Papua New Guinea - Policies and prospects for sustained and broad-based growth (Vol. 2) : Annexes

BIpot No 7121-NG Papua New Guinea Policies and Prospects for Sustained and Broad-Based Growth (in Two Volumes) Volume II: Annexes April 19. 16 Country Department V Asia Regional Office FOR OFFICIAL USE ONLY DocumntM of the VWwrd Bank This report has a restrjcted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without MAbdd Baok authorization.  CURRENCY EOUIVALENTS Annual Averages 1981 K 1.00 - US$ 1.487 1982 K 1.00 - US$ 1.356 1983 K 1.00 - US$ 1.199 1984 K 1.00 - US$ 1.118 1985 K 1.00 g US$ 1.000 1986 K 1.00 - US$ 1.030 1987 K 1.00 - US$ 1.101 March 31, 1988 K 1.00 - US$ 1.133 FISCAL YEAR January 1 - December 31  FOR OFFICIAL U= ONLY PAPUA NEW GUINEA POLICIES AND PROSPECTS FOR SUSTAINED AND BROAD-BASED GROWTH VOLUME II: ANNEXES Table of Contents Page No. PART I: POLICY ISSUES, PROGRAMS AND PROSPECTS IN SELECTED SECTORS I. AGRICULTURE A. Agriculture in the EconomyI... . { ............................ 1 B. Key Factors Affecting Development.......................... 4 C. Costs, Profitability and Medium-Term Production Pro sp e..s 7 D. Resources for Development..o,.o .o.... ... ... ..... 11 E. Medium- and Long-Term Strategyoo a t e gy..o... oo...ooo.. o.. 13 II. MINING A* Structureouot ur.eooo... o.o..o.. .ooo.....o..oo......o.oooo. 15 B. Development Prospects.............oe. oo..o............... 16 C. Managing Mineral Sector Development.... ................... 20 D. Balance of Payments and Fiscal Implications..oooovoo.ooo 24 III. ENERGY A. Petroleum Rescurces, Exploration and Prospects....pecs.0... 30 B. Issues for the Futuret u re...o....o........ooo.....e...oo. 32 C. Power Sector Status and Development Programoo.oooooo.*. 33 D. Issues Concerning Future Development....oo.... oo... oo.. 36 E. Priorities for Donor Fundingn d i ng.o............o.o..o.. 37 IV. TRANSPORT A. The Existing Sys tem 39 B. Importance of Transport Development..0................... 41 C. Major Policy and Institutional Issues..o..oo.**o. oo.... .. 42 D. Investment Strategyo.a t e gyoo.....o.o.. oo.o.ooo.... o... oo. 46 V. HUMAN RESOURCE DEVELOPMENT A. The Human Resource Basea.o..oo..o.......... oo...o.. o.o. 51 B. Implications of Population Growth.. o w th...00.......... 56 C. Strategy for Human Resource Development: Education and Training...... ......o.. ........................ 60 This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contenft m: v not otherwise be efivc~ with'lut Wor14 Bli k authori tOin.  Page No. PART II: INSTITUTIONYL AND PLANNING ISSUFS VI. INSTITUTIONAL FRAMEWORK FOR DEVELOPNNT A. Introduction ................ ..... 74 B. Institutional Reform in PNC 74 C. Results of the Reform Effort............................... 78 D. Future Directions and Substantive Needs.................. 82 APPENDICES I. Report on the Costs and Financing of Education: Recommendations II. Background Data to Annexes  PART I POLICY ISSUES. PROGRAMS AND PROSPECTS IN SELECTED SECTORS  I. AGRICULTURE A. Agriculture in the Economy 1.1 Agriculture is the most important economic sector in the country, providing the main source of livelihood to about 851 of the population, and accounting for about 352 of GDP and exports. The sector is expected to con- tinue to serve as the primary source of employment and broad-based growth in the economy and the Government, in recognition of its importance, has placed agriculture at the center of its development strategy. Production is dominated by smallholders who farm in a mixed subsistence-cash crop system. Smallholder cash crop production is characterized by low technology, low yields, and low levels of income. Within smallholder agriculture, cash- generating opportunities depend heavily upon access to markets and the agro- climatic zone. Production also takes place on estates which vary considerably in size, quality of management, yields, and costs of production. Although agricultural growth in the recent past has been well below potential, the prospects for future growth in export crop production are considerable. How far and how fast the growth potential can be realized will depend in good part upon the success of the Government in maintaining a favorable policy environment, and in addressing critical constraints in extension, institu- tional capacity, and manpower. The growth potential in production for the domestic market is less than the potential for export crops, giver. the size of the market and the limited scope for domestic production of major food imports. 1.2 Production for Domestic Consumption. Over half of the value of agricultural production comes from food crops and livestock. About three- fourths of livestock and food crop production is subsistence (nonmarketed) production. Sweet potatoes, yams, bananas, taro, cassava and sago are grown as the major staples, with pigs and chickens incorporated into the farming system. Traditional production systems are highly adapted to the particular environment. The subsistence production system is considered efficient in its use of land and labor, and the capacity of the rural population to feed itself is one of the country's most valuable assets. Commercial livestock production is dominated by broiler production, followed by beef, eggs, crocodile skins and pork. 1.3 Recent Growth in Production for Domestic Market. Under an umbrella of heavy protection from import bans and tariffs, sugar, commercial poultry and pig industries have been promoted over the past several years (Table 1.1). The sugar industry is a monopoly, comprising one large estate with limited outgrower participation; the comnercial pig and poultry industries are based on large-scale units with outgrowers supplying part of production. Domestic prices for these products are well above the prices of competing imports. This import substitution has been achieved, therefore, at a high cost to the consumer. Moreover, the poultry and pig industries produce relatively little domestic value added because of the high import content of production, parti- cularly imported feed grains. This may change in the future if the domestic feed grain industry continues to grow. 1.4 In spite of their overwhelming importance, very little data on food crop and village livestock production exist. Indirect evidence suggests that  food crop production is by and large keeping pace with population growth, although as cash incomes increase, diets are increasingly being supplemented with imported foodstuffs, particularly rice and canned fish. Rice and canned fish now make up about 30X of the value of food imports. In spite of increases in the volume of such import items, the total food import bill has remained roughly constant in real terms over 1981 to 1986, and has averaged 181 of total imports. Table 1.1: GROWTH IN PROWCTION OF BEEF, CHICKEN, PORK, EGGS AND SUGAR, 1981-86 Annual growth in domestic Imports as percent of production total consumption 1981 1986 1981-86 1981 1986 Domestic Coamercial Production of: Beef ('000 tons) 2,145 2,001 -1.41 64Z 76Z Chicken ('000 tons) 3,983 8,965 16.2Z 59Z 2Z Pork ('000 tons) 376 950 18.51 61X 311 Eggs ('000,000 dozen) 2,100 3,100 7.8Z 28Z 3Z Sugar 0 9,377/a N.A. 1001 641 /a Domestic sugar production began in 1983, and reached production levels of 30,000 metric tons by 1985. In 1986, however, the crop was hit by a sugar cane disease and production dropped off sharply. Source: DAL 1.5 Export Crops. Export crops, including coffee, cocoa, oil palm, coconuts, tea, cardamom and rubber, account for about one-third of the value of agricultural production. Smallholder production exceeds estate production in the four most important export crops-coffee, cocoa, oil palm, and coconuts. Coffee, located in the highlands and in the highland areas of the lowland provinces, is the most important agricultural export, both in terms of export earnings and number of producers, with approximately half of all rural households producing coffee. Coffee rust was detected in PNG in 1986, and has since spread widely throughout the coffee areas. The disease is expected to force a restructuring and rationalization of the industry over time. Because of poor management, smallholder coffee is the most vulnerable to the disease, and a smallholder coffee rehabilitation program is under way to improve coffee management and spray for rust control. Cocoa, with production concentrated in East New Britain and North Solomons provinces, is the second largest export crop. Oil palm is currently produced by three large Nucleus-Estate-with- Smallholders (NES) schemes. A fourth scheme is being established and several others are in the public investment pipeline. Coconuts are grown widely throughout the coastal provinces.  -3- 1.6 Recent Crowth in Exports. Over the five-year period from 1981 to 1986, the exports that recorded the fastest volume growth were palm oil and kernels, with an annual growth rate of over 202 (Table 1.2). Although oil palm was only introduced in PNG in the late 1960s, exports of oil palm pro- ducts have recently replaced copra as the third most important export crop. Export volumes of coffee, cocoa, and coconut products grew at rates ranging from -1 to 3Z. World prices of these -our comodities were volatile over the period, but producer prices were partially insulated from large price move- ments by the operations of the comodity stabiliz_tion funds. Signific-nt changes occurred within the copra and cocoa industries, with smallhoider shares of total production rising steadily. Cardamom exports also increased rapidly, but from a very low base. Exports of forestry products overall rose dramatically, with the source of growth being log exports. Exports of pro- cessed timber products declined, in part due to strong competition. Tuna exports declined sharply due to falling world prices and the inability of the Government to attract operators. Table 1.2: GROWTH IN VOLUMES OF MAJOR AGRICULTURAL, FISHERIES AND FORESTRY EXPORTS, 1981-86 Average annual growth 1981 1986 1981-86 Agriculture (tons) foee 47,006 53,638 2.6X Cocoa 28,479 31,823 2.21 Copra 99,390 92,968 -1.3X Coconut Oil 34,772 41,109 3.3Z Palm Oil 44,031 128,907 21.5X Palm Kernel 2,893 14,420 32.1X Tea 6,959 5,323 -5.4Z Rubber 4,536 4,944 1.7X Cardamom 10 387 72.6Z Fisheries (tons) Tuna 29,788 2 N.A. Crayfish, Prawns 1,281 1,565 4.01 Plywod ('000 sq m) 1,455 0 N.A. Logs ('000 cu m) 749 1,299 11.01 Lumber (cu m) 24,959 7,354 -24.4X Woodchips (tons) 102,000 81,000 -4.6Z Source: DtL  - 4- B. Key Fact,-s Affecting Development 1.7 kesearch and Extension. The future growth of agriculture in PNC depends heavil.y on the development of improved technologies an the extension of such technologies to the producer. Past research efforts have offered an excellent basis for expanding the production of major export crops, particu- larly oil palm and cocoa. Oil palm, cocoa/coconuts, and coffee research is now the responsibility of semi-autonomous research institutes, funded primarily by producers. The Government has retained responsibility for the food crop, livestock, and minor crop research programs. The most pressing research task at present is the ongoing work at the Coffee Research Institute in the development and multiplication of coffee leaf rust-resistant varieties of arabica coffee. These resistant varieties are not expected to be available for wide distribution before 1992. Other important research tasks in the area of major export crops include the selection of suitable traditional tall coco- nut varieties and development of pest-resistant coconut hybrids, and the ongoing development program for cocoa hybrids. The state of knowledge on food crops, livestoLk and the minor