The World Bank Group in Papua New Guinea, 2008-23
Chapter 4 | Supporting Growth in Nonextractive Sectors
Highlights
Several constraints undermine Papua New Guinea’s nonextractive growth aims. Among others, these include governance challenges that impede policy reform, weak institutions, overvaluation of the kina and its lack of convertibility, poor road infrastructure that constrains access to markets and services, underinvestment in agriculture, a lack of competition, and security.
The World Bank and the International Monetary Fund have cited the overvaluation of the kina as constraining growth in the nonextractive sectors and have called for a gradual relaxation in exchange rate restrictions. The World Bank conducted analytical work on the costs and distributional effects of the overvaluation across populations and included it in the 2023 Country Economic Memorandum to inform policy dialogue being supported by the International Monetary Fund.
The World Bank’s attempt to use budget support for fiscal and public management reforms was unsuccessful. The development policy operation failed to adequately identify and mitigate risks related to the government’s inability to implement reforms, contributing to the development policy operation’s failure to meet its objectives. Along with this, poor design of results indicators and a lack of provision for gathering data led to a moderately unsatisfactory rating for Bank performance.
The World Bank is effectively using performance-based contracts in the road sector and alternative service delivery models in the agriculture sector that others are replicating. Both aim to address deeply embedded patronage dynamics undermining nonextractive sector performance. The International Finance Corporation’s agribusiness work in Papua New Guinea has been limited, with modest results.
A lack of competition has undermined efforts to achieve inclusive growth in key nonextractive infrastructure sectors. The Bank Group (the International Finance Corporation and the World Bank) contributed to a significant increase in information and communication technology infrastructure; however, without successfully supporting enhanced market competition, penetration remains limited and costs are exorbitantly high. Similarly, a lack of competition in the banking sector has constrained small and medium enterprises’ access to finance—a core goal of the International Finance Corporation during the evaluation period.
Macroeconomic Issues
This chapter assesses the results of the Bank Group’s support for nonextractive growth. It first examines the Bank Group’s support for macroeconomic management as a key enabling condition. Next, it covers aspects of the physical enabling environment by focusing on infrastructure development for ICT and transport, including market linkages and agricultural development. Then it assesses Bank Group direct support for increasing access to finance for MSMEs in nonextractive industries, such as in the wholesale, retail, agriculture, tourism, and fisheries industries. It also covers Bank Group direct support for developing tourism opportunities.
Papua New Guinea’s lack of fiscal space and the lack of kina convertibility hamper growth across the economy, particularly the nonextractive sectors. Inadequate fiscal space—partly caused by disappointing collection of revenues from the extractive sector (only 11 percent of which flow into the budget)—and rising public sector debt service constrain the availability of finance for core development needs (debt service rose from less than 5 percent of government spending in 2012–13 to over 11 percent in 2017–20). The country’s risk of debt distress increased from low in 2017 to moderate to high in 2021 (World Bank Group 2022). Dutch disease, which is typical of a resource-dependent economy, has also contributed to low growth in the nonextractive sectors through an overvalued exchange rate.1
The lack of kina convertibility poses a substantial barrier to growth in the nonextractive sectors. The overvaluation of the kina has led to rationing of foreign exchange, dampening investment, and undermining productivity. However, domestic support for devaluation is limited because it would raise urban inflation significantly as a result of the reliance on imported goods. Consumers recall the inflationary effects of depreciation in 2013 and 2014 when global prices of copper, gold, and oil dropped and with them the value of the kina. The exchange rate is de facto fixed, although the central bank claims that the current exchange rate regime is floating and that foreign exchange is not rationed, despite ample evidence of foreign exchange rationing. The treasury has stated that the overvalued exchange rate and resulting foreign exchange shortage are hurting growth and employment in the nonmineral sectors (IMF 2022). However, devaluation would increase the private and government external debt burden. Without reform to the exchange rate regime, a sudden and disorderly adjustment is increasingly likely.
The World Bank and the International Monetary Fund have cited the overvaluation of the kina as constraining growth in the nonextractive sectors and have called for a gradual relaxation of exchange rate restrictions. Although other factors, such as insecurity, challenging terrain, poor infrastructure, and low human capital, also hamper growth, the International Monetary Fund has recognized kina overvaluation as a constraint. The International Monetary Fund has recently approved a $918 million arrangement to support measures to reform the foreign exchange regime (IMF 2023). The World Bank has also recently conducted analytical work on the costs and distributional effects of the overvaluation across populations, sectors, and regions in the country to inform the policy dialogue. The World Bank has argued for more flexibility and convertibility, most explicitly, in the recent (July 2023) Country Economic Memorandum.
