Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: RES12738

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURINGOF

PG: RURAL COMMUNICATIONS PROJECT

CREDIT 4791-PG

JUNE 17, 2010

TO THE

INDEPENDENT STATE OF PAPUA NEW GUINEA

August 7, 2014

Transport and Information Communication Technologies Global PracticeEast 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.

PAPUA NEW GUINEARURAL COMMUNICATIONS PROJECT (P107782)

ABBREVIATIONS AND ACRONYMS

BTS Base transceiver stationCAS Country Assistance StrategyDCI Department of Communication and InformationESA Environmental and Social AssessmentFM Financial managementICCC Independent Consumer and Competition CommissionICT Information communication technologiesIDA International Development AssociationIFR Interim financial reportIPBC Independent Public Business CorporationISP Internet service providerNICTA National Information and Communications Technology AuthorityOBA Output-based aidPIU Project Implementation UnitPNG Papua New GuineaUA Universal accessUAS Universal access schemeVSAT Very small aperture terminal (satellite)

Regional Vice President: Axel van TrotsenburgCountry Director: Franz Drees-Gross

Global Practice Senior Director Pierre GuislainGlobal Practice Manager: Randeep Sudan

Task Team Leader: Natasha Beschorner

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PAPUA NEW GUINEARURAL COMMUNICATIONS PROJECT (P107782)

CONTENTS

PageSUMMARY........................................................................................................................... 1PROJECT STATUS ................................................................................................................ 2PROPOSED CHANGES .......................................................................................................... 3APPRAISAL SUMMARY ....................................................................................................... 6ANNEX 1: RESULTS FRAMEWORK AND MONITORING ....................................... 12ANNEX 2: RISK IDENTIFICATION WORKSHEET..................................................... 14ANNEX 3: REQUEST LETTER FROM THE GOVERNMENT.................................... 20ANNEX 4: SUMMARY OF OPTIONS FOR SECOND UAS DEMO PROJECT.......... 23

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SUMMARY

1. The purpose of this restructuring paper is to support the introduction of the following changes to the Papua New Guinea Rural Communications Project (IDA credit 4791-PG) under a Level 2 restructuring: (a) officially transfer Project management from the Department of Communication and Information (DCI) to the National ICT Authority (NICTA); (b) reallocate Credit proceeds between categories 1 and 2 to reflect additional demand for policy and regulatory advisory services; (c) redefine the scope of the second universal access scheme (UAS) demonstration project for the provision of Internet; and (d) extend the Project closing date for two years to August 31, 2017.

2. The Board approved the Project on July 22, 2010 for a total of SDR 10 million (US$15 million equivalent), and it became effective on March 7, 2011. The project development objective (PDO) is to improve access to telecommunications infrastructure and services in rural and remote areas of Papua New Guinea. The Project includes financing for two major UAS demonstration sub-projects—using competitively-bid one-time capital subsidies to stimulate extension of ICT services to unserved and under-served areas of the country. The Project also finances technical assistance to the NICTA for the establishment and administration of the UAS and other regulatory matters; and to the DCI on ICT policy development.

3. Implementation progress was extremely slow in the first three years after Board approval. The delays were largely due to: (a) poor Project management and weak fiduciary capacity of the implementing agency (DCI) in both procurement and FM; (b) lack of coordination between DCI and NICTA, the sector regulator and main implementing agency of Project-supported activities; and (c) challenges associated with the Government of Papua New Guinea’s own systems for procurement reviews and clearances.

4. In the December 2012 ISR, the Project was downgraded from moderately satisfactory to moderately unsatisfactory in both progress towards achievement of PDO, and implementation progress. Procurement and financial management (FM) were also downgraded to moderately unsatisfactory. Over the last 12 months the World Bank team has provided intensified support (technical and fiduciary) to help NICTA and DCI accelerate implementation and improve Project management.

5. Implementation progress has improved. The first level 2 restructuring was approved on June 17, 2013, to expand the scope of the first UAS demonstration project. Several technical assistance consultancies are moving forward in a satisfactory manner, and the contract for the first UAS demonstration project for the provision of voice services (US$7 million) was signed in May 2014. As a result, over 50 percent of Project funds have now been committed and disbursements are expected to accelerate through end-2014.

6. A midterm review was carried in March 2014, which was instrumental in identifying the changes that are being proposed in this restructuring.

7. The proposed restructuring is necessary to: (a) ensure that Project-financed activities—in particular the UAS demonstration projects that explicitly target underserved rural communities—

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can be implemented in time to achieve the Project’s development objectives, and reflect changes in technology and telecoms market development in PNG; (b) provide additional support for the ICT policy and regulatory framework; and (c) strengthen implementation capacity by transferring the Project management responsibilities to NICTA, the manager of the UAS secretariat and the agency responsible for executing the majority of Project activities.

