FILE OtiPY. Document of The World Bank FOR OFFICIAL USE ONLY. Public Disclosure Authorized. Report No. P-2854-PNG. Public Disclosure Authorized

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A SECOND AGRICULTURAL CREDIT PROJECT May 4, 1981 FILE OtiPY Report No. P-2854-PNG This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Kina US$1.00 = K 0.67 K 1.00 = US$1.50 WEIGHTS AND MEASURES 1 kilogram (kg) = pounds (lbs) 1 metric ton (MT) = 2,200 lbs 1 hectare (ha) = acres (ac) ABBREVIATIONS DPI = Department of Primary Industry NPMA = National Plantation Management Agency PMTP = Plantation Management Training Program PNGDB = Papua New Guinea Development Bank SC = Project Steering Committee GOVERNMENT OF PAPUA NEW GUINEA FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT Credit and Project Summary Borrower: Beneficiary: Amount: Terms: Relending Terms: Papua New Guinea Papua New Guinea Development Bank (PNGDB) SDR 12.3 million (US$15.0 million) Standard US$12.6 million of the credit amount of US$15.0 million would be relent to PNGDB at a maximum 3% interest rate for a period of 22 years with 5 years of grace. PNGDB would onlend US$12.6 million to its subborrowers at a minimum interest rate of 9% (5% in disadvantaged districts) with variable repayment terms depending on the activities being financed. Project Description: The project would finance over a period of three years a share of PNGDB's planned agricultural lending and also support the expansion of related agricultural services. The project has two principal components: (a) field development of coffee, cocoa, oil palms and rubber and piggery and poultry enterprises through sub-loans made by PNGDB; and (b) expansion of hybrid coconut planting materials supplies, and of other support services to agriculture, such as crop development teams, consultants and studies. Planned field development is made on the most promising investments based on current investor familiarity and interest, available management, and favorable marketing prospects. To encourage new development the Government would contribute up to K 3,000/subproject towards the development costs. During implementation, it is proposed that lending for other crops also be included if it is established to the satisfaction of PNGDB and Government that such lending is justified. The proposed project is expected to bring about technological, managerial and institution building benefits to the country. It should also improve the standard of living of beneficiary farmers, raise productivity, increase production and exports and promote import substitution in the most suitable agricultural areas. A feature of the project is the introduction of sound professional management at the farm and livestock enterprise level. PNGDB's competence as a credit channel is well proven and additional support services should help improve investments and incomes. The main risks are those associated with external factors, IThis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - such as output prices. However, flexibility in the use of funds has been incorporated to allow for timely adaptations in response to changing circumstances. Estimated Local Foreign Total Costs: (US$ M) I. Field Development Coffee Rubber Cocoa Oil palms Crop processing Piggeries/poultry Financing Plan: Subtotal II. Support Services Hybrid coconuts NPMA buildings Cocoa New Britain Crop development teams Consultants Studies Subtotal Total Baseline Costs Contingencies: (applicable to Support Services) physical price Total Project Costs IDA Government /a PNGDB Subborrowers Total /b /a Of this US$0.6 million is the estimated Government's contribution for development cost of new subprojects financed under this project. /b Three per cent of these would be to pay for taxes and duties.

5 - iii - Estimated Disbursements: IDA FY: (US$ million) -- Rate of Return: 30%. Annual Cumulative Staff Appraisal Report: Report No PNG, dated April 29, 1981.

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7 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Independent State of Papua New Guinea for a second Agricultural Credit Project for the equivalent of SDR 12.3 million (US$15.0 million), on standard IDA terms. The Government would relend US$12.6 million of the proceeds of the credit amount to PNGDB at a maximum 3% interest rate for a period of 22 years, with 5 years of grace. PNGDB would onlend the US$12.6 million to its subborrowers at a minimum interest rate of 9% (5% in disadvantaged districts) with variable repayment terms depending on the activities being financed. The US$2.4 million balance of the Credit would be used to finance support services. PART I - THE ECONOMY 2. The last economic report, "Papua New Guinea: Economic Situation and Prospects" (Report No PNG), was distributed to the Executive Directors in December An economic mission visited PNG in February/March 1981; the following discussion of the economy of PNG is based on this work. Details of recent economic data can be found in Annex I. Structure of the Economy 3. Papua New Guinea is a land of rugged and sometimes impenetrable mountains, rich valleys and coastal plains, and numerous widely scattered islands. It is favored with abundant rainfall, considerable mineral resources, and forestry and fishery resources of good commercial potential. The capital city, Port Moresby, with a population of about 134,000, is an enclave, with no road links to other parts of the country, and is the largest urban settlement in what remains an overwhelmingly rural society. The most striking feature of PNG's economy is the dualism reflected in the relatively small employment in the modern monetary sector and the large proportion of the population engaged in the traditional agricultural sector. The modern sector is dominated by the Bougainville copper mine and by the nonnational community which was previously part of the Australian administration and which still contributes significantly to both the public administration and the private sector. Mining contributes about 15% of GDP, and the government sector and a variety of small manufacturing and service establishments contribute about half of GDP. Agriculture, forestry, and fishery, which employ about 85% of the labor force, provide the remaining 40% of GDP, with about 40% of the sectoral output coming from subsistence agriculture.

8 Per capita GNP in 1979 was US$650, but this average includes that of nonnationals, who are less than 1% of the population, but whose incomes average roughly 20 times those of nationals. When only nationals are considered, economic dualism in PNG is not as significant an issue as encountered in other countries with a similar economic structure. The average salary of national civil servants who make up the bulk of the modern sector for nationals is only about five times the estimated income of a subsistence household. While this difference does indicate the presence of inequalities, they are less extreme than, for example, in many African countries. The Government's development objectives call for a further reduction in disparities. At the same time, the Government has developed policies to minimize the impact of dualism in specific areas. For example, the renegotiation of the agreement with Bougainville Copper Ltd., ensured that the Government would get the bulk of profits over a certain level. Since the remainder of the profits accruing to the company and much of the expenditure incurred in the operations of the mine are paid overseas, they have little impact on local incomes. 5. PNG faced a critical period before and immediately following independence when, for three consecutive years (FY75-77), the economy failed to grow significantly. This resulted from the international recession as much as from conditions in PNG, but it compounded the difficulties faced by an emerging nation. In 1978 and 1979, however, GDP growth averaged over 5% p.a. in real terms, with the largest increases apparently occurring in construction, manufacturing, and services. When the Ok Tedi copper and gold mine begins production (in 1984), growth rates of GDP are likely to reach even higher levels, but there is still a need to improve economic performance, particularly in the agricultural sector, which has lagged behind the rest of the economy. 6. The large fluctuations in the growth of PNG's economy result partly from its vulnerability to international economic conditions. Imports are high, and international inflation is quickly passed on. Exports are dominated by four commodities - copper concentrate, coffee, cocoa, and copra - which contribute about 85% of total export earnings. Price fluctuations can thus have a severe impact on the economy. In addition, PNG runs a substantial structural deficit on its current account, the counterpart of the large budgetary grant from Australia, equivalent to about one-third of exports. 7. The Government has taken a number of steps to reduce the impact of variations in the international economy. A Mineral Resources Stabilization Fund smooths the impact of fluctuating copper prices on the budget, and

9 stabilization funds for coffee, cocoa, and copra are designed to reduce the oscillations in incomes of producers, thereby also dampening price-induced supply responses and contributing to the stability of government revenue. To date the management of these funds has been very disciplined and has reduced the fluctuations in government spending that would otherwise have occurred. A three-year wage agreement limited the rise of both public and private sector wages to that of the consumer price index, thus ending the sharp upward spiral of real wages that occurred during , and this principle has since been extended for another three years, with a maximum allowed increase of 11.75%. The hard currency policy followed by the Government has helped to cut down inflation to an average of 8% p.a. in the last three years, compared to an average of more than 12% in earlier years. In the area of foreign aid, the Government has just negotiated a second multi-year agreement with Australia, the major donor, which guarantees a steady, though declining, flow of aid for five more years. These agreements have helped the Government to proceed in an orderly manner with its development planning. Development Issues 8. The major issues which will affect the Government's ability to promote economic development are the formulation of a national development strategy and planning mechanism, the decentralization of government activities, and the ability to achieve self-reliance, both in staffing and in public financing. In the immediate post-independence period a concerted effort has been undertaken to define a set of economic and social policies and to establish the means by which decisions in allocating government resources will be taken in a disciplined and consistent manner. More weight has been given to developing a viable economic strategy and a decision making process for the use of government resources than to the preparation of a comprehensive development plan. Three major steps have been taken in PNG in the last three years: (i) a national development strategy has been defined; (ii) a set of sectoral programs and strategic objectives/criteria has been identified to provide the basis for resource allocations; and (iii) a process for evaluating new investment proposals based upon (ii) has been established. 9. The national development strategy places a high priority on improving the quality of life of the rural population. Its thrust focuses on rural development, emphasizing the less developed areas of the country. It includes the development of a few large natural resource projects aimed at reducing the present very heavy reliance on aid and leading towards economic self-reliance. The first objective recognizes not only the agricultural potential of the country, but also the fact that the agricultural sector will be for quite a few generations the main source of income generation and employment. The second objective, while not directly benefitting the vast

