Technical Assistance Consultant’s Report · PROJECT BUDGET ... outcomes in this area under the auspices of the Public Expenditure Review and Rationalization Program, Project 9.

Technical Assistance Consultant’s Report Project Number: TA 7427 PNG May 2011

Papua New Guinea Supporting Public Financial Management

FINAL REPORT Prepared by:

PDP Australia PTY LTD

North Sydney, Australia

For: Asian Development Bank This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)

PDP Australia Pty Ltd Supporting Public Financial Management

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CONTENTS

EXECUTIVE SUMMARY ........................................................................................................ ii

INTRODUCTION .................................................................................................................. 1

COMPONENT 1: STRENGTHENING GOVERNANCE/OVERSIGHT OF STATUTORY AUTHORITIES ........................................................................................................................................... 3

COMPONENT 2: IMPROVING EVALUATION AND PRIORITISATION OF GOVERNMENT PROJECT EXPENDITURES ................................................................................................... 14

COMPONENT 3: IMPROVING PROCUREMENT PRACTICES ................................................. 16

COMPONENT 4: ENHANCING SUB – NATIONAL SERVICE DELIVERY MONITORING ............. 20

COMPONENT 5: DOMESTIC DEBT MARKET DEVELOPMENT ............................................... 22

PROJECT BUDGET .............................................................................................................. 26

PROJECT LOGISTICAL ISSUES ............................................................................................. 28

ATTACHMENT A: PROJECT TERMS OF REFERENCE (AS PER INCEPTION REPORT) ............... 29

ATTACHMENT B: CONSULTATIVE WORKSHOPS RE STATUTORY AUTHORITY GOVERNANCE REFORM (COMPONENT 1) ................................................................................................ 37

ATTACHMENT C: TECHNICAL REPORTS .............................................................................. 38


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ABBREVIATIONS

ADB Asian Development Bank

AFMPM Agency Financial Management Practice Manuals

ASIC Australian Securities and Investments Commission

AusAid Australian Government Overseas Aid Program

BPNG Bank of PNG

CSTB Central Supply and Tenders Board

DHS Demographic health survey

EBRD European bank of Reconstruction and development

FMD Financial Management Division

GoPNG Government of PNG

GPM Good Procurement Manual

HIES Household income and expenditure survey

ICCC Independent Competition and Consumer Commission

IOSCO International Organization of Securities Commissions

IPA Investment Promotion Authority

LNG Liquefied Natural Gas

MRA Mineral Resources Authority

MTDP Medium Term Development Program

MTDS Medium Term Debt Strategy

NEC National Executive Council

NEFC National Economic and

Fiscal Commission

NFA National Fisheries Authority

NICTA Border Development Authority, and the National Information and Communications Technology Authority

NISIT National Institute of Standards and Industrial Technology

NMSA National Maritime Safety Authority

NPSDP National payment system development program

NRI National Research Institute

OECD Organisation for Economic Co-operation and Development

ORD Office of regional development

OTC Over-The-Counter

PCU Project Coordination Unit

PFMA The Public Finances Management Act

PNG Papua New Guinea

POM Port Moresby

POMSoX Port Moresby Stock Exchange

PSTBs Provincial Supply and Tenders Boards

SAMB Statutory Authorities Monitoring Branch

SC Securities Commission

TA Technical Assistance

TOR Terms of References


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EXECUTIVE SUMMARY

1. The Project formally commenced on 31 May 2010 and is scheduled for completion by 30 May 2011. The Project is comprised of the following five key components/deliverables:

Component 1: Strengthening Governance/Oversight of Statutory Authorities – in effect, a continuation of previously sponsored work by the ADB in achieving better outcomes in this area under the auspices of the Public Expenditure Review and Rationalization Program, Project 9.

Component 2: Delivery of training to Treasury and other relevant agency staff on effective evaluation and prioritization of government project expenditures.

Component 3: Improving the legislative framework for government/public sector procurement.

Component 4: Enhancing the monitoring of sub national government service delivery.

Component 5: Reviewing regulatory, institutional and legislative reforms needed to enhance the PNG securities market, and in particular, to facilitate the possible issuance of an ADB Kina denominated bond and the listing of Government securities on the stock exchange.

2. Although at the time of writing this Report some Project component reports were still being finalized, all outcomes sought in the Project Terms of Reference had been substantively delivered.

3. In respect of component 1, proposed new financial and performance management and reporting frameworks have been developed, together with recommended processes by which they should be implemented and administered into the future. Key new features recommended are:

That the Public Finances (Management) Act (PFMA) should be amended to provide that all provisions of the Act applying to statutory authorities, and certain state owned corporations, would be incorporated into Part VIII of the Act, and that all relevant agencies must within their enabling acts adopt compliance with Part VIII without exceptions. The specific provisions of Part VIII would also be enhanced/revised as necessary.

Where necessary, further guidance or elaboration on compliance with Part VIII, including in respect of financial and performance management and reporting, would be provided by way of Financial Instructions issued by the Head of the Finance Department, and perhaps Financial Regulations in some instances.

Agencies will be required to fully document their processes and procedures for compliance with the PFMA Part VIII in their internal Financial Management Manuals, which will include establishing appropriately constituted internal audit committees and tendering boards.


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4. Implementation and on-going administration of the new frameworks are proposed to be led by a new Statutory Authorities Monitoring Branch established within the Accounting Frameworks Division of the Department of Finance, supported as necessary by the Treasury and other relevant agencies.

5. In respect of component 2, a four-day training workshop was developed and successfully delivered twice to relevant staff of the Departments of the Treasury, Planning and Monitoring and Public Enterprises, and the Independent Public Business Corporation. A reference manual was also developed and some 30 printed and 30 soft copies provided to the Treasury for appropriate distribution to all participating agencies. Templates for computing relevant financial and economic performance measures were also developed and provided to Treasury.

6. A range of tentative proposals for legislative change in regard to public sector procurement practices and processes (component 3) had been developed in consultation with the Central Supply and Tenders Board and other key stakeholders. The proposals go to the question of the extent of change that is feasible given current and likely financial constraints to effective implementation, and to identifying specific areas of change to existing procurement law.

7. In respect of component 4, the consultant conducted a thorough review of the methodology and approach employed by the ADB in conducting a pilot survey of subnational service delivery in the Goilala District of Central Province, PNG. In this, she drew heavily on an extensive review of other surveys and data sources in this area, as well as methodologies and approaches that others are or have been employing. Among her key conclusions and recommendations are that the ADB should link more closely with what others are doing in the area in sponsoring any further survey initiatives and should tailor initiatives more towards measuring “outcomes” rather than “perceptions of outcomes.”

8. The work on domestic bond market development, component 5, essentially concluded that there are currently no substantial impediments to the issuance of ADB local currency bonds or the listing of government securities on the POMSOX. However, it identifies a number of regulatory coordination issues that need to be addressed and recommends ways forward in respect of these. It also identifies a number of initiatives that should be considered to promote the secondary market for locally issued securities.

9. Overall, the conduct of the Project proceeded very smoothly, and well within budget. There were, nevertheless, some logistical and other issues that arose which are noted towards the end of this Report. Areas of potential future ADB assistance in progressing the realization of desired final outcomes in respect of the various components of the Project are identified where relevant.


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INTRODUCTION

A. Introduction

10. This report represents the Final Report for the Asian Development Bank’s Technical Assistance (TA) Project TA 7427 PNG: Supporting Public Financial Management in Papua New Guinea. The core purpose of the TA was to deliver better governance through improved transparency, accountability and efficiency in managing and using public resources.

