Extended Annual Review Report

Project Number: 43929 Reference Number: LN2576/EI7302 September 2013

Loan Digicel Mobile Telecommunication Expansion Project (Papua New Guinea)

This is the abbreviated version of the document that excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – kina (K)

At Appraisal At Project Completion 18 Sep 2009 31 Dec 2009

K1.00 – $0.37325 $0.37800 $1.00 – K2.6792 K2.6455

ABBREVIATIONS

ADB – Asian Development Bank DCI – Department of Communication and Information EBITDA – Earnings before interest, tax, depreciation and amortization EHS – environmental, health, and safety EROIC – economic return on invested capital FIRR – financial internal rate of return GDP – gross domestic product ICCC – Independent Consumer and Competition Commission ICT – information and communication technology ITU – International Telecommunication Union NEC – National Executive Council NICTA – National Information and Communication Technology Authority NICT Act – National Information and Communications Technology Act PANGTEL – Papua New Guinea Radio-communication and

Telecommunication Technical Authority PNG – Papua New Guinea SMS – short messaging service

NOTES

(i) The fiscal year (FY) of the borrower, Digicel (PNG) Ltd, ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 March 2000.

(ii) In this report, "$" refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Officer-in-Charge J. Yamagata, Private Sector Operations Department (PSOD) Director C. Thieme, Infrastructure Finance Division 2, PSOD Team leader M. Kanda, Investment Specialist, PSOD Team members S. Durrani-Jamal, Senior Economist, PSOD

M. Manabat, Senior Investment Officer, PSOD J. Munsayac, Safeguards Specialist, PSOD

J. Orense, Associate Project Analyst, PSOD M. Pascua, Senior Safeguards Officer, PSOD R. Tabanao, Project Analyst, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i EXECUTIVE SUMMARY ii

I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 3

II. EVALUATION 4 A. Project Rationale and Objectives 4 B. Development Impact 4 C. ADB Investment Profitability 9 D. ADB Work Quality 9 E. ADB’s Additionality 9 F. Overall Evaluation 9

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 10 A. Issues and Lessons 10 B. Recommended Follow-Up Actions 12

APPENDIXES 1. Project-Related Data 13 2. Private Sector Development Indicators and Ratings: Infrastructure 14 3. Environmental Impact and Social Impacts 17

BASIC DATA Digicel Mobile Telecommunication Expansion Project (L2576/7302-PNG)

Key Project Data As per ADB Loan

Documents ($ million)

Actual ($ million)

ADB Investment: Loan:

Committed Disbursed

18 18

18 18

Key Dates Expected Actual Concept Clearance Approval Board Approval First Disbursement Loan Closing

19 Aug 2009 16 Nov 2009 23 Nov 2009 23 Nov 2009

19 Aug 2009 16 Nov 2009 23 Nov 2009 23 Nov 2009

Project Administration and Monitoring No. of Missions No. of Person-

Days Due Diligence/Project Development Loan Negotiations/Project Administration

1 1

6 3

EXECUTIVE SUMMARY

On 16 November 2009, the Board of Directors of the Asian Development Bank (ADB) approved a loan of up to $25 million from ADB’s ordinary capital resources to Digicel (PNG) Ltd, the borrower, for enhancement of its mobile telecommunications network infrastructure for better service provision in Papua New Guinea (PNG). The ADB loan facility of $18 million was fully drawn down on 23 November 2009. Cofinancing was provided to the borrower by the International Finance Corporation, Export Development Canada, and the Bank of South Pacific.

The borrower is an operating subsidiary of the Irish-owned Digicel group, which runs mobile telecom operations in 31 emerging economies, including six in the Pacific region. The financial assistance to the borrower is ADB’s first private sector infrastructure investment in the Pacific region, as well as its first private sector investment in PNG. It complements ADB’s preceding efforts in support of government reforms of the information and communication technology (ICT) sector in PNG, which evolved along with liberalization of the nation’s mobile telecom market, where the borrower served as a key driving force. Prior to the liberalization, the telecom market in PNG was insufficiently served by the former national monopoly (Telikom PNG) and had one of the world’s lowest teledensity rates. The borrower’s entry in 2007 accelerated development of the telecom market in PNG and marked a surge in mobile penetration from less than 3% in 2007 to 21% by 2009. Through continued network expansions and service innovations, the borrower has become the largest mobile operator in the country, and this has benefitted the nation’s remote and rural areas which formerly lacked basic telecom infrastructure. The borrower’s expansion, which ADB supported, resulted in wider coverage and a larger network capacity to meet the rapidly growing demand for mobile services in PNG.

This extended annual review evaluates ADB’s assistance to the borrower. The evaluation criteria are based on Project Administration Instructions 6.07B on the preparation of extended annual review reports for nonsovereign operations, issued in July 2008. Four major criteria were used: (i) development impacts and outcomes, (ii) ADB investment profitability, (iii) ADB work quality, and (iv) ADB’s additionality.

The development impacts and outcomes are evaluated using four criteria: (i) private sector development; (ii) business success; (iii) economic sustainability; and (iv) environmental, social, and health and safety performance. The borrower has transformed the telecom landscape in PNG by making mobile communication accessible and affordable to the rural majority for the first time. The expansion established additional sites with mobile coverage and improved the accessibility and quality of telecom services, particularly in remote and rural areas. Digicel’s lower price offering has redefined the mobile telecom service as a basic service affordable to the low-income majority in the country. The borrower’s wider coverage and affordable services drove a mobile revolution, increasing the penetration to 34% (2.4 million people) by 2011.

Access to ICT, in particular mobile services, is a key contributor to economic growth and poverty reduction. The telecom industry growth has made a strong contribution to national productivity in PNG. The industry contribution was up to 6.5% of total GDP in 2011, marking a cumulative annual growth of up to 29% for 2006–2011. Direct impacts include the creation of local employment, with about 700 jobs created directly and an estimated 13,000 jobs created indirectly in related areas. The borrower adopted best industry practices, which contributed to improved labor quality, productivity, and governance in PNG.

The mobile revolution has had a significant impact on people’s lives and on the economy. The borrower was the first to market a variety of innovative solutions, such as mobile banking and market information services, for individuals and businesses across the country. These services greatly improved productivity and opened new opportunities, effectively stimulating the economy. Indirect benefits have also been realized through Digicel’s community development initiatives in the areas of basic education and health, by which it demonstrates a high level of corporate social responsibility. The borrower also contributes to the delivery of public service

iii under the public–private partnership, where it serves as the key communication solution provider for efficient dissemination of public information to the nation’s rural majority. The project has had a major positive impact and demonstration effect on private sector development across PNG in relation to its stated development objectives. Private sector development performance is therefore considered excellent.

Digicel’s good operational and financial performance continued under rapid market growth, which surpassed its original forecast. Its subscriber base grew and its dominant market share made it the leading mobile operator in PNG. Its sustained cash generation created an effective growth cycle by allowing the company to accelerate investments for further growth. The borrower is rated excellent for business success.