10 - 4 - majority of the population, is intended to provide a resource base, thus allowing the implementation of development programs. The implementation of the second objective clearly entails the import of foreign capital and expertise. PNG has developed a policy of encouraging private investment for the exploitation of the country-s resources, while attempting to minimize its own investment in these areas and to maximize the revenues it would obtain from such developments. 10. To carry out its development strategy, the Government established the annual National Public Expenditure Plan (NPEP), a rolling four-year plan for the public sector which focuses political decision-making on the relative size of the allocations to each program or objective and therefore on the tradeoffs between them. Government departments are then assigned portions of each category to be achieved through specific projects. While the basic aims of the NPEP are to link the planning process with overall macro-economic policy and to direct public spending to the activities that have the highest national priority, its impact is limited by its coverage of new projects only. The first NPEP accounted for only 4% of the 1978 expenditures (K 20 million), but future plans will cover increasing portions of the budget as government revenues grow, ongoing projects are completed and a continuing review of existing expenditures leads either to their elimination or their reformulation and inclusion in the NPEP. In the 1980 budget, the NPEP encompassed over one-fifth of total expenditures. Implementation of NPEP projects has been delayed by lack of staff and experience, but the record is gradually improving. 11. Implementation of the NPEP is also affected by the decentralization process now taking place, since greater provincial control over spending will reduce the Central Government's ability to pursue its priorities, while inadequate staffing will interfere with the ability of the provinces to follow their own plans. PNG's topography has made it a country of scattered tribes, with no great sense of national unity, and a degree of political decentralization was a necessary response to secessionist pressures. Provincial governments are gradually assuming regulatory and financial control in some areas and will share power with the Central Government in others. Provincial governments are financed through Central Government conditional and unconditional grants, Central Government refunds of certain revenues, and their own taxation measures. Unconditional grants, which allow provinces to spend according to their own priorities, are by far the most important source of finance; but while in the 1980 budget they comprised over 80% of Central Government payments to the provinces, they amounted to less than one-quarter of total Central Government revenues. One of the most serious problems facing provincial governments is the shortage of trained and experienced staff, and their most urgent priority is to develop the capability for budgeting, planning, and project identification and preparation. The Central Government and other organizations assisting the provinces must make a concerted effort to orient inputs toward that goal.

11 12. Self-reliance in PNG involves both staff and financial resources. The Government has made substantial progress in replacing nonnationals with nationals, especially considering that the University of Papua New Guinea produced its first graduates as recently as However, the country still relies heavily on nonnationals for many necessary services. In the public sector, localization has reached an overall level of 90%, compared to 80% in 1971, but at the higher levels of skill requiring post-secondary education, the proportion of nationals is still only around 40%. This situation has created a relatively high cost Government and a dependence on foreign aid to help meet these costs. The shortage of qualified staff is reflected in the existing vacancies in Government, and in some departments the shortages of professionals are critical. The establishment of provincial governments is adding to the pressures on existing staff, as the Central Government intends to staff provincial governments with no increases in the overall size of the public service. The Government's response to these problems is a localization effort directed at replacing nonnationals and meeting increased manpower requirements through recruitment of local personnel. 13. Training courses are given by the private sector and by most government departments and statutory autthorities to meet their own needs. A centralized training scheme is under study. The Public Service Commission has also launched a Senior Executive Training Program to prepare Papua New Guineans to take over high level positions in the Government. 14. The Government's efforts to attain financial self-reliance emphasize modest but steady and sustainable growth in real public expenditure accompanied by a reduction of reliance on foreign aid (particularly from Australia). The Government has worked successfully to increase domestic revenue which has grown from 10% of GDP in FY68 to 20% in Domestic revenue, which accounted for only about 36% of government receipts in FY68, supplied two-thirds of the total in Tax revenue accounts for about 70% of domestic revenue. Over the past seven years, the Bougainville copper mine has been a major source of domestic revenue, averaging 18% of the total and reaching a peak of 27% in FY76, and another large gold and copper mine is expected to start production in PNG is heavily dependent on Australian aid, which still provides close to 40% of government revenue. IHowever, this ratio has fallen from nearly 60% in the early 1970s, and the Government expects to continue to reduce its reliance on the Australian grants. It will do this in part by raising additional domestic revenue but, in addition, it will continue its efforts to diversify the sources of foreign financial assistance, although none of this assistance will be on terms as beneficial as the unconditional Australian grant to the budget. Recent sources of assistance have included New Zealand and Japan, as well as the World Bank and the Asian Development Bank. The Government insists that all projects proposed for foreign aid be incorporated in the National Public Expenditure Plan which is based upon an explicit set of national development objectives. This insures that all foreign-financed projects pass a screening process and are in accord with Government priorities.

12 Capital expenditures have grown faster than current expenditures in the last two years, and the estimated share of capital expenditures in the 1980 budget is about 20%. In order to increase investment and at the same time raise the level of self-reliance, the Government realizes that it must contain the growth of current expenditures, over 40% of which go toward paying salaries and wages. The Government is attempting to limit the growth of wages and of the public service while finding less expensive sources for expatriate recruitment. External Sector 17. PNG experienced huge trade deficits prior to the introduction of copper exports in FY73. The current account deficit was around one quarter of GDP in the early 1970s. Imports were over 50% of GDP, whereas exports were only about one-third as high. Since FY73, however, earnings from copper exports have dwarfed those from other commodities, and, except for small deficits in FY75/76 when copper and copra prices fell, the balance on current account, which includes the large Australian grant, remained positive despite large service payments, and reserves of foreign exchange reached ten months worth of imports in mid Since then, however, falling commodity prices, a decline in the copper content in the output of the Bougainville mine, and rising imports have resulted in declining reserves. Although they are still at a healthy level (five months worth of imports in early 1981), they can be expected to decline further. The situation is unlikely to change significantly until the Ok Tedi mine begins to produce gold in The country is likely to require a net capital inflow of close to US$100 million p.a. during the next few years. About one-third of this amount will be in the form of private debt and direct investment, while the rest represents public borrowing, of which roughly one-half is likely to come from bilateral sources and one-half from international organizations. These funds are in addition to the large Australian grant, equal to US$260 million in 1980, and will have to grow in relative importance over time as the grant falls in real terms. Total external public debt outstanding as of December 31, 1979, amounted to US$478 million, of which US$135 million was owed to the Bank Group. Public debt service payments in 1979 were about 4% of exports; they are expected to rise to nearly 8% in the next few years and then to decline slowly. Debt payments to the Bank Group are only about 13% of total debt service payments. The debt service ratio, including net investment income payments (which are largely self-financing), is about 15% and will rise to a peak of 19% in Local Cost Financing 19. IDA's country strategy for Papua New Guinea supports the Government's primary goal of bringing development to the less developed areas of the country, particularly to the rural population. The types of projects which have been identified to implement this strategy tend to be relatively small and have relatively low foreign cost components. Therefore, it will at times be proposed to undertake some financing of local costs.

13 PART II - BANK GROUP OPERATIONS 20. As of March 31, 1981, Bank Group assistance to Papua New Guinea consisted of seven loans, eight development credits, and one loan/credit, totalling US$169.2 million. The first operation was a telecommunications loan of US$7.0 million approved in 1968; the most recent, a primary education loan of US$6.0 million and credit of US$12.0 million (SDR 9.4 million) approved in December 1980 but not yet signed. In the early years of lending, emphasis was on infrastructure and six of the seven loans and three of the eight credits were for power, telecommunications, ports and highway projects. Project implementation has been satisfactory even with the more complicated rural development projects. The rapid turnover of expatriate staff and the transitional problems of recruiting and training their replacements have led to delays in project monitoring and auditing but physical implementation has progressed approximately on schedule. As of March 31, 1981, 5 credits and 5 loans were fully disbursed and the effective loans and credits to Papua New Guinea held by the Bank and IDA amounted to US$157.9 million. Annex II contains a summary statement of Bank loans and IDA credits as well as notes on the execution of ongoing projects. 21. In more recent years, Bank Group lending has shifted to the agriculture and social sectors. Three of the seven outstanding loans and credits and five of the next six planned operations are in agriculture, rural development, and education. Furthermore, in view of the Government's decentralization policy and the fact that the greatest constraints to development efforts are at the provincial level, it is proposed that the thrust of Bank Group lending be directed towards a provincial orientation with the additional explicit objectives of institution-building and human resource development at the provincial level. 22. Past Bank Group operations have averaged about one per year and this is expected to increase to two operations per year from FY81 onward. This level of activity will allow continuous emphasis on agriculture, rural development, and education and further support of infrastructure development in selected areas, especially rural transportation. The Transport Sector Review dated January 29, 1980 (Report No. 2819a-PNG) and the Agricultural Services Review dated January 30, 1981 (Report No PNG) will provide direction for operations in these areas. This project, together with the primary education project will comprise the lending program for this fiscal year. For FY82, the current plan is to present a rural development project and a petroleum technical assistance project. Project design and implementation will continue to be constrained by the unavailability of technical staff, local and expatriate, and the decentralization of power to provincial government levels will probably exacerbate the problem. These risks will be mitigated, to the extent possible, by explicit institution building elements such as those contained in this project, but the process is of necessity a long-term one that will require a sustained effort and the acceptance of more uncertainty than would be the case with the type of projects that were initially supported by the Bank Group in PNG.