11. The Project formally commenced on 31 May 2010 and is scheduled for completion by 30 May 2011.

B. Project Scope

12. The Project is comprised of the following five key components/deliverables:

Component 1: Strengthening Governance/Oversight of Statutory Authorities. In particular, working with the PNG Treasury led Interagency Working Group this activity involved: (i) engaging with a number of pilot statutory authorities in reviewing current information and information systems for monitoring their financial and operational performance; (ii) agreeing for each agency key performance indicators and any additional information requirements; (iii) working with the agencies to design and establish an enhanced performance monitoring process or framework; and, (iv) identifying requirements and approaches for extending the enhanced monitoring process to all statutory authorities.

Component 2: Improving Evaluation and Prioritization of Government Project Expenditures. The TOR for this component required: (i) the preparation of relevant guidance materials on effective economic and financial analysis of government capital/project expenditures; (ii) the development of three case studies of project analyses relevant to the PNG context; and, (iii) utilizing the case studies, the conduct of training workshops for relevant staff of the Treasury, Department of National Planning other interested agencies, on economic and financial appraisal and monitoring of government project expenditures.

Component 3: Improving Procurement Practices. Working with the Central Supply and Tenders Board (CSTB) and other development partners, who also have advisors working with the Board, the TOR for this component require that the appointed consultant: (i) liaise with procurement stakeholders and provide ADB input to multiagency procurement initiatives, including the Procurement Engagement Group; and (ii) provide support to the CSTB on ADB related procurement matters.

Component 4: Enhancing Subnational Service Delivery Monitoring. Working with the ADB’s country economist (PNG Resident Mission) the TOR for this component required the appointed consultant (Survey Coordinator) to provide guidance on refining the survey instruments and methodology that were tested during an earlier pilot survey of households in a number of PNG Districts. In particular, the consultant was required to: (i) review the pilot phase survey design and methodology and recommend improvements; and (ii) prepare a report that details suggestions and recommendations from the pilot review.

Component 5: Domestic Debt Market Development. Working with the Department of Treasury (Financial Evaluation Division), the Bank of PNG and the PNG Securities Commission, the appointed consultants for this component (who included a legal expert)


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were required to identify issues requiring resolution prior to any proposed issuance of an ADB backed Kina denominated bond and any listing of government securities on the Port Moresby Stock Exchange.

13. Full details of the Project TOR are included in Attachment A

14. The activities involved with each of these components were undertaken progressively over the duration of the Project, albeit with some slippage in originally envisaged timeframes, as was explained in the Project Interim Report.

C. Report Layout

15. The remainder of this Report summarises the key activities undertaken in each project component together with the key recommendations or outcomes realized. Where relevant, opportunities or needs for on-going ADB or other donor support for the areas of activity involved in each of the components are identified. The Report also includes some observations on logistical and other issues that arose during the conduct of the Project that might usefully inform future activities of this sort in PNG.

16. The more detailed reporting on each of the Project’s components required under the respective Terms of Reference for each component have been, or will be, provided as an attachment.

D. Project Team

17. The international consultants engaged for this TA, and the in-country timing of their inputs, were as follows:

Table 1: Mission Schedule

Name Position 2010 2011

Murray Edwards Team Leader and Financial Analyst

31.05 – 30.11 01.02 – 31.03

Peter Winglee Economic Analyst 26.07 – 31.12

Rodney Rickard Statutory Authority Expert 25.10 – 31.12 01.01 – 17.04

Reia Brash Survey Coordinator 01.02 – 02.03

Neil Abel Procurement Specialist 22.02 – 20.05

Robert Andreoli Bond Issuance Expert 17.01 – 17.04

Nathan Hansford Legal Adviser 15.02 – 15.03

18. In addition, two locally engaged Financial Management consultants, Mr Wesley Kilala and Mr Jason Gilai, provided input to Project component 1 from 15 December 2010 to the end of May 2011 and from 7 February to 7 April 2011, respectively. Mrs. Lorena von Jonquières, based in PDP’s headquarters in Sydney, Australia, provided necessary administrative, contract and project management support to the project team.


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COMPONENT 1: STRENGTHENING GOVERNANCE/OVERSIGHT OF STATUTORY AUTHORITIES

A. Introduction and Scope

19. Work commenced on this Component in October 2010.

20. Consistent with the TOR, the voluntary cooperation of nine Statutory authorities was secured to assist the TA Team in the delivery of the TOR, namely: the National Maritime Safety Authority (NMSA), the Independent Competition and Consumer Commission (ICCC), the National Fisheries Authority (NFA), the Investment Promotion Authority (IPA), the National Research Institute (NRI), the Mineral Resources Authority (MRA), the National Institute of Standards and Industrial Technology (NISIT), the Border Development Authority, and the National Information and Communications Technology Authority (NICTA).

21. In addition to working with these nine agencies, two workshops were conducted in March 2011 with all interested agencies in Lae and in Port Moresby to explain and seek broader feedback on the proposals developed by the TA Team in response to the TOR. Further details are at Attachment A.

22. As indicated earlier, the TOR for this component set broadly three tasks:

Conduct a review of statutory authority current governance and financial management and reporting arrangements with a view to identifying any existing weaknesses or gaps compared to international standards of accountability for asset and liability management.

Work with the pilot agencies in defining Key Performance Indicators and other information requirements needed to facilitate the negotiation of annual performance agreements between statutory authorities and the Government and relevant Ministers.

Work with the Interagency Working Group, established to provide oversight to the processes for statutory authority governance reform, in the design and implementation of an enhanced statutory authority financial and performance reporting and monitoring system.

23. The TOR initially called for two reports to be prepared on outcomes and recommendations in relation to this work. It was subsequently agreed with the client and with the ADB, however, that outcomes would be better and more conveniently recorded in three reports, responding to the three components of the TOR, namely:

Governance and Financial Management Review Report – Pilot Statutory Authorities

Statutory Authorities Performance Management Systems Report: a Framework for Performance Reporting by PNG Statutory Authorities

Statutory Authority Proposed Monitoring Framework Report.

24. The following sub-sections summarise key findings and outcomes identified in each of these reports.


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B. Governance and Financial Management Review

25. The review focused on assessing the following key areas:

Financial management planning, execution and monitoring;

Performance of internal asset and liability management;

Quality of preparation and presentation of financial statements and preparation of financial performance indicators;

Required statutory reporting and level of adherence to standards;

Gap analysis between current statutory requirements and international standards,

Assessment of changes to the legal and regulatory framework, in particular, Part VIII of the Public Finances (Management) Act 1995, which currently covers all public bodies and may be more appropriately focused on just statutory bodies; and

Definition of the changes that need to be made in the nine pilot statutory agencies and extension of the changes across all statutory agencies.

26. A key task of the review was to develop diagnostic assessment tools that could be used in examining governance frameworks and financial management systems used by nine pilot Statutory Authorities.

27. The diagnostic tools were assembled in two parts. The first, a questionnaire designed to seek responses from agency boards, agency management staff and finance managers on the operation of governance and financial management systems from an operational perspective, that gave agencies an opportunity to register comments or suggest improvements. The second comprised internal control checklists that were designed to assess the appropriateness, relevance and actual operation of key financial management and managerial controls contributing to the achievement of agency objectives and activities.

28. These diagnostic tools were designed to review the following areas of governance, financial management, performance management and financial reporting:

Governance Frameworks

o Covering Legislative Compliance

Codes of Conduct

Audit Committees

Internal Audit

External Audit

Financial Management

o Covering Information Technology and Control

Financial Planning and Budgetary Control

Revenue

Expenditure and Disbursement

Asset Management


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Human Resources and Payroll, and

Liabilities

Financial Reporting

o Covering Financial Statement Preparation, and

Financial Statements Presentation

Performance Reporting

o Covering Performance Management Systems, and

Performance Management Reporting

(i) Key Findings and Recommendations

Financial Management - Automated Computerized Accounting Packages

29. Invariably, agencies are utilizing computerized accounting packages, such as AccPac, Peachtree and MYOB that provide standard accounting software features, while delivering impressive functionality and utility.