The borrower’s economic sustainability is rated excellent. The economic sustainability of the borrower is assured as it offers its subscribers value for money through improved accessibility and affordability of mobile telecom services. The borrower’s continued service innovation has increased the social and economic well-being of mobile users, particularly in remote and rural areas where telecom services were previously unavailable. The borrower is rated satisfactory in terms of environment, social, and health and safety performance. The environmental impacts of the expansion were insignificant and short term during construction. Environment and health and safety records submitted to ADB were found to be satisfactory. The expansion did not entail involuntary resettlement or indigenous peoples impacts. The borrower’s contribution to promoting social inclusiveness has been substantial through its corporate social responsibility program, which focused on gender, education, and health issues in rural and socially marginalized communities in the country.

ADB investment profitability is rated satisfactory. Debt service was made on time. Meanwhile, ADB’s overall work quality in relation to screening and appraisal, monitoring and supervision, and its role and contribution is rated excellent. After the Digicel group approached ADB, intensive processing was accomplished in close coordination with the sponsor and other lenders to meet the borrower’s time line. ADB undertook annual reviews and closely monitored the implementation by and compliance of the borrower. ADB’s additionality is rated satisfactory. ADB’s financing addressed the constraints that the private sector investor faced in accessing viable financing during the financial crisis, and accelerated the development of the mobile telecom market in PNG. In addition to increasing the confidence of private sector investors in the frontier economy, ADB’s financial assistance resulted in significant impacts on social and economic development across the country. The assistance supported the strategic direction of the Government of Papua New Guinea in promoting private sector participation for development. As a multilateral lender, ADB’s participation ensured the borrower’s accountability and the transparency of its compliance mechanisms.

Overall, ADB’s financial assistance to the borrower is rated highly successful. The liberalization in the mobile telecom sector resulted in significant sector growth and created spillover effects in social and economic development in PNG. The key driving force is the private sector initiative of the borrower that has led the sector revolution to date. The knowledge transferred by the Digicel group has benefitted the telecom sector in PNG, which in turn has helped the nation to overcome infrastructure rollout challenges. The assistance to the borrower demonstrates ADB’s comprehensive approach to supporting sector liberalization in PNG and to private sector development in frontier economies in the Pacific region. ADB will continue to monitor the progress of the ICT sector reform, including that of the state-owned operators, and the development of sustainable competition in the sector, which remains an issue and is expected to play a major role in the creation of an enabling environment for further social and economic development in PNG.

I. THE PROJECT

A. Project Background

1. Efficient telecom infrastructure plays a significant role in social and economic development in a country such as Papua New Guinea (PNG), where rough terrain and lack of adequate infrastructure make delivery of services and access to a largely rural population difficult.1

PNG, with an estimated population of 7.3 million, is the largest economy among the Pacific region developing member countries and globally is among those with the lowest telecom access. With high tariffs and low penetration of about 1% for fixed line and less than 3% for mobile services (prior to the market liberalization in 2007), the country’s telecom industry was characterized by low teledensity and was insufficiently served by Telikom PNG, the former national monopoly.

2. The Government of Papua New Guinea effectively undertook information and communication technology (ICT) sector reform in 2005 when the National Executive Council established the target to introduce competition in the mobile telecom industry by 2007. In March 2007, Digicel (PNG), the borrower, was licensed as a new mobile operator and its service commenced in July that year. Since then Digicel has grown significantly by way of continued network expansions, service innovations, and strong retail presence, and has become the largest mobile operator in PNG. By August 2009, Digicel had more than 1 million subscribers, establishing its leading position with a market share of about 80%. PNG’s telecom market is currently served by one fixed-line operator (Telikom PNG) and three mobile operators (Digicel, Bemobile, and Citifone2). Bemobile is the state’s mobile business affiliate partly owned by the Independent Public Business Corporation of PNG (IPBC).3

The market liberalization brought the benefits of reliable and affordable mobile services and motivated the government to partially privatize Bemobile in 2008.

3. The ICT sector reform in PNG has evolved in parallel with the mobile market liberalization. The reform objective is to ensure the availability of ICT services to the entire nation at affordable prices. The ratification of the National Information and Communications Technology Act 2009 (NICT Act) in November 2009 gave legislative effect to the sector-wide reform for open competition in the ICT sector. The new regulatory regime, which is administered by the National Information and Communication Technology Authority (NICTA), a newly established independent regulator, commenced in full in October 2010. The current progress of the reform is evidence that the government has made a step forward with a clearer regulatory framework and less uncertainty in place. However, implementation of the reform requires the government’s deliberate effort to forge an effective, sustainably competitive ICT sector, which is currently vulnerable to structural barriers and constraints. 4. Since the borrower’s entry in 2007, the mobile telecom market in PNG has developed significantly with mobile penetration increasing to 21% in 2009 and 34% in 2011.4

1 The urban population in PNG was estimated at 12.5% in 2011. Asian Development Bank (ADB). 2013. Papua New

Guinea Fact Sheet. Manila.

The International Telecommunication Union (ITU) reported global mobile penetration to be 67% in 2009 (57% for

2 Citifone was established in 2011 as another mobile business arm of Telikom PNG. It currently operates in Port Moresby and Lae.

3 The IPBC is a state-owned enterprise in PNG established under the IPBC Act 2002. It holds the majority of national commercial assets in trust and reports to the minister for public enterprises in PNG. Telikom PNG is wholly owned by the IPBC. The state’s ownership of Bemobile, originally established as a subsidiary of Telikom PNG, was transferred from Telikom PNG to the IPBC in 2008.

4 International Telecommunication Union. 2012. Measuring the Information Society 2012. Geneva.

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developing countries) and 86% in 2011 (78% for developing countries). 5

Similarly, within the Pacific region, PNG still trails other major countries in terms of mobile penetration. This implies that the mobile telecom market in PNG has room for further growth to meet undeveloped demand in the underserved areas.

5. Digicel is an operating subsidiary of the Digicel group, which runs mobile telecom operations in 31 countries in the Caribbean, Central America, and the South Pacific. The controlling shareholder of the Digicel group is Mr. Denis O’Brien, the founder, who is a successful telecom entrepreneur from Ireland. The Digicel brand started in Jamaica in 2001 and the group has 13 million subscribers globally. To date, the group has invested over $4.5 billion, and excels at developing frontier markets, 6 which are often characterized by high potential demand but low penetration because of market inefficiencies under state monopoly. The brand is renowned for its customer satisfaction strategy and its community support initiatives through the Digicel Foundations.7

The group’s operation in the South Pacific started in November 2006 and extends to six countries (Fiji, Nauru, PNG, Samoa, Tonga, and Vanuatu). PNG is the majority contributor in the regional operation and is one of the key growth drivers for the entire group.

6. In 2009, the Digicel group approached the Asian Development Bank (ADB) for financial assistance for its expansion program in PNG to improve its network facilities and services as international commercial banks were reluctant to provide medium-term loans during the global financial crisis. On 16 November 2009, ADB approved a direct loan of up to $25 million for the project. Cofinanciers were the International Finance Corporation, Export Development Canada, and the Bank of South Pacific. B. Key Project Features

7. The project implemented the borrower’s GSM8

network expansion to increase its network coverage and capacity for better service provision. Because of the rapid increase in its subscriber base, Digicel encountered certain capacity issues that restricted some of its strategic moves, including promotions that would have most benefited low-income users. Among other things, under the project additional switches were installed, the billing system was upgraded, and network coverage was expanded across the country, many of which were in remote and rural areas which lacked basic telecom infrastructure. The expansion resulted in a wider coverage of 3.5 million people, which enabled Digicel to effectively respond to the rapidly growing demand for mobile services in PNG.