14 - 8 - PART III - THE AGRICULTURAL SECTOR 23. About 95% of the land area is customary land with right patterns which vary considerably within and between ethnic groups. Rights are specific to cultivation, use of timber resources, hunting, fishing and other purposes. In the past, land rights have been maintained by force and have changed hands often as a result. Formidable obstacles must, therefore, be overcome to make additional land available for organized agricultural development. 24. Although the agricultural sector accounts for only about one third of GDP and export earnings, it employs almost 9 out of 10 economically active people and has the greatest relative development potential. Production for subsistence and for the market is carried on by smallholders and casheropping is carried out by plantations. Nationals have been acquiring the latter from nonnationals with government support. In 1979 the main cashcrops, practically all for export were: copra (105,000 MT); coffee (47,000 MT); cocoa (27,000 MT); palm oil (30,000 MT) and rubber (4,200 MT). The main subsistence crops are sweet potatoes, bananas and taro. Most families keep pigs. Beef and poultry production, on a modest scale, is being developed through commercial units. Crop yields are generally low. While in the past production increases were brought about by expansion of the cultivated area, there is strong evidence that good agricultural land, reasonably accessible with moderate to high fertility and suitable topography, will become progressively scarce. 25. Agricultural exports have largely stagnated in recent years. Large Australian Government grants have helped close the resource gap, but the grants are being progressively reduced. This situation must be redressed urgently through programs designed to bring about rapid increases in agricultural productivity and exports (with due regard to maintenance of adequate levels of subsistence production), based on continuous adaptation of traditional organization and practices in response to opportunities and incentives clearly perceived by villagers. Institutions 26. The present government decentralization process involves the often difficult coordination of multiple activities at the national and provincial levels. For purposes of the proposed project, the main national entities whose responsibilities need to be coordinated with those of the provincial government agencies are the Papua New Guinea Development Bank (PNGDB), the Department of Primary Industry (DPI), the plantation management units and the crop marketing agencies. 27. PNGDB is a publicly owned corporate body established in It emphasizes lending to smallholders and to enterprises which have a large impact on employment of nationals. Up to the end of 1979 PNGDB had approved a total of 27,400 loans amounting to K 106 million (US$160 million). PNGDB is an efficient and experienced entity, and its financial condition is sound.

15 - 9 - As of December 31, 1979 PNGDB's assets amounted to K 37 million (US$55 million) and net profits, averaged K 300,000 or US$450,000 in each 1978 and A recent increase in staff turnover and in repayment overdues, as well as poor coordination of extension services with credit delivery, are being addressed forcefully. PNGDB now has the organization, management and staffing to make a substantial increase in its medium and long-term lending for agriculture. 28. DPI is responsible for the development of agriculture, forestry, fisheries and livestock. As a result of the decentralization of public services DPI is presently organized at the national and the provincial level. At the national level DPI is responsible for overall policy and planning, operation of agricultural research stations and agricultural colleges, provision of specialized technical support, pest and disease eradication, quality control and implementation of large projects, such as settlement schemes, and the hybrid coconut program. At the provincial level, DPI is mainly responsible for agricultural extension services. 29. The ongoing decentralization program has weakened extension services throughtout the country. The main reasons seem to be the resignation and termination of contracts of a large number of experienced nonnationals and lack of suitable replacements among nationals; lack of adequate coordination between national and provincial staff; poor leadership and a certain degree of politicization of provincial staff; lack of goal-oriented activities in the provinces; and largely inadequate on-the-job training. The recently completed Agricultural Services Review has analyzed these problems and proposed some solutions. 30. Plantation Management. The plantation subsector, accounting for 146,000 ha or one half of the area under coconuts and cocoa and for 3,000 ha or most of the area under rubber was largely developed by nonnational owners/ managers and companies. However, even before independence uncertainty over future ownership and control of expatriate-owned lands had already created serious disincentives to investments and general upkeep of plantations. The situation worsened when large numbers of managers left PNG as plantation ownership was being transferred to nationals. Inadequate maintenance and lack of management resulted in a dramatic 30% reduction between in the output of cocoa, copra and rubber plantations. Recognizing the vacuum in the plantation management field the Government has established a Plantation Management Training Program (PMTP) which has provided training to about 300 nationals, and a National Plantation Management Agency (NPMA) which at present ably manages 48 plantations comprising about 15% of the plantation area. 31. Marketing Agencies. Marketing of the main cash crops and of commercial pigs and poultry is well-organized and functions properly. Statutory industry boards exist for copra, coffee and cocoa. These boards are primarily producer boards but include government representation. Their main functions are to provide orderly marketing and to operate price stabilization schemes. Rubber is exported by a group of forwarding agents. Palm oil and kernels are exported by the respective nucleus estate companies under government supervision. Commercial pigs and poultry are sold through well-established marketing channels in the main population areas.

16 Development Issues and Government Strategy 32. The basic task facing Papua New Guinea is to develop agriculture, both in the short term to close an important resource gap and in the long term to provide employment, adequate incomes and promote the welfare of the overwhelming majority of the rural population, which faces serious sociological and physical constraints. The specific issues faced by the Government are how to: (a) use policy tools to strengthen the market economy; (b) adapt traditional village organization and customs (including land tenure systems) to bring about continued and balanced agricultural development; (c) ensure effective participation in development of many dissimilar and often antagonistic clan groups; (d) effect a steady transfer of plantations from nonnationals to nationals with minimum losses of productivity and production; and (e) train, employ, motivate, organize and retain adequate numbers of young, poorly trained, inexperienced people to provide the required support services. 33. In the last decade, Government's strategy has emphasized development of the poorer provinces and has paid specific attention to improved nutrition and the social welfare of rural people. Specifically, Government has: (a) maintained an open economy based on a strong private sector supported by sound agricultural credit and export marketing structures, and export crop stabilization funds; (b) enabled clans to operate agricultural lands as legally recognized groups and helping guarantee individual rights in clan lands to bring about long-term farm improvements; (c) decentralized many development responsibilities down to the provincial level; (d) helped transfer control of plantations to traditional groups of nationals by providing these with funding and management support; and (e) expanded specialized agricultural instruction (agricultural colleges and other vocational schools) and in-service training, and giving more attractive remuneration to some categories of staff. 34. The immediate limitations faced by this strategy are: lack of adequate incentives (due to high production and marketing costs) for increasing cash crop production in many areas of the country; weakening extension services due to the continuing decentralization process and to the difficulties of replacing experienced expatriate staff; and other factors such as shortage of medium- and long-term funds,and difficulties in coordinating the provincial extension services with credit delivery. The above have resulted in stagnant or declining production of some of the main cash crops and rates of rural migration beyond the absorptive capacity of urban centers. The Government has recently initiated steps towards alleviation of some of these constraints. On the one hand it has undertaken, with assistance from the Bank, a review of the agricultural support services and is planning to strengthen these services. Complementing this initiative, it has increased the financial incentive to farmers, particularly in disadvantaged districts of the country, through partial subsidization of development costs (mainly management agency fees)/l of new projects and interest rates, /1 In view of weak extension services PNGDB generally requires its borrowers to hire services of management companies.