Chief Financial Officers and Financial Management Teams

30. A key element of effective governance and financial management regimes is the engagement of suitably professionally qualified, experienced and competent individuals into the role of Chief Finance Officer. This executive level accounting official must be supported by a suitably qualified, experienced and motivated financial management team. Generally, this was the case among the nine Pilot agencies.

The Governance and Financial Management Framework

31. The framework broadly applying to PNG statutory authorities currently is comprised of:

Agencies’ enabling law/Acts

The Public Finances (Management) Act (PFMA)

Finance Instructions issued pursuant to the PFMA

Finance Regulations

Ministerial Directions

Agency Financial Management Practice Manuals

32. The most significant existing gaps identified in the framework related to Agencies current enabling legislation, a lack of guidance provided to authorities, via Financial Instructions, on requirements for compliance with the PFMA, and gaps or inadequacies in agency financial manuals. Of particular importance is the current failure of Statutory Authorities to either adopt, implement or follow - in their enabling legislation - all sections contained in Part VIII of the PFMA and a tendency for Statutory Authorities to disregard


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some regulatory sections in Part VIII and substitute alternate versions of these legislative requirements in their enabling legislation.

33. Reflecting the findings of the Review, the following changes to the PFMA have been recommended:

Section 48 – Should state that ALL of Part VIII will apply to ALL statutory authorities (and some State Corporations).

Section 49 – Where a statutory authority controls a subsidiary corporation, all requirements of Part VIII should equally apply to both the authority and the subsidiary.

Section 50 – Should reaffirm that each statutory authority must submit an annual Performance and Management Plan in such format – and at such intervals – required by the Secretary for Finance.

Section 59 – Should clarify that all works, services and supplies exceeding a specified limit must be subject to public tendering, unless they are executed by the State or tendering is impracticable or inexpedient.

Section 61 – Should be amended to confirm that statutory authorities may establish their own Supplies and Tenders Board and allow for a financial instruction that will govern minor procurement.

Section 62 – The classification of Statutory Authorities between trading and non-trading entities should be simplified.

Section 63 – A financial instruction should be issued to provide guidance to Statutory Authorities in preparing annual financial statements and the related public disclosures that will accompanying those statements

34. The Report also recommends the following changes to the current governance and financial management framework:

Agency Enabling Legislation: Statutory authorities should acknowledge and follow all sections contained in part VIII of the PFMA. No exceptions or exemptions should be allowed.

PFMA Part VIII: Should require that all parts of this part of the PFMA must be adopted by agencies as an integral component of their own governance and financial management arrangements. Other parts of the PFMA including those covering the National Government Budgeting, Procurement and Tendering should not apply to statutory authorities, although those parts that impose specific oversight obligations – such as the Public Accounts Committee would continue to apply. The specific rules required to regulate and manage statutory authorities will be conveyed to them via Finance Instructions, Finance Regulations and Ministerial Directives. Those internal rules which are agency specific will be captured in Financial Management Practice Manuals, which are described in more detail below


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Financial Instructions: Financial instructions should become the primary communications tool used to inform agencies of each governance, financial management and financial reporting rule and requirement. Financial instructions should be issued to convey financial rules that are mandatory or to provide guidance to agencies on compliance with the PFMA.

Public Finance Management Manual (PFMM): The PFMM in its current iteration will not apply to statutory authorities. Rather, financial instructions contained in the PFMM should separately provide financial governance rules for each category of public bodies – that is, National Government Departments, Provincial Governments, Local Level Governments and statutory authorities – since in the majority of cases instructions issued are not relevant to all public bodies. To make the PFMM more relevant (and user friendly) it should be possible to split it into at least four parts. Each part would be relevant to one tier of government or category of public body. For example, Parts, 1, 2, and 3 may cover instructions relevant to National Government departments, provincial governments and local-level governments respectively. Part 4 could be reserved for holding those finance instructions issued only for statutory authorities.

Ministerial Directives: Statutory authorities must seek Ministerial approval to authorize certain acts and contracts, which exceed their authorized limits. The review found that no audit trail exists which would assist tracking each ministerial application, from beginning to end. It is practically impossible to trace every major expenditure for an authority requiring Ministerial approval to a properly constituted application form that has subsequently been signed by the Finance Minister. This needs to be rectified. Without the required Ministerial approval, major contracts signed by agencies may be rendered either unenforceable or voidable.

Agency Financial Management Practice Manuals (AFMPM): While financial legislation and financial instructions will generally provide higher-level rules and guides, Financial Management Practice Manuals must describe in precise detail the governance and financial management rules that will operate in each agency. In regard to an agency’s governance framework, the AFMPM should lay out details for legislative compliance, operation of an Audit Committee, and the establishment of an internal audit function. In regard to an agency’s financial management and reporting arrangements, the AFMPM should describe in precise detail how each accounting routine covering revenue, expenditure, debtors, accounts payable, inventories and any other accounting activity actually works. If the AFMPM does not cover the full spectrum of an agency’s governance and financial management systems, then the relevant parts of the Public Finance Manual will automatically apply. If an agency elects not to develop its own AFMPM, then all parts of the Public Finance Manual will apply to that agency

C. Statutory Authority Performance Reporting

35. The TOR for this Report essentially sought to give effect to a recommendation stemming from prior ADB supported work on improving statutory governance in PNG; namely, that statutory authorities be required to negotiate annual performance agreements with the Government and relevant Ministers.


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36. This proposal for annual performance agreements mirrors practice in a number of more advanced economies, including New Zealand, Canada, and to some extent Australia, and obviously has merit. However, and notwithstanding the fact that this proposal/recommendation was endorsed by the PERR 9 Interagency Working Group responsible for progressing statutory authority governance reform, there was a shared view among senior officials within key central agencies consulted in the preparing the report that moving to a system of negotiated annual performance agreements will prove problematic in the PNG context.

37. In particular, given capacity constraints within the relevant areas of the bureaucracy, it is highly unlikely that such agreements would be concluded annually in a sufficiently timely manner to achieve the objectives of the proposal. There is a high risk, moreover, that the process would invite inappropriate interference or meddling in the internal affairs of Statutory Authorities by Ministers and central bureaucracy. Negotiating performance agreements also requires that there is a coherent framework for performance management and reporting by statutory authorities, which currently does not exist in PNG.

38. Against that background, this Report recommends that the policy focus at this time should be on implementing a basic framework for annual performance reporting by statutory authorities to the Government. The framework should aim initially at embedding a system that requires relatively high level reporting against a limited number of key performance indicators. The focus then should be on improving, where necessary, the quality and detail of, especially, agency performance indicators and targets in the light of experience with the system.

39. Once a satisfactory level of performance reporting is achieved, the idea of moving to formal performance agreements might be revisited. In all likelihood, however, a well functioning performance reporting framework would achieve the same outcomes as would formal agreements.

40. Elements of performance reporting already exist in PNG. Among the nine pilot statutory authorities with which the TA Team worked in testing and developing the concept and approach recommended in the Report, most had specified key parts of the required basic framework within their Corporate Plans and/or other strategic planning documentation. However, for those agencies that have substantially specified performance reporting frameworks, there has to date been very little systematic reporting against them, either internally or externally.

41. Section 50 of the Public Finances (Management) Act, Part VIII, in fact requires “public bodies” to prepare performance and management plans “.. at such intervals as are required ..” and “shall be in such form and shall contain such information ..” as specified, by the Departmental Head of the Department responsible for financial management. This requirement is also replicated in the enabling Acts of some statutory authorities. The problem to this point is that the required instructions or directions by the Department of Finance needed to give effect to the provisions of Section 50 have not been issued and hence, there has been no compliance with them.

