items included in the 2007 RRP. b Depreciation of US dollar against kina: $1 = K2.797 in the 2007 report and recommendation of the President compared with $1 = K2.299 as of 30 June Sources: Government of Papua New Guinea and Asian Development Bank estimates. 8. Input price increases. Since project appraisal in 2007, historically unprecedented economic developments in PNG as well as extreme economic fluctuations globally have combined to inflate the US dollar costs of port facility construction. Cost inflation during the 3 years of preconstruction project implementation raised the cost of the current project as designed in 2007 by $62.46 million. Price increases relate to inputs such as structural steel and concrete and non-imported items including labor, materials, and energy (footnote 6). The current project implementation delay was due to relocation negotiations with people living on the project site (para. 17). The time needed to reach agreement and execute the relocation plan coincided with a period of unusual growth and cost escalation in PNG. 9. The buoyant PNG economy, which grew at an average rate of 7% from 2007 to 2010 is facing severe supply-side constraints that are inflating prices across the economy. Cumulative inflation in PNG between the end of 2007 and the end of 2010 is officially estimated to be around 25% but it is widely recognized that official consumer price index data significantly underestimate 4 ADB Grant Assistance Report for the Proposed Grant Assistance to Papua New Guinea for the Lae Port Livelihood and Social Improvement Project. Manila (Grant 9113-PNG) (accessible from the list of linked supplementary documents in Appendix 2). 5 Summary of Project Performance (accessible from the list of linked documents in Appendix 2). 6 Revised Project Cost Estimates (accessible from the list of linked supplementary documents in Appendix 2).

7 actual inflation. 7 Inflationary pressures have been particularly acute in the construction sector, with official figures showing that construction prices grew by 35% between the end of 2007 and the end of Capacity constraints in the construction sector result largely from the ongoing construction of a $15 billion liquefied natural gas project and its spillover effects across the economy. The sector has shown limited capacity to expand in response to the massive increases in demand resulting from port congestion, regulatory impediments, and perceptions that PNG offers a high-risk operating environment because of the country s poor law and order situation. Employers report shortages of skilled labor, and port and construction companies are operating at close to full capacity. In particular, strong demand for the limited supply of contractors in PNG is leading to rising contractor rates for engineering, construction, and transport services. These effects are particularly strong in the Lae area through which most supplies of construction material, equipment, and processing pass to the gas extraction plant and pipeline. The official consumer price index in the Lae urban area grew by 33% between the end of 2007 and the end of 2010, well above the national average US dollar depreciation. In the aftermath of the global economic crisis, the US dollar has depreciated against other currencies. It devalued 17.8% against the kina between the beginning of 2007 and the end of This depreciation has increased the overall project cost by $38.17 million. 12. Design modifications. Modifications to the current project design relate to (i) site clearance and site investigations, (ii) wharf structures, (iii) slope protection, and (iv) the diversion of Mai Creek. Appraisal cost estimates were based on preliminary engineering designs. IPBC was diligent and prudent in requiring additional geotechnical surveys to guide detailed engineering and design. Design changes respond to this additional information and exploit other opportunities to improve the technical quality of construction solutions Eligibility for additional financing. The Asian Development Bank (ADB) may provide additional financing to projects that (i) remain technically feasible, economically viable, and financially sound; (ii) are accorded high priority by the government; (iii) are consistent with the current project s development objectives; and (iv) are consistent with the current country partnership strategy. 12 These eligibility criteria are met for the proposed additional financing. The current project s technical feasibility has been strengthened and higher-than-original economic and financial returns are expected. The government has confirmed that the overall project is a nationally important strategic investment and the current project s development objectives are unchanged. The PNG country partnership strategy, confirms sea transport infrastructure as a strategic priority for ADB The Lae Port Development Project meets the eligibility conditions for additional financing for cost overruns because of (i) specific input price increases or overall inflation, (ii) exchange rate 7 International Monetary Fund Country Report No. 11/117 Papua New Guinea: Papua New Guinea Staff Report for the 2011 Article IV Consultation. Washington, DC (Table 1: Selected Economic and Financial Indicators, , p. 22) assesses PNG s official consumer price index. Survey data collected by Bank of Papua New Guinea indicate average growth in rental prices of 16.5% between 2005 and 2010, but rental prices are not incorporated in the index calculation. 