The World Bank sought to use budget support for fiscal and public management reforms but was unsuccessful. The World Bank’s first development policy operation (DPO) in Papua New Guinea in two decades (approved in FY19 as part of a programmatic series) sought improvements in revenue performance and public financial management.2 The DPO’s prior actions were relevant, but none of the related targets were met. The nonresource primary fiscal balance as a percentage of nonresource GDP deteriorated significantly instead. A prior action intended to improve revenue administration and enhance compliance did not achieve its intended impact because a required act was delayed in the legal process. Targets on timely submission of financial statements to the auditor general’s office and financial inclusion were also not met.
The DPO failed to adequately identify and mitigate risks related to the government’s low capacity and capability to implement reforms, contributing to the DPO’s failure to meet its objectives. Political fragmentation and an unpredictable policy environment limit the government’s ability to credibly commit to policy reforms, particularly policies that constrain spending. This can significantly reduce a DPO’s probability of success and the risk that medium- to longer-term policy reforms will not be sustained high. The volatile political environment that is not conducive to implementing revenue reforms and restraining unproductive expenditure often undermines government plans for implementing fiscal consolidation measures. Along with this, poor design of the results indicators and a lack of provision for gathering data led to a moderately unsatisfactory rating for Bank performance. (The World Bank approved a subsequent $100 million DPO in 2021 with prior actions focused on mitigating the COVID-19 pandemic’s negative economic and health effects, but it is too soon to assess the overall results.)
Rural Infrastructure Connectivity and Agriculture Development
The limited reach and poor condition of the country’s road network isolate large swaths of the population from markets, nonextractive income earning opportunities, and services. Poor roads are a key constraint to inclusive economic growth. Papua New Guinea is one of the few countries without a fully interconnected national road network, and its nine road networks in 21 provinces are unconnected because of challenging topography and high construction costs. The condition of the major roads has continuously deteriorated as a result of lack of maintenance, imposing significant costs on the economy (DOWH 2018). Household income and expenditure survey data show the relationship between a lack of road access and poverty.
The World Bank helped rehabilitate national and provincial road infrastructure, but massive underinvestment in road maintenance undermined outcomes. Transport sector operations have been the backbone of the portfolio. Projects representing 20 percent of the investment portfolio have helped rehabilitate 711 kilometers (8 percent) of the national road network, 274 kilometers of provincial roads, and 375 kilometers of feeder roads. However, over the evaluation period, most roads fell into disrepair because of the lack of government investment in road maintenance. By 2018, there were fewer roads in good condition and more roads in poor condition than in 2008, and 64 percent of provincial and local roads were in poor or failed condition, as reported by the Department of Works and Highways (DOWH 2018). The full scope of the challenge is difficult to estimate, given sporadic and poor-quality data on road conditions that undermine the World Bank’s ability (in partnership with others) to engage in the sector more strategically.
To achieve results in a context of deeply embedded patronage dynamics, the World Bank is testing new forms of performance-based approaches to address transport sector governance shortcomings. The World Bank’s January 2021 Economic Update (World Bank 2021b) reflects on the institutional and political factors undermining transport outcomes, including strong political incentives to build roads rather than maintain them and an unwillingness to safeguard road maintenance funding (leading to a vicious cycle of build-neglect-rebuild). As such, the World Bank (in partnership with the Department of Works and Highways) has been testing the use of long-term road contracts that include maintenance. Starting in 2014, the World Bank provided additional financing to pilot alternative methods for maintaining roads using long-term performance-based contracts that build the cost of road maintenance into the life cycle of road rehabilitation contracts. The World Bank leveraged its long-standing relationship with the Department of Works and Highways—cultivated through decades of World Bank support for road rehabilitation—to advance this shift and demonstrate the feasibility of this approach, and it will be scaled up in the latest transport project, which has attracted co-financing from DFAT. The government has indicated that it intends to adopt the model in its own contracts. Time will tell if this intention translates into reality and if long-term rehabilitation and maintenance contracts can yield sustainable results. Although not a panacea, they can at least guarantee maintenance for several years during and after rehabilitation. As of April 2023, World Bank support for the rehabilitation of the Hiritano Highway (which includes a long-term maintenance contract) increased the portion of the road maintained in good condition from 30 percent to 42 percent, achieving the project’s target.