8. The proposed changes are based on a request from the Government of Papua New Guinea dated May 1, 2014, and received by the World Bank on June 9, 2014 (Annex 3).

9. The proposed restructuring will not require any changes to the safeguards category.

PROJECT STATUS

10. The Board approved the credit on July 22, 2010 for a total of SDR 10 million (US$15 million equivalent), and it became effective on March 7, 2011. The Project Development Objective (PDO) is to improve access to telecommunications infrastructure and services in rural and remote areas of Papua New Guinea. More specifically, the Project components are as follows:

Component 1: Technical Assistance for UAS Secretariat in NICTA (US$1.2 million): to assist the UAS Secretariat established within NICTA to manage the implementation of the demonstration projects to be financed under the UAS Fund and to provide regulatory support in other areas as required.

Component 2: Universal Access and Service (UAS) Demonstration Projects (US$13.5 million): to finance pilot projects to be supported under the UAS scheme. First, demonstration projects for telecommunications services are proposed in geographically distinct locations across PNG, and second, demonstration projects for Internet services are proposed to establish Internet points of presence in around 60 district centres.

Component 3: Project Management (US$0.3 million): This component is strengthening the capacity of the DCI through the provision of advisory services and support for Project coordination, procurement, financial management, telecommunications technical support and supervision.

11. Implementation progress was extremely slow in the first three years after Board approval. The delays were largely due to: (a) poor Project management and weak fiduciary capacity of the implementing agency (DCI) in both procurement and FM; (b) lack of coordination between DCI and NICTA, the sector regulator and main implementing agency of Project-supported activities; and (c) challenges associated with the Government of Papua New Guinea’s own systems for procurement reviews and clearances. In the December 2012 ISR, the Project was downgraded from moderately satisfactory to moderately unsatisfactory in both progress towards achievement of PDO and Implementation Progress. Procurement and financial management were also downgraded to moderately unsatisfactory.

12. Over the last 12 months the World Bank team has been providing intensified support (technical and fiduciary) to help NICTA and DCI accelerate implementation and improve Project management. Key outcomes are as follows:

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(a) The Project Implementation Unit (PIU) was physically relocated from DCI to NICTA in late 2013 to improve interagency coordination. This was the first step toward consolidating Project management functions within NICTA. Evidence of improved supervision of the PIU has been seen since the move to NICTA, and NICTA management are significantly more engaged in fiduciary aspects of the Project.

(b) Based on a request from the Government of PNG (GoPNG) dated November 26, 2012, a level 2 restructuring was approved on June 17, 2013, which introduced the following changes to the Financing Agreement: (i) expansion of the scope of the UAS demonstration projects to include all four regions of the country, instead of restricting geographic focus to Chimbu and East Sepik.; (ii) revision of Project indicators included in the results framework; and (iii) exclusion of one of the withdrawal conditions for Category 2 subsidy payments, which risk was deemed no longer applicable.

(c) All withdrawal conditions for category 2: subsidy payments for the UAS demonstration Projects have been met, including the employment of an Independent Verification Agent in December 2013, and the final composition of the UAS Board on January 21, 2014.

(d) The draft set of UAS Rules and Regulations was approved by the NICTA board on March 14 and is being prepared to be submitted to the National Executive Council for endorsement.

(e) The first phase of policy advisory services to DCI was completed in October 2013. The initial program to provide regulatory assistance to NICTA is nearing completion, pending submission of a final report.

(f) Finally, the first UAS demonstration project for the provision of voice services (US$7,055,304) was signed on May 16, 2014 between the Independent State of PNG and Digicel (PNG) Limited. The contract has committed close to 50 percent of the total credit. Under this contract, telecommunications points of presence will be installed in 59 sites across all four regions of PNG, and will provide telecommunications services according to specified performance standards to nearly 500,000 currently unserved people.

13. A midterm review was carried in March 2014, which was instrumental in identifying the changes that are being proposed in this restructuring.

14. Currently, the preparation of the second UAS demonstration project is progressing and is expected to be launched by 3Q 2014. This will focus on provision of broadband Internet services to unserved rural communities. Further details are provided below.

PROPOSED CHANGES

15. The Department of Treasury has sent a formal letter dated May 1, 2014 and received by the World Bank on June 9, 2014, requesting the following changes in the scope of the Project:

(a) Implementation arrangements. Officially transfer Project management from the Department of Communication and Information (DCI) to National ICT Authority

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(NICTA). As a consequence of this request, disbursement arrangements are proposed to be changed, including the transfer of all Project accounts from DCI to NICTA;

(b) Re-allocation of financing proceeds. Reallocate credit proceeds between categories 1 and 2 to reflect additional demand for policy and regulatory advisory services;

(c) Project description. Redefine scope of the second UAS Demonstration Project for the provision of Internet services. As a consequence of this request, one of the Project’s intermediate indicators associated with this provision is proposed to be revised to allow flexibility in the option that would be undertaken; and

(d) Extension of closing date. Extend the Project closing date for two years to August 31, 2017. Associated changes to the Financing Agreement are summarized below.

