Sony has revealed in an interview with Gigazine, as translated by Adrian Sang, that the PSP’s library will be available on the NGP. Some of the titles will apparently be made available on the PSN Store, while others will be available on the NGP’s flash-based cards.
Backwards compatibility was likely cut to reduce costs and avoid needless technical issues as were experienced on the PS3. Obviously the plans to re-release the PSP’s entire library will be hindered by outstanding licensing issues, but this is better than nothing. Sony also stated that they have no plans to release a UMD reader device, so don’t get your hopes up.