For Official Use Only

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: RES17909

PROJECT PAPER

FOR A

PROPOSED PROJECT RESTRUCTURING

Public Disclosure Authorized OF THE

ROAD MAINTENANCE AND REHABILITATION PROJECT, PHASE 2

TO THE

INDEPENDENT STATE OF PAPUA NEW GUINEA

May 5, 2016

Public Disclosure Authorized

Transport and ICT East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized

CURRENCY EQUIVALENTS

(Exchange Rate Effective May 2, 2016) Currency Unit = Papua New Guinea Kina (PGK) US$1.00 = PGK 3.17 US$1.00 = SDR 0.71

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

DoW Department of Works PDO Project Development Objective EPM Employer’s Project Manager PGK Papua New Guinea Kina GoPNG Government of Papua New Guinea PNG Papua New Guinea IDA International Development Association RMRP II Road Maintenance and Rehabilitation Project, Phase 2 MCRP Building a More Climate Resilient SDR Special Drawing Rights Transport Sector Project NEC National Executive Committee SES Socio-Economic Surveys PBC Performance Based Contracting US$ United States Dollar

Regional Vice President: Victoria Kwakwa Country Director: Franz R. Drees-Gross Senior Global Practice Director: Pierre Guislain Practice Manager: Michel Kerf Task Team Leader: Jim Reichert

PAPUA NEW GUINEA

ADDITIONAL FINANCING AND RESTRUCTURING FOR ROAD MAINTENANCE AND REHABILITATION PROJECT, PHASE 2

CONTENTS

A. Summary 1 B. Project Status 1 C. Proposed Changes 3 D. Appraisal Summary 5 Annex 1: Results Framework and Monitoring 6 Annex 2: Systematic Operations Risk-Rating Tool 9

PAPUA NEW GUINEA: ROAD MAINTENANCE & REHABILITATION PROJECT, PHASE 2 RESTRUCTURING PAPER IDA Credit No. 4931-PG and IDA Credit No. 5404-PG (P119471)

A. SUMMARY

1. This Project Paper is in response to a request that the Government of Papua New Guinea (GoPNG) made through letters dated April 12, 2016 from the Department of Treasury, and seeks the approval of the Country Director to introduce the following changes to the Road Maintenance and Rehabilitation Project, Phase 2 (RMRP II) (P119471 and P145120), IDA Credit No. 4931-PG, IDA Credit No. 5404-PG, and any necessary accompanying amendments to the project’s legal documents:

 revise the Results Matrix and monitoring indicators;  extend the closing date of IDA Credit No. 4931-PG (the original RMRP II Credit) by 20 months, or until March 31, 2018;1  eliminate the requirement for counterpart funding for works and provide 100 percent financing from IDA funds for new works contracts signed on or after September 1, 2015;  reallocate project funds between disbursement categories; and  modify one project sub-component.

2. As a result of the continuing slide in the value of mineral resources, the macro-economic situation in Papua New Guinea (PNG) has deteriorated and GoPNG is under increasing budgetary pressure. GoPNG is no longer able to make its 22 percent contribution towards the cost of road works under RMRP II. As a result, GoPNG has asked that Credit No. IDA-5404-PG be restructured to allow for 100 percent financing of IDA funds for new works contracts.

3. The modifications proposed as part of this restructuring will not change the project development objective (PDO) or impact the fiduciary, safeguards or implementation arrangements that are currently in place for RMRP II. No new activities are proposed, no additional safeguards will be triggered, and there will be no escalation of the safeguards rating.

4. The Borrower remains fully committed to RMRP II. A qualified employer’s project manager continues to provide effective implementation support. Currently, the Department of Works (DoW), the implementing agency for RMRP II, has several works packages at various stages of preparation. These packages have a collective value estimated at US$65 million and represent 38 percent of RMRP II’s overall funding. Contracts for two of the packages have been approved and works to rehabilitate the roads are expected to commence after the contracts are signed in May 2016 (expected).

B. PROJECT STATUS

5. Background. RMRP II was approved on May 3, 2011 for Special Drawing Rights (SDR) 27.40 million (equivalent to US$43.00 million), and became effective on August 30, 2011. This was followed by an additional financing, which was approved on February 19, 2014 for SDR 82.40 million (equivalent to US$126.50 million).