Efforts to achieve enhanced agriculture market linkages through more targeted transport infrastructure connectivity have not come to fruition. A lack of infrastructure to physically integrate Papua New Guinea’s rugged terrain is a major impediment to expanding market opportunities for rural producers. Although the World Bank began to develop a transport project that would co-locate subnational roads in prime agricultural areas, the project design was dropped because the World Bank deemed it too complicated amid complex and fragmented institutional mandates and jurisdictions for national and subnational roads and because of political interference in road selection and high costs. The need to disburse IDA within deadlines also contributed to a decision to simplify the transport project, resulting in a reduced scope that reengaged mainly in national roads.3
The World Bank helped increase the production of key export crops but paid inadequate attention to food and nutrition security and building resilience. Between 2008 and 2020, the government of Papua New Guinea and the World Bank focused mainly on growing cash crops for export, which was the theme of the PPAP supported by the World Bank between FY10 and FY21. PPAP was piloted in six provinces and scaled up in 2014 to an additional six provinces reaching 10 percent of cocoa and coffee farmers and was innovative in introducing a parallel service delivery model. This model linked the farmers to lead partners who could aggregate, buy, and sell the products to exporters. Although project monitoring and evaluation was inadequate to determine income effects, the project helped replant 15,000 hectares of disease-resistant cocoa and rehabilitate 115 kilometers of market access roads. The PPAP also developed into a strong brand that other donors are now using (such as the International Fund for Agricultural Development, the European Union, and the Australian Centre for International Agricultural Research). However, it did not pay enough attention to food systems, considering the country’s issues with severe malnutrition—especially in women and children—and the rates of stunted growth in children. PPAP included a small nutrition intervention pilot with a gender focus, but progress has been slow in taking this to scale in a follow-up project (Agricultural Competitiveness and Diversification Project). Moreover, the follow-up project continues to focus on export commodities but also diversifies to spices, coconuts, and small livestock and plans to scale nutrition interventions, especially for the poorest. Toward the end of PPAP, many coffee farms experienced a pest invasion, but the World Bank directed only a small amount of support toward helping manage the infestation (box 4.1).
Box 4.1. The Coffee Berry Borer Is Devastating Coffee Yields in Papua New Guinea
Source: Lauren Kelly, Independent Evaluation Group.
Papua New Guinea is one of the last coffee producing countries in the world to be affected by the coffee berry borer pest, a small beetle that feeds on the coffee seed and damages the quality and quantity of the harvested crop (figure B4.1.1). Although the pest was detected in the Productive Partnerships in Agriculture Project areas in the highlands, very little has been done to address this threat (physical roadblocks helped but were insufficient to stop the flying pest, and efforts to use methanol at the farm level were unsuccessful because community members resorted to drinking it). A new project (Agricultural Competitiveness and Diversification Project) has a small component to address the pest, but financing is insufficient. Much more support is needed from the World Bank, research institutions, and other donors to stave off the devastation that is facing the coffee crop and thus the livelihoods of smallholders.
Source: Independent Evaluation Group.
IFC’s agriculture-related work in Papua New Guinea has been much more limited, with modest results. IFC supported one investment (in an indigenously owned coffee exporting company) and four advisory services in the agribusiness sector. Its support for the indigenously owned coffee exporting company was canceled because the client could access more attractive terms in the market. The four agribusiness advisories included support for supermarkets, aggregators, and a brewery. IFC effectively helped a global coffee buyer develop local certification capacity of 1,374 farmers that led to increased production, but no information was available about sales. An effort to support the production of starch from cassava through an outgrower program (for a brewery client) was dropped as a result of restrictions placed on alcohol exports in Papua New Guinea. A key piece of analytical work, co-produced by IFC and the World Bank on gender in agriculture (The Fruit of Her Labor: Promoting Gender-Equitable Agribusiness in Papua New Guinea), informed the design of an IFC agribusiness advisory services, which focused on fresh produce—source of self-managed income for women (unlike coffee and cocoa). Although this agribusiness advisory achieved gender participation targets in the fresh produce sector, it missed them in the coffee and cocoa sectors and did not report on gender-related income or benefit sharing results.