42. The performance reporting framework recommended will provide the basis to enforce the requirements of Section 50. In essence, it is proposed that the Head of the Finance Department through a Financial Instruction issued pursuant to Section 50 will require all


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statutory authorities, and any state corporations, subject to Part VIII of the Public Finances to prepare:

A medium term (3 – 5 year) Performance Measurement Plan as part of their Corporate Plan. This Plan, which must be agreed with the Department of Finance, will specify each agency’s Major Final Outputs (essentially their major functions as specified in their enabling legislation), the higher order government policy objectives or outcomes the outputs are intended to achieve or contribute to, and a limited number of key performance indicators by which an agency’s success in achieving its outputs and outcomes can be independently assessed.

An annual Performance and Management Plan. This basically will specify an agency’s planned activities for the year intended to deliver its Major Final Outputs and the estimated total cost of these activities. It therefore provides the annual link to the Performance Measurement Plan, and the basis for assessing annually an agency’s (cost) efficiency and (performance) effectiveness in achieving its outputs and desired outcomes.

An annual Performance Report. This will essentially report ex post, the agency’s actual achievements in the year concerned relative to its Performance and Management Plan – and it’s KPIs, in particular.

43. The work done with the nine pilot agencies, and feedback more generally received during the course of two conferences/workshops conducted with all interested agencies (see below), suggests that most agencies will already have the basic information sources and systems needed to facilitate performance reporting in terms of the above framework. For some, however, the need to allocate their budgeted and actual expenditures to “activities” (rather than the traditional line item categories of “salaries and wages”, “travel”, “motor vehicles”, etc) may pose an initial challenge. Importantly, nevertheless, all three aspects of the performance reporting framework proposed link to existing management planning and reporting processes.

44. The Performance Measurement Plan would be prepared in conjunction with, and would form a core part of, an agency’s Corporate Plan. The Performance and Management Plan would be prepared as part of an agency’s annual Budget or Business Plan. An agency’s annual Performance Report, while initially submitted separately to the Department of Finance, would ultimately form a core part of the agency’s Annual Report to Ministers and the Parliament. Hence, the additional planning and reporting burden the proposed framework will impose on agencies should be minimal.

45. All that said, it would still be a major task for the Departments of Finance and Treasury to effectively implement the framework; and there is little doubt that these agencies will require on-going external assistance in this regard. The experience in working with the nine pilot agencies suggests, in particular, that most statutory authorities will require significant assistance and guidance in developing appropriate Performance Measurement Plans.

(i) Compliance Monitoring - Statutory Authorities

46. Drawing on the findings and recommendations of the above two Reports, this Report sets out the details of a recommended Governance and Financial Management Monitoring


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Framework (the “monitoring framework”) intended as an appropriate mechanism for monitoring and reviewing compliance by statutory authorities with both the proposed new financial and performance management and reporting frameworks and instructions issued by the Finance Secretary.

47. The new compliance framework is intended to inform statutory authorities of their financial management, financial reporting and compliance obligations and require confirmation that compliance is actually being achieved. The Report notes that with previous updates to public finance legislation, there has been no formal monitoring to ensure financial reporting and compliance requirements were communicated to agencies, and that agencies either adopted them or modified their own financial management systems in order to comply. The framework is intended to close this communications gap and provide support and encouragement to authorities in adopting cost-effective, compliant systems of financial administration.

48. While the monitoring framework is primarily compliance-focused, information generated under the framework will also be important in contributing to government decision making on the allocation of public resources and other policy issues. In this context, it will be important that the Departments of Treasury, National Planning and Monitoring and the agency’s own portfolio department are also actively involved in the monitoring and evaluation process, and in providing feedback to agencies covered by the framework, as appropriate.

The key features of the new compliance system

49. Under the framework, the Finance Minister, the Secretaries of Finance and Treasury, statutory authority boards, chief executives, chief finance officers and agency staff will work together to manage risks and compliance obligations. The primary responsibility for compliance will continue to rest with individual authorities, and their governing boards.

50. It is intended that the Department of Finance will take the lead in implementing and managing the proposed monitoring regime. To this end, the Department is proposing to establish a new Statutory Authorities Monitoring Branch (SAMB) within its current Accounting Frameworks Division. It is expected that the Department of Treasury will assist in implementing the monitoring framework (and, as noted, will also play a key on-going role with the other relevant agencies in evaluating financial and performance reports submitted by agencies under the relevant frameworks proposed).

51. Within this assignment of departmental responsibilities, the SAMB will work very closely with agencies in reporting compliance, providing guidance on systemic issues and assisting with corrective actions across the network of statutory authorities.

52. In essence, the proposed compliance-monitoring framework will consist of the following activities:

Self-assessment by statutory authorities of their compliance against the requirements of Financial Instructions.

Desktop reviews by SAMB staff of the self-assessment and other information available to the Departments of Finance and Treasury about the agency’s compliance record.


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Where SABM identities specific areas of non-compliance, formal correspondence highlighting the specific compliance matter together with any corrective action required to satisfactory resolve the issue will be sent directly to the agency concerned.

If the compliance issue remains unresolved, the SAMB, in consultation with others as may be appropriate, will recommend what further action may be required, including possible disciplinary or termination measures, in order to resolve the issue.

53. Formal monitoring will consist of compliance checks based on standard questionnaires or checklists linked to the proposed governance and financial and performance management and reporting frameworks, and explicit compliance expectations extracted from information contained in Financial Instructions issued to statutory authorities. In particular, compliance checklists, questionnaires and other monitoring tools will be designed to confirm compliance has been achieved in regard to each attribute of the proposed new financial and performance management and reporting regimes. An overall compliance rating will be assessed for each agency based on compliance scores shown in these monitoring forms.

Achievement of Financial Management Compliance

54. It is anticipated that financial management compliance will take some time to achieve. In setting up the SAMB, it is recommended that the Department of Finance should initially set modest goals aimed at implementing the framework in a gradual, incremental way. The compliance framework should then progress by setting realistic goals and achievable targets.

55. In order to attain satisfactory levels of compliance, it is intended that agencies must also commit to establishing and effectively operating the following governance arrangements:

Internal Control Structures: Agencies must develop rigorous internal control structures to ensure that agency targets, objectives and outcomes are achieved and inherent risks associated with an agency’s business activities are effectively contained.

Role of the Audit Committee: The Audit Committee will assume a leading role in the financial governance, financial and performance reporting, and oversight matters of each statutory agency. In addition to becoming actively involved in monitoring of financial management compliance issues and monitoring compliance remediation plans, the Audit Committee will work very closely with Internal Auditors to ensure an agency achieves the required level of financial management compliance.

Role of Internal Audit: Agencies will rely on their Internal Auditors, or other appropriate internal review processes to monitor the continuing effectiveness of agency internal control structures to ensure those structures operate as planned and that any significant breach of financial management policies, procedures or processes are detected, reported to the Audit Committee and quickly rectified.

Risk Management Plans: Agencies will develop risk management plans - and risk avoidance strategies - based on the likely risk factors facing an authority and the potential financial loss or adverse business result that may result from those risks.


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Issues Management: Statutory Authorities will be responsible for resolving compliance issues for their own agency. Where the same compliance issue is detected in several agencies, the statutory authorities monitoring branch (SAMB) will work with each agency to initiate action to remedy the issue. In order to track each compliance issue, SAMB will develop an automated system for tracking each issue, from detection through to final resolution. The automated issue tracking system will capture the following compliance information:

o Statutory Authority (or group of agencies) concerned o Assigned Tracking Number o A brief description of the compliance issue o An assessment of the possible detrimental impact o Issue Detection Date o Proposed Resolution Action o Proposed Resolution Date o Final Rectification Date

Compliance Management Knowledge Centre: Statutory Authorities must develop training programs to acquaint agency board members, executives and agency staff with their compliance obligations. Specific training programs should extend to each element of the new financial management framework; namely, governance, financial management, financial reporting and performance management and reporting, and highlight compliance obligations of each managerial level. As many agencies will benefit from these training sessions, the SAMB should consider developing training sessions and training calendars that will allow many agencies to participate in group training sessions. To maximize these training opportunities, the Finance Training Branch should be invited to develop compliance training modules using classroom sessions, audio visual training aids or other suitable learning tools.