1 IDA Credit No. 4931-PG is the main project credit and has a current closing date of July 31, 2016. The additional financing (IDA Credit No. 5404-PG) closes on April 30, 2021.

6. The PDO is to: (i) improve road transport to project areas through providing satisfactory physical condition and safety in selected roads; (ii) strengthen institutional arrangements for road maintenance, including the participation of the private sector and communities; and (iii) enhance road-related economic opportunities for women. The development objectives of RMRP II remain relevant and achievable.

7. Project Status. As of April 15, 2016, US$27.87 million, or about 16.5 percent of available funding, had been disbursed. Since the approval of the first additional financing in February 2014, project activities have focused on preparing designs for several road improvements, and while disbursements have been limited to date, they are set to increase with the expected signing of two contracts for road works by end-May 2016. These are collectively valued at US$36.70 million. DoW has identified a long list of possible roads for rehabilitation under RMRP II, and the project is expected to fully disburse by its current closing date of April 30, 2021.

8. Component 1: Rehabilitate, Upgrade and/or Maintain Roads and Bridges. The 17.5 km section of the Hiritano Highway between Inawabui and Bereina was completed in December 2014 under budget and ahead of schedule. An additional one kilometer of road was rehabilitated and maintained through the cost savings. Routine maintenance of a critical 67 km section of the Hiritano Highway was successfully completed in January 2014. A second contract to reseal 56 km of the Hiritano Highway between Malalaua to Epo is underway and works are about 70 percent complete. This contract is expected to be completed by August 2016.

9. A GoPNG priority is to rehabilitate the 53 km East Cape Road in Milne Bay Province. Bids from eight firms were received, and on November 2, 2015 the Bank provided its no objection to the bid evaluation report and recommended award. This contract was recently approved by GoPNG’s National Executive Committee (NEC) and mobilization is expected by June 2016. A second contract to rehabilitate a 24 km section of road in Central Province was also recently approved by NEC and mobilization is also expected by June 2016.

10. The designs and preparation of bid documents to rehabilitate two other roads are underway.

11. Component 2: Technical Assistance. Progress to pilot a performance-based road maintenance contract (PBC) has been steady. A 112 km section of the Hiritano Highway has been identified, and the scope of works, service levels, and arrangements for implementing the pilot PBC agreed. The tender is expected to be launched in mid-2016 with works commencing in early-2017.

12. As a result of ongoing rehabilitation works on the Hiritano Highway, women from local communities have been employed in a variety of jobs, including to direct traffic along sections of road that are under rehabilitation, and as cooks and cleaners in work camps. They will also be employed under the project through community-based, routine roadside maintenance contracts. A contract to carry out socio-economic surveys (SESs) to monitor the project’s impact on beneficiary communities will get underway in early-January 2016. This will be followed by two additional SESs at the mid-point and end of the project.

13. Component 3: Contingency for Disaster Risk Response. This provisional zero-cost component will support preparedness and rapid response in the event of a disaster, an emergency, and/or catastrophic events. To date, this option has not been triggered.

14. Project Performance. Progress towards Achieving the PDO and Overall Implementation Progress have been rated Moderately Satisfactory or Satisfactory since September 2011.

15. The proposed works and project activities are expected to be completed within RMRP II’s closing date of April 30, 2021, and the Borrower continues to have sufficient capacity for implementation.

16. Compliance with safeguards requirements as described in the Environmental and Social Management Framework and Land Acquisition and Resettlement Policy Framework has been satisfactory, and to date there have been no negative impacts in relation to the road works financed under the RMRP II. Safeguards capacity at the implementing agency has improved through the addition of two staff to DoW’s Environmental Management Unit.

17. RMRP II is in compliance with Bank procurement and financial management policies, as well as all legal covenants. There are no outstanding audits and no audit qualifications for RMRP II.

18. However, the implementing agency for RMRP II (DoW) was also responsible for implementing the now closed Building a More Climate Resilient Transport Sector Project (MCRP) (P129322), and this project has overdue financial audits for 2013 and 2014. Since DoW is responsible for the financial management of project funds and the submission of audited financial statements and accompanying audit reports for MCRP, the Team sought clearance to restructure RMRP II from the Practice Manager for Financial Management and the Division Manager for Loan Operations. This request, which was supported by the Country Management Team, was approved on January 30, 2016.