crops is much less advanced than that of major export crops. Reaearch in these areas has provided few messages for the farmer, particularly in the complex area of subsistence food production. ).8 The dissemination of existing technologies to a large number f smallholders presents a major problem. Since the devolution of responsibility for extension to the 19 provincial governments following Independence and the loss of many experienced extension officers, the extension structure has been severely strained, and in some provinces has all but disappeared. While the quality of the service varies between provinces, the most frequently cited problems include: poorly trained and motivated staff; inadequate supervision; inadequate contact with research staff; lack of housing, vehicles and training equipment; inability to reach women farmers (or to retain female staff); and the multiplication of tasks without clear priorities. While in the past some agricultural technologies have spread in PNG without agricultural extension, in most cases the lack of an effective service imposes a severe constraint on the extent and speed with which more efficient and profitable farming techniques and inputs can be spread. A number of ad hoc solutions to strengthen extension are being devised for particular commodities including: (a) maintaining extension under national control (oil palm, rubber); (b) de facto privatization of extension and other activities (Coffee Development Agency); and (c) various fcrmulae for cooperation between DAL and the provin- cial DPIs (cocoa/copra, fruits and vegetables, minor crops and livestock). Given the urgency of the situation, there seems to ba no alternative to following an essentially ad hoc approach in the immediate future; in fact the main need now is to ensure that these programs are firmed up and implemen- ted. But looking beyond the immediate future, it is important that the national and provincial governments work out a systematic strategy which would cle&rly define the kind of extension service needed, the division of labor between the various levels of government, and the resources needed to make it work. 1.9 Land. About 97X of the land in PNG is held under customary ownership, a system that promotes social stability and equal access to land within clan groups. With population growth and the spread of cash crops, the sustainability of the traditional land tenure system has been challenged. While the customary land system is not a major constraint to smallholder  development in the immediate future, some form of land registration will surely be required in the longer term. Even more important will be the need to devise environmental policies and measures to ensure sustainable produc- tiorf, particularly in areas of high population density. Alienated land makes up about 32 of the total land surface, but perhaps 10X or more of arable land. Estates are generally located on alienated land under 99 year leases granted by the wovernment. Considerable amounts of alienated land are not under cultivation, and this represents a major untapped asset, particularly foi turther private estate investment in agriculture. However, there is no reliable inventory of such land, and cumbersome allocation procedures cause considerable delays. The Government is now giving higher priority to strengthening land administration to make such land available for development purposes. 1.10 Transport and Market Access. The country's rugged topography makes access to many rural areas difficult and communications costly. Given the geographic fragmentation of the population, access to transport is often a more serious constraint to agricultural production than the physical charac- teristics of the land. Costs of transporting agricultural inputs into and commodities out of remote areas are high. These costs mean that many low- value crops, such as rubber or copra, need to be concentrated close to ports. It is difficult to extend the benefits of major export crops to more remote areas, both because net returns to the farmer are low, after paying transport costs, and because it is difficult to bring in the services required to increase the farmer's productivity. Moreover, the lack of access to urban markets constrains the production of marketable food items, i.e., fruits and vegetables. A program for improving rural infrastructure, particularly rural/feeder roads, should form an integral part of the agricultural development strategy. 1.11 Institutional Capacity. The scarcity of skilled and experienced manpower in both the private sector and in the Government is perhaps the most serious single constraint facing agriculture. Most of the institutions that serve the agricultural sector are young and have not develeped the structures, procedures and management and staff capacities to tackle all of the challeng- ing tasks that face them. Nowhere is this more evident than in the provinces, which have been allocated a major share of the responsibility for agricultural development but are still without the capacity to exercise such responsibili- ty. The planning and implementing capacity of government agricultural agencies will be a key factor determining what the sector can achieve over the next few years. 1.12 Incentive Structure. As a small producer of its major export crops, PNG is a "price taker" on the world market, and can do little to influence the price it obtains for its products--although there is perhaps a limited scope for improving average prices through better quality control and marketing arrangements and efforts to gain greater access to preferential markets. Prices from 1988 to 1995 for PNG's major agricultural exports are currently projected to average in real terms only 75% of average prices over the period 1981-87. In the face of weak commodity prices, it is even more critical that sectoral and economy-wide policies support remunerative producer prices. The major policies affecting producer prices are the operation of the price stab- ilization funds; taxes, subsidies, and protection; and wage and exchange rate policies.  - 6 - 1.13 (i) Price Stabilization. PNC has operated price stabilisation funds for its major export comodities for many )ears. The funds reduce price fluctuations by assessing a long-run moving average price, and extracting a levy or paying a bounty whenever the current pricef gets significantly out of line with the reference price. These generally well-managed stabilization schemes have reduced producer price fluctuations and are appreciated within their respective industries, but are not without problems. Problems emerge when the moving average does not approximate the long run trend, and/or the formula is not followed, with the result that the funds can build up substantial surpluses (the recent experience with coffee) or run completely out of resources (copra). The Copra Fund, for example, depleted its funds for the second time in the past six years in November 1987. In both instances, the Fund has had to borrow co continue operations. This putr the Fund in a difficult position, as the first part of any price recovery is already mortgaged to servicing the loans and, therefore, cannot contribute to rebuilding the Fund's resources for future price slumps. Given these kinds of problems, there is clearly a need for periodic reviews of fund operations. 1.14 (ii) Taxes, Levies, Subsidies, and Protection. Compared to most countries, agricultural taxes and levies are low in PNG. An exception is the recently imposed coffee rust control levy. Through this levy, coffee producers finance the activities of the recently forued CDA. With this additional levy, the total burden of export taxes and levies is higher for coffee producers than for other cash crop producers, at over 10% of gross producer income in 1987. Given the already much lower returns to coffee compared to export crops such as cocoa and oil palm, these taxes are esen more burdensome. The new producer levy has achieved the objective of quickly providing funding to CDA. But over the medium term, government assistance to the agency should increase and the proportion financed by producers should be reduced. Export taxes on coffee, cocoa, oil palm and copra are 2.5Z of f.o.b. value, except when they are waived during price slumps. Producers finance most of the commodity research with moderate research levies. 1.15 The authorities have been able to keep subsidies at a relatively low level. Direct agricultural subsidies consist of some limited provision of subsidized seedlings and small livestock to smallholders, concessional interest rates on some types of agricultural loans, and some public assistance in marketing in remote areas. Agricultural protection, on the other hand, has increased in the past five years through a combination of import bans and tariffs on sugar, poultry, pork, and fruits and vegetables. This trend toward greater protection needs to be checked. Import bans should be replaced with a tariff that is reduced over time. As noted earlier, the import substitution that has occurred in the poultry, sugar, and pork industries has been achieved at a significant cost in resource misallocation and higher consumer prices. 1.16 (iii) Wages and Exchange Rate. Rural wages are high in PNG compared to countries which are its competitors in production. However, there does not appear to be much scope for reducing rural wag s by lowering rural minimum wages, because rural minimum wages appear just sufficient to attract the necessary labor. Rural wage-rate distortions seem to arise largely from urban minimum wages which, because of a high differential over rural wages, pull labor from rural areas, raising the rural market-clearing wage. This points to the need for a downward adjustment of the urban minimum wage. There has been considerable debate on the subject of whether the exchange rate policy  - 7 - has taxed the agricultural sector in the past; on balance the sector probably has been slightly taxed. Given the expectation that most comodity prices will remain weak over the medium term, both the exchange rate and wage levels need to be carefully watched in ensuring the maintenance of adequate producer incentives. These policy instruments could become especially important if a mineral resource boom materializes, which might put upward pressures on wages, inflation and the exchange rate. Unless these pressures are contained, the future viability of agriculture (on which the country will depend to sustain long-term development) could be threatened. C. Costs, Profitability, and Medium-Term Production Prospects 1.17 The future health of agriculture will depend upon the extent to which it can remain profitable in increasingly competitive markets. The key to maintaining profitability in the face of continued weak world prices will be to improve productivity and reduce costs of production. Export Crops 1.18 Coffee. Coffee is a feirly low-return crop relative to cocoa and oil palm (Table 1.3), but for many households it still offers the most attrac- tive cash cropping opportunity. There is great potential for increasing yields and raising farm incomes among smallholders through simple activities such as weeding, pruning and shade control. Increased cash incomes from coffee would produce widespread benefits, given that approximately half of all rural households earn some cash income from coffee. However, the capacity of small farmers to cope with coffee leaf rust is uncertain, and depends very much on the success of thc rehabilitation program (now being implemented by CDA). The estate sector is much better equipped to control the disease, but is expected to have difficulties over the medium term under the low price forecasts, because of its generally high-cost structure. These factors indicate that the industry is facing a period of transition, and is likely to undergo considerable restructuring. A weeding out process is expected to occur; some smallholder producers in areas hardest hit by coffee rust will cease production but the remaining smallholders are expected to increase their production over time through improved crop husbandry. In the estate sector also, the least efficient producers will be forced to lower production costs, or drop out of business. On balance, production is expected to increase over the next fi7e years, though still remaining below the 1987 record crop (Table 1.4).  - 8 - Table 1.3: COMPARISON OF PROFITABILITY OF MAJOR SMALLHOLDER CASH CROPS (Constant 1987 Kina) Discounted net Peak year return per man-day annual net income (discount rate12%) (1 ha, Kina) Coffee (arabica) Low input coffee leaf rust control 2.2 420 High input coffee leaf rust control 2.0 780 No rehabilitation 2.3 290 New Establishments (starting 1987) Oil palm (village) 10.9 850 Sole hybrid cocoa 5.6 830 Sole coconut (hybrid) 1.5 330 Hybrid cocoa/coconut interplanted 4.3 950 Cardamom 2.4 to 3.3 250 to 420 Chilies 2.1 560 1987 Rural Minimum Wage Rate 3.4 Source: World Bank, Papua New Guinea: Agricultural Assessment Review, Report No. 7090-PNG, April 1988, Annex 3. Table 1.4: PROJECTED PRODUCTION VOLUMES OF MAJOR AGRICULTURAL EXPORTS, 1987-95 Projected Esti- growth p.a. mated Projected from Volumes 1987 1988 1989 1990 1995 1987-1995 Coffee (tons) 64,740 46,190 48,000 49,900 60,700 -1% /a Cocoa (tons) 35,600 37,600 40,100 43,100 58,100 6% Copra (tons) 94,800 95,000 95,000 95,000 95,000 0% Coconut Oil (tons) 42,100 41,000 41,000 41,000 41,000 0% Palm Oil (tons) 130,000 135,000 161,000 187,000 299,000 10Z Palm Kernel (tons) 18,700 20,300 24,100 28,100 44,800 11% Rubber (tons) 5,300 5,500 5,700 5,900 6,900 3% Tea (tons) 6,500 7,000 7,000 7,000 7,000 1% /a The projected growth rate in coffee production from 1988 to 1995 (excluding the record 1987 production year) is 4% p.a. Projections for coffee output are subject to more than a normal degree of doubt because of the uncertain future of coffee. At the time of the follow-up mission in March 1988, there were good prospects that 1988 could be another record year. However, there is still a wide margin of error in predicting the net effects of coffee leaf rust and the efforts to control it over the medium term. Source: Staff estimates.  - 9 - 1.19 Cocoa. The cocoa industry is expected to face low average prices over the next few years. However, the introduction of high-yielding, disease- resistant hybrids has greatly improved PNG's competitive position. Following a long period of decline, the estates have rapidly replanted with hybrids and production is expected to increase dramatically over the next few years. As with coffee, the typical small cocoa producer uses few cash inputs, follows generally poor management practices and has very low yields. A concerted effort has been started under the Smallholder Cocoa/Coconut Rehabilitation and Expansion Project to encourage smallholder hybrid cocoa establishment by improving the provincial extension services for cocoa. Some smallholders are adopting hybrids on their own, and returns to labor are estimated to be relatively high (Table 1.3). But widespread dissemination depends critically on whether the weak provincial extension services can be quickly improved. Overall, growth prospects for cocoa look good, provided no major problems emerge w:th the management of hybrid cocoa, and total production volume is projected to grow by about 6Z p.a. over the next 7 years. 1.20 Coconuts. Coconut is primarily grown intercropped with cocoa, serving as shade and providing an additional output, but is also grown alone, with low returns, in coastal areas of sandy soils not suitable for production of higher-yielding crops. Increasingly, the future of the coconut industry is tied to its role as a shade crop fer cocoa. Future production depends importantly on how available varieties will compare with faster-growing shade species. Production volumes are projected to remain flat over the medium term. 1.21 Oil Palm. Oil palm is expected to remain the fastest growing agricultural export. By 1995, oil palm export earnings are projected to be roughly on par with those from coffee. Although world market prices are expected to remain fairly low, PNG has a strong competitive advantage over most major producers. Estate yields are perhaps the highest in the world for unfertilized production. Smallholder oil palm is projected to provide the highest return to labor among major crops (Table 1.3). Current production is from three large Nucleus-Estate-with-Smallholders Projects, all with govern- ment and foreign investor equity in the estate, and smallholder development financed by the Government. Another large scheme is under development. Land is not a constraint to further development in the medium to long term. At least five additional areas of alienated land have been identified for future development. The main constraints to future development would be: (a) the Government's ability to finance its equity contribution and smallholder development, assuming this model continues to be followed; and (b) the identification of private investors for future schemes. 1.22 Rubber. In terms of soil and climate, rubber would seem to have as good a potential as oil palm in PNG. Yet, rubber has not been very success- ful. With the present level of technology and management, it is difficult to foresee a major expansion in rubber production. Because of this, production volumes are projected to grow at low rates. However, recent developments in latex production technology--which permit a combination of higher yields, better quality rubber, and substantial savings in labor--could dramatically improve prospects if introduced in PNG together with good management.  - 10 - 1.23 Tea and Minor Crops. Tea is an estate crop in PNC and has little scope for expansion, given land availability and returns. Also, minor crops such as cardamom and chilies have only modest scope for growth. These minor crops have a rather low return to labor, and tend to be grown in fairly remote areas (without the potential for growing alternative cash crops) because of their high value-to-weight ratio. Production for Domestic Consumption 1.24 PNG has the technical potential to grow virtually all of its own food requirements. However, the scope for expanding production for domestic consumption is in practice limited by several major constraints. Local markets are very small, compared with major export markets, and the country is already self-sufficient in many of those items which are the easiest to produce. The scattered geography of the country, high transport costs, and the small scale of operations result in generally high costs of production, which make it difficult for local products to compete with major food imports (rice, cheap canned fish, canned corned beef, and inexpensive cuts of meat, which together make up about 50% of food imports). Heavy direct subsidies and/or high levels of protection would be required to make domestic production of these goods profitable, compared with alternative activities. A number of important industries, notably sugar and the commercial production of poultry and pigs, have already been established on a high cost basis, under the umbrella of various protective measures that have raised the cost to the consumer and restricted market growth. These industries will grow only modestly, unless costs can be reduced, encouraged by a progressive reduction in protection, so that more consumers can afford their products. 1.25 The marketing of the staple rootcrops has been impeded by their low value-to-weight ratio. There is potential for increased domestic production of higher-value food items, such as fruits and vegetables, but the industry to date has suffered from poor product quality and packaging, fragmentation of producers, and expensive and unreliable shipping facilities. The Government attempted to address some of these problems with the formation of a government body to directly market fruits and vegetables. This government-run corpora- tion made heavy losses and was abolished in 1982. More recent attempts to promote the fruits and vegetables industry have relied upon high levels of protection (a complex system of high import tariffs, import bans, and a quota system), which entail high costs to the consumer and resource misallocation. 1.26 There has been concern that subsistence production in areas of high population density may be under severe stress, with consequent shortening fallow periods, declines in production, and malnutrition as a direct result of the failure of the agricultural system. Evidence to date, however, indicates that the subsistence production system has held up well. For example, some areas judged by observers in the 1960s to be in danger of imminent ecological collapse have been studied recently and indications are that household produc- tion systems have adapted to the increased population density (in part through increased migration), and the subsistence agricultural system is still pro- ducing adequate levels of output. Nutritional stress has been identified in many districts in PNG, but detailed studies thus far of these areas have linked the nutritional problems to poor nutrition education and the lack of  - 11 - health services rather than to problems in agricultural production. Nonethe- less, the subsistence production system is clearly an area that needs careful monitoring, and nutrition/health measures are needed to address the nutri- tional problems that do exist. DAL if attempting to redirect its research on food crops to a farming systems approach, which would emphasize improved food cropping systems that produce more and better food, minimize the family's worklosd, and are environmentally sustainable. Substantial results from the new resaearch efforts, however, will not be available for many years. Fisheries and Forestry 1.27 PNG has a large skipjack tuna resource which is presently dormant due to low prices. Negotiations are continuing for the establishment of a cannery to process an annual catch of 30,000 tons. Crayfish and prawn exports totaled about K 10.5 million in 1986. The recent catch levels of 1,200 to 1,500 tons per year for prawns and crayfish represent the maximum sustainable yields of the resource. Log exports are a major export item, and continued growth in export volumes is expected over the medium term from new conces- sions. The rate at which timber is being felled both commercially and destroyed through shifting cultivation is not monitored, and reforestation is inadequate. A forest resource management strategy is urgently needed so that these resources can be developed on a sustainable basis. D. Resources for Development 1.28 The resources devoted to agricultural development, in both the private and public sectors, have tended to fall in real terms in recent years, despite the priority given to the sector in statements of development strategy. The public sector allocates resources to agriculture through the national and provincial governments, statutory agencies and financial intermediaries, as well as through equity participation in joint-ownership investments. An analysis of total budget appropriations shows that the share of resources going to agriculture has remained at roughly 7-9% over 1984 to 1987, while actual expenditures have tended to fall in real terms. Thus, the stated intention of the Government to give high priority to the promotion of agriculture has not yet been reflected in actual resource use. 1.29 The proposed Public Investment Program (PIP) covering the period 1988 to 1992, on the other hand, allocates a much greater share of resources to agriculture. However, the limited planning and implementation capacity at both national and provincial levels will make it difficult for the public sector to effectively absorb such a sharp increase in resources. This suggests that the program needs to be scaled down and concentrated on priority programs. 