SAMB to Maintain an Information Database

56. It is also proposed that the SAMB would maintain a web-based database providing statutory authorities and other interested parties with the following information:

A Public Financial Management Library

The Public Finances (Management) Act

Financial instructions

Financial Regulations

Ministerial Directives

Public Financial Management Manual

Agency Financial Management Practice Manuals

Messages from the Secretary of Finance

Compliance Information - containing the Framework, certification checklists and supplementary material


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Financial and Performance Reporting - containing the Financial and Performance Reporting Instructions

D. Need for Further ADB Assistance

57. While the three abovementioned reports give clear guidance as to the frameworks and monitoring systems needed to enhance statutory authority governance in PNG, implementing these will still be a formidable task for the Departments of Finance and Treasury. There is no doubt that external assistance for these agencies will be required if timely outcomes are to be realized, especially in developing the requisite checklists required for the proposed monitoring framework; in assisting agencies in their development of performance reporting frameworks; and in the drafting of relevant Financial Instructions.


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COMPONENT 2: IMPROVING EVALUATION AND PRIORITISATION OF GOVERNMENT PROJECT EXPENDITURES

A. Summary of Work and Findings

58. The details of the work done and outcomes realized in relation to this Project component were reported in the Project Interim Report. In essence, and consistent with the TOR for this component, a four day training course in project expenditure evaluation was developed by the Team Leader/Financial Analyst and the Economic Analyst and delivered twice over the periods 28 September to 1 October 2010 and 4 to 7 October 2010. The rationale here was to minimize the numbers of participating staff absent from their respective work areas at any one time.

59. Some 44 staff from the Treasury, the Department of National Planning and Monitoring, the Department of Public Enterprises and the Independent Public Business Corporation attended the two courses. Feedback from participants, documented in the Project Interim Report, was very positive as to both the content and presentation of the training. Participants completing the course were provided with a certificate acknowledging their participation, signed by the Secretary for Treasury, Mr Simon Tosali, and the then Officer in Charge of ADB’s PNG Resident Mission, Mr Allan Lee.

60. In essence, the training involved presentations, discussion and practical exercises linked to PNG case studies covering:

Key concepts, issues and processes involved in evaluating all government expenditures and major policy interventions, all of which entail some degree of cost-benefit or cost effectiveness analysis common to project expenditure evaluation.

Project financial evaluation and key concepts and issues involved in project financing

Project economic cost benefit and cost effectiveness evaluation.

61. As was also required by the TOR for this component, some 30 printed copies and 30 “soft” copies of the significant body of reference material drawn on or prepared in conducting the training courses was provided to the Structural Policy and Investment Division of the Treasury for its own future reference and that of the other participating agencies and Treasury Divisions.

62. Ideally, all this material will provide the basis of future training in project and more general expenditure evaluation for new staff and others unable to attend the training conducted, which the Treasury and the other attending agencies should themselves be capable of delivering.

B. Need for Further ADB Assistance

63. Should there be scope for further ADB sponsored training in project expenditure evaluation, this could usefully be targeted to key line spending agencies in PNG. Particular candidates here might include the Department of Commerce and Industry (which at present clearly lacks an appropriate economic framework for developing project expenditure proposals for government), the Departments of Works, Health and Education. How receptive


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these agencies might be to such training, however, is unclear. There might also be scope to review current guidelines and practices for project expenditure appraisal to standardize and upgrade procedures in this regard. There are at present some guidelines for submitting project expenditure proposals to the Department of National Planning and Monitoring for inclusion in the Development Budget, although it seems these are not rigorously applied currently.


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COMPONENT 3: IMPROVING PROCUREMENT PRACTICES

64. The TOR for this component as initially drafted was deliberately kept reasonably general to allow some flexibility to determine a final scope of work in consultation with the Central Supply and Tenders Board (CSTB) to facilitate the most useful outcome from the very limited resources available. In the event, it was agreed that the consultant for this component would develop options and recommendations for legislative change on procurement matters.

65. Work on the component commenced in late February 2011 and finished late May 2011. Consultations with stakeholders suggested that there are five options that could be considered when reviewing possible changes to the procurement legislation of PNG:

Option 1 – No Change

66. This option is considered to be a valid consideration in circumstances where insufficient resources may be available to facilitate the roll out of new legislation. Without the requisite roll out support, new legislation will only cause confusion to Government and contractors and disrupt existing processes. It will also provide an opportunity for inefficient or corrupt officers to claim a lack of knowledge or confusion on their part. Procurement methods such as pre-qualification and select tendering require procurement planning and a level of expertise that has to be encouraged and developed within PNG. Any modification to the legislation without consideration as to the support required to provide individuals with the necessary skills is fraught with danger as it allows an even greater possibility for lost value for the State.

Option 2 – Modify the procurement legislation under Part VIII of the Public Finances (Management) Act only

67. Considerable work has been expended by the Departments of Finance and Treasury, within the framework of a current review of the PFMA being undertaken by the Department of Finance, on identifying the number and type of Statutory Authorities within PNG. There is an argument that the existing procurement legislation (which is embodied within the PFMA) should be modified to provide clarity to these entities alone. This would provide business certainty for these Authorities and allow a clearer interpretation of how the Government of PNG (GoPNG) public procurement requirements are applied to these bodies.

68. This option in effect largely reflects the approach to procurement by statutory authorities that is recommended by the Project component 1 TA Team. In effect, the approach being advocated in that context is to continue to allow statutory authorities to operate their own tendering processes, and to establish their own internal tender boards, subject to their processes being properly documented, and auditable, within their Agency Financial Management Practice Manuals, among other things.

69. It is clear, however, that there are significant differences of view among key stakeholders about the latitude that should be accorded to statutory authorities to determine their own procurement processes/practices: and ultimately, of course it will be a matter for the GoPNG to determine.

Option 3 – Minimal changes


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70. In line with the desires of some stakeholders, changes to the legislation could be minimal, but allow for subsequent or more detailed requirements to be included in possible Financial Regulations and Instructions. Again, this is in line with the approach being recommended for statutory authorities under Project Component 1. This would allow flexibility to change the Instructions as circumstances change. There is a concern by other stakeholders, however, that any potential changes should be covered by the Act to ensure the ability to enforce sanctions if not followed.

71. Under this option funds would need to be directed towards Agencies that provide training to Departments, Provinces and other public bodies. A roll-out program would also need to be developed. There is currently no commitment by GoPNG or development partners to support the necessary change management issues to effect this option.

Option 4 – Large Scale Change

72. A recent OECD DAC Assessment of PNG public procurement processes and an AusAID sponsored Education Procurement Capacity Assessment have both recommended large scale modifications to the relevant legislation, including to cover areas not presently addressed. The areas include procurement planning, contract packaging, greater detail on procurement thresholds, inclusion of a review period and creation of a complaints handling mechanism. Some stakeholders have expressed the concern that this would be excessive if incorporated in the current PFMA and that many of the areas should be covered by Financial Instructions. The adoption of a National Procurement Act could also be considered under this option. The current Good Procurement Manual (GPM) could be ratified as a mandatory document for procurement. To achieve this outcome the GPM would need to be updated and cross–referenced to the relevant legislation.

73. Again, however, there is currently no commitment by GoPNG or development partners to support the necessary change management issues to effect this option. To reduce costs the change management activities could be combined with the rollout of Standard Bidding Documents being developed by the CSTB.

