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. 1 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. 2 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.