C. PROPOSED CHANGES

19. Change in Results Framework. Because GoPNG will no longer provide its full counterpart contributions to the project, which were estimated to be US$40.50 million, the target values for PDO Indicator 1 - “km of roads rehabilitated” - will be modified. Counterpart funds paid to date are approximately US$17.00 million. The remaining US$23.50 million will not be paid. This amounts to about 13 percent of the overall amount that had been earmarked for road improvements. Consequently, the target values for PDO Indicator 1 will be revised as follows:

Indicator Cumulative Target Values Roads Rehabilitated (Core) 2016 2017 2018 2019 2020 2021 Revised Targets: 75 km 100 km 125 km 150 km 175 km 185 km Original Targets: 90 km 115 km 145 km 175 km 200 km 220 km

20. Counterparts have indicated that it was difficult to measure the “percentage of national project roads being maintained by private contractors” (PDO Indicator 3). One challenge is the lack of agreement on the length of the overall national road network. As currently defined, the indicator is too broad to be measured in a consistent and meaningful manner and has been redefined to include the following sections of national roads, all of which are expected to be rehabilitated under RMRP II:

Central Province: Length Inawabui to Bereina 17.5 km Gamoga Village to Hula 23.9 km Vanapa Bridge to Bereina Township 112.0 km Gulf Province: Malalaua to Epo 56.5 km Epo to Kerema 9.5 km Madang Province: Bogia to Awar 25.7 km Milne Bay Province:

Goilanai Bridge to Gopaia Bridge, Lot A 26.1 km Gopaia Bridge to East Cape Point, Lot B 26.9 km

21. As a result of the ongoing rehabilitation works, women from local communities have been employed in activities other than routine roadside maintenance, such as directing traffic along sections of road that are under rehabilitation, and serving as cooks and cleaners in work camps. To date, it has been reported that about 2,100 person days of work have been carried out by women. However, the project currently only has one indicator to measure the number of person days worked by women in routine maintenance activities. This indicator alone does not fully capture the full benefits of the project’s impact on employment of women, and the project team proposes to add the following indicator: number of person days worked (by women) as a result of project activities that are not related to routine maintenance activities. The following target values for this new indicator are:

New Indicator Cumulative Target Values (number) Number of person days worked (by women) 2016 2017 2018 2019 2020 2021 as a result of project activities that are not 3,500 4,000 4,500 5,000 5,500 6,000 related to routine maintenance activities.

22. Change in Legal Covenants. The covenant requiring the deposit of counterpart funds in an escrow account by April 30th of each calendar year will be deleted as a result of this restructuring.

23. Change in Credit Closing Date. The closing date of IDA Credit No. 4931-PG (the original RMRP II Credit) is July 31, 2016. Currently there are two contracts being financed from the original credit, including a: (i) works contract with Dekenai; and (ii) contract with the Employer’s Project Manager (EPM) to support project implementation. A study of socio-economic impacts of road and bridge improvements will also be tendered, but only after works between the Malalaua and Epo section of the Hiritano Highway have been completed (Dekenai contract). Payments to the EPM are low compared to the contract value, and the full EPM contract will not be utilized by the current closing date. A tender for a new EPM is underway and a new consultant is expected to be appointed by end-2016. To ensure that all activities under the original project can be fully completed, the closing date for IDA Credit No. 4931-PG will be extended by 20 months, or until March 31, 2018. This would be the first extension of the closing date of IDA Credit No. 4931-PG.

24. Change to Financing Plan. As mentioned under paragraph 19, because the requirement for 22 percent counterpart financing for works will be eliminated, the Borrower’s contribution will be revised downward from US$40.5 million to US$17.00 million, which is the estimated overall amount of counterpart funds paid to date under the original RMRP II (IDA Credit No. 4931-PG) and the additional financing (IDA Credit No. 5404-PG). Eliminating the requirement for counterpart funds will reduce the amount available for rehabilitating, upgrading and/or maintaining roads and bridges (Component 1) by an estimated US$23.50 million.