17 with a view to inducing urgently needed new development and rehabilitation in cash cropping livestock and fishery subsector (paras. 38 and 48). Of the 90 districts in the country, the 30% most disadvantaged have been selected in where subprojects are eligible for subsidy. The selection of districts is based on per capita cash crop income and other socioeconomic indicators. The size of the total subsidy is not large and unlikely to exceed K 250,000 per year. A positive feature of this subsidy package is the temporary nature of the management fee subsidy. This arises from the fact that management companies would be gradually replaced with the strengthening of extension services. The proposed project also addresses the above problems. PART IV - THE PROJECT 35. The proposed project was identified in mid-1978 and was prepared by Government with the help of consultants, and appraised in May A staff appraisal report (No PNG) dated April 29, 1981 is being distributed separately. Supplementary project data are provided in Annex III. Negotiations were held in Washington from November 10 to November 12, 1980, with the Papua New Guinea delegation led by Eliakim Tobolton, First Assistant Secretary, and were completed by telex on April 23, Project Objectives 36. The main objective of the project is to improve the standard of living of about 4,000 farm families, particularly in the disadvantaged districts of the country, by increasing productivity, production (and exports) of tree crops and, to a lesser degree, of pigs and poultry, which together account for the bulk of existing and foreseeable marketable agricultural production in the country. The project would lead to substantial increases in employment, participation of nationals in the cash economy, and transfer of improved farming practices, including land conservation, to smallholders and would have an impact on subsistence agriculture. Another important objective is to lay the basis for future development of coastal areas by substantially increasing supplies of hybrid coconut planting material. Project Details 37. The proposed project has two major components: (a) lending for field development of coffee, cocoa, oil palm and rubber, and pigs and poultry; and (b) expansion of hybrid coconut planting materials supplies and other support services to agriculture.

18 Field Development (estimated cost: US$21.0 million). Under the proposed project, an estimated area of 8,000 ha will be cleared and planted with coffee, cocoa, rubber and oil palms. This will be done in blocks adjacent to existing plantings or in new settlement areas. The actual area to be developed for each crop will be based on subloan demand, and PNGDB would retain full flexibility to alter the notional areas which were used for costing at appraisal. To encourage new development the Government would contribute up to K 3,000/subproject to meet part of the development costs./1 In the livestock sector it is proposed to finance only a few commercial size piggeries and broiler units in the most suitable areas of Lae and Port Moresby, the two most important consumption centers. Assurances were obtained from Government that such project investments would be completed beyond 1983 (Section 3.01(d) of Development Credit Agreement). 39. Support Services (estimated cost: US$5.5 million). Coconut devlopment under this component of the project will consist of establishing the basis for future large-scale plantings of higher yielding varieties by increasing the area and number of hybrid seed gardens, planting hybrid observation/demonstration plots in major coconut growing areas, and distributing hybrid seednuts to estates and smallholdings. Government funds will also be made available for other agricultural support services: (a) to NPMA mainly for staff quarters and offices; (b) to PNGDB to staff a pilot cocoa smallholder rehabilitation program in New Britain and to hire consultants for data processing, financial planning and evaluation; (c) to provincial governments (as is the case already in Eastern Highlands province) for the staffing, vehicle purchases and establishment of other facilities to organize and initially operate crop development teams which would help with the registration of farmers' groups and lands; and (d) to the appropriate agencies to pay for studies which were recommended by the review of agricultural support services. 40. Monitoring and Evaluation. It is essential to provide effective project monitoring and evaluation given the paucity of data pertaining to smallholder agriculture and the importance of the project for future development of the country. Data would be regularly collected by management agents and settlement authorities and relayed to PNGDB management on inputs, including planting material, supplies, and area cleared and planted. Data on yields, and impact of increased project-induced production on villagers' incomes also would be gathered. This monitoring system is currently being introduced by PNGDB and would be particularly helpful in changing project mixes as conditions warrant. Evaluation would be carried out by consultants. /1 The development cost subsidy of K 3,000 comprises: (a) subsidy of K 2,400/subproject for management agency fees; and (b) K 600 for costs of land survey, soil tests and tools.

19 Estimated Costs 41. The total cost of the project, including contingencies, is estimated at about US$28.6 million, of which about 38% would represent foreign exchange requirements and about 3% taxes and duties. Costs are based on December 1980 prices. For the support services component, a physical contingency of 5% and estimated price escalations amounting to 9% in 1981, 8.5% in 1982, and 7.5% in 1983/84 have been included. Together, the contingencies would amount to US$800,000 or 15% of the total cost of the support services. Financing Plan 42. The project would be financed by an IDA Credit of US$15.0 million, which represent about 52% of total project costs of which US$11 million are foreign costs and US$4 million local costs. Local cost financing is required because the types of projects to be financed tend to be relatively small and labor-intensive, and have low foreign exchange components. Such financing would be consistent with the IDA country strategy of supporting the Government's plans to bring cash crop development to subsistence farmers (para. 19). The Government would contribute US$3.5 million for support services; in addition it would provide funds to PNGDB for implementation of the subsidy program (para. 34)./1 PNGDB would contribute US$7.4 million, and farmer beneficiaries US$2.3 million, for field development. The Government would assume the foreign exchange risk. Retroactive Financing 43. Retroactive financing for up to US$1.5 million would be made available to cover drawdowns beginning June 1, 1980, based on policies and procedures which are considered adequate. Retroactive financing is required because PNGDB has already incurred considerable expenditures during the past ten months to enlarge its lending, in expectation of this project. If PNGDB had not enlarged its lending, farmers' loan demand would have diminished as a result of uncertainty and farm management agreements could have become ineffective. Additionally, the hybrid coconut program would have been delayed. Project Management 44. Overall policy for both field development (credit) and the support services components of the project, as well as review of operations, interagency coordination, and budget approval, would be the responsibility of a /1 These funds would provide for: (a) reimbursement to PNGDB for granting subloans at lower rates (5% p.a.) in disadvantaged districts (para. 48). Broad estimates indicate that this interest subsidy would total about US$3.1 million (K 2.1 million) over full repayment period (22 years) of subloans financed under the project; (b) the Government's contribution towards meeting part of development cost of new subprojects (para. 38). This is estimated to amount to US$0.6 million (K 0.4 million) over 3 years. PNGDB would pass on these development cost subsidies to the management companies responsible for developing subprojects.

20 project Steering Committee (SC), chaired by the Secretary of the Department of Finance, and including PNGDB's managing director, the Secretaries of the Departments of Primary Industries, Lands and Commerce, the Registrar General and relevant provincial government representatives. The establishment of the Steering Committee and the appointment of its members would be conditions of effectiveness (Section 6.01(b) of Development Credit Agreement). Specific responsibilities for each component would be as follows: Field Development (Credit). PNGDB would manage the credit component. It would act as credit channel and supervise field operations. In this task it would be assisted by NPMA, private field managers, settlement authorities and DPI staff until PNGDB is satisfied that owners can manage their properties adequately; and Support Services. Responsibilities for this component would be divided among: (a) PNGDB, which would be responsible for administering a cocoa rehabilitation program in New Britain and would prepare a follow-up project; (b) PNGDB-s Board, which would prepare the terms of reference and appoint the consultants to PNGDB; (c) DPI, which would prepare and implement the hybrid coconut program; (d) the Finance Department which would directly supervise the NPMA investments and the studies; and (e) provincial governments which would manage the crop development teams and extension services. Both PNGDB-s managing and deputy directors terms of office expire in October Government is cognizant of this and will take steps to ensure PNGDB management continuity during project implementation. 45. In accordance with previous practice, farmers or clan leaders in existing cocoa and coffee areas, would be contacted by staff of either PNGDB, management agencies, crop development teams or provincial extension services and informed about the project. Those who showed definite interest would be helped by the above staff in organizing themselves legally as business groups and in obtaining land titles. Land titling is slow and complicated, involving staff of the Decentralization and Land departments, as well as provincial staff. However, it is expected that for purposes of the proposed project the processing of individual cases would take about three months based on previous experience at the provincial level, and with the assistance of management agents who would help with group registration and titles. Private solicitors and surveyors would assist in cases where provincial and national government staff were unable to do the job in time. 46. The relevant PNGDB field office, after being approached for a loan by a business group, would ask the latter to choose a manager from a PNGDBapproved list. The manager would subsequently prepare a farm plan, arrange for creditworthiness analysis of the potential borrowers and subsequently would be in charge of developing the land blocks (with the assistance of selected farmers, PMTP trainees and extension staff) including land clearing and preparation, maintenance, input supplies and marketing of produce.