8. The Digicel PNG Foundation forms an integral part of the borrower’s business strategy. As an in-house not-for-profit organization funded by Digicel, the foundation partners with civil society, churches, local government, and the private sector to develop sustainable projects and programs across 22 provinces in the country. It has a particular focus on basic education and health to improve education infrastructure for conducive learning and to bring basic health services to rural and socially marginalized communities. 5 Mobile penetration rates (2011) in other developing member countries include Afghanistan 54%, Cambodia 70%, Fiji

84%, India 72%, Indonesia 98%, Lao People’s Democratic Republic 87%, Mongolia 105%, Myanmar 3%, Palau 75%, Pakistan 62%, Philippines 92%, Samoa >91%, Solomon Islands 50%, Tonga 53%, Vanuatu 56%, and Viet Nam 143%.

6 The Digicel group won the Best Operator in a Developing Market award at the World Communications Awards in 2010. The World Communications Awards are the foremost global telecom awards and recognize the companies and individuals responsible for the innovations, achievements, and new services that are helping to build the telecom industry.

7 The Digicel Foundations comprise three nonprofit suborganizations in Jamaica, Haiti, and PNG which provide funds on a charitable basis for development of the communities where each operates. The Digicel PNG Foundation began its operation in October 2008.

8 The Global System for Mobile communications is the most popular standard for mobile service in the world.

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9. The project is ADB’s first private sector investment in PNG and the first private sector infrastructure investment in the Pacific region. The project complemented earlier efforts by multilateral donors including the World Bank and ADB. ADB’s support for ICT sector reform in PNG includes its support for the development of industry codes of practice and interconnection determinations,9

and its involvement in the public consultation for the National Information and Communications Technology Bill.

C. Progress Highlights

10. The network expansion was completed in 2009 and improved the borrower’s cash generation capacity, which funded further growth. Digicel continued its active investments in network expansions to cover more remote areas. Such expansions increased the population coverage to about 70% (4.5 million people as of March 2012) across the country. In addition to expanding the coverage, the borrower continued with technology upgrades for better service quality, which included 3G10

network overlay in key urban centers. This was the first high-speed mobile broadband service in the country, and it enabled a higher degree of connectivity and networking.

11. In parallel with its network infrastructure deployment, Digicel effectively cleared the uncertainty surrounding its business operation in the developing regulatory environment. The borrower secured its official right to interconnect with Bemobile and Telikom PNG under the interconnection agreements in 2010. The borrower completed its migration to the new regulatory regime in July 2011, and was granted three new ICT licenses, 11

which confirmed its right to international gateway operation and opened up potential for more competition in the areas of fixed-line services and a range of other ICT services. At the same time, the NICTA acknowledged that the borrower achieved all of its mandatory rollout obligations under the original license a year ahead of schedule.

12. Under the new regulatory regime, Digicel continued to advance its service innovation, developing new segments and increasing market penetration. In 2011, the borrower acquired the Data Nets group, a leading network and internet service provider in PNG, which enabled the borrower to offer a full suite of voice, data, and internet communications services to both corporate and individual subscribers. Following earlier launches in Fiji, Samoa, and Tonga by its regional affiliates, Digicel started a mobile financial service in 2011. The service, Cellmoni, has been developed by the Digicel group in partnership with the Pacific Financial Inclusion Program, which promotes financial inclusion in the Pacific region.12 The borrower was judged the country’s most innovative company of 2011 by the PNG Institute of Directors13

for its contribution to transforming the telecom landscape in PNG through its expanded coverage and innovative services.

9 ADB. 2005. Technical Assistance to Papua New Guinea for Policy for Private Sector Development. Manila. 10 3G is one of the latest mobile technologies and the fastest-growing host among mobile units and handsets. 11 On 14 July 2011, the NICTA granted three ICT licenses to the borrower—the Individual Network License, the Individual

Applications License, and the Individual Network (Gateway Service) License to operate its own international gateway. 12 The Pacific Financial Inclusion Program is a Pacific-wide program designed to bring financial inclusion and financial

literacy to the Pacific region. Funded by the United Nations Development Programme, United Nations Capital Development Fund, European Union, and Australian Agency for International Development, its strategy is to seek out and introduce new ways of serving hard-to-reach populations, and to foster greater commitment and cooperation among regional stakeholders to build inclusive financial systems throughout the Pacific region.

13 The PNG Institute of Directors is PNG's membership institute for directors. It promotes professional directorship and good governance at all board levels in PNG.

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13. The mobile telecom market in PNG developed rapidly. As of the end of 2011, the total number of mobile subscribers in the country was estimated at about 2.40 million, majority of which was served by the borrower.

II. EVALUATION

A. Project Rationale and Objectives

14. The project was designed to expand Digicel’s mobile network infrastructure and to expand its affordable telecom services across PNG, where demand was growing rapidly. By providing improved accessibility and increased affordability, the project was expected to have a substantial impact on economic growth and rural development by extending the benefits of mobile telecom services to many isolated communities across the country. More specifically, it was envisaged that the project would result in (i) expanded affordable telecom services, particularly for low-income users in PNG; (ii) improved access to and quality of telecom services in the country, particularly in remote and rural areas; (iii) economic growth, by facilitating access to markets and information and developing other businesses relying on telecom services; (iv) demonstration of good governance and strong social responsibility, promoting good practices in the private sector in PNG and the Pacific region; (v) better access to information, including public service delivery, education, health, and security; and (vi) direct employment opportunities, managerial training, and staff development, and associated business opportunities for dealers and contractors in underdeveloped areas in PNG. ADB was expected to play a catalytic role consistent with its strategies and operations, including its response to the global financial crisis at that time. B. Development Impact

1. Private Sector Development 15. The introduction of market competition through Digicel’s entry has transformed the telecom landscape in PNG by making mobile communication accessible and affordable to the majority of people in the country for the first time. The project improved access to and quality of telecom services in PNG, particularly in remote and rural areas. The borrower’s network coverage has increased to cover many isolated areas—such as the PNG–Indonesian border town of Wutung in the West Sepik Province, the Milne Bay Islands, the region of Bougainville, and Western Province—where it brings to many villagers the first opportunity to experience efficient communication and have access to economic and social opportunities within and outside the country. By establishing the only near-national coverage, the borrower continues to bring mobile communications into areas that have never had any form of telecom coverage. 16. The competitive market has redefined the mobile service as a basic service affordable to a large portion of the population in PNG. Prior to the borrower’s entry, just owning a mobile phone was considered a luxury because call rates were too high and handsets were very expensive. The borrower significantly reduced call rates by up to 70%,14

14 Since Digicel’s entry, average domestic call rates have dropped by 45% in peak hours and 70% in off-peak hours,

while average international call rates have dropped by 40% in peak hours and 38% in off-peak hours (A. Batten, R. Duncan, and J. Gouy. 2009. Papua New Guinea Economic Survey: from boom to gloom? Pacific Economic Bulletin). Digicel’s current tariff rates are K0.99 ($0.37) for peak and K0.49 ($0.19) for off-peak for domestic on-net calls (first minute), and K1.48 ($0.56) for peak and K0.99 ($0.37) off-peak for international calls.

and sold less-expensive handsets with free SIM cards for as low as K49 ($20), which enabled low-income earners to own a mobile phone. In addition, Digicel offered a range of better-value pricing and promotions, including “super off-peak” rates (e.g., K0.11 [$0.04] per minute for on-net calls in off-peak hours) which made mobile communications more affordable. The improved affordability is reflected also in a sector indicator,

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the mobile-cellular sub-basket as a percentage of gross national income per capita, which decreased from 25.1% in 2008 to 18.9% in 2011.15

17. The improved accessibility and affordability led to a mobile revolution involving a large rural-based population. It was estimated that Telikom PNG (Bemobile) had only about 150,000 mobile subscribers (less than 3% penetration) prior to the borrower’s entry in 2007. Digicel’s wider coverage and lower-priced services caused a surge in mobile penetration to more than 13% within a year of its launch. In 2009, mobile subscriptions rose to more than 1.4 million. Since then, it further increased to 2.4 million (34% penetration) in 2011, a significant increase by 24 times over the 5-year period from 2006 before the market liberalization.