1.30 Table 1.5 presents the proposed PIP by agricultural program. The largest share of resources (43%) is devoted to the major export crops. This is appropriate, but a considerable effort will be required to prepare and  - 12 - implement these programs.'/ The technical and institutional basis for the oil palm program is well established, but it will be difficult to initiate the seven projects included in the PIP over five years, particularly since over- seas investors are yet to be found for some of these projects. The small- holder coffee rehabilitation program is off to a good start under the newly created CDA, but important problems still need to be resolved, including CDA's financing and relationship with the provinces. The cocoa/copra smallholder program is already under way in some provinces, but it may be necessary to provide a more effective formula for national/provincial cooperation under this project. Moreover, there are doubts about the justification of resources going into rubber without a major improvement in technology and management. 1.31 A second group of five projects is targeted at minor exports (cardamom, chilies, pyrethrum) and food and livestock for the domestic market. One main objective of these projects is to reach the less developed areas which, by and large, do not benefit from the major export crops. This is clearly a very important objective. However, in many cases, the technical basis for these projects is not very sound and the institutional framework for implementation--particularly the extension services at provincial level--is weak. It would be advisable to proceed cautiously with this program; in some cases, a pilot exercise should be the first step before embarking on a large- scale program. 1.32 A major expansion in general agricultural credit is provided for in the PIP. This amounts to nearly 35Z of the total program, in addition to credit allocated to support the NES schemes in oil palm and cocoa. This allocation seems to be far too large, both in terms of the absorptive capacity of ABPNC and the immediate needs of the sector. There are dangers in trying to push credit programs faster than the rural sector is ready to absorb them, with the double risk of jeopardizing the development of sound attitudes towards rural savings and the use of credit and threatening the financial position of ABPNG. 1.33 The PIP includes an agricultural and livestock extension project, which is as yet undefined beyond its objective of increasing the effectiveness of national and provincial extension services. It is important to note that about half of the proposed expenditure under the PIP is on projects that will require an efficient provincial extension service. 1/ A full discussion of the agricultural programs in the Public Investment Program can be found in the World Bank report, Papua New Guinea: Agricultural Assessment Review, Report No. 7090-PNG, April 1988.  - 13 - Table 1.5: AGRICULTURE IN THE PIP, 1988 TO 1992 (K millions at 1988 prices) Program PIP amount Percent of total Coffee 37 10.3 Cocoa 27 7.5 Oil palm 61 17.0 Rubber 28 7.8 Minor Exports/food supply 46 12.8 Other Programs 35 9.7 General Agricultural Credit 125 34.8 Total 359 100.0 Subtotal, Major Export Crops 136 42.6 Source: The Public Investment Program, 1988-92, Budget Document No. 3, November 1987. E. Medium- and Long-Term Strategy 1.34 (i) Priorities Over the Medium Term. The Government's prime concern in the agricultural sector is stimulating growth, with the focus on the main export crops. Government strategy, recognizing the trade-offs between a growth-oriented strategy and balanced regional growth, also calls for greater emphasis on food production and development of the least developed areas. Given the implementation capacity of the institutions that serve agriculture, a practical determination of medium- and long-term priorities can be made. For the short to medium term, the Government should concentrate effort on high-priority programs that (a) have a high pay-off in terms of production, exports and employment and (b) can be readily accomplished within the existing constraints. These high-priority programs include: (i) stemming the outbreak of coffee leaf rust; (ii) improving productivity in the smallholder cocoa industry; and (iii) expanding production of oil palm under the successful NES model. These crops have the most advanced technology available for dissemination, a large body of experienced producers, and the most mature institutions to promote further development. It is important that these core programs get all the resources they need. Some of the programs in food and livestock production and in less-developed areas may initially have to be scaled down where there is neither the technical knowledge nor the administrative capacity to implement them as fast as the investment program envisages. 1.35 (ii) Toward a Longer-Term Strategy. The Government should lay the foundations now for accelerated and more broad-based growth in the longer term. There are four areas that require urgent attention: (a) ensuring that the research institutions have the resources to do their job, so that new  - 14 - technologies can be developed and tested; (b) devising an effective extension service; (c) strengthening key institutions at both national and provincial levels; and (d) hlman resource development, including a more systematic approach to the development of local skills and experience and greater flexibility in overseas recruitment. A longer-term strategy for agricultural growth would include: (i) further intensification of treecrop production in existing s.allholder areas; (ii) the extension of treecrops into areas that have thus far not benefited from them; (iii) greater emphasis on food production; and (iv) a more systematic approach to the alleviation of rural poverty and the development of less developed areas.  - 15 - II. MINING A. Structure 2.1 PNC has many mineral resources and has been the focus of exploration for many decades. While many different types of minerals are found (including precious metals, base metals, ferrous metals and industrial minerals), the most important in economic terms are copper and gold. Mineral ore bodies are found throughout the various provinces. Some are in attractive locations with relatively easy transportation access and good climatic conditions. Others are found in remote, interior locations with difficult access and unfriendly climatic conditions. Thus, the economic viability of different ore bodies depends not only on the characteristics of the ore body (e.g., size, grade, depth, etc.) but also on location in terms of infrastructure availability and costs (e.g., power supplies, water, townsite, transport). 2.2 In 1986, PNG was the seventh largest gold producing country and the eleventh largest copper producing country in the world (excluding Centrally Planned Economies). There are currently two very large mining operations in PNG, namely, Bougainville Copper Ltd. (BCL), which is owned 54Z by CRA Ltd. (Australia), 19Z by the PNG Government and 27% by public shareholders, and the Ok Tedi Mining Company Ltd. (OTML), which is owned 30% by BHP Ltd. (Australia), 30% by AMOCO Inc. (USA), 20% by the Government of PNG and 20% by the Star Mountains Holding Company (representing FR Germany interests). BCL is one of the ten largest copper mining operations in the world. In 1986, BCL produced and exported a copper/gold concentrate containing 178,600 tons of copper and 16.4 tons of gold. OTML is a relative newcomer and started production in 1986. From 1984-87, OTML produced nearly 60 tons of gold from a "gold cap" that overlays a larger copper/gold ore body. OTML started copper production in 1986 and by 1990 (when the mine should reach full production), it is expected to be producing annually about 190,000 tons of copper and 12 tons of gold (both contained in concentrate). Both BCL and OTML also produce silver as a co-product. In addition to BCL and OTML, about two tons of gold per year are produced by a combination of small-scale alluvial miners and a small mining company (NGG Holdings Ltd.) in the Wau goldfield. 2.3 The ownership of mineral resources is vested in the state. The National Government sets minerals policy and regulates the industry. The Government's policy is that mining exploration and development should be undertaken by the private sector. While the Government is keen to encourage development by local companies, it has also taken active steps to encourage the entry and participation of foreign mining companies in the sector--since larger projects generally require specific technical capabilities and large amounts of capital which are not available locally. At the same time, however, the Government has reserved the right to hold up to 30% of the equity in new, large mining projects. For individual projects, the Government's equity decision is specified at the time the mining lease is assigned to the project. 2.4 The Department of Minerals and Energy (DME) is responsible for administering and regulating the mining sector (as well as the petroleum  - 16 - sector). Most mining development takes place under the 1977 Mining Act and taxation/incentives are specified in the Income Tax Act (Mining and Petroleum) 1978, except for Bougainville and OK Tedi which operate under the 1968 Bougainville Mining Act and 1976 OK Tedi Mining Act, respectively. The mining legislation provides for an orderly process in obtaining mineral exploration and development rights. The procedures are fairly explicit and the rights and responsibilities of the mining companies reasonably well defined. DME is able to monitor the process effectively. It is presently preparing a new, updated Mining Code. Once a completed draft is available, it will be discussed with company representatives through the Chamber of Mines before being finalized. This is a sound approach. 