8 Government of Papua New Guinea, Department of Finance and Treasury National Budget Port Moresby. 9 Bank of Papua New Guinea Quarterly Economic Bulletin Statistical Update, Table 9.3 (online). accessed on 20 September Depreciation of the US dollar against the kina: $1 = K2.797 in the 2007 report and recommendation of the President (RRP) compared with $1 = K2.299 as of 30 June Details of improved engineering solutions and other changes to the port facility construction are in the Revised Project Cost Estimates (accessible from the list of linked documents in Appendix 2). 12 ADB Additional Financing. Operations Manual. OM Section H5/BP. 13 ADB Country Partnership Strategy: Papua New Guinea, Manila. 3

8 4 fluctuations, (iii) underestimated costs, and (iv) delays. The current project also meets the eligibility conditions for additional financing resulting from project modifications: (i) the changes are needed to accommodate changed (engineering design) implementation conditions and to respond to innovations; and (ii) the changes are consistent with government priorities, the development objectives of the current project, and the country partnership strategy. 15. The current project has addressed all design and most implementation problems, and it has been performing well for most of the past 12 months. The cost overruns result primarily from a 2- year implementation delay caused by the need for complex relocation negotiations with people living on the current project site. 14 IPBC, the Morobe Provincial Government, and ADB worked closely to achieve a successful outcome, but the time needed to agree and execute the relocation plan was underestimated at appraisal. 16. Although the current project has been delayed, it meets four out of six of the standards for additional financing for a project not performing well: (i) the overall project will likely deliver its expected outputs; (ii) implementation progress has been satisfactory in the last 12 months, though contract awards and disbursements were delayed; (iii) compliance with safeguard policy requirements is satisfactory; and (iv) risks have been managed successfully. With the successful relocation of affected people off the project site, no further significant implementation problems are foreseen. The current project is rated actual problem in the project performance report, but this is only due to contract awards and disbursements being significantly behind schedule because of the implementation delay caused by the relocation negotiations. The rating results from the delayed award of the port facilities civil works contract, which is the single principal contract for the overall project. The contract was successfully tendered in May 2011 and is expected to be awarded either in late 2011 or early 2012, at which point the current project is expected to be rated on track. 4. Implementation Progress 17. Progress. Preconstruction activities are mostly complete, including detailed engineering and design and the revision of engineers cost estimates. The construction supervision consultant contract has been awarded, the civil works contract has been successfully tendered, and ADB has issued no objection for the contract award. The project site is cleared and contractors can be mobilized immediately after the contract is signed. Affected people are receiving livelihood and social improvement support, and many businesses and communities in Lae are participating in the gender-responsive HIV awareness and prevention program (footnote 5). 18. Lessons learned. The lesson learned is that project implementation schedules for complex projects need to be conservative. Additionally, price contingencies in a natural resource-driven highgrowth situation should be generous. Ideally for port facilities projects, all necessary geotechnical surveys and detailed engineering and design should be completed during project preparation. 19. Policy dialogue. The current project is underpinned by strong policy dialogue between ADB and the government. The dialogue has continued during implementation and focuses on (i) resettlement plan arrangements and ongoing monitoring; (ii) IPBC responsibilities and project management arrangements and capacity building; (iii) PPCL tariff and revenue generation, including annual tariff reviews through the regulator, the Independent Consumer and Competition Commission; and (iv) public private partnership (PPP) opportunities for future port development and operation. 15 ADB completed a preliminary assessment of Lae port PPP potential, which is being used by IPBC to prepare a time-bound PPP strategy and action plan. 14 Summary of Project Performance and Revised Project Cost Estimates (accessible from the list of linked documents in Appendix 2). 15 ADB helped the government prepare a national PPP policy, which was approved by the cabinet in December The next phase of ADB support has helped produce a PPP bill and regulations, which are likely to be tabled in Parliament in November 2011 or early 2012.