A. Implementation Arrangements

16. The Government has requested the transfer of implementing agency from DCI to NICTA. The justification for supporting the Government's request is as follows:

17. NICTA is an existing implementing entity for the Project as formalized in the Project Agreement signed between PANGTEL (predecessor agency to NICTA) and the Association on August 9, 2010. On and from the Succession Date, the obligations of PANGTEL were transferred to and vested in NICTA. NICTA was subsequently established on October 29, 2010.

18. NICTA is the implementing agency of Project activities of Part 2: UAS Demonstration Projects, which had accounted for 90 percent of the total credit (82 percent under the restructured Project). It is important to have the PIU and the UAS Secretariat physically, functionally and administratively located under the same umbrella, especially considering the weak institutional capacity of DCI as evidenced during the first three years of the Project.

B. Re-allocation of Financing Proceeds

19. The Government has requested the following changes to the allocation of the credit proceeds. Justifications to support these changes are to: (a) respond to demands for the provision of additional advisory services for DCI and NICTA; and (b) to reflect the realities of costs associated with Project Management.

CategoryAmount of the Credit Allocated

(expressed in SDR)

Percentage of Expenditures to be Financed (exclusive

of taxes)Original Revised

(1) Goods, consultants’ services, Training and Incremental Operating Costs for the Project

1,000,000 1,769,600 100%

(2) Subsidy Payments 9,000,000 8,230,400 100% of the amounts disbursed for Outputs delivered as per the respective Service

AgreementTOTAL AMOUNT 10,000,000 10,000,000

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C. Project Description

20. The Government has requested the following changes to the Project components as specified in Schedule 1 Project Description.

Part 1: Technical Assistance for NICTA No change

Part 2: UAS Demonstration Projects: Current. b) carrying out of a Demonstration Project for the establishment of Internet points of presence in about sixty (60) district centres in major geographic region of the Recipient’s territory for the operation of internet cafes by subcontractors.

Revised. b) carrying out of a Demonstration Project for improved Internet access in targeted district centres in major geographic regions of the Recipient's territory

As a consequence, one of the Project intermediate indicators is proposed to be revised as follows to allow flexibility in the option that would be undertaken:

Current. Increased percentage of 89 district centres with public Internet access points

Revised. Percentage of 89 district centres with Internet access

Part 3: Technical Assistance for DCI (current: Project Management) Current. Strengthening the capacity of DCI through the provision of advisory service, training and support for Project coordination, procurement, financial management, telecommunications support and supervision.

Revised. Strengthening the capacity of DCI through the provision of advisory services, training and technical support

Part 4: Project Management (new - moved from Part 3) Current. Not applicable

Revised. Strengthening the capacity of NICTA through the provisions of training and support for Project coordination, procurement, financial management, and supervision.

D. Extension of Closing Date

21. The Government has requested the extension of the Project closing date for 24 months from August 31, 2015 (current) to August 31, 2017. Justification for supporting the Government's request include:

(a) the need to ensure that the UAS demonstration projects that explicitly target underserved and unserved rural communities can be implemented in time to achieve the Project’s development objectives, and to reflect changes in technology and telecoms market development in PNG;

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(b) the need to provide additional technical and advisory support to NICTA and DCI, in light of changing market conditions and evolving trends in universal access;

(c) the recognition of proactive measures taken by the Government to improve Project management, including transfer of implementing agency and progress in hiring of a procurement advisor for enhance procurement capacity;

(d) the assessment of the updated procurement plan as realistic and achievable within the extension period; and

(e) confirmation that the relevant Operational Policy (OP) 10.00 conditions have been met, namely that: “the Closing Date is not extended: (i) for Projects subject to suspension of disbursements, except for items exempted from suspension; or (ii) for any financing to a borrower with any outstanding audit reports or with audit reports which are not satisfactory to the Bank, unless the borrower and the Bank have agreed on actions to address the deficiencies.”

APPRAISAL SUMMARY

Project Description

22. The following table summarizes the original and revised component names and proposed allocations:

Current Component Name

Proposed Component Name

Current Cost (US$M)

Proposed Cost (US$M) Action

Technical Assistance for NICTA No change 1.00 1.60 Revised

UAS Demonstration Projects No change 13.50 12.10 Revised

Technical Assistance for DCI, including Project Management

Technical Assistance for DCI 0.50 0.80 Revised

n.a. Project Management n.a. 0.50 New

Total: 15.00 15.00

Part 1: Technical Assistance for NICTA (original US$1.0 million, restructured US$1.6 million)

23. The total cost of this component has been increased to incorporate additional advisory assistance for NICTA, given the evolution of the ICT market and regulatory priorities. The scope of this advisory assistance is directly relevant to supporting improved (rural) access and affordability of ICT services, and will cover the following issues detailed below.