2.5 Companies can apply for Prospecting Authorities (PAs) which entitle them to undertake exploration work. The PA system is sensibly designed and seems to be working farily well. When a PA holder is ready to develop a mine, a mining lease application is made. For larger projects, a Special Mining Lease (SML) is required. DME has recently prepared a standard format for the mining lease based on experience with the most recent project--Misima (as well as OTML and BCL). It is proposed to use this new document for the next project (Hidden Valley). The SML is granted by the National Executive Council (NEC), a Cabinet level body, following completion, submission and approval by appropriate government agencies of various reports and agreements including an Environmental Plan, Feasibility Study, Mining Development Agreement, Equity Agreement (if appropriate), Lease Recommendation and Financing Proposal. For smaller projects, a Mining Lease is granted by the Minister of Minerals and Energy following submission and acceptance by DME of similar documentation as for the SML. The reports required by DME and NEC help ensure that mining projects are designed and implemented in a sound technical, environmental, economic and financial manner, as well as in full accord with national interests. The procedures require the submission of satisfactory plans for infrastructure facilities, training programs and business development schemes, all of which contribute to increasir- the benefits of the project to the local communities. Provincial Governments and local officials become directly involved in the process through land acquisition procedures as well as liaison comittees, coordination grouaps and working committees involving officials from mining companies, DME and Provincial Governments. B. Development Prospects 2.6 BCL operates the Panguna copper/gold mine on Bougainville Island in North Solomons Province. The mine has been an extremely successful venture. BCL is a low cost producer well able to compete with other copper producers worldwide. From 1972-1986, the mine has achieved earnings of K 1,206 million (which have resulted in K 412 million income taxes, K 596 million dividends and K 196 million retained earnings) on sales of K 4,099 million. The mine is at a mid-life stage with about twelve years of economically recoverable, proven ore reserves remaining--given present technology, production levels and expected prices. 2.7 BCL will need to undertake an investment program of about K 190 mil- lion (in 1988 terms) over the period 1988-1992 in order to maintain the present production level--68,000 tons per day (tpd) of ore and preconcentrate  - 17 - feed. This would provide for concentrate production containing about 190,000 tons per year (tpy) copper and 18 tpy gold. BCL is also considering a much larger investment program (of about K 330 million, in 1988 terms, from 1988- 1992) which would include ar in-pit crusher and conveyor and additional mining equipneLt and preconcentrate capacity, and which would increase throughput to 88,O00 tpy ore and preconcentrate feed. While this investment would increase annual copper and gold production only slightly in the next few years, it would extend the life of the mine well beyond tie year 2000. BCL's decision will have important implications for the PNG economy and Bougainville Island- as well as for BCL itself. 2.8 OTML operates the Mount Fubilan mine at Tabubil in Western Province. The mine is located in a remote area of extremely heavy rainfall with the main transportation access via the Fly River. The mine has experienced a number of technical misfortunes, the most serious of which has been the collapse of a US$200 million tailings dam required for the disposal of waste material. From time to time, mine construction and mining operations have been interrupted by a shortage of supplies and by a lack of water for ore processing facilities at the mine. This has occurred during occasional dry periods of low rainfall when the river level has fallen, interrupting shipping on the river. These difficulties have resulted in large construction cost overruns and the project has experienced several financial restructurings-the most recent of which was agreed in 1986 as part ef the Seventh Supplemental Agreement. OTML's difficulties reflect not only very difficult operating conditions (in terms of climate and terrain) but also questionable design decisions and an uneasy division of construction and operation responsibili- ties between the major shareholders. Following the last restructuring, BHP has taken sole responsibility for operating the project. This is a positive step which should support a timely completion of the project and achievement of full capacity operating rates. 2.9 In 1987, OTML produced 18 tons of gold and 40,000 tons of copper (provisional estimate). Like BCL, OTML basically has a competitive operating cost structure. However, it has a very large debt-service burden. As of end- 1986, it had US$486 million long-term debt and, at full capacity in 1990, its debt service charges are expected to be over 40% of annual cash operating costs. In addition to long-term debt, OTML has US$270 million of preference shares (which were issued as part of the 1986 restructuring). These shares, which earn interest at a commercial rate, have a tax exempt status and will be redeemed as soon as sufficient cash is available (probably in 1989 and 1990). A combination of high depreciation allowances for tax purposes, high interest charges, the tax-exempt preference shares and low to moderate profitability is expected to result in OTML not making income tax payments until the early to mid-19909. 2.10 Gold Exploration and Development Potential. PNG is presently experiencing a gold exploration boom. There are five medium to large projects 4thich could start construction between 1988 and 1990. Two are very large-- Lihir and Porgera--each estimated to have over 300 tons of recoverable gold. Each is expected to have an annual production of about 24-25 tpy gold in the first five years of production (due to zones of high grade gold being mined initially), declining to an average of 9-10 tpy thereafter. Two are medium-  - 18 - size projects, namely Misima and Hidden Valley, each with 70-80 tons of estimated recoverable gold and expected to average about 6 tpy production. The fifth is Uramit (also known as Wild Dog) which has about 25 tons of estimated recoverable gold and an expected annual production of 4 tpy. There are also four other potential small (0-2 tpy gold) projects--Mt. Victor, Wapolu, Tabar and Laloki. 2.11 Available data indicate that the potential gold projects noted above generally have ore grades in the range of 1-5 g/t, with some high grade zones in excess of 20 g/t. Several also have silver as a by-product. Order of magnitude estimates indicate cash operating costs (including by-product credits) of US$150-250 per oz of gold. Total production costs (including depreciation and interest charges) would be in the range of US$250-350 per oz of gold. These costs would range around the middle of the world cost curve. At early 1988 gold prices (of about US$500/oz), most of the expected projects should show good profits. However, there would be only marginal to moderate profits if gold prices fall below US$400/oz. 2.12 The Misima project is the most advanced. Misima was presented to the NEC for approval in mid-1987 but final agreement was delayed for several months due to NEC concerns regarding the adequacy of proposed township arrangements (which included plans that housing for the families of senior, married staff would be located in Cairns, Australia rather than on Misima Island). The dispute was resolved in late 1987 after modifications were agreed to the proposed arrangements and construction started in early 1988. Misima is the only one of the possible new projects for which a Feasibility Report has been completed and presented to the Government. Except for Misima, most of the estimates regarding reserves, ore grades, expected production levels, mine life, capital costs, operating costs, profitability, etc. are very tentative. Estimates of the timing of these possible projects (Table 2.1), as well as investment requirements, export volumes, import costs, taxes and dividends must, therefore, be treated very cautiously. However, they permit the ranking of projects according to the likely size and economic impact and provide an initial base of information which can be refined as feasibility work is completed (in the next 6-24 months).  - 19 - Table 2.1: PHASINC OF MAJOR NEW MIMING PROJECTS Feasibility Mining report license Start Start Full Project completed issued construction Production Production Hisim Completed Issued 01/88 08/89 09/90 Urauit 12/88 02/89 03/89 03/90 10/90 Hidden Valley 12/88 02/89 04/89 01/91 10/91 Lihir 04/89 07/89 10/89 10/91 10/92 Porgera 07/89 01/90 04/90 01/93 01/96 Source: Staff estimates. 2.13 Annual capital expenditures for the mining sector are expected to increase from about K 200 million in 1987 to nearly K 500 million in 1989 (Table 2.2). Expenditures at BCL (which are based on the lower of the two scenarios noted in para. 2.7) and OTML are quite substantial in 1987 and 1988 but taper off thereafter. The expenditures for the new gold projects increase sharply in 1988 and are expected to be over K 400 million each year in 1989 and 1990. Table 2.2 MINING SECTOR ANNUAL CAPITAL EXPENPITURES, 1988-95 (million kina-current terms) 1988 1989 1990 1991 1992 1993 1994 1995 Existing mines /a 144 88 57 32 27 39 39 40 New mines /b 113 411 433 291 191 178 95 15 Total 257 499 490 323 218 216 134 55 /a BCL, OTHL 7T Misima, Uramit, Hidden Valley, Lihir, Porgera as well as various small projects. Source: Staff estimates.  - 20 - 2.14' Copper production is expected to increase from about 208,000 tpy in 1988 to around 380,000 tpy in 1990 and thereafter. The bulk of the increase will come from OTML. Gold production is expected to increase only modestly in 1989 and 1990 when increases at BCL and Misima offset a decline at OTML. It is noteworthy that even with the development of new gold projects, BCL is expected to provide over 401 of PNG gold production in 1990. A rapid growth in gold production from possible new projects is still a few years away--and is not expected to materialize before 1991 (Table 2.3). Table 2.3: COLD AND COPPER PRODUCTION, i988-95 1988 1989 1990 1991 1992 1993 1994 1995 Cold (tpy) 36 38 41 54 64 78 85 90 Copper (000 tpy) 265 332 382 387 387 378 382 378 Source: Staff estimates. C. Managing Mineral Sector Development 2.15 Financing Arrangements. The new gold projects are being prepared by companies such as Placer, CRA, Renison, MIM, BHP and Kennecott, which are well established in the international mining industry and should be able to make adequate financing arrangements to meet the project needs. All of these companies have good access to financial resources and are benefitting from the present world mineral markets boom. In one or two cases, it is conceivable that all of the necessary funds can be provided by the company concerned from its own or parent company resources. In other cases, the companies concerned should be able to borrow an appropriate portion of the financing needed from commercial banks on competitive terms. Placer has successfully raised funds for its proposed PNG mining activities through a stock float in early 1987. MIM had also intended to raise funds through a stock float that was planned for November 1987. However, that float was postponed following the October 1987 world stock market collapse. While present stock market conditions may not be attractive enough for MIM to resume the proposed float in the foreseeable future, the company has sufficient financial resources to meet its expected investment needs for PNG mining projects. In considering possible financial arrangements for expected new projects, DME has been proposing a debt-equity ratio between 2:1 and 3:1. This is a sound range given the technical and market price risks faced by such mining projects. 2.16 Stability of Policy Environment. The timely realization of the development potential of the mineral sector will be strongly influenced by how the Covernm3nt, and in particular the NEC, goes about implementing its poli- cies as individual projects are presented for approval. Final approvals for Misima, which is the first in a series of expected new gold projects, were delayed by several months due to the Covernment revising its position on two  - 21 - issues--nausly Covernment equity participation and townsite arrangements. Such delays tend to increase project costs and cause slippage in production and the realization of benefits both to the project entity and to the economy. Such changes, if they continue to occur, may also undermine investor confidence. Companies may become hesitant to invest in the sector since, in any case, mining projects are inherently risky, as illustrated by some of the difficulties of OTKL. One measure, which might reduce the possibility of such changes, would be for the NEC to institute briefings by DME on the status of major mining projeczs on a regular basis (perhaps quarterly). 