Option 5 – Comprehensive Change

74. The CSTB are looking at a more comprehensive legislative change that would include the creation of a Procurement Authority, the development of a National Procurement Act and the inclusion of procurement considerations at the time any loan or grant agreements are being discussed with development partners. This option has support from a number of stakeholders within GoPNG but would require comprehensive consultation with development partners and Treasury. Again, there is currently no commitment by GoPNG or development partners to support the necessary change management issues to effect this option. As per Option 4, to reduce costs the change management activities could be combined with the rollout of the Standard Bidding Documents being developed.

Tentative Recommended Course of Action

75. At this stage it is not clear as to which of the abovementioned options will gain the required support of stakeholders and the GoPNG, although the most feasible avenue for effecting legislative changes at present is through the current review of the PFMA being led by the Department of Finance. Irrespective of this, the tentative recommendations for required legislative changes at this stage are:


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Recommendation 1 – That the practice of providing Advance Payments to suppliers or contractors should be covered by an existing Part of the PFMA or the addition of a new Part. The sections on Advance Payments should outline the circumstances when such payments are valid and the operational requirements to ensure that suppliers and contractors meet their contractual obligations.

Recommendation 2 – The procurement legislation be amended or enacted to specify expenditure thresholds at which approvals are required by the Central Supply and Tenders Board and the Head of State on the basis of project value, rather than contract value.

Recommendation 3 – That the procurement legislation allow for the approval of major projects by the Central Supply and Tenders Board up to a total value of 50 million kina before the need to refer to the Head of State for approval.

Recommendation 4 – That a graduated framework be included in the procurement legislation for Provincial Supply and Tenders Boards (PSTBs) to approve procurement expenditure at a number of levels up to a maximum of 5 million Kina; and for the CSTB to have the ability to restrict or extend the levels of an individual PSTB on the basis of demonstrated performance.

Recommendation 5 – That the legislation be amended to allow Statutory Authorities covered under a revised Part VIII of the PFMA the ability to access GoPNG procurement arrangements inclusive of any procurement arrangements that may exist in their own enabling legislation.

Recommendation 6 – That a graduated framework be included in the procurement legislation for Statutory Authorities to approve procurement expenditure at a number of levels based upon the level of demonstrated expertise; with the CSTB having the authority to restrict or extend the levels of an individual Authority, subject to performance.

Recommendation 7 – The legislation should allow for Whole of Government and Framework procurement agreements to be entered into. For this to be effective development partners should consider providing support for CSTB personnel under a mentoring program either in country or overseas. Selected GoPNG personnel should be placed with overseas Agencies for at least three to four months.

Recommendation 8 – The CSTB, or any subsequent Procurement Authority enacted, should be provided with resources in the form of a number of technical advisory staff, both long and short term. These staff to include specialist advisors on legal rule setting.

Recommendation 9 – That a Procurement Coordination Unit (PCU) be established within the CSTB, staffed with an internationally experienced officer to head the PCU along with the addition of at least three National staff. The PCU to have responsibility for ensuring that the legislation is implemented within Agencies and that development partners adopt the GoPNG procurement framework.

Recommendation 10 – That the requirement to conduct procurement planning be enacted in the procurement legislation along with the need to develop Local Industry Plans for major projects.


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Recommendation 11 – A capacity building program, that includes the development of procurement plans, be included in any legislative roll-out.

Recommendation 12– Development partners consider the provision of technical assistance to support the engagement of a Procurement Law Specialist and a National Legal Specialist to draft and to assist with the implementation and passing of a National Procurement Act and a Procurement Authority, if ultimately endorsed by GoPNG.

Recommendation 13– That a National Procurement Act be developed for presentation to the Parliament of the Independent State of Papua New Guinea after the 2012 General Elections. In the intervening period capacity building and skill development be provided similar to the provisions of the UNCITRAL Model Law on Procurement as guide.

Need for Further ADB Assistance

76. Clearly, irrespective of how the GoPNG decides to proceed, there will be a need for considerable on-going financial and technical support in implementing and rolling out any substantive changes to existing procurement legislation in PNG.


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COMPONENT 4: ENHANCING SUB – NATIONAL SERVICE DELIVERY MONITORING

A. Scope and Activities

77. In line with the terms of reference for this component, the Survey Coordinator undertook an extensive review of the design and methodology that was utilized in developing and conducting an ADB pilot survey aimed at evaluating the effectiveness of subnational government service delivery in the Goilala District of Central Province, PNG during November and December 2009. The report on the review detailed key findings and recommendations for enhancing outcomes from any future survey work the ADB might conduct in this area.

78. The review involved:

Extensive consultations with key stakeholders, including the National Economic and Fiscal Commission (NEFC), the Office of Regional Development (ORD) and the National Research Institute (NRI) aimed at gauging the usefulness of the information generated from the Goilala pilot in terms of guiding future expenditure and other policies.

An examination of currently available alternative data sources on service delivery at the District level, including the recently completed Household Income and Expenditure Survey (HIES) and a 2006 Demographic Health Survey (DHS), both conducted by the National Statistical Office, to assess the potential value add of future ADB surveys.

An examination of alternative data collection approaches currently being undertaken by other agencies; in particular, the District Information Monitoring System (DIMS) being established by the ORD to monitor spending under the Government of PNG’s District Services Improvement Program (DSIP), among other things, to inform possible future approaches to conducting future ADB survey work/inputs.

B. Key findings

Confirm that there is still a need to improve monitoring and evaluation of basic service delivery outcomes at district and community levels.

Any future tracking activities targeted at basic service delivery at district and community levels, need to yield sufficient measurement of actual basic service delivery outcomes.

A range of approaches have been recently undertaken or are currently underway, by other key stakeholders and agencies, from which much data can be extracted in relation to basic service delivery outcomes.

There are a number of opportunities for close collaboration with key stakeholders/agencies that can facilitate triangulation or cross-validation of mutually required data pertaining to district service delivery outcomes.


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C. Recommendations

That future district service delivery data collection activities align to GoPNG initiatives – in particular the DIMS.

That the ADB Pilot survey approach and instruments be revised to take account of factors including:

o The need to establish a clear purpose for the data collected through a research framework that links questions to service delivery imperatives.

o The need to target a range of study locations with varying access to district services / resources, and study parameters that factor in availability, accessibility, and acceptability issues.

o The need to adopt a range of methodologies targeted at different groups of respondents, such as carefully designed and facilitated community focal group discussions/community consultations, as well as facility interviews – similar to the approach taken by Public Expenditure and Service Delivery survey conducted in relation to the PNG education sector.

o The need to adopt questions and response parameters that are carefully specified, to ensure that experiences of government funded service delivery are being gauged (as opposed to donor or church funded services).

o The need to align data collection to similar efforts by other key stakeholders. This will support cross-validation of complementary district service delivery information.

o The desirability of focusing on Districts where there are existing networks to facilitate maximum data collection in a timely and cost-effective manner.

o A need for survey design and implementation to comprehend alternative surveys / studies / data sources that are current or have been recently completed.


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COMPONENT 5: DOMESTIC DEBT MARKET DEVELOPMENT

A. Scope and Activities

79. Work on this component commenced in mid January 2011 with the arrival of the Bond Issuance Expert. He was subsequently joined by the Legal Expert from mid February 2011.

80. Consistent with the TOR, the Team, in consultation with all key stakeholders1 undertook comprehensive reviews of the PNG government securities market and of the institutional, regulatory, taxation, and legal environments relevant to the potential issuance of an ADB local currency bond and listing of government securities on the Port Moresby Stock Exchange (POMSOX). The findings and recommendations are incorporated in two reports: “Papua New Guinea: Supporting Public Financial Management Component 5: Domestic Bond Market Development,” and Bond Market Legal Specialists Report on Institutional, Regulatory, Taxation and Legal Issues associated with an ADB Kina Bond Issuance and Listing PNG Government Securities on the POMSOX Legal Specialists “Review of Institutional, Regulatory, Taxation and Legal Environments.”