24. Regulatory capacity building (Phase 2). The Project will continue to support the institutional strengthening and capacity building of NICTA through the provision of specialist economic, financial, legal and technical advisory services. In this regard, additional regulatory

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advice is anticipated to address existing needs and emerging challenges, including but not limited to: spectrum management, operator and spectrum licensing issues (including relicensing and reallocation), infrastructure-sharing, consumer protection, information gathering, and compliance monitoring, including quality of service standards. The component will also support the capacity of NICTA to respond to “next generation” regulatory issues, such as cybersecurity, privacy, e-commerce, content regulation and broadcasting.

25. Spectrum management, numbering, number portability and licensing. This component will assist NICTA with the review and updating of the National Numbering Plan, undertake cost benefit analysis of pre-selection and number portability, support the development of a pre-selection and number portability implementation plan for PNG, and support the development of a numbering fee structure for PNG. Public inquires will be undertaken, as required under the National ICT Act 2009. This component is also intended to assist NICTA with the identification of spectrum that could be allocated or assigned on a market based allocation scheme. This will entail the development of the licensing process, an award criteria and selection process.

26. Economic regulation. This component will assist NICTA with its ongoing economic regulatory responsibilities, including but not limited to: wholesale regulation (including interconnection, cost modelling), customer protection and retail pricing regulation, dispute resolution, consumer protection, and a review of existing instruments, rules and determinations, as appropriate, under the Act. This component will provide specialist legal and economic support to the key telecommunication issues and tasks as required by NICTA. The scope of work may include but is not limited to: (a) legal support to help develop and advise on rules and procedures across a range of core regulatory issues (viz. dispute resolution processes and procedures, regulatory proceedings, interconnection and wholesale access arrangements, Reference Interconnect Offers, nondiscrimination obligations of access providers, consumer protection, and arrangements needed to manage infrastructure sharing); and (b) economic support to specifically develop models and implement methodologies for regulatory determinations (viz. assessment and application of the declaration criteria for wholesale services, terms and conditions of access to declared services, interconnection pricing, market analysis, wholesale pricing and tariff reviews).

27. Content/broadcasting regulations. NICTA is mandated to issue content licences, which are subject to terms and conditions set forth by NICTA. The National ICT Act 2009 (Act) envisages the development of Content Regulations under section 217 of the Act. Policing and administration of broadcasting and content licensing scheme has been particularly challenging for NICTA in the absence of a content/broadcasting regulation. Copyright, privacy, local content are amongst the key issues that are not addressed as a result. This component will help NICTA provide advice on the preparation of these content regulations (programming requirements, local content, ownership and control) that will provide the direction for content development and broadcasting in PNG.

Part 2: UAS Demonstration Projects (Original US$13.5 million, restructured US$12.1 million)

28. Re-scoping. The scope of the UAS demonstration Project for Internet access has been updated, given the time that has elapsed since the Project was prepared, and taking into account the developments in PNG's ICT sector in the past few years.

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29. NICTA and the World Bank team have reviewed and have undertaken consultations with ICT service providers on the following issues: (a) the extent and quality of connectivity generally, including fixed, mobile access, terrestrial and satellite backbone networks, availability of Internet access in the originally targeted 60 district centres; (b) the nature and extent of public access Internet service provision (public and private sector) in district centres, and operator plans for network expansion in the medium-term; and (c) likely costs and implementation arrangements for the component, in view of these developments. The detailed report is available in the Project files, and the key points are summarized below.

30. Rural Internet access and constraints. Currently available ICT service in the rural areas of PNG remains very basic. Prices of services are high (for some indicators 10 times higher than regionally comparable levels); and take-up is very low (1 to 2 percent) in comparison to similar economies (10 to 15 percent). Operators continue to roll-out second-generation (2G) mobile services, that is, basic voice and text, in rural areas rather than third-generation 3G or higher-capacity networks that offer faster data transmission (mobile broadband). The main constraints to affordable, widespread Internet development in PNG include: (a) the high cost of international connectivity, due to capacity constraints as well as regulatory factors; and (b) the lack of high-capacity domestic backbone networks. Addressing these constraints will require significant additional investments beyond the scope of this Project, plus concerted regulatory actions by NICTA regarding wholesale bandwidth access and pricing.

31. Proposed approach. The approach proposed under the Project recognizes these broader constraints, and offers a feasible shorter-term solution to address the pressing communications needs of the poorest communities, while at the same time building capacity in NICTA for effective utilization of universal access funds and, through component 1, addressing regulatory barriers to more widespread Internet access.