21 Management services would be phased out over 4 to 7 years based on the group's ability (as determined by PNGDB's branch managers) to take over management responsibilities. The Government would subsidize part of the management fees (up to K 2,400/subproject) while the remaining management fees would become part of the subloan extended by PNGDB (para. 38). For oil palm and rubber settlement areas which have families and land rights already established and settlement authorities in place, procedures would be limited to PNGDB's subloan approval and subsequent processing. Commercial poultry and piggery enterprises will be relatively few in number and would find much less difficulty in arranging land leases and adequate management; hence no complications are expected. The above procedures have proved satisfactory in the past. Relending and Onlending Terms 47. The Government would enter into a subsidiary loan agreement (SLA) with PNGDB under which: (a) $12.6 million of project funds would be transferred to PNGDB at a maximum 3% interest rate repayable in 22 years including 5 years of grace for principal. These terms are in line with expected project generated cashflows; (b) PNGDB would on-lend at a minimum of 9% p.a.;/1 (c) Repayment Terms would be based on the technical/financial profile of the field investments to be made. The repayment periods are expected to be as follows: coffee and cocoa, 12 years repayment, 5 years grace; oil palm, 9 years repayment, 5 years grace; rubber, 14 years repayment, 8 years grace. (d) Free Limit of K 100,000 is proposed. Individual subloans in excess of K 100,000 would be submitted to IDA for approval before it is approved by PNGDB; and (e) Subborrowers Contribution. The subborrowers would make an average 10% equity contribution to their farm investments in the form of cash, labor and materials. The SLA would be agreed with IDA, and its signing would be a condition of effectiveness. /1 This rate is positive by comparison with projected (7.5%) long-term inflation rates.

22 In addition to the terms and conditions of on-lending in para. 47 above, eligible subborrowers in disadvantaged districts and those undertaking new subprojects would receive subsidies in line with the Government's subsidy program (para. 34) as follows: (a) in disadvantaged districts subborrowers would be charged a lower interest rate amounting to 5% p.a. The interest subsidy would only apply to first K 100,000 of the subloan, and (b) a subsidy of up to K 3,000/subproject would be provided to cover part of the development costs of new subprojects. PNGDB would implement this subsidy program on behalf of the Government, for which it would receive supplementary funds from the Government (para. 42). Procurement 49. For equipment and construction financed by funds relent for beneficiaries' subprojects, procurement would be undertaken in accordance with local competitive bidding practices. Government's and PNGDB's procurement procedures ensure competitive bidding and are acceptable to IDA. Land clearing and preparation, planting and upkeep (amounting to about US$17.0 million) would be carried out by the project beneficiaries themselves or by hired labor. Planting materials (US$2.0 million) would be acquired from existing local sources through Government procedures used for local shopping arrangements. The relatively small amounts of building materials required, vehicles, small machinery, equipment and accessories (US$2.9 million) and fertilizer and chemicals (US$1.6 million), would be supplied through agents of local and foreign firms, which are well represented in the country, through prudent shopping in accordance with Government's procedures which are satisfactory. Civil works would be awarded following similar procedures. Field management (US$2.7 million) would be contracted by participating farmers to experienced local firms which offer these services, and which are preselected by PNGDB./l These arrangements have proven satisfactory in the past. Approximately 27 man-months of short-term consultancies would be needed. The approximate cost of these would be US$7,000 per man-month and would inlcude fees, international travel, vehicles and allowances. 50. The terms of reference for the review of data processing and financial planning, for evaluation and for the studies would be prepared in consultation with IDA. Assurances were obtained on these during negotiations (Section 3.03 of Development Credit Agreement). Disbursements 51. Disbursements against the IDA credit would be made on the basis of (a) 35% of the cost of civil works; (b) 35% of expenditures for vehicles and equipment, which are to be procured locally; (c) 100% of the cost of consultants' services; (d) 66% of subloans made by PNGDB for crops and /1 There would be about fourteen private management companies available for the project additional to NPMA.

23 livestock; and (e) 66% of staff salaries for crop development programs. Disbursements against free-limit subloans and staff salaries for crop development programs would be made on the basis of certified statements of expenditure; supporting documentation would be retained by PNGDB for subloans and by DPI for staff salaries, and would be made available for review by supervision missions. All other disbursements would be made against full documentation. Disbursements are expected to be completed by June 30, Accounts and Audit 52. PNGDB has an efficient accounting and record keeping system and its internal and external auditing are well organized. Assurances were obtained that PNGDB and other participating agencies would keep separate project accounts and that audited project and agency accounts will be furnished to IDA within six months of the closing of the fiscal year (Section 4.01 of Development Credit Agreement). Production and Marketing 53. Present volumes of annual production and 1990 project-induced annual production, in parenthesis, for the above crops are (in MT): coffee 47,000 (8,000); cocoa, 27,000 (1,400); palm oil, 30,000 (5,000); and rubber 4,200 (3,500). No difficulties are foreseen in marketing the incremental production of these crops because the existing marketing channels are well organized, additional production will be insignificant in relation to the world market, and more specifically because PNG imports are given preferential treatment by Australia. Pork and broiler meat would replace imports and would be sold locally in Lae and Port Moresby using existing retail channels. Project-induced production would represent about 25% of projected national production of broilers and less than 2% of pork through The percentage for pork would be about 20% of the projected supplies in Lae and Port Moresby (the two most important consumption centers) for the same period. 54. The mission has assumed the following world market prices (1980 constant) for : Coffee (US$/kg) Cocoa (US$/kg) Palm oil (US$/MT) Palm kernels (US$/MT) Rubber (US$/kg) Farm-gate prices are based on the above and are estimated to be about 85% of FOB prices for coffee, cocoa, palm oil and rubber. The relatively narrow marketing margins are due mainly to the favorable location and good road

24 network serving the project areas, as well as to narrow profit margins resulting from the high level of competition among traders and processors (coffee and cocoa), and reasonable management authority fees (rubber and palm oil). 55. Pork prices ex-abattoir are estimated to average K 2/kg and dressed broilers should sell for K 1.70/kg or roughly at the same levels of import prices. The general price trend is favorable, with demand in Lae and Port Moresby projected to surpass domestic supply through Financial Impact 56. The typical farm models show reasonably attractive net cash flow positions. The key to this favorable financial performance is the professional management at relatively low cost which would be made available to farmers. Incremental net cash family incomes per annum of between US$450 (cocoa) and US$3,200 (rubber) at maturity would represent from 145% to 360% of incomes without the project which are based on operation of rundown plantations, low yielding subsistence agriculture or part-time employment. The estimated financial rates of return to participating farmers would be from about 17% to 30%. 57. The project's impact on PNGDB would result in a generally improved net income and liquidity position through 1990 and beyond. The project would also increase PNGDB's loan portfolio at an opportune time; PNGDB has recently expanded its staffing and other facilities in the expectation of increased lending to agriculture. 58. Over the project's three-year period, central government would contribute K 2.3 million to defray part of the costs of support services. In addition its contribution towards management fees subsidy and interest subsidy is estimated to amount to K 0.4 million (over 3 years) and K 2.1 million (over 22 years) respectively, in nominal terms (para. 42). These expenditures amount to K 2.8 in present value terms at 12%. These would be fully recovered from sale of hybrid coconut seedlings, NPMA fees and export duties. Beneficiaries and Benefits 59. The number of farmers who would be project beneficiaries would be difficult to estimate with any accuracy because it is impossibile to predict the relative importance of the different crops to be financed as this, in turn, depends on effective demand in several large and different geographical areas of the country. However, on the basis of likely farm sizes for each crop, it is tentatively estimated that about 4,000 farmers would directly benefit from the project. Another 4,000 to 5,000 families, who are small shareholders in the central piggeries/poultry enterprises, would also benefit from the project.

25 A large majority of beneficiaries would be families with present annual per capita incomes of $275/350 which are slightly above an absolute per capita poverty income level in rural areas of $275. Although rural income differentials are difficult to estimate in the absence of any kind of reliable statistical data, it appears reasonable to assume that income differentials generally are rather small because of the prevalent system of clan welfare and income-redistribution and the access to land for most of the rural population. As a result of the latter there would be a diffusion of benefits beyond direct project participants. 61. The estimated economic rate of return (representing an average of various farm models used) would be: coffee - 35%, cocoa - 15%, rubber - 27%, oil palms - 34%, piggeries and broilers - 26%. The estimated overall economic rate of return over a 25-year period is 30%. 62. The above estimates are based on the following assumptions: (a) a shadow field manual wage at 60% of the prevailing K 2.30 (US$3.45) per day minimum official rural wage. This is taking into consideration the levels of wages and value of food paid for self-help projects which indicate a certain degree of under-employment; and (b) local costs adjusted by a standard conversion factor of 0.96 to bring them to border price levels. The most probable and relevant variables which would affect the project are yields and output prices. Sensitivity analyses using 12% as the opportunity cost of capital show that the justification for project investments would be possible even with major output price declines. For example, gross bpnefits would have to decline by about 43% before the project's IERR would be reduced to the opportunity cost of capital. Similarly, the project would still be viable if costs increased by 76% above present estimates. However, smallholder cocoa is much more sensitive than the other investments. It would take only an 11% unfavorable change in benefits to bring down the return from 15% to 12%. Risks 63. The project is national in scope and supports investments in several crops as well as livestock, and caters for a large number of individual borrowers drawn from diverse cultural backgrounds, many of whom are entering market-oriented production for the first time. Consequently, the project faces some organizational risks, legal problems associated with land ownership, difficulties in ensuring adequate labor supplies at reasonable cost, and the possibility of crop and livestock diseases. However, improved management, which is an important feature of the project, should ensure cost-effective operations, deal with some of the organizational and legal problems, and minimize any losses stemming from diseases. Moreover, the project allows considerable flexibility in