Table 1: Mobile-Cellular Telephone Subscriptions in Papua New Guinea, 2006–2011 Year 2000 2006 2007 2008 2009 2010 2011 Number of subscribers

8,560 100,000 300,000 874,000 1,417,546 1,909,078 2,400,000

Penetration (subscriptions per 100 inhabitants)

0.16 1.60 4.69 13.35 21.15 27.84 34.22

Source: International Telecommunication Union. ICT Statistics - Time series by country (Mobile-cellular subscriptions). 18. The mobile revolution has had a significant impact on people’s lives and the economy in PNG. Digicel was the first to market a variety of innovative solutions for individuals and businesses across the country, which improved productivity and opened new opportunities, effectively stimulating the economy. Its value-added solutions include (i) the mobile Marketing Information System,16 which enables local farmers and buyers to access the right markets for the best price and quality of rural commodities (fresh produce) which are key livelihoods; (ii) mobile banking and payment solutions,17 including short messaging service (SMS) banking, electronic wallet (Cellmoni service to transfer money, or lodge or withdraw cash by mobile phone), electronic utility payments (EasiPay, PNG’s first vending system for prepaid electricity), and electronic top-up options, all of which have brought access to safe and affordable basic financial services to the rural majority without access to banking services and helped them by reducing the costs of accessing these services in cities; and (iii) various corporate solutions including BlackBerry services, broadband internet services, integrated voice and data solutions, and outsourced call center services, all of which offer businesses of all sizes cost-effective solutions. Among these, it is noted that Digicel plays a key role in promoting financial inclusion in PNG through its close partnership with the Nationwide Microbank,18

the largest microfinance institution in the South Pacific, which integrates the borrower’s solutions—such as improved connectivity between its remote branches, mobile money hosting, and call center operation—as the key business infrastructure to advance its corporate mission to “bank the unbanked” in the country.

19. As sector experience and studies support, access to ICT, in particular mobile services, has a material impact on economic growth. Increased mobile penetration is considered a key contributor to economic growth and poverty reduction for development. Telecom sector growth driven by Digicel has made a strong contribution to national productivity in PNG. The sector gross domestic product (GDP) recorded a surge in growth, estimated at up to 41% in 2007, which was 15 ITU. 2011. Measuring the Information Society 2011. Geneva; World Bank. 2013. The Little Data Book on Information

and Communication Technology 2013. Washington, DC. 16 Developed in partnership with the Fresh Produce Development Agency of PNG. 17 The borrower hosts a range of financial services in partnerships with key local institutions including BSP, Teachers

Savings and Loan Society, National Superannuation Fund, Nambawan Super Fund, Nationwide Microbank, Post PNG, and PNG Power.

18 The bank operates 12 branches throughout PNG and offers affordable savings and loan products to micro and small businesses. It currently manages depositor funds in excess of K70 million with over 100,000 customers.

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more than eight times that in 2006, and cumulative annual growth of up to 29% for 2006–2011 (Table 2). The sector contribution increased up to 6.5% of total GDP in 2011, and peaked at up to 21% of total GDP growth in 2008 and 2009. More recently, the NICTA estimated the ICT sector contribution as 10.4% of total GDP growth in 2010.19

Table 2: Real Gross Domestic Product Indicators in Papua New Guinea, 2006–2011 Item 2006 2007 2008 2009 2010 2011 Real GDP in K million (% growth) All sectors 8,823

(2.3) 9,454 (7.2)

10,079 (6.6)

10,698 (6.1)

11,507 (7.6)

12,803 (11.1)

All nonmining sectors 7,793 (3.9)

8,424 (8.1)

9,064 (7.6)

9,700 (7.0)

10,529 (8.5)

11,940 (13.2)

Communication, transportation, and storage

233 (5.0)

329 (41.3)

460 (39.8)

593 (29.0)

713 (20.1)

827 (16.0)

Sector contribution (Communication, transportation, and storage)

% share in all sector real GDP 2.6 3.5 4.6 5.5 6.2 6.5 % points to growth in real GDP 0.1 1.1 1.4 1.3 1.1 1.0

GDP = gross domestic product. Source: Ministry of Treasury. 2011–2013. 2011 National Budget, 2012 National Budget, 2013 National Budget. Port Moresby. 20. Direct benefits brought by Digicel include the creation of local employment. The borrower directly employs about 700 personnel 20

and has generated an estimated 13,000 indirect job opportunities in its distribution and sales channels, contractors, suppliers, and other related vendors. The borrower facilitates skills and knowledge transfer of best practices in its global group operations. It offers various programs and courses, internally and externally, which include career and personal development programs and training courses on corporate sales and distribution; customer care; management development; media gateway; graduate development; entrepreneurship for small-scale businesses; and environment, health, and safety management, which all contribute to upgrading the quality and productivity of labor and the standard of governance in PNG.

21. Community development is an integral part of Digicel’s business strategy. Despite the nation’s unique challenges, which include the issues attributable to the many different cultural backgrounds of the people, the borrower has been successful in having a significant social impact across PNG and has demonstrated a high standard for corporate social responsibility, which is one of the best among the Digicel group’s global operations. As of March 2013, the borrower, through the Digicel PNG Foundation, had funded 181 community-based projects across 22 provinces and provided K18.75 million ($7 million) to local marginalized communities; these activities have directly impacted more than 100,000 beneficiaries. With the focus on basic education and health,21

19 NICTA and ITU. 2012. Mobile Tariff Regulation in a Transition Market Environment - The Papua New Guinea

Experience. At ITU regional seminar on costs and tariffs for member countries of the regional group for Asia and Oceania (SG3RG-AO). Bali.

the foundation’s initiatives include

20 The borrower continues empowering women in PNG. As of March 2012, the borrower employed about 300 females on a full-time basis, of which 20 were managers. It also facilitates employment of hundreds of women on a part-time basis for its sales roadshows and street sales activities across the country.

21 The foundation has five main goals: (i) to provide young children with access to basic education, (ii) to provide access to basic health services in rural and other marginalized areas, (iii) to support marginalized communities to become more self-reliant, (iv) to provide basic services for victims of domestic violence, and (v) to provide access and basic services to people with special needs.