32. The original Project design envisaged support for public Internet access in 60 district centres through Internet cafes. Given the high cost of connectivity in PNG, and global trends with regard to public Internet access—very widespread transition to individual devices—the business case for Internet cafes has weakened, so the scope of public/community Internet access facilities has been limited to a very small number of sites, and co-located with schools. This is to provide a more sustainable institutional base for these facilities, in terms of day-to-day management, supporting infrastructure and security. The revised Internet demonstration project will thus focus primarily on improving access to mobile broadband connectivity, thus maximizing the number of potential beneficiaries within rural PNG. The bulk of the resources in this demonstration project will be allocated for the upgrade and extension of network capacity.

33. Accordingly, the revised UAS demonstration project for Internet will finance the following:

34. Mobile broadband expansion. New build and/or network upgrade from 2G to 3G + in unserved rural areas. Coupled with commercial rollout around major urban areas supported directly by the private sector, this investment will help to bring broadband Internet to the majority of the PNG population within a one- to two-year period; and

35. Community Internet centres. Located at eight PNG post-primary schools in district centres. This component will also support user skills development, and facilitate access to

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teaching and learning materials. It also supports outreach to the wider community to familiarize users with the Internet and associated information resources.

Part 3: Technical Assistance for DCI (original US$0.9 million, including project management; revised US$0.8 million for DCI TA)

DCI is seeking to hire additional staff to strengthen its ICT policy mandate. This component will finance a second phase of policy-related advisory services, based on the outputs from analytical and advisory services provided in 2012-2013. The scope of work will include the following: (a) update of the national ICT policy, including stakeholder consultations and inter-agency coordination mechanisms, and support for implementation; (b) advice on national and government chief information officer functions and responsibilities; (c) capacity building for DCI and other ministry/agency staff as appropriate.

Part 4: Project Management (total US$0.5million)

36. This component has been separated from the original component 3 and will support Project coordination, procurement and financial management. Existing contracts of the PIU consultants will be transferred from DCI to NICTA until contract expiration.

37. Procurement: No changes to the procurement thresholds are currently being proposed as part of the restructuring. However, to address the weak capacity in procurement, NICTA is in the process of hiring a part-time Procurement Advisor within the PIU. The PIU will be structured as follows under NICTA management, and under direct supervision by the Director of Economic and Consumer Affairs of NICTA.

Current PIU structure (DCI): New PIU structure (NICTA):a. Project Coordinator/Procurement

Specialist; andb. Financial Management Specialist,

c. Project/Procurement Coordinatord. Financial Management Specialiste. Procurement Advisor (part-time)

38. Additionally, NICTA has modified the contract of existing consultants that have assisted NICTA in the preparation of the UAS rules and regulations to provide additional services, including assistance in the following areas: (a) preparation of the bidding documents for the second UAS demonstration Project for internet (US$5 million); and (b) advice to the UAS Secretariat on determination of UAS Levy for 2015 based on benchmarking analysis.

39. An updated Procurement Plan has been prepared, taking account of the proposed restructuring.

40. Financial management. No changes to the FM arrangements are currently being proposed as part of the restructuring. NICTA has requested to maintain current arrangements of submission of both Project Audits and Entity Audits under the Project management of NICTA. However, a recent FM review of the Project has identified a number of issues. These issues have been proactively discussed between the Bank, DCI and NICTA management, and specific action plans were agreed during the Bank mission in December 2013 and February 2014.

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41. As a result, the Project currently meets most of the fiduciary requirements with no outstanding Project audits or financial reports. An exception to the audit requirement was approved by the PMFM on June 17, 2014 in consultation with CTRLN. The Bank’s Financial Management Specialist has verified that NICTA and the auditors are taking the necessary actions on the overdue audits to progress them to completion. This authorization is based on the fact that the overdue entity audits are now being brought up to date, as the 2010 and 2011 audits are expected soon (the financial statements have been prepared) and that 2012 and 2013 audits will commence once the 2011 Auditor-General’s Office certificate has been issued.

42. Transfer of accounts to NICTA. Additionally, the following action items have been agreed to transfer Project accounts from DCI to NICTA.

(a) Bank Account. The bank account for the Designated Account is currently with DCI, and will be transferred to NICTA.

(b) Financial Reporting. DCI and NICTA will ensure that the accounts are reflected in the appropriate entity, and that issues in accounts, audits and IFRs with the different basis of accounting between DCI (cash) and NICTA (accrual) are addressed. After the actual transfer of Project management to NICTA under the proposed restructuring, accounts will be prepared on an accrual basis with an effective date of the end of the next reporting period (September 30, 2014).