26 financing subprojects as conditions warrant, and overall risks would therefore be minimized. Given the limited application of fertilizers and chemicals, there are limited risks associated with increases in their prices, while pig and poultry prices are expected to remain relatively stable because the products are intended for the local markets which are expected to be undersupplied for about a decade. Environmental Impact 64. The areas to be developed agriculturally are presently under old plantings, primary or secondary forests, often in undulating or steeper topography. The project will help reduce uncontrolled shifting cultivation in highly erodable terrain by introducing permanent trees in a stable, longlasting agricultural system which will preserve favorable ecological conditions. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The Development Credit Agreement between Papua New Guinea and the Association and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, are being distributed separately to the Executive Directors. 66. Special conditions of this project are listed in Section III of Annex III. 67. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed Credit. Attachments Washington, D.C. May 4, 1981 Robert S. McNamara President

27 - 21- Annex I TABLE 3A PAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET P,e i of 5 PAPUA NEU GUINEA REFERENCE GROUPS (WEIGHTED AQEAGES LAND AREA (THOUSAND SQ. KM.) - MDST RECENT EST TE TOTAL AGRICULTURAL 19.5 MOST RECENT MIDDLE INCOME IIIDDLE IDIC0M 1960 /b 1970 /b ESTIMATE b ASIA & PACIFIC LATIN AMERICA & CARIBBFAN GNP PER CAPITA (USS) ENERGY COISUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) URBAN POPULATION (PERCENT OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 5.0 STATIONARY POPULATION (MILLIONS) 9.0 YEAR STATIONARY POPULATION IS REACHED 2120 POPULATION DENSITY PER SQ. 1M PER SQ. EM. AGRICULTURALAND POP'JLATION AGE STRUCTURE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL /c URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATU RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAIILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS).. USERS (PERCENT OF MARRIED WIOMEN) FOOD AND NUTRITION INDEX OF FOOD ERODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) PROTEINS (GRAMS PER DAY) OF WHICH ANIMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL URBAII RURAL ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL URBAN RURAL POPULATION PER PHYSICIAN /d POPULATION PER NURSINC PERSON /d POPULATION PER HOSPITAL BED TOTAL 170.0/d 150.0/e P0.3 UERBAN.... RURAL.... ADMISSIONS PER HOSPITAL BED HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBAN.... RURAL.... AVERAGE NUIBER OF PERSONS PER ROOR TOTAL.... URBAN.... RURAL.... ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL.... URBAN.... RURAL....

28 Annex I TABLE 3A PAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET PaR, 2 of 5 PAPUA NEW GUINEA REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE)-a MOST RECENT MIDDLE INCOHE MIDDLE INCCGHF 1960 /b 1970 /b ESTIMATE /b ASIA 6 PACIFIC LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLHENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMIALE VOCATIONAL ENROL. (2 OF SECONDARY) P.2 PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION * CINEMA ANNUAL ATTENDANCE PER CAPITA LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL HALE FEMALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS.... HIGHEST 20 PERCENT OF HOUSEHOLDS.... LOWEST 20 PERCENT OF HOUSEHOLDS.... LOWEST 40 PERCENT OF HOUSEHOLDS.... POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES la The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and /c Indigenous population growth rate is 2.82; Id 1964; /e Most recent estimate of GNP per capita is for 1979, all other data are as of April, October, 1980

29 N.,..: Annex I p... 3 Of 5 DEFINITIONS OF SOCIAL INDICATOR' Although the dta are drawn from. en.r.e Ilgenerally ludged the wotarooeso n eih oeol lob noe ta heyy se h inter hesuse ofthe lak ofetenadcddfntossdnnete usdt ifr etr e otie igtedaa h aamn ae ~att~nalvoompa~lie dor ns ed uniorm, is aut te suerhe acoutre In reaing - erere P of. oneiddleao to smother. Thes anerage Ers only ofehnemare the- ve.lus ofec.. totr t rime.awne she, orr end defeere ghr loupa.il-~bdt...bt.. f l tub thousand edit qim.) hhreeitd- rorust tonlpr orutattonittetsh.hy h5 meagr peseinlag pt des, ortsr n rsomceo st raedllo aes eaaqsi t...ed free a els hota uis E Itleel Agroelud s -_ sta ofegnolua Ir rste epnnl onpemaen ly i o-lat.. pe. ur.s.e.t oulto diridhd hymuhe ef prenle d~ ~~~~Pelnr pepoela ed-tfg.uhe. ad sel-perlem les,tsi. ISPPI Cu T -- Id -,k.,pnc pl etk siersatoren akh rnc,et- ubw amddrunaif divided hy the in reepene In rtber ofbetibd oulatd bysg covrion -ethod as Wonld Bsnk Atlas (197f-79 hasiel ; 1960, oyhi e ret eee n pragg fniei h..e Ibt.sd we 1970, and 1979data. hshlbittetit blrter.d Plicyinsi... ar t- bilabpsie1rs hac.patswy staffe hy bileseti- one plsoe.lptenlhitebseetebiiehnldh psiemiptly tswffdl ENEtRGY CONStloPTION PER AIPITA - Alos uempiro narts nry10. geaeno vldf urlhstas howevr, tdi ud lessen adl etdilo sod linite,pernocus, vtursigee ad Sydro.veeraegohra els- ncrmo pemaenl stafe by1 a.i phy_ia.te. by a.ld eedltt assladset, tree l ktiegrese f uosh equivalen per -epita; , sod 1979 nurse, m1idnfe cr07 lys offer y tepy.tlect sonedbais edi1 peside-t rupl-latiutton AND1VTA l STATISTICS hepes ona rrn 1 op aeed pedinel ed areiyosse Te-lfrito.Od-wrllioe As ef Joly I; t96t, 1970, sod rheta uaeto a - Inel ushrdiof ad e tosstnior diesbege dare. Proc ~~~~Rdiot-dedbh hoerttsir h mse o es 'irlse,uy-edf irersoc f toa) -Stin ef rtat eputtion thtantr d.iffrn dfnton fob as areas ear effeet onaparehility of dat.ootn Plrudntiun Pro.diwolon A lue ' ehl enniste fa rupo hedioldoa14ek este2. blhg eete R Poal p pulaion..e by ae sd sen td sheer cotit.o.et Itatsroot it,ae hesoeodfe uorec. Y - tb.il.di Prolcoens prametrs fo araty rate otmprt1s uf three -1 asse.e.a.. uoreoms ofd peron r ro-oe,sea.edreti p vrg In lfeeneeenyathtttloreeegwih nutr~ erespia roe hr f eror enrue, t ul ran sd url eupedseenhie seren lenel end fo.pt1 ewat isrt bfrepeaoyseltio dn aetre aeseemigdosrit sh 75Psr. fospra,olies Elooee at y.oeltesgtudro.y..o ghterrsesm fet lttdon dign f ottra n psp.latl-pleyog erfrss coeef be. tlcret rren fdrio---ttl rbn n ua face country t.1ei thnsw1l andfentstr In _neirntn_ofnorelts rojotet 0orIfteenn teed urose. bogo e otl,guhr toaldnliog n rune nero d.e.tn1re.p..ts irortj-ly i liin qarer py... tperee g Ores tonao onrulelon-lnssoteeeey opulatio ther Is to-nnd ste of nte Itw isese e I. eetnly. Iei Teettumr tis popuctlo seeenrlleto all ages. atteprmr-rop- pe naeeoleeete reheatedh onl Ohm basco thepostdngrnslre tthe popj,tislt narsbo-g ooeln;nral ldsrlds gd6i sent.f lass t lftiiy.. dji. EUCTONeotsthotesleuainenoleteysne l ers sta Sea beari resj Th I.i. Id. Scitdrv -hcool tondi, sale sdd fsaeie -Gle...ut.d as eb. ds fae -irarsotre tbsi 1f,. l td -ir.~t ftsh:uoa tn reqfret arl leat four yearsil of-aproe prmyletruestea Pe.A.r ys - 00 p h.t-yea fpuiclne sqar ipe kf-letye -10 heta re ofi. -h-1ewgeerl ea-tos,orteoe rane hisluttw feg Peran. ke. eenioultursiland-coapuredaeralboedw. fofragfrioul-ntherfat.trlard ttludeid... only. ypercent untietisoraaceed-oth.ent n fypspojndirsli-ottsee a ttute lro. 90.l 0970 and 1979 dana. ant I. r bou-rte r.l-i end. thoosr-oetai :td.h srtedi user pepularfonetfor 1950-Ni,Ih9h0-t-1 sod 10d0-If. eernecdrndi...levels. tattoos-fo 1kil-fl,.9I0-Il, nd 1970-I. as.roerae f otladltpoolttn g d P15yersso ere..t., pepulatlom; 191C1,P1971, end1979 dens.icogshopapot enoclat 1970, leo; end teth taos. ears~~~~~1ld _~ly wat fra 1 2 1h7 righ pfragn; I...tudeesaulste _eareea Irons tdroueio htearraeruserofdagher anefellher.r...ry.rec telto rse; sully fi1e-pa dvrsge coigo ad 1971 bro doateo eerl obi Ien ohousd od ofppualo;anide e Paenrautost (acere arl -Ade..eIs)- recetegs h uf serrer-d- coutroru1ltoddeoriog r00 of eeil ld-wno age5 (i-au y960sr0 Al nhe useb Stt-nru riet otoleet- jitr rheond.l 1-orudiidton - b rene b10 ere Pe.. ihs sthso oi G-1ra onet In naesil group.lge ~ A.1 1t I Ige ra.. puslee pr rhuadpplto;enld` nlesdt ern 5~letinon tyot 950o 60e 1to0o70utde1970sod In yad1oeliter rlist.rat inof ee..ls as I: efect C_d th,,sand) 5'rth R- - A-..I (gl ii- hr.rc..eaod orarer ASheen Ctouhartn onoiatt..) dieiud tetaveesg ra.tional a 96eera0gc p. 1e97r8p0 wt d 5 hs 916,170 n 96dn. n eeecot r-erd.i c Retr (orl ef...odt -A...o.r of rauhirreenes.. ld f iophd-yfree NUMTO or ot...lo of. wet fod soo8 tee. aes...r tognnonryite nattu Fetc ieo reot,a wde-egei tc.stwpie sld nmlfe,ses re forouiund eeholod buht roel. ud. ng heudecivbs.. ude.. h-, sin que'yrri eeuedl,to fi-y-esmg, n lsesi ddi thotne. lelur6-0e197on o easde- cecoppe ar e npeale 96,17 a oseoc sng h twtearsd Pet haed 00 lyeloigleai nrds fo honu 1 et doer.j,.. hoshodlae,iy1-5 l 1 Ird 970, d,)-ate..hsera fh,191en 0 ereiaeo ttllao fne- 99 e 'or traaton co ol potet asondy -Poeooeen tr er -- IIuar le rceti -Lter fon-or to i tot.. efarete,auc hg, trtdeg vet elfood otply en day Net spply f fend.ie- is toed,de at.. shre. Re- ard. el f-lety,nr an-ae ypngrg of tota lehperbl isee;190 ellonaue ofho gnaa 51 atal rene peha. -stbl ad1 asso ad VORttlc ttnrae rn-no cud mte, and fe t-pehnidies1 sr inl p d ete.. of eio 10 gram pbodb, nmlpoen. eessad e en parse ore- ohnpunrd asp total, ae ndfjrelbe eoe ant. ored lonr.dthaets of15grs of tota) l prret end 23l gras. epperrtgsoftr,etsadfml popuatio of llth... apettely; sotmalpretre as an Ceeg fothwol,ppadbyaqitettr lf, 1910F, sd17 data "the arep. TO partitedsgli ratesi. esfb tonid Peed 1970 Srrey; end dune. ag-nc d--dur o thr poput ele.' ilong and rime- -rt. It fee eaf.tt~~ I :v,!,d,d'p, pt.d-i.. f I'E-'- -hrorta- ef Pseonb-dnoIeeCloith en eac an t-dl t- here Synb obee shlre ad1979 date.l I :. eater rue ten protonad as fbsr bnrenles, spings, gee santoer sells) a tatima.. Ogiaf is-a eanly. lonine. Leel lotl. rr.nardta - arba rad rgr t perornogew oftheir eepeoree poplundinm..- loa di.e arepb lerom elteepsrr nos evltroetir.f.nrg.prrept fevet e saipstiosednt or bs Dlaeer roaboe ayb prncl Oow fsh nne.rha.e.r Isdt lena 19be rura conetenrd.. te 'Aibt teat ohwesnoirha.o.r d. ilr-oalurrm let tonfsterorherron f-engt raecs -diepoaasae Ieferae no- rhe res.peotrpylt. rooen oedonoieadyol at Ittr posal mytnetudr soddlepeesl ha elts osliacton nrelthoucteaee-nl,bennfett i Analyisl.. d ProjethEI.Deet efhmaeaoeessdsatenesgrby srr- eo d sectleior e oeofoteop19 ad nata Ostlitles 'I orliw per''