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(i) education infrastructure projects, which have established 241 rural primary and elementary school classrooms and provided access to basic education for 7,500 children in rural communities;

(ii) a community-based teacher training program (Isi Learning Program), which has trained 113 teachers in early childhood development and learning;

(iii) 45 community learning centers, which have provided basic education to children in local communities and helped those in the pre-formal education system;

(iv) 10 mobile health clinics, which have brought basic health services to remote and marginalized communities and treated more than 200,000 patients; and

(v) the Basic Life and Business Skills Program, which has provided more than 3,000 participants across 26 different communities with basic life and job skills.

22. Public–private partnership is a key to public service delivery in PNG. Digicel provides local government agencies with its nation-wide short messaging service (SMS) platform as a low-cost and efficient solution for disseminating public information to the nation’s rural majority. The borrower’s public service initiatives include its key role as the infrastructure provider for the early warning and information system for coastal and inland floods, which is operated jointly with PNG’s Office of Climate Change and Development, the National Disaster Centre, and the PNG National Weather Service. The system increases the public’s disaster preparedness in 11 vulnerable provinces in the north coast and islands regions, where the majority of the estimated 2.3 million inhabitants are exposed to flooding risks.22

In partnership with the National Statistics Office, the borrower facilitates population awareness for maximum participation in the PNG census and contributes to addressing the data problems in the nation’s statistics system, which is vital for socio-economic analysis, policy formulation, and development.

23. The project has had major positive impacts on private sector development across PNG in relation to its stated development objectives. Private sector development impact is therefore considered excellent.

2. Business Success 24. The borrower performed well as it benefitted from rapid market growth and, thus, surpassed its original forecast. The borrower’s dominant market share made it the leading mobile operator in PNG. The borrower’s high operating performance was driven by its effective business strategies including service innovations and efficient cost management. 25. Because of the rapid growth of its operation, Digicel’s financial performance was robust, with progressive improvement in its revenue generation. Digicel’s sustained cash generation capacity improved its leveraged position, and created an effective growth cycle by allowing it to accelerate investments for further market development, which brought tremendous subscriber growth and increased usage. 26. The project is rated excellent for business success.

3. Economic Sustainability 27. The project is rated excellent for economic sustainability.

22 The Adaptation Fund. 2012. Programme Proposal for Enhancing Adaptive Capacity of Communities to Climate

Change-Related Floods in the North Coast and Islands Region of Papua New Guinea. Washington, DC.

8

28. The economic sustainability of the project is assured as the borrower offers its subscribers value for money through the improved accessibility and affordability of mobile telecom services. The borrower’s continued service innovation has increased the social and economic well-being of mobile phone users, particularly in remote and rural areas where telecom services were previously unavailable.

4. Environmental, Social, Health, and Safety Performance 29. The project was classified environment category C following ADB’s Environment Policy (2002). The project was assessed unlikely to have adverse environmental impacts. The development of the borrower’s expansion sites followed guidelines prescribed by the Papua New Guinea Radiocommunications and Telecommunications Technical Authority (PANGTEL) in accordance with International Telecommunication Union (ITU) standards, and required the statutory approvals and/or permits from responsible agencies when applicable (e.g., for protected areas, consolidated land and public utilities, civil aviation authority, etc.) and the customary landowners’ consent. 30. During construction, there was no significant earthmoving and civil works. There was minimal clearing of vegetation to expand sites and extend access roads. Limited and short-term impacts included noise and dust from transport of materials. All sites were built in compliance with best construction and housekeeping practices. Measures to ensure proper and safe transport of materials and equipment were implemented to avoid injuries to workers and the community. Staff from the borrower’s security, human resources, and construction teams is responsible for looking after environmental, health, and safety (EHS) aspects during construction and operation. The borrower conducts monitoring of EHS procedures and training on fire protection and safety, accident prevention and response, materials handling, and control and maintenance of equipment and facilities, and submits regular reports to ADB. Overall, the project's environmental impacts were insignificant and short term, anticipated during construction, and ceased when construction of the sites was completed. EHS records submitted to ADB have been found satisfactory. 31. The project did not entail involuntary resettlement or indigenous peoples impacts. Installation of mobile base stations, towers, and support infrastructure was undertaken following a strict selection criteria which avoided involuntary resettlement impacts. While the project was implemented in a country populated by indigenous peoples, the project itself did not have a distinct adverse or beneficial impact on a particular indigenous peoples group. All mobile phone users in PNG benefitted from improved mobile communications service. 32. As part of its corporate social responsibility program implemented by the Digicel PNG Foundation, programs for women were undertaken. Together with the Ginigoada Bisnis Development Foundation, the foundation introduced the Strongim Meri program for women in marginalized communities around Port Moresby. The program supports provision of training for women in areas such as basic literacy, numeracy, health and hygiene, family care, handicrafts, cooking, and sewing. Digicel complies with national labor laws and has taken measures to comply with internationally recognized core labor standards. Implementation of its human resources policy is supported by a strong local and regional human resources department. The borrower also implements a comprehensive grievance policy. 33. With its focus on improving education infrastructure for conducive learning and bringing basic health services to rural and socially marginalized communities, Digicel’s contribution to PNG communities has been substantial and has improved the lives of beneficiaries as depicted in various testimonials and reports, which are publicly available. The borrower’s contribution to promoting social inclusiveness and its social safeguards performance is deemed satisfactory.

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C. ADB Investment Profitability

34. The pricing scheme, which was common to all international lenders providing foreign currency (dollar) debt, was considered in line with internal benchmarks undertaken by ADB’s private sector operations and was deemed reasonable to reflect some external benchmarks. 35. Digicel performed quarterly debt services in a timely manner. ADB investment profitability is rated satisfactory. D. ADB Work Quality

36. The Digicel group approached ADB in 2009 when medium-term commercial financing was limited in the international financial market because of the global financial crisis. The intensive processing, in close coordination with the sponsor and other lenders, was accomplished and fully met the borrower’s tight time line in support of the market growth. ADB’s performance in screening, appraisal, and structuring is rated excellent. 37. ADB undertook annual reviews and closely monitored the project’s implementation through regular and extra reporting by Digicel. The borrower complied with all reporting requirements under the financing agreements in a timely manner. ADB overall work quality is rated excellent. E. ADB’s Additionality

38. ADB’s financing addressed the constraints that the private sector investor faced in accessing viable financing for further growth and accelerated the development of the mobile telecom market and associated sectors in PNG. In addition to enhancing the private sector investors’ confidence in the frontier economy, ADB’s financial assistance brought essential social and economic development impacts across the country. By expanding the use of accessible and affordable mobile communication among the rural-based majority, the project symbolizes how key infrastructure can positively impact society and the economy, and how ADB can demonstrate the positive impacts it can bring to frontier economies. 39. ADB’s financial assistance to the project formed an integrated approach supporting the ICT sector reform by the Government of Papua New Guinea and complementing ADB’s prior contributions to the reform initiative. ADB’s participation in the project supported the strategic direction of the government and facilitated sector development through private sector participation. The project is well aligned with the strategic direction of ADB, which highlights infrastructure development conducive to improved basic services and market accessibility, particularly in rural areas. As a multilateral development bank lender, ADB’s participation ensured the project’s accountability and the transparency of its compliance mechanisms. ADB’s additionality is rated satisfactory. F. Overall Evaluation

40. The project is considered highly successful in consideration of the positive impacts it has delivered, particularly in terms of private sector development. As ADB’s first private sector investment in PNG and its first private sector infrastructure investment in the Pacific region, ADB’s participation in the project demonstrates a model for its support to sustainable private sector development, good corporate governance, and strong social responsibility in frontier economies. The project’s impacts are already significant and are likely to become much larger with further development of the ICT sector and other sectors which benefit from ICT.