9 5 5. Safeguard Compliance 20. Activities under the resettlement plan prepared for the original loan have been mostly completed and the livelihood support programs and resettlement monitoring are in progress. Relocation from the project site of a canoe landing site and fish market for a local clan, the Labu, will be completed before the start of port facility civil works. 21. The current project was categorized environmental category A and a full environmental impact assessment of the current project was carried out under the project preparatory technical assistance. The environmental impact assessment and environmental management plan were posted on the ADB website in compliance with the disclosure requirements of ADB s Environmental Policy (2002). 6. Management of Risks 22. Resettlement was considered the greatest risk to the current project and IPBC has managed this risk effectively. To date, contract packages and procurement methods have been properly defined and closely followed to ensure that capable, reputable, and reliable suppliers, contractors, and nongovernment organizations are hired. 23. The other identified major risk was corruption. Recruitment of consultants and contractors has closely followed ADB recruitment and procurement procedures. To mitigate the risk of corruption: (i) the project management unit (PMU) management and all staff have been trained in ADB s and the government s anticorruption policies, the concept of whistle-blowing, and methods of reducing vulnerability to corruption; (ii) IPBC will develop and maintain a project website to disclose the audited project financial accounts, overall project progress, and procurement activities; (iii) direct payment procedures will predominate; (iv) imprest accounts will be prudently used and closely monitored by ADB; (v) ADB has participated in the selection of key consultants in consultation with IPBC, and reviewed beforehand the bidding documents and contract awards for all international and national competitive bidding contracts; and (vi) financial management is centralized in the PMU for internal control. Identifying IPBC as the executing agency further mitigates the risk of corruption, as Transparency International is represented on the IPBC board of directors, and IPBC is among the organizations that are PNG s most closely watched. Other overall project risks pertain to law and order, project management, construction quality, and HIV prevalence. The overall project design takes these potential risks into account. The government will be required to provide security during overall project implementation and IPBC continues to maintain a team of qualified counterpart staff in the PMU. B. Impact and Outcome 24. The impact and outcome of the overall project remain unchanged. The overall project will catalyze industrial and commercial development and promote trade for PNG by relieving a binding constraint on key port infrastructure in Lae. C. Outputs 25. The outputs of the current project remain unchanged, and have been partly achieved. Details are in paras. 2, 5, and 6 (footnote 5). D. Investment and Financing Plan 26. Investments. The revised total cost of the overall project is estimated to be $ million, including taxes and duties of $9.49 million. The costs of the different components are summarized in Table 2 and details are in the revised project cost estimates (footnote 6).