30 ANNEX 1 Page 4 of 5 COUNTRY DATA - PAPUA NEW GUINEA GROSS DOMESTIC PRODUCT IN 1979 /a ANNUAL RATE OF GROWTH (at current prices) FY68-73 FY US$ (%, FY69) (%, FY73) (%, 1977) Million % (Constant prices) GNP at Market Prices 2, /b 0.2/b 3.3/b Gross Domestic Investment Gross National Saving Current Account Balance Exports of Goods, NFS 1, Imports of Goods, NFS 1, OUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1979 Value Added /c Employment V.A. Per Worker US$ Million x 000 _ US$ % of National Average Agriculture Industry ,141 1,295.3 Services , Total/Average 2, , , GOVERNMENT FINANCE Central Government (K Million) % of GDP 1980 /a 1979 FY Current Domestic Receipts Current Expenditures Current Deficit Capital Expenditures External Assistance (net) /a Preliminary. As of January 1, 1978, PNG changed its fiscal year from July 1 - June 30 to January 1 - December 31. Here, FY refers to the July 1 - June 30 period, whereas 197_ refers to the calendar year. /b GDP. /c At factor cost. not not applicable available March 1981

31 COUNTRY DATA - PAPUA NEW GUINEA - 25-ANNEX I Page 5 of 5 June June MONEY, CREDIT AND PRICES (Million K outstanding at end of period) Money and Quasi Money Bank Credit to Public Sector, net Bank Credit to Private Sector, net (Percentages or Index Numbers) Money and Quasi Money as % of GDP Consumer Price Index ( ) Annual Percentage Changes in: Consumer Price Index Bank Credit to Private Sector BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE ) US$ (US$ Million) Million X Exports of Goods , Coffee Imports of Goods Cocoa Resource Gap (Deficit - -) Copra & Copra Products Services (net) Timber & Timber Products Transfers (net) Copper Concentrates Balance on Current Account Gold All Other Commodities Private Capital (net) Public MLT Loans (net) Total Errors and Omissions /b Increase in Reserves EXTERNAL DEBT, DECEMBER 31, 1979 US$ Million Imports of fuel and related materials Public Debt, incl. Guaranteed Nonguaranteed Private Debt Total Outstanding & Disbursed RATE OF EXCHANGE PUBLIC DEBT SERVICE RATIO FOR 1979 /c X Public Debt, incl. Guaranteed 4.3 Nonguaranteed Private Debt US$1.00 = K 0.79 US$1.00 = K 0.67 K 1.00 = US$1.26 K 1.00 = US$1.50 Total Outstanding & Disbursed IBRD/IDA LENDING (AS OF 12/31/79) US$1.00 = K 0.71 US$ Million K 1.00 = US$1.41 IBRD IDA Outstanding & Disbursed Undisbursed Outstanding incl. Undisbursed /a Preliminary. /b Including capital n.e.i. /c Ratio of debt service to exports of goods and nonfactor services... not available March 1981

32 ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATIONS IN PNG A. STATEMENT OF BANK-LOANS AND IDA CREDITS /a (as of March 31, 1981) Loan or Credit Amounts (US$ millions) Number Year Borrower Purpose Bank IDA Undisbursed Five credits and five loans fully disbursed PNG 1976 PNG Agriculture PNG 1976 PNG Education PNG 1977 PNG Roads PNG 1978 PNG Ports II PNG 1978 PNG Rural Development PNG 1980 PNG Third Highways PNG 1980 PNG Third Highways Total of which has been repaid/b Total now outstanding Amount sold 8.1 Repaid Total now held by Bank and IDA 76, Total undisbursed /a Total does not include the Primary Education Project (Loan of $6.0 million and Credit of SDR 9.4 million) which has not yet been signed.