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Table 6: Evaluation of the Digicel Mobile Telecommunications Expansion Project

Indicator/Rating Unsatisfactory Partly Satisfactory Satisfactory Excellent Development Impact

Private sector development X Business success X Economic sustainability X Environmental, social, health, and safety performance

X

ADB Investment Profitability

X

ADB Work Quality X ADB’s Additionality X Unsuccessful Partly Successful Successful

Highly Successful

Overall Rating X ADB = Asian Development Bank.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

41. The market liberalization in the mobile telecom sector brought about significant sector growth and had spillover effects on both social and economic development in PNG. The key driving force is the private sector initiative by Digicel that has led the telecom sector revolution to date. The knowledge transferred by the Digicel group, with proven practices in other frontier economies, has benefitted the telecom sector in PNG, which in turn has helped the nation to overcome infrastructure rollout challenges. To stimulate more growth in the next phase of sector reform, the Government of Papua New Guinea promotes further competition in the provision of internet services and wholesale services for international connectivity, which will help substantially lower ICT costs and allow service providers to expand services across the country. Throughout the reform, appropriate regulatory interventions to safeguard effective competition and consumer protection remains a key issue. Liberalization of the mobile sector is expected to go through a process of continued experimentation. 42. Since November 2005, when the government approved an ICT sector reform policy to introduce competition in the mobile telecom sector, there have been political arguments over the reform’s approach, particularly the scope and pace of the liberalization. Frequent shifts in the nation’s ICT policies, 23

even after licensing Digicel in 2007, have resulted in administrative difficulties and legal disputes among stakeholders and created regulatory uncertainty over the borrower’s right to the spectrum license and the international gateway operation, both of which are critical for effective market competition. It was intended by the government that market competition in general would facilitate the rehabilitation of Telikom PNG and its affiliate as a national priority, but the state-owned operator needed significant resources for modernization to operate effectively in a competitive market. It was seen that Telikom PNG’s limitations in the impending competitive market induced a series of political interventions in the reform process.

23 Key issues under policy discussions included the legal scope of the mobile carrier operations for competition, the

state’s monopoly of network infrastructure and international gateway operation, and the licensing regime under the existing regulators, all of which led to the conclusive shift to the phased introduction of open competition and the new sector regime streamlined under the new independent regulator (NICTA).

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43. The regulatory uncertainty remained until 2009–2010 when the NICT Act was enacted and the new regulatory regime commenced in full and finally became aligned with the government’s multilateral commitment to sector liberalization through forums such as the World Trade Organization. Digicel incurred extra costs and work, including litigation actions, to sustain its operations during the period of uncertainty. The ICT sector reform in PNG encountered challenges at the inception stage as the domestic authorities had difficulties in policy formulation, regulatory coordination, and implementation planning to provide certainty to the reform process. The international commitment, together with the support of the general public, encouraged stakeholders to overcome the potential regressions and ensure the reform’s credibility in order to increase investor confidence. 44. While the mobile sector liberalization has initially been effective in encouraging private sector investment and accelerating nation-wide market development, Digicel’s high performance temporarily led to the company becoming a quasi-monopoly,24

which forced the authorities to adopt appropriate regulatory measures to guide the market so as to achieve a sustainable competitive state. The post-liberalization market, though rapidly growing, is still vulnerable to structural barriers to effective competition. Such barriers include the high costs of infrastructure rollout, economies of scale, and network externalities.

45. Tariff-mediated network externalities, among others, has become an issue requiring close attention by all stakeholders. Upon Bemobile’s request, in January 2011 NICTA initiated a public inquiry to examine if the borrower, having gained substantial market power, set a high price discrimination between on-net and off-net call rates, which resulted in potential anticompetitive effects of enclosing its majority users incentivized to make on-net calls. NICTA concluded that the borrower’s off-net price premium was excessively high by international standards 25 and, in September 2012, the government declared a retail service determination on the borrower’s prepaid retail national voice services,26 which capped the premium at up to 40%, with a few exceptions subject to NICTA’s approval.27

46. While the quasi-monopoly situation is temporal at the inception stage of the liberalization, the competitive framework should be effectively adjusted in a timely manner for improved market efficiency and consumers’ benefit as the country remains one of the less-affordable mobile markets in the Pacific region. An international benchmark28

indicates that, for a common basket of mobile services, PNG is the third least-affordable among 17 countries assessed in the Pacific region. Similarly, for the monthly spend for the common basket, the borrower ranks fifth highest and Bemobile ninth highest among 20 major mobile operators in 13 countries in the Pacific region. Though these benchmarks don’t provide an absolute conclusion as they normalize or disregard the complex differences in the circumstances of various countries, they still suggest that the price level in PNG is at the upper end of the cost spectrum within the region.

24 Digicel’s share in the retail mobile service market is estimated at 75% on a subscriber basis and 88% on a revenue

basis. It has service area coverage of 23.8%, which is much higher than Bemobile (4.4%) or Telikom PNG (Citifon 5.9%) (2011).

25 NICTA. 2012. Response to Comments Report – NICTA staff’s response to the comments received in response to the Second Discussion Paper about the need for a retail service determination regarding certain mobile telephony services. Port Moresby.

26 NICTA. 2012. Public Inquiry into the need for a Retail Service Determination regarding certain mobile telephony services - Second Discussion Paper. Port Moresby.

27 The retail service determination will be effective for 5 years and is subject to an interim review after 2 years. 28 A benchmark gauged by percentage of average monthly income spent on mobile services for low-volume use (30 calls

and 100 SMSs per month). PNG marked around 15%. Network Strategies. 2013. Mobile connectivity and affordability in the Pacific: the 2013 update. Auckland; Organisation for Economic Co-operation and Development. 2010. Revision of the methodology for constructing telecommunications price baskets. Paris.

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47. The government expects that mobile operators will continue to reduce real prices as a sign of goodwill and customer responsiveness. After the liberalization commenced there was a significant drop in mobile service tariffs in PNG; however, NICTA observed that there were few examples of upward tariff adjustment, leaving aside the impact of high inflation, even where competition was weak. This suggests a potential risk of market inefficiency that requires the attention of the regulator. 48. In markets with unique challenges (as often seen in the frontier economies in the Pacific region), the introduction of efficient competitors and the absence of appropriate regulatory control (i) can lead to another monopoly replacing a state-owned entity that has legacy and new constraints on its competitive response; and (ii) allows the new entrants to dominate the market quickly, which can limit the ability of consumers to gain the full benefits of efficient competition. ICT sector reform in PNG, extending from the mobile telecom market, is expected to facilitate further competition for sector-wide growth. At this early stage, however, deliberate control by the regulator remains critical to ensuring fair and effective competition which will maximize and balance the stakeholders’ benefits at each stage. Private sector initiative remains a key driving force for market development, but it is not a perfect measure as seen in the progress in mobile market evolution to date. It is equally essential that the former national incumbents, under an appropriate competition framework, catch up with the advancing competition by increasing their efficiency and competitiveness to sustain the value of the reform through the liberalization. 49. PNG is still behind other major Pacific countries in terms of telecom penetration, which leaves significant room for growth. Further improvement in accessibility and affordability is needed, while the geographic and demographic challenges29

will become more relevant as the penetration rate increases. Telikom PNG, through its mobile operations including Bemobile, is tasked with meeting the nation’s social policy and security objectives, particularly extending the telecom network reach to more rural areas including those where competition is unlikely to be viable on a strictly commercial basis. This will require a developmental initiative in which the state-owned operators are expected to take a primary role for universal service which enables all Papua New Guineans to share in the ICT gains. Effective competition for efficient ICT cost cannot be sustainable without the national operators being competitive and effective participants in the market.