10 6 Table 2: Project Investment Plan ($ million) Item 2007 Amount a 2011 Additional Financing 2011 Revised Amount a Civil works b Land acquisition Compensation and relocation Livelihood and social support HIV prevention Consulting services Training Contingencies c Financing charges during implementation d Total = not available. a Includes taxes and duties of $4.44 million (2007) increased to $9.49 million (2011), financed by the government. b In 2007 prices in 2007, and 2010 prices in c Physical contingencies computed at about 15% for civil works. Price contingencies computed at 1.2% for foreign exchange costs and 3.2% for local currency costs; includes provision for exchange rate fluctuation on the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Interest during construction is computed at the 5-year forward London interbank offered rate. Sources: Government of Papua New Guinea and Asian Development Bank estimates. 27. Financing plan. With additional financing, ADB s total financial assistance for the overall project will amount to $ million equivalent. ADB will continue to finance 64.9% of the project investment plan. The cost estimates, by financing source for 2007, and revised financing plan are summarized in Table 3. Table 3: Financing Plan ($ million) Additional Financing Source Total Percent Amount Total Percent ADB OCR ADF JFPR HIV/AIDS Cooperation Fund a OFID Government Total ADB = Asian Development Bank, ADF = Asian Development Fund, HIV/AIDS Cooperation Fund = Cooperation Fund for Fighting HIV/AIDS in Asia and the Pacific, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources, OFID = OPEC Fund for International Development. a Contributor: Government of Sweden. Source: Asian Development Bank estimates. 28. The government has requested an additional loan of $85.0 million from ADB s ordinary capital resources to help finance the overall project. The loan will have a 24-year term including a grace period of 4 years, an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The government has provided ADB with (i) the reasons for its decision to borrow under ADB s LIBORbased lending facility on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 29. The government has requested a loan in various currencies equivalent to SDR2,650,000 from ADB s Special Funds resources to help finance the overall project. The loan will have a 32-year term, including a grace period of 8 years, an interest charge of 2.02% per annum during the grace

11 period and thereafter, and such other terms and conditions set forth in the draft loan and project agreements. 30. The government will onlend the proceeds of the additional financing loans to IPBC through a subsidiary loan agreement on terms and conditions acceptable to ADB. The subsidiary loan agreement shall be executed on the same financial and other terms and conditions as set out in the additional finance loan agreements. The government will bear the foreign exchange and interest rate variation risk of the additional finance loans. 31. The government is requesting ADB to finance the increased overall project cost for the following reasons: (i) the resettlement program has been successfully completed and the project site is available for civil works to commence immediately; (ii) switching funding sources of the overall project would disrupt the awarding of the port facilities civil works contract package and may result in significant delay in completion of the overall project; (iii) the overall project is urgent and critical for the economic development of the entire Highlands region and Morobe province as a result of ongoing congestion problems at the port, and the impending commencement of the liquefied natural gas project and other extractive industries projects; (iv) the government does not have readily available similarly priced funding that can accommodate the identified cost increase; and (v) tidal basin and facilities construction financing under a PPP arrangement is not viable because of perceived construction risks. E. Implementation Arrangements 32. There are no changes to the implementation arrangements for the original loan, which are summarized in Table 4 and described in detail in the project administration manual (PAM). 16 The PAM for existing loans (footnote 1) was confirmed by the government. Aspects Arrangements Implementation period October 2008 June 2014 Estimated completion date 30 June 2014 Management (i) Oversight body Table 4: Implementation Arrangements Project Steering Committee; IPBC managing director (chair); IPBC director, Planning and Infrastructure Division (secretary); Senior representatives from departments of National Planning and Monitoring, Treasury, Justice and Attorney General, Lands and Physical Planning, Environment and Conservation, Independent Consumer and Competition Commission, Morobe Provincial Administration, and PNG Ports Corporation Limited (members) Independent Public Business Corporation Morobe Provincial Administration (JFPR-funded component) and Lae Chamber of Commerce Incorporated (for the HIV and AIDS and gender components) Lae, 10 staff (ii) Executing agency (iii) Key implementing agencies (iv) Implementation unit Procurement International competitive bidding 1 contract $ million Consulting services Construction supervision 1 contract $5.50 million Disbursement All disbursements under the loans, ADB OCR-loan, ADB ADF-loan, OFID, and JFPR grant proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time); a copy was provided to IPBC. A disbursement letter was sent to IPBC by ADB s Controller s Department. It outlines the disbursement procedures and other related arrangements for financial administration of the overall project. ADB = Asian Development Bank, ADF = Asian Development Fund, IPBC = Independent Public Business Corporation, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources, OFID = OPEC Fund for International Development, PNG = Papua New Guinea. Source: Asian Development Bank Project Administration Manual (accessible from the list of linked documents in Appendix 2).