81. In addition to one–on–one discussions with key stakeholders, a workshop was conducted with all interested parties on 30 March to consider the findings and recommendations of the TA Team, and a further interactive consultation with the main government agencies involved was conducted in April. The details are contained in the Domestic Bond Market Development Report.

82. Overall, the findings suggest that there are no substantial impediments to the issuance of ADB local currency bonds or the listing of government securities on the POMSOX. However, there are a number of regulatory coordination issues that need to be addressed. There are also a number of initiatives that should be considered to promote the secondary market for locally issued securities.

83. The key findings and recommendations of the two Reports include:

B. Institutional Arrangements

Treasury

84. The Financial Management Division (FMD) of the Treasury should be designated as the Government’s capital market development coordinator. The Government of PNG needs a directed approach to its capital market development efforts. Currently the various agencies engaged in efforts towards this goal lack a degree of coordination. FMD is best placed to undertake the role of government coordinator for overall capital market development activities including the possible ADB issuance and POMSOX listing.

85. Treasury to constitute and chair a Capital Market Development Working Group. The Treasury should consider constituting a working group comprised of the agencies involved in this assessment and any other government agencies deemed necessary for the effective operation of the working group. The mandate of the working group would initially focus upon 1 Stakeholders included the Financial Management Division of Treasury, the (Central) Bank of PNG, the Port Moresby Stock Exchange, the Securities Commission, the Internal Revenue (Taxation) Office and key market participants.


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outlining, prioritizing and advocating market development activities. This would necessarily include a final decision on the priority and likely timeframe of an ADB Kina Bond issuance and a POMSOX listing.

86. Government to consider developing a capital markets development master plan. A capital market development master plan links in all of the elements required of the government to develop the capital market of PNG in a sequenced and well-planned manner. A format may be to have sub-groups of the working group look at different sections of the market, for example a POMSOX led group may look at self-regulatory organizations and bring their recommendations to the working group for discussion and approval. Alternatively an external consultancy could undertake this role. ADB has funded similar projects in Asia including Thailand and Vietnam.

Bank of PNG (BPNG)

87. Treasury should delay any ADB issuance or POMSOX listing until key recommendations of the National Payment System Development Program (NPSDP) have been implemented by BPNG. ADB issuance and POMSOX listing are not high on the priority list for the Government. The government recognizes that an effective and modern payments system is a key feature of the enabling environment required by the ADB to issue a Kina bond and for government securities to be listed on POMSOX. Therefore it is important that the Government focus first on the development of the payments system through the NPSDP, to ensure another of the enablers is in place.

88. BPNG should consider conducting a high-level review of the exchange controls with the view to greater liberalization. Foreign investors have sighted current exchange controls as a deterrent to entering the PNG fixed income market. The Government needs to review the controls and determine whether the cost in terms of foreign investment lost exceeds the benefits of the controls. Consideration should also be had to liberalizing controls on a specific instrument basis or investor type; namely foreign investors and multi-lateral issuance.

POMSOX

89. POMSOX to work closely with Treasury to qualify securities listing procedures. The listing rules and procedures for POMSOX upon review contain a number of measures that could be streamlined or waived for the Government if they decide to list. Some of the issues identified include the overall streamlining of the application as well as a review of the fee structure. Specific points of clarification have been outlined in the legal specialists report.

90. POMSOX, Treasury and BPNG to agree the settlement arrangements for listed government securities. The POMSOX have not yet offered a fully integrated solution for the settlement of on-market transactions, but such a solution should be avoided as it can lead to increased costs and trade ‘fails’. The recommended solution in the present environment is for BPNG to retain the registry and ultimate settlement responsibilities for transactions effected through the POMSOX. This may be revisited after implementation of the governments NPSDP at the end of 2011.


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Securities Commission

91. “Re-house’ the Securities Commission within a more appropriate organization. The Securities Commission (SC) is not able to monitor or regulate effectively. There is a significant lack of capacity to perform its regulatory duties and functions due in part to a lack of professional regulatory staff, poor funding and its current ‘housing’ arrangements within the Investment Promotion Authority (IPA).

92. The clear preference of the SC is to ‘jump’ to independent status. With regard to the regulatory capacity of the SC this is clearly not a feasible option. Nor is it likely that the SC could generate own source revenues anywhere near sufficient to fund its operations, and budget funding to this end would at best be highly uncertain. As such, a sequenced approach is proposed whereby an interim ‘re-housing’ step is imposed prior to any independent SC. There are benefits in the short to medium term for ‘re-housing’ the SC within another government agency that undertakes a similar regulatory role. The two possible options identified here are the BPNG and the Independent Consumer and Competition Commission (ICCC).

93. The preference should be to ‘re-house’ the SC at the BPNG where it would be able to leverage off the regulatory experience of the Bank and develop its capacity ahead of any decision by the Government to fund its full independence.

94. Capacity Building the SC: The ‘re-housing’ option necessarily contains an ‘in-built’ capacity building obligation on behalf of the host agency that the SC needs to take full advantage of. If the ‘re-housing’ option is embraced the SC will have the unique opportunity to learn from one of the recognized regulatory leaders in PNG.

95. More formal capacity building options need to be embraced when and if the SC receives a greater level of funding. Until this happens there is no budget for any staff training. That said, there are some ‘non-funded’ options potentially available to the SC in assisting to build its capacity. In particular, the SC signed an MOU with the Australian Securities and Investments Commission in 1999. This MOU essentially operates to facilitate information sharing between the two agencies. However, the SC could use the MOU as a basis for requesting funded training from ASIC either in country or in Australia. IOSCO also provides training options to member countries and may consider offering a secondment or funded training in PNG if requested. One of the issues with IOSCO however is that the SC still has outstanding fees owed for the past three years.

Regulatory Issues

96. A comprehensive review of the Securities Legislation is required: As noted, the SC is ineffective and needs a complete structural review. A review of the effectiveness of the current Securities Law is also required. It is understood, in fact that new legislation potentially establishing the SC as an independent entity and revising and updating the existing securities law is in an advanced stage of drafting, including with the assistance of a New Zealand advisor. However, despite repeated requests made to the SC for copies of this draft legislation by the TA Team, the Project Team Leader and the Treasury, the TA Team were not given access to it. Irrespective, it will be important to ensure that the proposed new legislation meets PNG’s needs. To this end, the SC could use a Legal Indicator Survey approach as developed by the EBRD for use in Eastern Europe. This is basically a survey style approach to determine the effectiveness of the Securities Act in PNG. The survey could


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be completed ‘in-house’ by he Government Solicitor, though probably better completed by a legal firm or consultant with capital market experience.

97. Regulatory overlap issues need to be addressed. The BPNG and Treasury regulate the government securities market and the SC supposedly regulates the POMSOX. If government securities are listed on the POMSOX there will be a degree of regulatory overlap. Whilst it is not necessary for a formal MOU to be written between the agencies, the roles of the regulatory agencies with respect to government securities does need to be clarified by clearly defining the objectives and responsibilities of each agency. Communication between regulators (in particular BPNG and the SC) could also be improved by constituting Council of Regulators. This Council would be a high-level committee whose initial mandate would be to delineate the powers, authorities and responsibilities between the regulators. Longer-term the Council would help build the capacity

Taxation

98. No tax should be levied on an ADB LCY Bond. Under the Agreement establishing the ADB to which PNG is a signatory the issuance and associated services and investment should be exempt from all tax. The government should also consider exempting foreign investors from tax. The government is trying to attract a new investor base of foreigners with this issuance. Restrictive tax regimes will deter international investors. The government should consider exempting the ADB bond from all taxes as an investor incentive.

Secondary Market for Debt Securities

99. The report highlights the importance of developing the secondary market for debt securities in PNG in the overall efforts to promote development and diversity in the local market. Among other things, it highlights a need for the BPNG to develop and implement Repurchase Agreements and International Standard Documentation and guidelines; and together with other relevant players, to promote development of the interest-rate swap market. There is also an argument for the Treasury and BPNG to consider in the medium-term allowing short-selling of government securities, as this benefits market liquidity and importantly can create efficiencies in the primary market.