Expanding Information and Communication Technology Services for Nonextractive Sector Growth in Rural Areas
The Bank Group catalyzed growth of the ICT sector through infrastructure development but fell short of supporting increased market competition, leaving penetration limited and costs exorbitantly high. Through its Rural Communications Project (2011–18), the World Bank contributed to expanding ICT infrastructure (2G and 3G cell towers) in rural underserviced provinces, as planned. As a result, more than 80 district centers in four underserviced rural provinces (that are less commercially viable) received internet coverage. IFC, through advisory and investment, supported the training of telecommunication retailers and helped a telecommunication firm build telecommunications infrastructure (800 towers). IFC also piloted the installation of solar phone charging stations, providing access to about 34,000 rural inhabitants. However, ICT access (as defined by affordability and use) is limited because of the monopolistic character of the telecommunications market. Although IFC helped privatize telecommunication services by displacing an underperforming SOE, it did not support other entrants to the market to increase competition. As of 2022, an international telecommunications firm held 92 percent market share in Papua New Guinea.
Stark gender disparities in access to mobile and internet technology undermine women’s effective participation that would help grow the nonextractive economy. Women are 10 percent less likely than men to own a mobile phone and 23 percent less likely to use mobile internet (Highet et al. 2019). However, this varies depending on the relative status of women regionally, with starker divides in patrilineal versus matrilineal areas (Curry, Dumu, and Koczberski 2016). Safety concerns are a key barrier to women’s access to mobile and internet technology, in addition to barriers related to affordability, accessibility, digital literacy, and skills (Highet et al. 2019). Women’s partners often restrict their access to mobile phones, and women report that men are suspicious of women using mobile phones. To lessen tensions in the household, many women avoid owning a mobile phone or use phones only in front of their partners because of the negative associations with women’s mobile phone use, such as extramarital affairs (Highet et al. 2019). Although accelerating digital inclusion for women can help address gender inequalities, as with all areas of development, it is critical to consider the social context within which women operate and the social risks involved in efforts to increase women’s mobile phone uptake and use.
Micro, Small, and Medium Enterprise Access to Finance
IFC support allowed banking institutions to expand their business, but market competition remains limited, constraining SME access to finance. Bank South Pacific (BSP), the largest and only Indigenous bank in Papua New Guinea, has traditionally dominated Papua New Guinea’s banking sector. In 2010, BSP controlled 50 percent of Papua New Guinea’s loan and deposit markets, making short-term deposits its primary funding source. IFC aimed to increase access to finance for MSMEs by addressing BSP’s poor liquidity. BSP was IFC’s main beneficiary, representing 7 out of 17 financial sector activities. Although IFC helped BSP expand its business, it had limited impact on increasing its goal of achieving MSME access to finance because of little competition in the banking sector (three large banks dominate). Even so, during the evaluation period, two of the three major banks (ANZ and Westpac) began to scale down their operations. IFC successfully supported a small domestic bank, Kina Bank, to acquire ANZ, absorb its SME customers, and provide better-quality SME services, but this did not increase competitiveness or total MSME financing. As of 2021, the ratio of deposits to loans exceeded 100 percent, with outstanding loans concentrated in large corporations. In 2019–20, IFC supported a nonbank financial institution to increase SME financing, but the operation failed because of COVID-19.
Tourism
Bank Group support for downstream tourism activities lacked realism and was ineffective. Representing only 1.8 percent of GDP and about 2.9 percent of total employment (WTTC 2022), Papua New Guinea’s niche tourism opportunities—with its diverse culture, pristine coral reefs, and prime surfing and diving sites—are largely untapped. Country strategies either envisioned the Bank Group playing a key role in developing the sector (Papua New Guinea CAS for FY08–13; IFC Country Strategy for FY19–23) or exercised caution, pointing to severe limitations associated with institutional capacity, the security environment, and infrastructure quality (CPS for FY13–16). A $20 million World Bank tourism investment project (2017–22) was canceled after disbursing 10 percent of the loan because of the inability of national institutions to implement activities at the subnational level (including the Tourism Promotion Authority’s weak capabilities).4 The project was not informed by relevant analytical work (a regional tourism analysis focused on the Pacific islands overstated opportunities and underestimated risks for Papua New Guinea). An IFC advisory also helped the Tourism Promotion Authority obtain market data while seeking to build tour operators’ capacity. Yet inexperience at the subnational level, including a lack of awareness about local political issues between tour operators, led to project staff being coerced and threatened (a director of one of three companies being provided advisory to withdrew from project activities as his position in the local community was complicated by his involvement with IFC) and the closure of community activities. According to the closeout report, more direct communication was needed with local operators about the project’s nature, including explaining the difference between investment and advisory.