12 8 III. DUE DILIGENCE A. Technical 33. Port facilities to be constructed by the overall project are described in para. 5. The tidal basin and wharf will be able to berth panamax container vessels of a maximum 50,000 deadweight tons. A container yard of 12.7 hectares will be provided behind the wharf structure. Additional design elements include (i) an administration building, (ii) cargo shed, (iii) navigation aid towers, (iv) services infrastructure and security fencing, (v) Mai Creek diversion channel, and (vi) port link road pavement. The design life conforms with IPBC requirements, current good practice, and international codes. The marine structures will be designed to remain fully operational within the design life period. Technical aspects of the design remain largely unchanged since appraisal for the original loans and the overall project remains technically feasible. B. Economic, Financial, and Public Private Partnership Opportunities 34. Economic evaluation. The 2007 forecasts for port traffic to 2030 for overseas and domestic coastal cargo for Lae port were updated taking into account data on the actual traffic handled in , which increased at an average annual rate of 7.8%, almost twice the rate assumed in The revised cargo traffic forecasts used in the economic analysis for the additional financing applied the actual rate up to 2011, and after 2011 assumed an average annual cargo growth rate of 6% (compared with 4% reducing to 3% assumed in the 2007 forecasts). The modest increase in the revised forecast cargo traffic reflects the continuing strong economic growth in the Lae port hinterland and the multiplier impacts of increased consumption expenditure generated by new development projects The 2007 economic analysis was updated using the same methodology and assumptions, revising the costs and benefits in line with the latest data, and actual experience since Capital costs were updated to reflect actual expenditure to date and the revised design costs for the tidal basin, while economic benefits were adjusted to reflect the increased cargo forecasted. 36. At a 12% discount rate, the overall project is economically viable. The net present value is about K248 million (compared with K104 million in the 2007 report and recommendation of the President [RRP]) and the economic internal rate of return is 18.7% (compared with 15.8% in the 2007 RRP). The economic internal rate of return calculation was subjected to sensitivity analysis to test the effects of negative changes in the key parameters that determine the benefits and costs of the overall project. The sensitivity analysis showed the overall project to be economically viable despite a 20% increase in costs, a 20% decrease in benefits, or a 1-year delay in the construction period. 37. Financial evaluation. Tariffs for essential services continue to be regulated by a contract between PPCL and the Independent Consumer and Competition Commission, and measured in terms of revenue earned per revenue ton of cargo have increased at an average annual rate of 14% between 2006 and 2011 (K24.09 per revenue ton in 2011 compared with K12.55 in the 2007 RRP). 38. The 2007 financial evaluation was updated using the same methodology and assumptions, revising costs and revenues in line with actual experience since Capital costs were updated to reflect the revised design costs for the tidal basin, while revenue estimates were adjusted to reflect the increased cargo forecasts and increased tariff rates. The financial analysis assumes that PPCL will operate the new port facilities built under the overall project. 17 Updated Traffic Forecast and Economic Analysis (accessible from the list of linked documents in Appendix 2).

13 39. Assuming existing revenue items remain the only revenue sources, real growth in revenue per cargo revenue ton continues in line with that experienced in (5% annual real growth), and removing 50% of the excavation and/or dredging and reclamation costs for phase 2, the aftertax financial internal rate of return is 7.8% (compared with 6.8% in the 2007 RRP), which compares favorably with the weighted average cost of capital of 5.1% in the 2007 RRP. The results of the sensitivity analyses (10% reduction in demand, 1-year delay in construction, 10% increase in project costs, and 10% reduction in tariffs) confirm the robustness of the overall project s financial viability, although a 1-year delay in benefits lowers the financial internal rate of return to 3.3% Public private partnership opportunities. In 2011, ADB studied and assessed opportunities for private involvement in the financing and operation of the tidal basin and facilities. 