100. The Report also identifies a need for Treasury-FMD to continue to develop T bill and government benchmark securities with appropriate outstanding sizes to accommodate secondary trade; effective benchmarks being precursors to the repurchase and interest rate swap markets. The Treasury-FMD needs to develop a refinancing strategy to manage large “bullet” benchmark maturities.


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PROJECT BUDGET

Final overviews are to be included in the final version.

A. Overview Working Months*


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B. Overview of Out of Pocket Expenses*

C. Overview Budget*

* All values are approximate only, as we are still receiving invoices and claims


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PROJECT LOGISTICAL ISSUES

101. Overall, the Project ran smoothly and all required outputs/outcomes were met. There were, however, a number of issues that impacted the Project that are worth recording.

102. As indicated above and in the respective component reports, difficulties were encountered in gaining needed access to and input from key relevant agencies. This was particularly so in the case of the Securities Commission and to a slightly lesser degree, the Inland Revenue Commission and POMSOX with respect to Component 5. Difficulties were also encountered in gaining the needed inputs from pilot statutory authorities to agree, “Key Performance Indicators,” although in hindsight, the task here was a very ambitious one. In all other respects, the pilot agencies were very cooperative in meeting the needs of the component 1 tasks. It is difficult, however, to see how these issues can effectively be addressed, other than to impress upon the lead government agencies involved the importance of ensuring whole of government buy in to achieving the objectives of ADB funded activities/projects.

103. The Project was also not spared the perennial problem encountered by anyone seeking to do business in PNG of gaining timely approval for the required staff entry visas. This is an issue that all the main aid agencies should continue to be working with the PNG Government on.

104. Finally, the issue of transport logistics. It was originally envisaged/agreed that the Treasury would provide required transport for the Project Team(s). On the arrival of the Team Leader, however, it became clear that Treasury did not have the capacity to provide this logistical support. It is difficult to operate effectively in Port Moresby and other centers in PNG without access to self drive or dedicated chauffeured vehicles, especially in the circumstances of this Project where all tasks required very extensive consultation and engagement with large numbers of stakeholders spread throughout the city. While there are risks involved in (self) driving in PNG, they are far less than the alternative of public transport, to the extent it exists in Port Moresby and elsewhere. Ultimately, the Project was well served with initially one vehicle, and then two vehicles toward the latter phase when most consultants were in country.


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ATTACHMENT A: PROJECT TERMS OF REFERENCE (AS PER INCEPTION REPORT)

A. Project activities and tasks

Component 1: Strengthening Governance/Oversight of Statutory Authorities

Working with the PNG Treasury led interagency working group this activity will seek to engage with up to 10 pilot statutory authorities in reviewing current information and information systems for monitoring their financial and operational performance; agree for each agency key performance indicators and any additional information requirements; work with the agencies to design and establish an enhanced monitoring process; and, identify requirements and approaches for extending the enhanced monitoring process to all statutory authorities.

It is expected that key outputs from this activity will inform, or otherwise be drawn upon, in determining outcomes from a broader review of the Government’s financial management framework that has been initiated by the PNG Department of Finance for completion in 2012. It is anticipated that the broader review will result in substantial amendments to, or a complete rewrite of, the Public Finance Management Act 1995 (PFMA) and the Finance Management Manual. From the perspective of this broader review, one additional task identified by the Department of Finance for consideration under Component 1, if possible, is for the consultant to assist in developing a clearer and more coherent classification of “Public Bodies” for potential inclusion in a revised PFMA.

Component 2: Improving Project Evaluation and Prioritization.

Working with the Treasury and the Department of National Planning, this activity will prepare relevant guidance materials on effective economic and financial analysis of government capital/project expenditures; develop three case studies of project analyses relevant to the PNG context; and, utilising the case studies, conduct training workshops for relevant Treasury and Department of National Planning staff, and possibly staff from other interested agencies, on economic and financial appraisal and monitoring of government project expenditures.

The Training and guidance materials developed will embrace both project economic and financial appraisal and project financing, pitched to a level that will allow Treasury, National Planning and any other Central Agency personnel effectively to assess the cost-benefit analyses and other supporting information that line agencies present, or are expected to present, in support of their expenditure proposals.

Component 3: Improving Procurement Practices

Working with the Central Supply and Tenders Board (CSTB) and other development partners, who also have advisors working with the Board, the TOR for this component require that the consultant will (i) liaise with procurement stakeholders and provide ADB input to multiagency procurement initiatives, including the Procurement Engagement Group; and (ii) provide support to the CSTB on ADB related procurement matters.

In discussions with current advisors to the CSTB, it was advised that the CSTB has recently completed a Procurement Assessment Report, inter alia, in light of an OECD DAC review of


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PNG procurement processes and similar AusAID analysis, and are now moving to develop a Capacity Development Strategy and Implementation Plan.

Until the latter Plan is completed and relevant decisions taken, which may not be until the end of 2010, it is not possible to determine exactly which components the consultant engaged under this TA can best provide implementation support to. At this stage, nevertheless, possibilities identifiable include:

Assisting in development of standard bidding documents.

Reviewing/promoting better CSTB linkages to spending agencies such as health, education etc

Assisting in establishment of educational courses leading to professional qualifications in procurement.

Assisting Department of Commerce and Industry in its efforts to establish processes for prequalifying contractors for Governmental work.

Irrespective, it is now proposed that the timing of the consultant’s three months of inputs should be deferred to commence in mid January 2011, as against the original start date of 1 September 2010.

Component 4: Enhancing Subnational Service Delivery Monitoring

Working with the ADB’s country economist (PNG Resident Mission) the TOR for this component require that the consultant (Survey Coordinator) will provide guidance on refining the survey instruments and methodology that were tested during an earlier pilot survey of households in a number of PNG Districts. In particular, the consultant will (i) review the pilot phase survey design and methodology and recommend improvements, and (ii) prepare a report that details suggestions and recommendations from the pilot review.

Component 5: Domestic Debt Market Development

Working with the Department of Treasury (Financial Evaluation Division), the Bank of PNG and the PNG Securities Commission, the consultant for this component together with the legal expert will identify issues requiring resolution prior to any proposed issuance of an ADB backed Kina denominated bond and listing of government securities on the Port Moresby Stock Exchange. The TOR provide, in particular, that the Bond Issuance Expert will (i) review institutional, regulatory, taxation and legal arrangements having potential implications for an ADB backed Kina bond issue and listing of government securities on the Port Moresby Stock Exchange; (ii) formulate proposals to address potential issues; (iii) conduct two stakeholder workshops to provide background on ADB’s local currency product, advise on process, and review identified issues and proposed responses; (iv) prepare a road map for the potential issues of a local currency bond, listing of government securities on the stock exchange, and creation of a secondary bond market which identifies the necessary prerequisites (including market conditions); and, (v) identify resource requirements and prepare a capacity development plan for the Securities Commission.

The Legal Expert will assist the Bond Issuance Expert in relation to activity (i) and (ii) above


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B. Work Plan and Methodology

Component 1: Strengthening Governance/Oversight of Statutory Authorities

Identify and seek participation of 10 pilot statutory agencies

It has been agreed with the Departments of Finance and Treasury that a letter, to be jointly signed by the Secretaries of the two Departments, will be prepared inviting participation in the pilot studies of the following 10 agencies that have been identified by the Interagency Working Group, namely: (i) Mineral Resources Authority, (ii) National Airports Corporation, (iii) National Forestry Authority, (iv) National Fisheries Authority, (v) Independent Consumer and Competition Commission, (vi) National Road Safety Council, (vii) National Information and Communications Technology Authority (NICTA), (viii) National Agricultural Research In