Extended Annual Review Report Project Number: 43929 Reference Number: LN2576/EI7302 September 2013 Loan Digicel Mobile Telecommunication Expansion Project (Papua New Guinea) This is the abbreviated version of the document that excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011. CURRENCY EQUIVALENTS Currency Unit – kina (K) At Appraisal At Project Completion 18 Sep 2009 31 Dec 2009 K1.00 – $0.37325 $0.37800 $1.00 – K2.6792 K2.6455 ABBREVIATIONS ADB – Asian Development Bank DCI – Department of Communication and Information EBITDA – Earnings before interest, tax, depreciation and amortization EHS – environmental, health, and safety EROIC – economic return on invested capital FIRR – financial internal rate of return GDP – gross domestic product ICCC – Independent Consumer and Competition Commission ICT – information and communication technology ITU – International Telecommunication Union NEC – National Executive Council NICTA – National Information and Communication Technology Authority NICT Act – National Information and Communications Technology Act PANGTEL – Papua New Guinea Radio-communication and Telecommunication Technical Authority PNG – Papua New Guinea SMS – short messaging service NOTES (i) The fiscal year (FY) of the borrower, Digicel (PNG) Ltd, ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 March 2000. (ii) In this report, "$" refers to US dollars. Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Officer-in-Charge J. Yamagata, Private Sector Operations Department (PSOD) Director C. Thieme, Infrastructure Finance Division 2, PSOD Team leader M. Kanda, Investment Specialist, PSOD Team members S. Durrani-Jamal, Senior Economist, PSOD M. Manabat, Senior Investment Officer, PSOD J. Munsayac, Safeguards Specialist, PSOD J. Orense, Associate Project Analyst, PSOD M. Pascua, Senior Safeguards Officer, PSOD R. Tabanao, Project Analyst, PSOD 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. CONTENTS Page BASIC DATA i EXECUTIVE SUMMARY ii I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 3 II. EVALUATION 4 A. Project Rationale and Objectives 4 B. Development Impact 4 C. ADB Investment Profitability 9 D. ADB Work Quality 9 E. ADB’s Additionality 9 F. Overall Evaluation 9 III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 10 A. Issues and Lessons 10 B. Recommended Follow-Up Actions 12 APPENDIXES 1. Project-Related Data 13 2. Private Sector Development Indicators and Ratings: Infrastructure 14 3. Environmental Impact and Social Impacts 17 BASIC DATA Digicel Mobile Telecommunication Expansion Project (L2576/7302-PNG) Key Project Data As per ADB Loan Actual Documents ($ million) ($ million) ADB Investment: Loan: Committed 18 18 Disbursed 18 18 Key Dates Expected Actual Concept Clearance Approval 19 Aug 2009 19 Aug 2009 Board Approval 16 Nov 2009 16 Nov 2009 First Disbursement 23 Nov 2009 23 Nov 2009 Loan Closing 23 Nov 2009 23 Nov 2009 Project Administration and Monitoring No. of Missions No. of Person- Days Due Diligence/Project Development 1 6 Loan Negotiations/Project Administration 1 3 EXECUTIVE SUMMARY On 16 November 2009, the Board of Directors of the Asian Development Bank (ADB) approved a loan of up to $25 million from ADB’s ordinary capital resources to Digicel (PNG) Ltd, the borrower, for enhancement of its mobile telecommunications network infrastructure for better service provision in Papua New Guinea (PNG). The ADB loan facility of $18 million was fully drawn down on 23 November 2009. Cofinancing was provided to the borrower by the International Finance Corporation, Export Development Canada, and the Bank of South Pacific. The borrower is an operating subsidiary of the Irish-owned Digicel group, which runs mobile telecom operations in 31 emerging economies, including six in the Pacific region. The financial assistance to the borrower is ADB’s first private sector infrastructure investment in the Pacific region, as well as its first private sector investment in PNG. It complements ADB’s preceding efforts in support of government reforms of the information and communication technology (ICT) sector in PNG, which evolved along with liberalization of the nation’s mobile telecom market, where the borrower served as a key driving force. Prior to the liberalization, the telecom market in PNG was insufficiently served by the former national monopoly (Telikom PNG) and had one of the world’s lowest teledensity rates. The borrower’s entry in 2007 accelerated development of the telecom market in PNG and marked a surge in mobile penetration from less than 3% in 2007 to 21% by 2009. Through continued network expansions and service innovations, the borrower has become the largest mobile operator in the country, and this has benefitted the nation’s remote and rural areas which formerly lacked basic telecom infrastructure. The borrower’s expansion, which ADB supported, resulted in wider coverage and a larger network capacity to meet the rapidly growing demand for mobile services in PNG. This extended annual review evaluates ADB’s assistance to the borrower. The evaluation criteria are based on Project Administration Instructions 6.07B on the preparation of extended annual review reports for nonsovereign operations, issued in July 2008. Four major criteria were used: (i) development impacts and outcomes, (ii) ADB investment profitability, (iii) ADB work quality, and (iv) ADB’s additionality. The development impacts and outcomes are evaluated using four criteria: (i) private sector development; (ii) business success; (iii) economic sustainability; and (iv) environmental, social, and health and safety performance. The borrower has transformed the telecom landscape in PNG by making mobile communication accessible and affordable to the rural majority for the first time. The expansion established additional sites with mobile coverage and improved the accessibility and quality of telecom services, particularly in remote and rural areas. Digicel’s lower price offering has redefined the mobile telecom service as a basic service affordable to the low-income majority in the country. The borrower’s wider coverage and affordable services drove a mobile revolution, increasing the penetration to 34% (2.4 million people) by 2011. Access to ICT, in particular mobile services, is a key contributor to economic growth and poverty reduction. The telecom industry growth has made a strong contribution to national productivity in PNG. The industry contribution was up to 6.5% of total GDP in 2011, marking a cumulative annual growth of up to 29% for 2006–2011. Direct impacts include the creation of local employment, with about 700 jobs created directly and an estimated 13,000 jobs created indirectly in related areas. The borrower adopted best industry practices, which contributed to improved labor quality, productivity, and governance in PNG. The mobile revolution has had a significant impact on people’s lives and on the economy. The borrower was the first to market a variety of innovative solutions, such as mobile banking and market information services, for individuals and businesses across the country. These services greatly improved productivity and opened new opportunities, effectively stimulating the economy. Indirect benefits have also been realized through Digicel’s community development initiatives in the areas of basic education and health, by which it demonstrates a high level of corporate social responsibility. The borrower also contributes to the delivery of public service iii under the public–private partnership, where it serves as the key communication solution provider for efficient dissemination of public information to the nation’s rural majority. The project has had a major positive impact and demonstration effect on private sector development across PNG in relation to its stated development objectives. Private sector development performance is therefore considered excellent. Digicel’s good operational and financial performance continued under rapid market growth, which surpassed its original forecast. Its subscriber base grew and its dominant market share made it the leading mobile operator in PNG. Its sustained cash generation created an effective growth cycle by allowing the company to accelerate investments for further growth. The borrower is rated excellent for business success. The borrower’s economic sustainability is rated excellent. The economic sustainability of the borrower is assured as it offers its subscribers value for money through improved accessibility and affordability of mobile telecom services. The borrower’s continued service innovation has increased the social and economic well-being of mobile users, particularly in remote and rural areas where telecom services were previously unavailable. The borrower is rated satisfactory in terms of environment, social, and health and safety performance. The environmental impacts of the expansion were insignificant and short term during construction. Environment and health and safety records submitted to ADB were found to be satisfactory. The expansion did not entail involuntary resettlement