19 The overall project was assessed not to be financially viable for whole or partial private financing through a PPP model at this stage because of perceived high project construction risks. It was assessed that PPP potential will increase as the tidal basin phase 1 construction nears completion. Phase 2 construction risks will be lower and PPP/private financing may be financially viable. PPCL is currently undertaking a 20-year Lae Port Masterplan study to identify key infrastructure and service requirements to support future growth. The Masterplan will be used to identify and develop PPP opportunities. C. Governance 41. Since its incorporation in 2006, PPCL has improved corporate governance and financial management, particularly in budgeting and financial reporting. The project management arrangements established by IPBC, including the PMU and project steering committee, are considered to be operating effectively and no change to those arrangements is needed as a result of the additional finance. D. Poverty and Social Safeguards 42. The additional financing does not include additional works involving issues of involuntary resettlement, indigenous peoples, and gender; and has been classified category C for involuntary resettlement, indigenous peoples, and some gender benefits. All civil works will be undertaken in existing locations identified or acquired under the current project. Additional safeguard documentation on involuntary resettlement is not required. The resettlement implementation, monitoring, grievance redress, and livelihood support programs will be continued during overall project implementation according to the resettlement plan prepared under the current project. E. Environmental Safeguards 43. The proposed additional finance loan is classified category B. The additional financing will include provision of additional quarry materials to build slope protection, a small creek diversion, and an access road. Environmental impacts caused by the additional financing would be short-term, localized, and can be mitigated. An updated draft initial environmental examination and environmental management plan is being finalized by IPBC and will be posted on the ADB website in compliance with disclosure requirements of ADB s Safeguard Policy Statement (2009). F. Risks and Mitigating Measures 44. The current project risks will continue to be managed through mechanisms already established within IPBC to ensure ADB recruitment and procurement procedures are closely followed, particularly in relation to disbursement and audited project financial accounts. Any 18 Updated Financial Analysis (accessible from the list of linked documents in Appendix 2). 19 ADB Assessment on Facilitating Public-Private Partnership for the Lae Port Development Project. Manila. 9

14 10 remaining resettlement risk is minor and will continue to be monitored by IPBC. Other risks pertaining to law and order, project management, construction quality, and HIV and AIDS prevalence will continue to be managed by IPBC through mechanisms already established. The government will provide security during overall project implementation and IPBC continues to maintain a team of qualified counterpart staff in the PMU. Provided the port facilities civil works contract is awarded within the bid validity period, there is minimal risk of further significant cost overruns although future contract variations resulting from unforeseen engineering and other implementation issues cannot be ruled out. IV. ASSURANCES AND CONDITIONS 45. The government and IPBC have assured ADB that implementation of the overall project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and the loan documents. All major loan covenants under the original loans have been complied with, except the requirement for the preparation of the time-bound action plan for PPP for operation of new port facilities constructed under the overall project. This will be done within 1 year from completion of the overall project The government and IPBC have agreed with ADB on certain covenants for the overall project, which are set forth in the loan agreements and project agreement. Disbursement under the loan shall not be made until the government and IPBC have concluded a subsidiary loan agreement, the terms of which shall have the same financial and other terms as required in the loan agreements. V. RECOMMENDATION 47. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve (i) (ii) the loan of $85,000,000 to Papua New Guinea for the additional financing of the Lae Port Development Project, from ADB s ordinary capital resources, with interest to be determined in accordance with ADB s London interbank offered rate (LIBOR) based lending facility; for a term of 24 years, including a grace of period of 4 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board; and the loan in various currencies equivalent to SDR2,650,000 to Papua New Guinea for the Lae Port Development Project, from ADB s Special Funds resources, with an interest charge at the rate of 2.02% per annum during the grace period and thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board. Haruhiko Kuroda President 10 November PPCL is currently undertaking a 20-year Lae Port Masterplan exercise and targeting to complete it by December The Masterplan will be used to identify and develop PPP opportunities and prepare the time bound action plan for operation of new port facilities constructed under the overall project.