(c) Counterpart funds. Currently the counterpart funding for the Project is included in the PNG Public Investment Program (PIP) and Budget under DCI. As at this restructuring, NICTA is already coordinating with the Department of Treasury to make a submission before the Government deadline for the GoPNG budget appropriation of the counterpart funds required for 2015 and onwards to be made to NICTA. Also NICTA is coordinating with the Department of Treasury, Department of Finance and DCI to transfer the balance of the counterpart funds already provided from DCI to NICTA.

(d) Contractual Requirements. NICTA and DCI will ensure all legal issues are addressed for the transfer, including applicable consultant contracts and transfer of assets.

(e) Taxation. NICTA will be registering for a goods and services tax number for the Project and submit goods and services tax returns.

43. Retaining of Records. NICTA will ensure that the Project records of DCI are still maintained and available as per the Financing Agreement which requires records to be maintained and available for up to two years after the Project closes.

44. Disbursements. While the disbursement rate was at 6 percent as of July 28, 2014, disbursement is now expected to accelerate through end-2015 with the implementation of the first UAS demonstration project ($7 million). Further, once the second UAS demonstration project (US$5 million) is awarded, nearly 90 percent of the Project funds will be committed and disbursements are expected to complete through end-2016. The table below summarizes the disbursements to date and the revised projected expenditures until the proposed closing date of August 31, 2017.

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Fiscal YearActual and

Projections (USD)

2011 37,501.43

2012 1,795.39

2013 138,775.64

2014 376,990.87

2015 8,850,000.00

2016 5,510,000.00

Total 14,995,063.33

45. Safeguards. The proposed restructuring does not affect the safeguards category or trigger any new safeguards policies. Furthermore, the Environmental and Social Management Framework that was prepared by the Government during preparation applies to any UAS project, including those financed under the Project.

46. Risks. The risks and mitigation measures identified in the Risk Identification Worksheet (Annex 2), which was prepared during Project preparation remain relevant. Updates have been included in the RIW to reflect the current status and mitigation measures that are being undertaken by the Project.

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ANNEX 1Results Framework and Monitoring

Project Development Objective (PDO): To improve access to telecommunications infrastructure and services in rural and remote areas of PNG.

Revised Project Development Objective: No change

PDO Level Results Indicators*

Cor

e

D=DroppedC=ContinueN= New

R=RevisedUnit of Measure Baseline

Cumulative Target Values**

Frequency Data Source/Methodology

Responsibility for Data CollectionYR 1 YR 2 YR 3 YR4

Mobile cellular telephone subscriptions provinces targeted by the Project (number of subscribers per 100 inhabitants)

R Number 0 2 6 8 11 Annual Statistics and Reports from Telecom Operators

NICTA

Increase in Internet usage in rural district centres (annual increase in users)

C percentage

0 0 50% 50% 30% Annual Statistics from Telecommunications Companies and ISPs

NICTA

Beneficiaries

Direct Project beneficiaries (number)

C Number(‘000)

0 6,000 15,000 22,000 30,000 Annual Statistics and Reports from Telecom Operators

NICTA

Indirect Project beneficiaries (number), of which female (percentage)

C Number(‘000)

0 140,000 265,000 265,000 265,000 Annual / Census Statistics and Reports from Telecom Operators and national census information

NICTA

INTERMEDIATE RESULTS

Intermediate Result 1: Private investment in rural telecommunication

The average distance to the closest telephone in the provinces targeted by the

R Km may be over 50

5 5 5 5 Annual Statistics from Telecommunications Companies

NICTA

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Project and ISPs

Percentage of population coverage in the provinces targeted by the Project

R % 30 35 70 70 70 Annual Statistics from Telecommunications Companies and ISPs

NICTA

CurrentIncreased percentage of 89 district centres with public Internet access points

RevisedPercentage of 89 district centres with Internet access

C % 15-20 (est) 40 60 70 Annual Statistics from Telecommunications Companies and ISPs

NICTA

Intermediate Result 2:UAS fund performance

UAS Fund operational C No Yes Yes Yes Yes Yes End of YR1 NICTA Annual Report; UAS Fund report

NICTA

Successful Demonstration Projects undertaken by UAS Secretariat

C 0 1 1 1 1 1 Annual NICTA Annual Report; UAS Fund report

NICTA

Intermediate Result 3: Regulatory Technical AssistanceImproving the capacity of NICTA to deliver on their UAS mandate (1-5 scale)

C 0 3 4 5 5 5 Annual Survey to operators

DCI

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ANNEX 2

Risk Identification WorksheetVersion 003 June 11, 2010Updated on August 1, 2014

Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

RiskI. Country and/or Subnational Level Risks

The CAS identifies the following main country risks: (i) political instability, which may lead to a decline in the governance environment; (ii) a fall in commodity prices or excessively rapid spending of mineral resources; (iii) growing unemployment, which may lead to increased violence and social instability; and (iv) natural disasters, which may cause significant economic disruption. Weaknesses in public fiduciary systems, including at the sub-national level, is further identified as a risk to project implementation.