B. Recommended Follow-Up Actions

50. ADB’s private sector assistance to the borrower (Digicel), together with its ongoing assistance to Bemobile, 30

29 Challenging aspects include a low number of urban dwellers (13% in 2011), a low population density (15 persons per

square kilometer in 2010), and a large land area consisting of rugged and mountainous terrain and outer islands, which inhibits the development of key supporting infrastructure such as electricity supply and efficient logistics.

demonstrates ADB’s comprehensive approach to supporting mobile telecom sector liberalization in PNG and private sector development in frontier economies in the Pacific region. ADB will keep monitoring the progress of the reform and the development of sustainable competition in the ICT sector, which plays a major role in creating an enabling environment for further social and economic development in PNG.

30 ADB. 2011. Report and Recommendation of the President to the Board of Directors on the Proposed Equity Investment and Loan - Bemobile Expansion Project (Papua New Guinea and Solomon Islands). Manila.

Appendix 1 13

PROJECT-RELATED DATA

A. Investment Identification

1. Country Papua New Guinea 2. Loan numbers LN2576/EI7302 3. Type of business Mobile telecom operator 4. Project title Digicel Mobile Telecommunication

Expansion Project 5. Investee company and/or borrower Digicel (PNG) Limited 6. Amount of approved ADB assistance $25 million B. Investment Data

1. Concept clearance approval 19 August 2009 2. Date of Board approval 16 November 2009 3. Disbursements Initial 23 November 2009 Final 23 November 2009 Amount $18 million Source: Asian Development Bank.

Appendix 2

14

PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: INFRASTRUCTURE Impact of the Project Ratings

Impact to Date

Potential Impact (Sustainability) and Risk

to its Realization Combined

Ratea Justification/ Annotations

1. Beyond Company Impact

Ratingb Rating Riskc

1.1. Private sector expansion. Contributes as a pioneering or high-profile project to facilitating or preparing for more private participation in the sector and economy at large

Excellent Excellent Modest Excellent Private sector initiative is the key driver for ICT sector reform in PNG. The borrower‘s entry in the mobile market is the first model case of private sector participation in the ICT sector. The borrower’s success has led and will continue to lead sector-wide liberalization in the industry and private sector development in related sectors in the country.

1.2. Competition. Contributes new competition pressure on public and/or other sector players to increase efficiency and improve access and service in the industry

Excellent Excellent Modest Excellent Key objectives of the ICT sector reform in PNG include (i) to introduce effective and sustainable competition to deliver market discipline and economic benefits; and (ii) to transform Telikom PNG group, the national operator, into a robust and sustainable business. The borrower’s entry started a telecom revolution in PNG, bringing improved accessibility and affordability and significant market growth. This has put effective pressure on the national incumbent to continue its transformation.

1.3. Innovation. Demonstrates efficient new products and services, including areas such as marketing, distribution, tariffs, production, and technology, and ways to cover or contain cost, manage demand, etc.

Excellent Excellent Low Excellent Service innovation is one of the borrower’s key business strategies and the value it has brought to the telecom market in PNG. The borrower has redefined mobile telecom service as a basic service which is accessible and affordable to a large portion of the population in PNG. The borrower was awarded by the PNG Institute of Directors the country’s most Innovative Company of Year 2011 for its contribution in transforming the telecom landscape in PNG through its expanded coverage and innovative services.

1.4. Linkages. Relative to investments, contributes notable upstream or

Excellent Excellent Low Excellent The borrower was the first to market a variety of innovative solutions for individuals,

Appendix 2

15

downstream linkage effects to business clients, consumers, suppliers, key industries, etc. in support of growth

businesses, and government agencies across the country, which improved productivity and opened up new opportunities, effectively stimulating economic growth. The borrower’s services have become a key to advance their missions. The borrower’s investment and operation has created employment opportunities across the country, both directly and indirectly, which includes for local contractors and suppliers for the network construction, retail distribution and sales channels, dealer stores, and vendors.

1.5. Catalytic element. Contributes by including pioneering and/or catalytic finance or mobilizing, or inducing more local or foreign market financing and/or foreign direct investment in the sector

Satisfactory Satisfactory Modest Satisfactory ADB’s financing addressed the constraints that the private sector investor faced in accessing viable financing for further growth, and contributed to enhancing the confidence of private sector investors in the frontier economy.

1.6. Affected laws, frameworks, and regulation. Contributes to improved laws and sector regulation for PPP, concessions, joint ventures, and BOT projects, and to liberalizing markets as applicable for improved sector efficiency

Excellent Excellent Modest Excellent The borrower’s entry is in line with the liberalization process of the telecom industry in PNG. Its entry and successful operation has gone through a series of regulatory reviews of and refinements to the ICT policies in the country, in which the borrower has provided effective feedback to the authority and contributed to facilitating necessary implementation of the sector reform.

2. Company Impact with Wider Potential

2.1. Skills contribution. Contributes to new strategic, managerial, and operating skills with actual or potential wider replication in the sector and industry

Excellent Excellent Low Excellent The borrower facilitates skills and knowledge transfer of best practices in its global group operations. It offers various programs and courses internally and externally which include career and personal development programs and training courses on corporate sales and distribution; customer care; management development; media gateway; graduate development; entrepreneurship for small-scale businesses; and

Appendix 2

16

BOT = build–operate–transfer; ESHS = environmental, social, health, and safety; ICT = information and communication technology; PNG = Papua New Guinea; PPP = public–private partnership; PSD = private sector development.

a The combined rating should weigh future impact and risk to its sustainable realization. b Unsatisfactory, partly satisfactory, satisfactory, and excellent. The rating is not an arithmetic mean of the individual

indicator ratings, and these have no fixed weights. Consider already manifest actual impact (positive or negative) and the potential for impact as well as risk to its realization.

c Rating Scale: Risk: high, medium, modest, and low.

environment, health, and safety management, which all contribute to upgrading labor quality and productivity in the country.

2.2. Demonstration of new standards. Demonstrates new ways to operate the business and compete, and investee performance against relevant best industry benchmarks and standards

Excellent Excellent Low Excellent The Digicel group has established a successful track record in mobile telecom operations in frontier economies globally and has successfully demonstrated its proven standards for an efficient mobile telecom business in PNG. The borrower’s business strategies and approach have contributed to promoting rationalization and efficiency in the ICT sector as a whole in PNG.