15 Appendix 1 11 REVISED DESIGN AND MONITORING FRAMEWORK Design Summary (Current Impact Enabling environment for industrial and commercial development is created Design Summary (Overall Enabling environment for industrial and commercial development is created Performance Targets and Indicators with Baselines (Current new industrial and commercial enterprises established by 2020 Performance Targets and Indicators with Baselines (Overall new industrial and commercial enterprises established by 2020 Data Sources and Reporting Mechanisms (Overall Post-project completion survey Registrar of Companies Assumptions and Risks (Overall Assumptions Policy environment and incentives for investment improve Outcome Port bottleneck constraining trade is relieved Port bottleneck constraining trade is relieved 500 1,000 jobs generated by 2020 Lae port cargo handling capacity increased by about 1.4 million revenue tons per year after completion 500 1,000 jobs generated by 2020 Lae port cargo handling capacity increased by about 1.4 million revenue tons per year after completion Stevedoring and cargo handling reports Law and order problems are addressed Assumptions Highlands Highway is rehabilitated Lae port cargo handling rate increased from 140 tons per hour to 210 tons per hour by 2015 Lae port cargo handling rate increased from 140 tons per hour to 300 tons per hour by 2015 Port statistics Macroeconomic and political stability continues Ship calls increased from 600 to 900 by 2017 Ship calls increased from 600 to 900 by 2017 Global economy remains buoyant and sustains high commodity prices. Lae port management is improved by AusAID. Outputs 1. New port facilities are operational. New port facilities are operational. Basin, multipurpose berth, and terminal constructed by 2011 Basin, multipurpose berth, and terminal constructed by 2014 Assumptions There is no sudden change in the government s strategic focus and priorities.

16 12 Appendix 1 Design Summary (Current 2. Livelihood of directly and indirectly affected people is improved Design Summary (Overall Livelihood of directly and indirectly affected people is improved Performance Targets and Indicators with Baselines (Current 482 new houses for 2,912 people built by 2008 a 3 schools in Malahang expanded by 2008 and 473 children enrolled in schools in Malahang by 2008 a Performance Targets and Indicators with Baselines (Overall a a Data Sources and Reporting Mechanisms (Overall Independent monitoring reports by the NGO Provincial administration s health and education reports Assumptions and Risks (Overall The government provides counterpart funds on time. Governance issues will not impede the implementation program. 1 health clinic improved by expanded community centers, including health clinic improvements, by 2013 $40,000 microcredit provided to 200 households by 2011 $40,000 microcredit provided to 200 households by 2014 Reports of Wau Microbank Limited 3. HIV/AIDS incidence in Lae is reduced. HIV/AIDS incidence in Lae is reduced Income levels for resettlers and Labu people increased by 3% 5% by 2011 HIV/AIDS prevalence in Lae and Huon district decreased by 20% Income levels for resettlers and Labu people increased by 3% 5% by 2014 HIV/AIDS prevalence in Lae and Huon district decreased by 20% Activities with Milestones (Overall 1. Construct a tidal basin (700 x 400 meters), a multipurpose berth of 240 meters, and terminal works by Resettle 482 households by Rehabilitate and enhance the livelihood of the affected people by Mobilize the response of the private sector and NGOs to HIV/AIDS. 5. Mitigate environmental risks through engineering design, the construction contract, and environmental monitoring. Inputs (Additional Financing) ADB: $89.12 million Item OCR ADF Government Amount $85.00 million $4.12 million $48.28 million ADB = Asian Development Bank, ADF = Asian Development Fund, AusAID = Australian Agency for International Development, NGO = nongovernment organization, OCR = ordinary capital resource. a Deleted because of implementation of the supplementary resettlement plan. Source: Asian Development Bank.

17 Appendix 2 13 LIST OF LINKED DOCUMENTS 1. Loan Agreement (Ordinary Capital Resources) 2. Loan Agreement (Special Funds Resources) 3. Project Agreement 4. Project Administration Manual 5. Summary of Project Performance 6. Contribution to the ADB Results Framework 7. Updated Financial Analysis 8. Updated Traffic Forecast and Economic Analysis 9. Country Economic Indicators 10. Risk Assessment and Risk Management Plan Supplementary Documents 11. Report and Recommendation of the President to the Board of Directors (original loan) 12. Update of the Port Sector Analysis 13. Grant Assistance to Papua New Guinea for the Lae Port Livelihood and Social Improvement Project 14. Revised Project Cost Estimates