2.17 Taxation and Incentives. The Government has made a concerted effort to design a Aining taxation and incentive system that provides reasonable incentives ant returns to producers while enabling the Government to take the bulk of the wirdfall profits that can occur during a mineral markets boom. This is a sound approach which has been well implemented and has proven successful in terms of providing a relatively attractive environment for mining exploration and development while generating substantial fiscal revenues. Incentives include an accelerated depreciation provision which effectively reduces tax rates while companies recover their capital invest- ment. There is an Additional Profits Tax (APT), which prcvides for high tax rates (marginal rates ef up to about 65Z) for very profitable projects or for other projects during periods of high profitability. Broadly speaking, the APT takes effect when projects show a return on investment of above 20X. There is also a dividend withholding tax which applies when dividends are repatriated by foreign shareholders. Overall, the effect of the taxation/ incentive system is to put a fairly heavy tax burden on very profitable projects but to tax marginal profits very lightly. The tax system includes a royalty of 1.25X (on sales revenues) that goes to the relevant Provincial Government (80X) and landowners (20X). The royalty is small enough that it does not cause undue economic distortions but also ensures that no mining project operates on an entirely tax-free basis. 2.18 Iquity Policy. The Covernment has the right under present arrange- ments to take up to 302 equity in new mining projects. So far, the practice has been to take. a lower amount. Presently, the Government holds about 20% of the equity in both BCUT and OTML and has negotiated to take 202 in Misima and 102 in Porgera. From an economic and financial standpoint, the Government's practice does not appear to be well justified. Many of the mining projects in PNG have only moderate expected returns, are inherently risky and government investment in them may result in the crowding out of other investments. Assuming a 2:1 debt equity ratio, the equity requirements of the new gold projects will be about K 530 million during 1988-92, indicating the Government will need to invest about K 105 million to take a 20Z share. The Government could find itself in a position of borrowing on the international capital markets in order to replace foreign equity inflows. This may not be the best approach. (If the Government also has to provide 202 of the loan capital, as in the case of Misima, the total government obligation would increase to about K 285 million). Of course, if there is a gold or copper price boom, the projects may yield high returns. But the bulk of the extra earnings are, in any case, collected by the Government in the form of taxes (through the APT).  - 22 - 2.19 The underlying rationale for Government equity holding in new mining projects would appear to reflect political, as well as economic considera- tions. Specifically, the holding of equity enables the Government to assure the electorate that the nation is sharing directly in mining industry profit- ability and its management. In addition, there is presently a movement to establish a corporate vehicle to which the government holdings in mining companies could be transferred. One possibility is that individual citizens could hold shares in the vehicle. Another possibility is that the vehicle could be registered as a Minerals Holding Company on an international stock exchange, thereby enabling the Government to raise funds through a "stock float". Part of the Government' s motivation in considering such an initiative is the possible development of a local capital market as a new avenue to domestic savings. While such an objective is worth pursuing, there are many questions which must be addressed if the vehicle is to be successful. So far, there has been no attempt on the part of the various government agencies concerned to fully examine the implications of the various possibilities. Furthermore, the situation has been recently c-.-licated by the Government considering the sale of part or all of its CVL J1._res--the disposal of BCL shares would seam contrary to the proposal ro esi.$alish a vehicle. Overall, there is presently an absence of a well-prepares end articulated government approach in applying its equity policy. Given tne pipeline of potential projects, it would be desirable to establish an orderly approach instead of proceeding on the basis of ad hoc steps. 2.20 Distribution of Benefits. The distribution of benefits (between the National Government and that of the province where the project is located) is a potentially contentious issue which can cause projects to be delayed and, in extreme cases, postponed or cancelled. At present, the National Government takes the bulk of the fiscal revenues from a mining project. For example, in the case of BCL in 1986, the National Government received about K 54 million in terms of fiscal receipts (corporate and employee income taxes, import duties, dividend withholding tax, etc.) whereas the Provincial Government and local community received about K 6 million (from royalties and local business taxes, etc.). For the proposed new gold projects, concern regarding the split of benefits may result in local communities and provincial governments holding back from fully supporting the projects. Indeed, in one or two cases, pro- active local groups may even hold the project's development hostage in the hope of getting a better deal. It is neither in the interest of the National Government nor provincial governments to see productive developmen.s delayed or postponed due to unresolved differences. One possible solution being considered by DME would be to have a Development Agreement prepared and signed between the National Government and the concerned provincial government as part of the project arrangements. Such an agreement could spell out the full range of benefits to be received by the local community--not only taxes but also infrastructure, employment, community development and services, etc.-- to ensure that the local community and provincial authorities are fully supporting the project. 2.21 Bougainville Exploration Moratorium. A very important case presently relates to the suspension of exploration on Bougainville Island in North Solomons Province. Since April 1971, there has been a moratorium on issuing PAs and on exploration work being undertaken on certain PAs previously  - 23 - issued. The moratorium originally reflected concerns of the Provincial Government regarding possible negative effects of exploration on the local community. However, it would appear that one of the key factors which have prevented the lifting of the moratorium is the Provincial Government's dissat- isfaction with its share of benefits from the project. Consequently, Bougain- ville Island has missed out on the exploration boom of the past several years. Many companies consider the island to have promising potential for gold ore bodies and are keen to take out exploration licenses. BCL would also like to undertake exploration (under PAs which are presently frozen) to see if additional and/or new ore bodies can be found to extend the life of the Panguna Mine. The lead times for undertaking exploration, completing feasibility work and implementing a new large mining project can be so long (for example, nine years for BCL's Panguna mine and seventeen years for OTML's Mt. Fublian mine) that it may well be in the interests of both the Provincial Government and the National Government to find a set of conditions under which the moratorium can be lifted in the near future. 2.22 DME Staffing and Other Administrative Issues. The next five to ten years will see several new mineral projects being developed. The staff needs of DME, the department responsible for the sector, will be considerable (in terms of both the number of staff and the level of skill and experience), to review feasibility work, prepare cabinet papers, analyze financial returns, and negotiate and supervise projects. It is questionable whether DME has sufficient staff to meet its present workload, especially regarding monitoring the status of new projects as well as the prospects of BCL and OTML. Further- more, the workload will be even greater if the Government takes equity in these projects. DME does not have sufficient positions to undertake its future workload. Nor does it have positions specified for the long-term training and grooming of local staff to eventually replace contract staff. The clock is ticking and there is some danger that, with insufficient staff, DME will only be able to react to situations instead of being able to take the initiative. It is very much in the Government's interest to carefully identify DME's staff needs and adequately fill them in the light of the project pipeline. DFP should also make sure it has an adequate complement of suitably knowledgeable staff to support DME in project processing and negotiations, as well as in raising project funds (when Government takes an equity position.) 2.23 Mining companies have expressed concern that there are unnecessary difficulties and unpredictable delays in obtaining visas (for both staff and families) and work permits. Given the Government's policy to encourage the presence of foreign mining companies in the sector, and given the important benefits the sector provides to the economy, it would seem desirable that efficient administrative procedures be adopted by all government depart- ments. An example would be to is3ue multiple entry visas for a given period for mining company personnel and their imnmediate family members. 2.24 Small-Scale Mining (SSM). SSM offers significant benefits in terms of grass roots employment. However, the promotion of SSM in terms of going to remote areas and showing villagers how to construct and use sluice boxes and pans, and how to identify, recover and sell gold, is very labor intensive. DME should prepare an analysis of the potential benefits of SSM and a  - 24 - comprehensive development program so that the Government is fully informed of the potential for SSM and is able to take necessary decisions on the appro- priate budget for such an activity. 