25. Change in Disbursement Arrangements. As already noted, the precipitous drop in the prices for mineral resources and petroleum, which account for some 20 percent of PNG’s economic activity and nearly 80 percent of its exports, contributed to a rapid decline in the country’s macro-economic situation. Although GoPNG did provide RMRP II with PGK 20 million in counterpart funds in 2015, the country’s difficult fiscal situation means that GoPNG can no longer make its 22 percent contribution towards the cost of road works under the project. While GoPNG has provided counterpart funds to complete the ongoing contract to reseal the 56 km section of the Hiritano Highway from Malalaua to Epo, it cannot do the same for new contracts. As such, the requirement for counterpart funding will be eliminated for new works contracts signed on or after September 1, 2015. It is worth noting that DoW has not signed any contracts since September 1, 2015. However, two new road works with a collective estimated value of

US$36.70 million were recently approved by NEC, but these contracts can’t be signed until DoW can demonstrate that there is sufficient funding to pay for the contracts. Unless RMRP II is restructured to allow 100 percent IDA financing of new road works, DoW will not be able to sign these contracts or enter into any new commitments under the project.

26. Reallocations. Because no operating costs have been incurred under the project to date, and to help offset a projected shortfall in funding for consultant services under Category 2, a total of SDR 2,150,000 will be reallocated from IDA Credit No. 49310 Category 3 (SDR 650,000 for operating costs) and IDA Credit No. 49310 Category 1 (SDR 1,500,000 for goods, works, non-consulting services and consultants' services) to Category 2 (goods, non-consulting services and consultants' services).

27. Change to Components and Cost. As the project has been rolled out, it is evident that many activities expected to be carried out under sub-component 2.2, entitled “Piloting an Integrated Maintenance Regime for Hiritano and/or Magi Highways,” are similar to, and overlap with, key activities to be carried out under the performance-based approach being piloted on the Hiritano Highway (sub- component 2.3). In addition, the loss of counterpart funding will reduce the overall monies available for RMRP II, and GoPNG would like to use any savings to finance works. As such, this sub-component, which will not prevent the PDO from being achieved, would be eliminated.

D. APPRAISAL SUMMARY

28. Financial and Economic Analysis. None of the proposed changes would have a significant impact on the original economic, financial or technical analyses of the project as appraised.

29. Risks. The proposed restructuring does not trigger new risks or exceptions to Bank policy.

Annex 1: Revised Results Framework and Monitoring Indicators

Revisions to the Results Framework for RMRP II Comments/ Rationale for Change PDO Current (PAD) Proposed The PDO is to: (i) improve road transport to project areas through providing satisfactory physical No Change condition and safety in selected roads; (ii) strengthen institutional arrangements for road maintenance including the participation of the private sector and communities; and (iii) enhance road-related economic opportunities for women. PDO Indicators Current (PAD) Proposed Change Kilometers of roads rehabilitated. No Change Percentage of Hiritano Highway No Change maintained to good condition. Percentage of national project roads No Change being maintained by private contractors. Number of person days worked (by No Change women) in project-related routine road maintenance activities. New Indicator: Number of person To better capture the overall n.a. days worked (by women) as a result economic opportunities for women of project activities that are not as a result of project-related related to routine maintenance activities. activities.

REVISED PROJECT RESULTS FRAMEWORK Project Development Objective (PDO): The PDO is to: (i) improve road transport to project areas through providing satisfactory physical condition and safety in selected roads; (ii) strengthen institutional arrangements for road maintenance including the participation of the private sector and communities; and (iii) enhance road-related economic opportunities for women.

Baseline Cumulative Target Values (FY) Progress To Responsibility

Unit of Original Project Data Source/ PDO Level Results Indicators Date 2016 2017 2018 2019 2020 2021 Frequency for Data Measure Start Methodology (2015) Collection