Substantial The following mitigation measures have been identified in the CAS: (i) improving the transparency and accountability in the use of extractive industry revenues, and strengthening oversight agencies; (ii) support for dialogue among key stakeholders, including national and sub-national government, the private sector, civil society and development partners; (iii) support for acyclical fiscal stance, the accumulation of reserves and the reduction of public debt, promoting effective use of public resources, and the diversification of the economy; (iv) preparation of a youth integration strategy, especially in urban areas; (v) the development of a climate change strategy and participation in regional disaster risk reduction initiatives.

[update August 2014]Political and structural risks remain relevant though the economic environment has changed significantly since the multi-billion Exxon-Mobil natural gas project is being implemented. A new Country Partnership Framework/country diagnostic will be undertaken in FY15.

Substantial

II. Sector Governance, Policies and Institutions Sector Specific Risks Political interference, policy reversals by the Substantial The National Executive Committee approved a Moderate

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Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

RiskMinister, attempts to reduce powers of the independent regulator.Delays in processing of required legislation/regulations to enable establishment of rural communications fund mechanism

pro-competitive National ICT Policy in March 2009. Comprehensive legislation was passed in December 2009, providing for the establishment of NICTA and the UAS scheme, inter alia. The legislation was gazetted in March 2010. Some regulations on operator licensing are under preparation, but additional regulations still need to be prepared. The Project includes a regulatory TA component to support the enabling environment for telecoms reform more broadly. Further risk mitigation measures include regular consultation and consensus-building with government and industry stakeholders, public awareness/communications campaigns.

[update August 2014]NICTA was established on October 29, 2010. Project supported technical assistance for Regulatory Capacity Building has been moving forward in a satisfactory manner since early 2013. Additionally, a draft set of UAS rules and regulations has been prepared. As of August 1, 2014, the draft is under final legal review, before submission is made to the National Executive Council for approval.

III. Operation-specific Risks Technical Design Changing market demand and technologies. Moderate Telecoms/ICT projects need to anticipate these

risks. Regular consultation with telecommunications industry/updated demand analysis will be required. Technology-neutral approach to bidding essential.

[Updated August 2014]

Low

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Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

RiskNICTA and the Project team have over the past year conducted in-depth analysis of the market, including regular consultations with industry players. In response to the rapidly increasing mobile expansion/penetration, a level 2 restructuring was approved in June 2013 to expand the scope of the first UAS demonstration project beyond Chimbu and East Sepik provinces. The second level 2 restructuring takes into account the current status of internet in PNG and the global trend that is evolving from the establishment of fixed public internet access points to a more wireless/mobile broadband based approach.

Implementation Capacity And Sustainability

Limited capacity of project implementing agency (sector ministry).

High More frequent fiduciary supervision, including support if needed from the Port Moresby office.Dedicated procurement and financial management staff to be identified for project implementation unit. Upfront and continuous training; liaison with country office. Technical support to Ministry through PHRD Grant in preparation phase. Government to engage new technical staff.

[Updated August 2014]The Bank team has been providing intensified implementation support and review over the past year, including frequent visits and regular audio-calls. Given the sustained weak capacity of DCI, project management will be consolidated to NICTA, which is the sector regulator and main implementing agency of Project supported activities. NICTA is in the process of hiring a

Substantial

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Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

Riskqualified procurement advisor to improve procurement performance (position advertised on July 28, 2014). The project coordinator and FM consultant are under close supervision by NICTA management.

Delays in NICTA becoming fully functional Substantial Government has contracted external advisors directly to assist with the NICTA transitional arrangements and initial operations in 2010.[Updated August 2014]NICTA is established and is fully operational as the sector regulator.

Moderate

Delays in establishment of the UAS Secretariat Substantial UAS Secretariat included specifically in legislation. Establishment to be recommended as a priority to new management.

[Updated August 2014]The establishment of the UAS secretariat was one of the disbursement conditions for the UAS subsidy payments. The secretariat was established in 2011. Subsequently, a notification was sent by the Bank to the borrower on July 8, 2014 notifying fulfillment of disbursement conditions.

Moderate

Enabling Environment, Investor Perceptions

Lack of interested bidders in demonstration project

Moderate Regular consultations with telecommunications and ICT industry; public information/awareness efforts by Implementing Agencies. Continuous improvement in enabling environment through regulatory reforms. Other investment climate reforms beyond the scope of this project

[Updated August 2014]NICTA has been holding regular consultations with prospective bidders in preparation of the

Moderate

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Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

Risktwo UAS demonstration projects. 18 EOIs were received for the first UAS demonstration project.