33 ANNEX II Page 2 of 4 B. PROJECTS IN EXECUTION /1 Loan No Popondetta Smallholder Oil Palm Development Project; US$12.0 Million Loan of November 19, 1976; Effective Date: January 6, 1977; Closing Date: December 31, The project is designed to establish 9,600 ha of oil palms with processing facilities around Popondetta. It includes 4,000 ha nucleus estate and a factory to serve both estate and smallholder production, developed as a joint venture between the Government and the Commonwealth Development Corporation. The Bank-financed portion of the project includes: 5,600 ha of oil palm plantings, subdivided into 1,400 smallholder plots; long-term credit facilities for smallholders to be provided through the PNGDB; extension and visiting inspection services; and technical assistance for project management; social infrastructure and improvement of the road network. Smallholder oil palm planting is slightly behind target but this is expected to be back on schedule by the end of the current planting season. The nucleus estate planting is ahead of schedule and should be completed by May 1981, one year ahead of appraisal estimate. The first phase development of the oil palm processing factory has been completed and became operational on May 15, The transport company for collection of smallholder crop has been formed and the first harvest from smallholder blocks within the project was collected on September 2, All other works are generally on schedule but some cost overruns have occurred in the road program which will be met from unallocated funds. Disbursement still lags behind expenditure - following a temporary improvement - and this is primarily due to the fact that the drawdown from PNGDB is well below the actual physical situation. Credit No. 661 Education Project: US$4.0 Million Credit of November 19, 1976; Effective Date: January 3, 1977; Closing Date: December 31, The project is designed to: (a) meet manpower requirements in agriculture, industry, health and the teaching service; and (b) support education and planning studies in PNG. Physical project implementation /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

34 ANNEX II Page 3 of 4 is nearing completion on schedule; technical assistance has incurred minor delays, but these are being overcome. Educational outcomes look promising. Project costs are within appraisal estimates. Disbursements lag behind schedule because of delayed submission of withdrawal applications. Credit No. 677 Second Highlands Road Improvement Project; US$19.0 Million Credit of January 28, 1977; Effective Date: March 29, 1977; Closing Date: June 30, The project will improve and pave 68 kn of the Highlands Highway. It further provides detailed engineering and feasibility studies of the same highway in rural development studies of the Enga and Chimbu Provinces, and techical assistance to domestic road construction contractors. Civil works are proceeding satisfactorily; detailed engineering and feasibility studies have been completed. The Chimbu rural development study has been completed and the Enga study will be finished in the second part of The technical assistance component has also been completed. Loan No Second Port Project; US$3.5 Million Loan of May 18, 1978; Date of Effectiveness: December 19, 1978; Closing Date: June 30, The project will provide facilities for container handling at Port Moresby so that the greater efficiencies of container shipping can be realized. Major components include additional land reclamation of 1.6 ha, to give a total of 4.2 ha, a 125 m berth, an extension of the present container freight station, and improvements to the port access road. Also included in the project are a 30 m coastal berth at Samarai, located on a small island off the coast of Southern Papua, provision of three pilot launches and consulting services for project design and implementation, and for training Papua New Guinea Harbours Board staff. All major project components have been satisfactorily completed. Total dry cargo traffic at all PNGHB's ports in 1980 was 1.86 million tons, slightly over that for 1979 (1.81). Total container traffic at all PNGHB's ports in 1980 was about 52,910 which represents a 10% increase over container traffic in The Government approved a tariff increase of about 71% in total revenues. This increase should enable the Harbours Board to meet its future financial obligations as well as comply with the 7% rate of return covenant required under the loan. Credit No. 841 Rural Development Project I; US$20.0 Million Credit of November 7, 1978; Effective Date: March 7, 1979; Closing Date: June 30, Within the Southern Highlands Province, the project would provide for research into subsistence crops, nutrition and health of the people,

35 ANNEX II Page 4 of 4 expand coffee, tea, silk and cardamom production, build roads, schools and health subcenters; support adult education and agricultural extension services; and contribute to the general development of the province's people and economy. The construction of civil works (roads, schools, health centers, training facilities and houses) is generally on schedule. After some initial delay, the nutrition and subsistence component of the project is gaining momentum after the appointment of a team leader and five consultants for the research unit in the fall of However, two more consultants and several more technical specialists will still have to be recruited in The facilities for the nurses training school at Mendi have been completed. However, the program for nurses training was held up by the National Nursing Council because of shortage of tutorial staff at the school and shortage of adequate experienced staff at the Mendi hospital. Teaching has commenced in two secondary schools of which one is still under construction. Under the non-formal education component, many schools and villages have received various types of assistance. Tea, coffee and cardamom companies have been formed and are satisfactorily managed or advised by a full complement of technical staff in the Southern Highlands Management Authority (SHMA). In the land development program, there has been some shift from originally proposed tea lands to coffee and cardamom, due to the increased costs of transportation of fresh tea leaves from the tea lands to the factory. The establishment of smallholders' coffee plantings (clan coffee blocks) is somewhat slow. The silk component of the project has been fully assessed by an FAO mission in April, 1980, which has made appropriate recommendations. Project Management will undergo some more changes during Both Project Manager and Deputy Project Manager have indicated their intent to leave the project after they have identified suitable and experienced successors. For the Deputy position a well-experienced project accountant with managerial capacities is being recruited. Loan No and Third Highway Project; US$13.0 Million Credit Credit No and US$17.0 Million Loan of May 27, 1980; Effective Date: September 30, 1980; Closing Date: December 31, 1984 The project would assist the Government in completing its program to improve and pave the Highlands Highway from the main port at Lae through the Hfighlands region up to Togoba. It would, further, help strengthen central and provincial governments by assistance in formulating through the help of consultants a strategy for maintenance of national, provincial and village roads. The project also provides additional assistance for transport planning and project identification, preparation and implementation at the provincial level. The civil works have been successfully tendered and construction is underway. The consultants' study on rural transport is also underway and the Inception Report has been received. The Government's assitance for road maintenance has not started yet.

36 ANNEX III PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I: Timetable of Key Events (a) Time taken by the country to prepare the project (b) The agency which has prepared the project (c) Date of first presentation to IDA, and date of the first IDA mission to consider the project : Six months : Government with consultants : Mid-1978 (d) Date of departure of Appraisal Mission : April 6, 1980 (e) Date of completion of negotiations : April 23, 1981 (f) Planned date of effectiveness : August 21, 1981 Section II: Special IDA Implementation Actions None. Section III: Special Conditions Conditions of effectiveness would be: (a) the establishment of Steering Committee and the appointment of its members (para. 44); and (b) the signing of the subsidiary loan agreement (para. 47).

37 , e::2:58.;.apqa NEIA4 tcean GUINEA _ns.* "1'^ _ b r~~~, PA6A Nrw dijin~~~~~~~~~a ~~~ ~~~~~~~PNGDB j ForGO ~~~~~~~~~~'<tn IBRD PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT DISTRIBUTION OF CASH CROP AREAS AND~ 146- ~~~~~~~~~~50 50APRIL 1Q8 FIELD OFFICES _ COCONUTSS :A9- v^4tr^tia ; E % V ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~COFFEE : < : >; i42- A ' 8*iorengan \ ; &\ 4 0:~~~~~~~~ - -\ ~ ~ ~ ~ ~~ ~=;. : * _ CRUABER E I OIL PALM go Koving PYRETHRUM TEA.,$0; -61l? F% I_.-Qto' - INTERNAtiONAL ROUNOAR0IES. - {, -lpeplg,'r--. a \ * I \ * I f * < f,< 4,,,ENGA*I t ',; < WEEST I ~~----~~ s- MADANG > 1 ; f + wa / < W.b. X41 _ NEW BRITAI EAST NEW BRIT:AIN O NEW IEAD i U I'I - \ s. NEW IRELAN s; BRANCH OFFICE N ANIjWWk A SIREFRANCH OFFICE WESTSEPIK I I 40 I N 14% *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ REPRESENTATIVE OFFIC -4- i JJ j EAST SEPIK I PROVINCIAL ROUNQARIES 4t- 5f~~\vt < ~ </T,;SOUTHERN, I OTEN LIKE HIGHLANDS HI P -' IA 1 %Son k WESTERN " '' S O,NQi- > G WL - -, 7;-fAS \' ' A. - MI/A - *~~~~~~~GULF*ROE 'I-SOO N - D..oot - * NORTHERN /4. 0 < L, X[:;'1. J % o K o o PORT MORESBY 9 MIE- -C ;; IrTRAL * I ¾ Ct'> N~~~~~~~~~~~~~~~~~~~~~'IL NE WAY1 1~~~. A- - N WE KIOEESj/b,/t MI'LES ic ;,:1 =M Thi.op h. born pwotd bj' Nh. AL1~~~~~~~~~~T0AiIk 2 ~ ~ ~ ~ ~~~~~~~~~~~~01dooo.t LV,o ooflaoof. IT, IorNoMr Aom USTRAWA p4420 A 1500~~~~~~~~~160iw 1540 th-- fooio