Core (2011) Quarterly EPM/DoW PDO Indicator One: Kilometers of km 0 18 75 100 125 150 175 185 Project Progress EPM/DoW roads rehabilitated. Reports Reports PDO Indicator Two: Percentage of EPM/NRA Hiritano Highway maintained to % 30 35 40 40 45 45 50 50 Annually Progress EPM/NRA good condition. /a Reports PDO Indicator Three: Percentage of EPM/DoW national project roads being % 20 20 20 25 30 35 35 40 Annually Progress EPM/DoW maintained by private contractors. /b Reports PDO Indicator Four: Number of EPM/DoW Annual person days worked (by women) in Progress number n/a 0 612 714 816 918 1,020 1,122 Project EPM/DoW project-related routine road Reports & Reports maintenance activities. /c SES PDO Indicator Five: Number of EPM/DoW person days worked (by women) as Annual Progress a result of project activities that are number n/a 2,100 3,500 4,000 4,500 5,000 5,500 6,000 Project EPM/DoW

New Reports & not related to routine maintenance Reports SES activities. /d

NOTES: /a Good condition is measured by an International Roughness Index (IRI) of 5.0 or lower. /b National project roads include: (i) Central Province: Inawabui to Bereina, 17.5km, Gamoga Village to Hula, 23.9km, and Vanapa Bridge to Bereina Township, 112.0km; (ii) Gulf Province: Malalaua to Epo, 56.5km and Epo to Kerema, 9.5km; (iii) Madang Province: Bogia to Awar, 25.7km; and (iv) Milne Bay Province: Goilanai Bridge to Gopaia Bridge, 26.1km and Gopaia Bridge to East Cape Point, 27.0km. /c It is assumed that for each 10 km of road, 5 groups of 20 people (200 sq. meters/day/worker) will maintain 160,000 sq. meters annually with 4-cycles, which results in 800 working days per year. Estimates for road projects are that women will represent 17% of overall workers carrying out routine road maintenance activities, and that roads will be maintained on a 3-cycle, rather than a 4-cycle, basis. It is further assumed that the following lengths of roads would be maintained each fiscal year: 2015: 50 km of roads; 2016: 60 km of roads; 2017: 70 km of roads; 2018: 80 km of roads; 2019: 90 km of roads; 2020: 100 km of roads; 2021: 110 km of roads. The number of workers per km and percentage of women employed may vary across provinces and within communities. /d Project activities that are not related to routine maintenance activities could include directing traffic along sections of road under rehabilitation, serving as cooks or cleaners in work camps, working as day laborers, etc.

Intermediate Results and Indicators Cumulative Target Values (FY) Baseline Progress Responsibility Unit of Data Source/ Intermediate Results Original Project to Date 2016 2017 2018 2019 2020 2021 Frequency for Data Measure Methodology Indicators Start (2011) (2015) Collection Annual Supervision Component 1: Number of works Number 0 1 4 6 7 8 9 9 Project & Progress DoW contracts tendered. Reports Reports Component 2: Number of Annual Supervision domestic companies trained in Number 0 0 5 8 10 14 17 20 Project & Progress DoW bidding and contract Reports Reports management. Component 3: Number of Annual Progress gender-based violence and Number 0 22 30 40 50 55 60 65 Project Reports & DoW HIV/AIDS awareness Reports SES workshops conducted.

Annex 2: Systematic Operations Risk-Rating Tool (SORT)

Risk Category Rating 1. Political and Governance Substantial 2. Macroeconomic Substantial 3. Sector Strategies and Policies Moderate 4. Technical Design of Project or Program Substantial 5. Institutional Capacity for Implementation and Sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Substantial 8. Stakeholders Substantial 9. Other OVERALL: Substantial Explanation: Political and governance risks are related to political stability and the volatile security conditions throughout the country. While security issues have typically occurred in provinces that are outside the scope of RMRP II, risks remain. Other important risks for the project include cost overruns and delays in awarding and implementing contracts due to GoPNG’s prolonged process to approve large contracts, and the limited capacity within counterpart agencies. To mitigate these risks, a dedicated employer’s project manager with extensive experience working in PNG has been contracted and continues to assist DoW with project implementation, in particular by providing guidance with respect to contract management, the procurement process, and preparation of financial systems and documents.

Given the uncertain economic environment and the continued downward pressure on prices for mineral resources, there is considerable pressure on GoPNG’s national budget. As such, the macroeconomic risk rating should be elevated to substantial.

None of the proposed changes would have a major impact on the original economic, financial or technical analyses of the project as appraised.

Because works are limited to rehabilitation and maintenance of existing road sector assets, the environmental and social risks are well understood and can be managed. Experience to date with safeguards under RMRP II has been largely satisfactory.