2.3. Improved governance. As evident in set standards in corporate governance, stakeholder relations, ESHS fields, and/or good energy conservation standards

Excellent Excellent Low Excellent The borrower is managed by an experienced team of managers as a part of the Digicel group’s global operation, which is committed to high standards of corporate governance and social responsibility. It has demonstrated a comprehensive, sustainable business development and management approach to the frontier economy as a whole as well as the ICT sector itself.

3. Overall PSD Rating. Unsatisfactory, partly satisfactory, satisfactory, and excellent. The rating is not an arithmetic mean of the individual indicator ratings, and does not have fixed weights. Actual positive or negative impacts, future impacts, and risks to its realization need to be considered.

Excellent Excellent Modest Excellent The project is considered excellent in that it has effectively facilitated private sector development in PNG. The private sector initiative by the borrower in the ICT sector will continue to be a key driving force for the sector reform and development and will serve as a model case for private sector participation for efficient and sustainable social and economic development in frontier economies.

Appendix 3

17

ENVIRONMENTAL AND SOCIAL IMPACTS

A. Introduction 1. The project provided financial assistance to Digicel, a mobile telecom operator in Papua New Guinea (PNG). The project targeted the expansion of the borrower's nationwide mobile telecom network and the enhancement of its affordable telecom services across PNG, where demand has been growing rapidly. The project involved the construction, operation, and maintenance of the infrastructure and facilities needed to expand the network coverage and capacity to meet the demand. 2. The project was classified as environment category C following the Asian Development Bank (ADB) Environment Policy (2002), Involuntary Resettlement Policy (1995), and Policy on Indigenous Peoples (1998). The project was assessed unlikely to have adverse environmental and social impacts. The development of the borrower’s sites for expansion follows guidelines prescribed by the Papua New Guinea Radio-communication and Telecommunication Technical Authority (PANGTEL) in accordance with International Telecommunication Union standards and require the statutory approvals and/or permits from responsible agencies when applicable (e.g., for protected areas, consolidated land, and public utilities, civil aviation authority, etc.) and the consent of the customary landowners. B. Review Findings

1. Environment

3. Site selection. Sites were selected to meet the following technical requirements: (i) suitable for link, (ii) provide coverage to densely populated areas, and (iii) proximity to an existing access road and less than 5 kilometers if a new access needs to be built. Sites were chosen to avoid locating them in or adjacent to sensitive ecosystems such as wetlands; national parks; sanctuaries; protected and or reserved forests or areas with archaeological, historical, or recreational value. The sites are located in highly populated areas with high economic and income-generating activities and along major roads. When locating sites in urban areas, land zoning is considered to speed up the statutory approval and acquisition process. No construction is allowed on sites without the necessary permit and approvals from government authorities. 4. Impacts due to construction and operation. During construction, there were no significant earthmoving and civil works. Clearing of vegetation for site expansion and extending access roads was minimal. Limited and short-term impacts included noise and dust from transport of materials. All sites were built in compliance with best construction and housekeeping practices. Measures to ensure proper and safe transport of materials and equipment were implemented to avoid causing injuries to workers and the community. The borrower's field engineers and electricians on site are trained to operate and maintain the telecommunication equipment, including servicing and troubleshooting. The project operates within the given set of frequencies as guided by PANGTEL. 5. Environment, health, and safety. Staff from Digicel’s security, human resources, and construction teams is responsible for looking after environmental, health, and safety aspects during construction and operation. Qualified first aid officers are available in all offices and a professional field medic is based in the borrower’s head office in Port Moresby. Health awareness campaigns such as on malaria and HIV in the workplace are also held annually in all regional offices. Fire safety monitoring is in place with regular fire and other emergency drills, and inspection and

Appendix 3

18

certification of fire detection and suppression and mechanical systems is held at least annually. Technical department briefings, workshops, and training sessions are carried out regularly, including accident prevention, safe lifting practices, use of material safety data sheets, safe chemical handling procedures, proper control and maintenance of equipment and facilities, emergency response, and use of personal protective equipment. The borrower conducts monitoring of the project’s environmental, health, and safety aspects and has submitted the agreed annual reports to ADB.

2. Social

6. Social safeguards. Mobile base stations, towers, and support infrastructure such as access roads were constructed on sites selected based on a strict selection criteria which avoided involuntary resettlement impacts. Mobile base stations and support infrastructure were sited on (i) registered land or land clearly owned by one clan, (ii) land that has low agricultural value, (iii) uninhabited or vacant land, and (iv) on roofs and on walls of buildings. The terms of lease were negotiated with property owners on a willing lessor–willing lessee basis. While the project was implemented in a country populated by indigenous peoples, the project itself did not have a distinct adverse or beneficial impact on a particular indigenous peoples group; all mobile phone users in PNG benefitted from improved mobile communications service. The borrower has obtained full consent of property owners and customary land owners as documented in the lease agreements. The project did not entail involuntary resettlement and indigenous peoples impacts. 7. Gender and other social dimensions. While no specific gender measure was incorporated in the project design, the borrower, through the Digicel PNG Foundation, implemented programs for women. Together with the Ginigoada Bisnis Development Foundation, the foundation introduced the Strongim Meri program for women in marginalized communities around Port Moresby. The program supported provision of training for women on gender-based violence; sexual health; personal health and hygiene; basic literacy and numeracy; family care; modern money and basic business awareness; as well as handicrafts, cooking, and livelihood skills training. The borrower has adopted and continues to implement the Digicel group's corporate environmental and social responsibility strategy which requires Digicel to be an equal opportunity and meritocratic employer, with no bias with regard to gender, health, disability, race, or religion, rewarding staff fairly for good performance and providing them with first-class benefits to improve their health and living standards. The borrower complies with national labor laws and has taken measures to comply with internationally recognized core labor standards. Implementation of its human resources policy is supported by a strong local and regional human resources department. The borrower also implements a comprehensive grievance policy.

8. The borrower has invested K18.75 million on education and health programs with the objective of improving education infrastructure for conducive learning and bringing basic health services to rural and socially marginalized communities. Classrooms and sanitation facilities were constructed in primary and elementary schools in 22 provinces. In partnership with the National Capital District Commission, the foundation helped children in settlements around Port Moresby, Lae, Mt. Hagen, and Goroka to have access to early childhood learning by funding salaries of preschool teachers, providing subsidies for a number of community learning centers, and funding grassroots community-based teacher training on early childhood development and learning. Ten fully equipped mobile health clinics were also provided to several communities which do not have easy access to basic health services equipped to provide immunization. Through these clinics, HIV/AIDS testing, treatment, and counseling; tuberculosis and malaria treatment; and pre- and antenatal treatment were given to the local community free of charge. In cooperation with the City Pharmacy, the foundation also provided basic first aid kits and training to a number of urban

Appendix 3

19

settlements. As of December 2012, the Digicel PNG Foundation had directly assisted 100,000 beneficiaries. C. Conclusion and Recommendation Based on review and evaluation of Digicel’s environmental and social responsibility strategy and the project’s annual monitoring reports, it is concluded that, overall, the project's adverse environmental and social impacts are insignificant and short term, were anticipated during construction, and cease when construction of the site is complete. Environmental, social, health, and safety records submitted to ADB have been satisfactory. The Digicel PNG Foundation contribution to PNG communities has been substantial and has improved the lives of beneficiaries as depicted in various testimonials and reports which are publicly available. The borrower’s contribution to promoting social inclusiveness and its social safeguards performance is deemed satisfactory.