Financial Management

Limited institutional capacity. Also risks associated with establishment and management of the proposed Universal Access Scheme fund.

Substantial Dedicated FM staff in project implementing unit. For UAS Fund: independent verification/audit.

[Updated August 2014]The PIU FM consultant is fully on board and the Independent Verification Agent (IVA) for the UAS demonstration projects was employed in December 2013.

Moderate

Procurement (i) The legal framework for procurement in PNG is complex with differences between the responsibilities of the Central Supply and Tenders Board, Supply and Tender Boards (STB), specialized STBs and Provincial STBs and Departments. Substantial discretionary powers are provided to the Minister of Finance related to the STBs; (ii) the legal framework and procedural instruments (e.g. procurement manuals) lack consistency, and there are no standard bidding documents; (iii) capacity is very limited with few experienced procurement staff; and (iv) widespread perception of corruption in government and weak capacity of oversight agencies to carry out their mandate.An additional procurement risk for this project is lack of familiarity with output-based contracting.

High (i) Inclusion of Special Procedures for NCB into the project’s legal agreement; (ii) preparation of a project implementation manual, including procurement procedures and SBD; (iii) capacity building of the implementing agency’s dedicated procurement staff during preparation and as part of project activities; and (iv) strong verification procedures, particularly in the prior review of packages; (v) specific training program in output-based aid procurement.

[Updated August 2014]Despite training and guidance, procurement capacity within DCI remained weak over the past 3 years. NICTA is in the process of hiring a qualified procurement advisor (part-time) to assist with preparing quality procurement packages. Additionally, NICTA has modified the contract of existing consultants that have assisted NICTA in the preparation of the UAS rules and regulations to provide additional services,

Moderate

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Risk Factors Description of RiskRating of

Risk Mitigation Measures

Rating of Residual

Riskincluding assistance in the preparation of the bidding documents for the second UAS demonstration Project for internet (US$5 million);

Social And Environmental Safeguards

The project is expected to yield substantial social benefits in terms of improved communications, potentially reducing the isolation of communities. There are possible environmental impacts from construction of new telecommunications infrastructure.

Low Upfront safeguards assessment in preparation phase and continuous monitoring. Community involvement and public awareness/information programs.

[Updated August 2014]An in-depth safeguards supervision mission was conducted in July 2014 to review and provide further guidance to NICTA and relevant stakeholders on the implementation of the Environmental and Social Management Framework including the land acquisition guidelines.

Low

IV. Overall Risk (including Reputational Risks) Overall Risk H S

Memo items: Due to the risky overall country environment, the overall risk rating is High. The main project risk relates to the limited experience and capacity of the implementing agencies.

a Rating of risks on a four-point scale – High, Substantial, Moderate, Low – according to the likelihood of occurrence and magnitude of potential adverse impact.

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ANNEX 3Request Letter from the Government

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ANNEX 4

SUMMARY OF OPTIONS FOR SECOND UAS DEMONSTRATION PROJECT

Option Benefit/US$ subsidy Time /Complexity Comments

1

Internet centres in remote locations & relying on VSAT (2008 proposal revised to 2014)

Highest subsidy per user beneficiary, user; access less convenient, higher user cost/MB data ($0.4), lowest user experienceIf CIC is set up within existing buildings (school, District HQ, store) - Capex - $17,000/ siteOpex - $15,000/pa/site

Longer than operator work programsRequired contractor for management of CICsContractor to negotiate premises for each CIC

Centres are a source of awareness/ experienceLowest performance, highest costViability poor, sustainable only while subsidised

2

Internet centres within reach of existing base stations

Median subsidy per user population (~$15); access less convenient, potentially good user experience, higher user cost/MB data ($0.04)If Internet centre is set up within existing buildings (school, District HQ, store) Capex - $15,000/ siteOpex - $12,000/pa/site

Longer than operator work programsPossible single contractInternet centres to negotiate access with operatorsContractor to negotiate premises for each Internet centre

Centres are a source of awareness/ experiencePotentially good performanceInternet cost an issueSuitable for incorporation into an associated or aligned separate businessViability poor , sustainable only while subsidized by project or separate business

3

Retain 2G network, Upgrade to 3G

Low (<$5) subsidy per user population. Best user convenience; lowest user cost /MB data ($0.04), good performance to userCapex $10,000-20,000 /site

Quick. Integrated into operator works program and marketingSingle contract.3G sites set by Govt

Existing 2G users continueNew 3G users access Internetprovides for individual entrepreneursInternet cost an issue

4

Hybrid - Expand upgrade of 2G base stations to 3G and establish some Internet centres

Low subsidy per beneficiary population for convenient Internet access and availability of training in trial areas

Integrated into operator works program and marketing;Second contract for Internet centres

Similar to option 3 but with some Internet centres to accelerate demand

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