2.25 Environmental, Health and Safety Aspects. The Government recognizes that there are important environmental, health and safety aspects to mining and has taken steps to ensure that appropriate standards are adopted. The key environmental aspects in mining in PNG relate to the satisfactory disposal of waste material from the mining and concentrator operations (the latter known as tailings) to minimize harm to the nearby terrain and spoilage of the water table and river :;stems. Health and safety aspects relate to the safe operation of heavy plant and equipment as well as satisfactory noise and dust control. Approval of environmental plans are required for all mining projects and environmental aspects are closely monitored by the Government to ensure satisfactory conditions. At Bougainville, BCL has taken care to maintain good environmental, health and safety standards. BCL's original tailings dumps are approaching capacity and it has initiated investment for the construction of new facilities. At OTML, good efforts are also being made to ensure satis- factory environmental, health and safety standards. OTML, however, faces a rather difficult situation regarding tailings disposal following the collapse of a major tailings dam due to an earthslide. In order to enable operations to continue, tailings are disposed into local rivers on a temporary basis. OTML and the Government are carefully monitoring the environmental aspects (including six-monthly reviews by external consultants who examine geo- chemical, fishery/biology and river mechanics/sedimentation aspects). Studies are in hand to devise a new permanent tailings disposal system which is expected to be tnder construction by 1990. D. Balance of Payments and Fiscal Implications 2.26 Nature of Linkages. The mining sector is largely an enclave sector with relatively few direct links to the rest of the economy. This is scarcely surprising since PNG is at a relatively early stage of economic development and has not yet developed the type of industrial base needed to service and support medium- to large-scale mining projects which are capital intensive and technologically sophisticated. At present, most of the goods and services required for mineral operations must be imported. Both the Government and the mining companies are making efforts to increase the local content of production, but only modest increases can realistically be expected. Most of the consumer goods required by mining company personnel are also imported. For these reasons, the multiplier effect of mineral iavestments is small. Moreover, mining has only a limited impact on employment. Even at BCL and OTML, which are large operations by world standards, employment is relatively modest (about 6,000 for both operations combined) and employment at Misima is expected to add about 1,100. Most of the managers and supervisors are expatriates. Both the Government and the companies are attempting to maximize the employment of local managers/supervisors, buit these attempts are constrained by a lack of qualified local personnel. Thus, the main benefits provided by the mining sector to the rest of the economy are financial flows rather than direct linkages.  - 25 - 2.27 Mineral Market Outlook. The profitability and financial contribution of the PNG copper and gold production are closely linked to copper and gold market prices. For most of the 1980s, the international copper market has been in a prolonged slump caused by over-supply and excess capacity. There was a coyper market boom in 1979 and 1980 when copper prices averaged US$0.98 per lb - and US$0.90 per lb respectively. Since then, annual average prices have been in the range of US$0.62-0.75 per lb. During 1987, the copper market swung back from surplus to shortage and prices almost doubled from US$0.70 per lb in January to US$1.30 per lb in December, with prices averaging US$0.75 per lb for the year. Given prices of US$1.30 per lb in January 1988, average prices for the year can be expected to be anywhere in the range of US$0.85-US$1.30 per lb. As a conservative estimate, the lower- end price has been used in this report (Table 2.4). For 1989, copper prices are expected to be slightly below 1988. By 1990, the world copper market is expected to be in surplus again (as over 750,000 tpy capacity enters production between 1988-1990 frrm mines in PNG (OTML), Chile, Portugal, Australia and USA) and copper prices are expected to decline sharply and recover only slowly thereafter. The outlook for gold prices is more promising. Gold demand has remained strong and has absorbed supplies from new mines entering production. Average gold prices have increased from US$319 per oz in 1985 to US$440 per oz in 1987 and were US$480 per oz in January 1988. Gold prices are projected to increase more or less in line with inflation and to reach US$595 per oz by 1995. Table 2.4: COPPER AND GOLD PRICES, 1988-95 (US$ current terms) 1988 1989 1990 1991 1992 1993 1994 1995 Gold (US$/oz) 455 470 490 510 530 550 570 595 Copper (US$/lb) 0.85 0.80 0.70 0.60 0.65 0.70 0.75 0.80 Source: Staff Estimates. 2.28 Balance of Payments Contribution. The mining sector makes a major contribution to the balance of payments. In 1988, the sector is expected to make a total net contribution of about US$400 million, consisting of US$243 million on the current account and US$156 million on the capital account (Table 2.5). These estimates are based on a 1988 copper price of US$0.85 per lb and a gold price of US$455 per oz. It is to be expected that, in actuality, prices may be higher than these levels. The higher prices will result in higher exports and current account contributions from the mineral sector. 1/ All prices are for London Metal Exchange (LME) high grade cathode as quoted by Metals Week.  - 26 - 2.29 The total contribution of the mining sector to the balance of payments is expected to increase only modestly in the next three years to reach about US$490 million in 1991. The expected construction boom has an important influence on the composition of the sector's balance since higher imports (for the construction of new projects) reduce the current account surplus. In contrast, the inflow of foreign equity and loan funds to finance the new projects considerably improves the capital account. It is not until the period 1992-1995 that the new projects (combined with higher metal prices) have a sharp impact on the overall balance of payments, with the total contribution of the mining sector increasing to over US$800 million by 1995. During this period, the current account balance increaes sharply, despite large outflows on account of interest and dividend payments, but the capital account balance declines as inflows fall and outflows increase to repay the debt. Thus, the nature of the mining secLor's contribution to the balance of payments changes markedly during the projection period. From 1988-90, net capital inflows are much larger than net current account inflows--which reflects the large investment boom expected in these years. After 1990, the investment boom matures into a production boom. In this phase, the current account increases substantially (as exports rise relative to imports) and the capital account moves from surplus to deficit (because loan disbursements are declining and companies are starting to repay the funds borrowed to construct the new mines). 2.30 Fiscal Contribution. The mining sector is an important source of fiscal revenues in PNG. In 1986, BCL estimated its total fiscal contribution at just over K 60 million. By comparison, OTHL (which is not yet profitable enough to pay income tax) contributed about K 10 million. BCL is expected to continue to be the primary source of fiscal revenues until 1990 when Misima should start paying taxes. It is not until the early 1990s that fiscal revenues are expected to increase sharply. The level of revenues will, of course, depend on the exact timing of new gold projects entering production. It could reach as high as K 350 million by 1995, depending on gold prices (Table 2.6). It must be remembered that several of the gold projects will last only 6-8 years and that Misima and Porgera will have much higher produc- tion levels in the early years due initially to mining high-grade gold zones. Unless major new deposits are found, production (and fiscal revenues) can be expected to peak in the second half of the 1990s and decline there- after.  - 27 - Table 2.5: MIUIIC SECTOR BALANCE OF PAYMEpTS, 1988-95 (BASE CASE) (US$ million-- current terms) 1988 1989 1990 1991 1992 1993 1994 1995 Current Account Exports (fob) Copper 322 430 396 316 358 392 438 475 Cold 518 619 682 877 1,077 1,296 1,551 1,709 Silver 12 13 35 43 53 67 83 70 Total 852 1,062 1,112 1,236 1,488 1,755 2,072 2,254 Imports (fob) /a -391 -659 -705 -636 -639 -751 -758 -768 Services (net)7b -218 -354 -350 -309 -368 -430 -460 -476 Current Account Balance 243 49 58 291 482 575 853 1,010 Celital Account Equity /c 180 234 220 106 81 51 55 60 Loan Disbursements 44 279 279 233 150 181 95 0 Capital Account (net) 156 410 408 199 39 -6 -97 -188 Overall Balance 399 459 466 490 521 569 757 822 /a Imports for mine construction and operation. rb Include dividends, interest, and freight and insurance (plus retained earnings as a debit). /c Includes retained earnings (as a credit). Source: Staff estimates.  - 28 - Table 2.6: MINING SECTOR INCOME TAXES, 1988-95 (BASE CASE) (US$ million--current terms) 1988 1989 1990 1991 1992 1993 1994 1995 Existing mines /a 57 62 43 18 54 47 98 123 New gold mines - - 31 60 102 153 188 228 Total 57 62 74 78 156 200 286 351 /a BCL, OTML Source: Staff estimates. 2.31 In addition to the tax benefits and depending on its equity holdings, the Government could also receive dividend payments. Estimates given in Table 2.7 illustrate the possible level of dividends payable to the Government if it took 20X equity in all projects. Table 2.7: MINING SECTOR DIVIDEND PAYMENTS TO GOVERNMENT, 1988-95 (BASE CASE) (US$ million--current terms) 1988 1989 1990 1991 1992 1993 1994 1995 Existing mines /a 13 14 10 7 13 13 14 17 New gold mines - - 5 9 15 22 26 30 Total 13 14 16 16 28 35 41 47 _s BCL, OTML Source: Staff estimates. 2.32 It must be strongly emphasized that the expected contribution of the mineral sector to the economy depends critically on the selection of price assumptions and on the production achieved by new projects. For example, if the projected increase in gold prices does not occur, fiscal benefits would be sharply lower. A sensitivity analysis of the impact of a gold price of US$450/oz in 1995 (rather than US$595 as assumed) indicates that income taxes would be reduced by more than half (Table 2.8).  l ~~~~~~~~~~- ,29 - Table 2.8: SENSITIVITY OF MINERAL REVENUES TO LOVER GOLD PRICES, 1988-95 1988 1989 1990 1991 1992 1993 1994 1995 Gold Price (US$/oz) 450 450 450 450 450 450 450 450 Total income tazes 57 49 64 46 98 109 141 159 Total dividends 13 13 14 12 21 24 28 30 Source: Staff estimates.  - 30 - III. ENERGY A. Petroleum Resources, Exploration and Prospects 3.1 PNG is fortunate in that a substantial portion of both its land and offshore areas is underlain with sedimentary basins, which offer the potential of finding petroleum resources and have attracted exploration activity since the 1920s. To date, 120 wells have been spudded, and discoveries include two oil fields, five gas and condensate fields and four dry gas fields. Based on these discoveries, PNC's hydrocarbon reserves in-place (proven, probable and possible) have been tentatively estimated at 10 tcf of gas, 136 mmbbl of condensate and 343 mmbbl of oil (Table 3.1). The recent oil discovery in the (Early Cretaceous to Late Jurassic) Toro Sandstone formation of the Iagifu structure in the Paouan basin has generated the greatest interest, as only one of about 20 struccures in the same area have yet been tested. Nevertheless, the geology is conplex and, to date, only about 65 mmbbl of the estimated reserves can be cor.sidered to be proven and recoverable. At least three additional discovery wells will be needed before the commercial feasibility of a development program at Iagifu can be envisaged. Table 3.1: PETROLEUM DISCOVERIES AND RESERVE ESTIMATES Estimated resource-in-place Well name Date Operator Oil Condensate Gas (nmmbbl) (nunbbl) (tcf) Kuri 1 1956 Australasian Petroleum - - 0.12 i Puri 1 1958 Australasian Petroleum - - - Barikewa 1 1958 Island Exploration - - 1.6 Iehi I 1960 Australasian Petroleum - - 0.31 Bwata 1 1960 Australasian Petroleum - 0.34 0.52 Uramu 1A 1963 Phillips - 0.43 0.21 Pasca A2 1969 Phillips - 36.00 0.35 Juha 1 1983 Chevron } Juha 2 1983 Chevron } - 100.00 2.30 Juha 3 1984 Chevron } Iagifu 2 1986 Chevron 293 - 1.00 Iagifu 3 1986 Chevron } S.E. Hedinia 1 1987 Chevron 30 /a - 2.1 S.E. Hedinia 2 1987 Chevron } - Hides 1 1987 British Petroleum 20 /a - 1.5 /a Includes oil and condensate. Source: Department of Minerals and Energy.  - 31 - 3.2 If the necessary level of reserves can be proven, a preliminary feasibility study prepared by the license holder (Chevron) estimates that the least-cost development program at Iagifu would involve the construction of a 16-inch pipeline southeastward over 270 km of difficult terrain to a floating storage and offloading facility in the Gulf of Papua. The pipeline would have a capacity of 95,000 b/d, which would be more than sufficient to service reserves of up to about 500 mmbbl. The crude oil would be exported and the associated gas would be reinjected for reserv>.r pressure maintenance. The cost of the project is tentatively estimated at L654 million. The time schedule for the project is based on the assumptions that the engineering for the project can be completed by late 1989, pipelir.e construction will begin in late 1990 and oil production in mid-1992. The main technical issues asso- ciated with the feasibility of the project and its implementation schedule relate to (i) the reserve estimates associated with the Iagifu field and neighboring structures, and (ii) the estimated time required for project engineering. To obtain an independent opinion on these issues, the Government has contracted the services of expert consultants to review the available information. In addition, the commercial feasibility of the project is highly sensitive to the price of oil. 3.3 It is difficult to evaluate the financial significance of the development of the Iagifu field in the absence of additional information on the reserves and a more reliable judgement of commercial viability. To obtain an estimate of the range of possible outcomes, DME is currently developing a model to evaluate the fiscal and financial implications of a set of alterna- tive assumptions, based on the preliminary feasibility study.- Such a model should contribute essential elements for decision-making in regard to the desirability of the Government's taking an equity option (of up to 22.5%) at the time (1989) it is expected to consider a petroleum development license (PDL) for the Iagifu project. 3.4 While all of the exploration is orienter toward finding oil, most of the discoveries, aside from the Iagifu field, have found gas and condensate. Although the availability of gas has been proven since the mid-1950s, the depressed export market for LNG has discouraged the development of export- based projects, and the remote location of the finds, combined with the small size of the domestic markst (PNG's total consumption of petroleum products amounted to 5.1 mmbbl in 1986, equivalent to about 29 billion cf/year), has constrained develonft for 1nrnlE-nnaunt1n- 3.5 Two recent developments have the potential of brightening this picture in the near future: (i) There is a high level of interest in developing the offshore Pasca-A gas/condensate field for the production and export of condensates, LPG and possibly LNG. While the very high condensate content of the field would seem to make this an attractive proposition, the project faces a high degree of technical risk associated with a geologically difficult situation which has already led to an 18-month long blowout in 1984-85 1/ Preliminary results of this study indicate that reserves of about 180 mmbbl at Iagifu would be required to have a commercial project.  - 32 - and the resulting uncertainty regarding the size of the remaining gas and condensate reserves. If these difficulties can be overcome, and drilling begins soon, the Pasca project could be on stream within about three years. (ii) The planned development of major mining projects (at Porgera, Hidden Valley, etc.), with their attendant energy requirements, has brought to the fore the need to assess the feasibility of developing some recent gas discoveries in the Southern Highlands area Of particular interest in this regard would be the use of gas for power generation, which could facilitate the extension of the power grid into the Highlands area, not only to serve the needs of the mining projects but also to provide electricity to villages and small industries along the way. The Government is planning a study to review the options in this regard. B. Issues for the Future 3.6 Petroleum exploration is proceeding apace in 36 active Petroleum Prospecting License (PPL) areas. On the basis of work commitments associated with these PPLs, it is anticipated that about 100 additional wells will be drilled over the next six years, most of them in the Papuan Basin. Even so, given the size of the sedimentary basins and the complexity of the geology, most of the country can be regarded as virgin territory. Thus, the Govern- ment's main objective for the sector will continue to be the promotion of petroleum exploration and development by the private sector. 3.7 This objective has been supported since 1983 by a World Bank/OPEC project to collect and organize existing data relating to petroleum explora- tion, organize a promotional campaign, and establish a Petroleum Division within the DME. This exercise was successful in focusing industry attention on PNG and has resulted in a dramatic increase in exploration. Nevertheless, the continued success of the Government's efforts cannot be taken for granted. While the current regulatory and fiscal framework for the sector appears to have been widely accepted by international investors, there remain areas to be clarified, such as the criteria that will be used for the declara- tion of a petroleum "location" and the definition of "national interest," "protection of the environment" and "welfare of the people" in regard to the granting of a PDL. The DHE is currently working on these issues. 3.8 Basically, the current regulatory framework leaves a substantial amount of discretion for the Government to influence the course of exploration and development at critical points. This puts a substantial burden on DME to develop its technical and administrative capacities in tandem with the growth of the sector so as to be able to exercise its responsibilities in the best long-term interests of the country. The main areas where DME would need to strengthen its expertise are: (a) the monitoring and regulation of petroleum exploration and development activities; (b) the design and implementation of a suitable fiscal regime and strategy for government participation in petroleum development; and (c) the development of a strategy and an economically viable program for the domestic utilization of PNC hydrocarbons (oil, gas and condensates',. 3.9 While institutional strengthening is a major objective, DME's efforts have been hampered by apparent contradictions between its objectives  - 33 - in this regard and other educational and personnel administration objectives of the Government. In particular: (a) the objective of developing a cadre of well-qualified nationals to take over middle and upper-level professional positions in the public and private sectors now filled by expatriates is being undermined by severe cuts in the budget for tertiary level education; (b) within the public service, the training of qualified understudies for key positions now filled by expatriates is hindered by the absence of trainee positions in the approved departmental staffing plans; and (c) a hiring freeze has made it difficult to fill even approved positions which are currently vacant, to say nothing of expanding requirements. Unless the above issues are resolved, the limits on institutional capacity are likely to constrain the extent to which the country can obtain the maximum benefit from its potential petroleum reserves. The highest priority in the sector should be to continue to develop the technical and administrative capacities of DME (and also those of the private sector--as they are interrelated). To address this problem, DME is preparit.g a proposal that will identify the specific needs and suggest a plan of action to meet them. It is expected that a technical assistance package to support this plan will be presented to the Consultative Group for priority consideration. C. Power Scctor Status and Development Program 3.10 The power sector in PNG consists of (i) Elcom, a Government-owned commercial statutory authority, which serves most residential, commercial and industrial consumers, (ii) several enclave industries which constitute the largest consumers of electricity, and (iii) a number of rural diesel-based "C" centers which are subsidized out of the Public Investment Budget and operated by the local governments. As shown in Table 3.2, out of a total installed capacity of about 476 MW in 1986, Elcom accounted for 203 MW, the enclave industries for about 267 MW and the "C" centers for about 6.5 MW. As the "C" centers are no longer being established, and the self-generation facilities of the enclave industries should be regarded as an integral part of their produc- tion process, and evaluated as such, the discussion that follows will focus on the systems managed by Elcom, which form a major part of the public sector investment program.  - 34 - Table 3.2: INSTALLED ELECTRIC GENERATION CAPACITY, 1986 (MW) Hydro Thermal Total Elcom Port Moresby 62.5 28.0 90.5 Ramu 57.2 20.7 77.9 Other 10.8 23.4 34.2 Subtotal 130.5 72.1 202.6 Self-Generation Bougainville Copper - 196.0 196.0 Ok Tedi 2.2 28.0 30.2 PNG forest products 3.5 - 3.5 Other - 37.0 37.0 Subtotal 5.7 261.0 266.7 C Centers 0.5 6.0 6.5 Total 136.7 339.1 475.8 Source: Elcom and staff estimates. 3.11 Elcom owns and operates 19 independent power systems, largely concentrated in 25 major urban centers located throughout the country. Of the total installed generation of 203 MW at the end of 1986, 130 MW was hydro- electric and 72 MW thermal. The largest systems are at Port Moresby, with 90.5 MW, Ramu (Lae-Mt. Hagen), with 77.9 MW, and the Gazelle Peninsula (Rabaul), with 16.1 MW. The remainder are diesel-based local systems. After a period of steady growth during the late 1970s, electricity sales growth has fluctuated widely around an average rate of 3.8Z p.a. during the 1981-87 period, mainly as a result of economic conditions. From the 1987 level of 581 GWh, Elcom is projecting its sales to grow at an average rate of 5.8Z p.a. through 1997. On the basis of this forecast, which is updated yearly, Elcom has prepared a 10-year system expansion plan which in turn forms the basis of its 10-year investment program, summarized in Table 3.3. The central feature of Elcom's expansion program is the shift from a mix of run-of-river hydro and diesel plants toward greater reliance on firm hydropower. This shift is being initiated through the Yonki Hydroelectric Project, financed by the Bank, Japan and the EIB, which includes the construction of the Yonki Dam and the  Table 3.3: ELCOM'S INVESTMENT PROGRAM, 1988-95 (1987 constant Kina million) Total Expended project prior to Project description cost 1988 1988-97 1988 1989 1990 1991 1992 1993 1994 1995 Yonki Dam hydroelectric 91.2 11.3 79.9 30.6 27.5 21.1 0.7 0.0 0.0 0.0 0.0 Ramu 2A hydroelectric 120.5 0.0 120.5 0.2 0.0 0.0 0.0 0.6 2.9 1.8 28.7 Ramu transmission 45.7 3.0 42.7 7.0 9.6 5.7 1.6 5.4 8.8 4.5 0.1 Manpower planning and training 40.9 4.3 36.6 3.4 5.4 5.7 3.5 3.5 2.7 2.8 3.0 Rural distribution 43.2 4.3 38.9 2.6 3.1 3.3 3.7 3.5 3.7 4.3 4.7 Urban distribution 22.7 1.2 21.5 1.7 1.4 1.6 1.7 1.8 2.1 2.4 2.7 Other 172.8 29.6 143.2 14.0 16.3 12.5 17.4 12.9 13.5 13.0 20.7 Capitalized overhead 144.6 20.1 124.5 8.8 9.5 10.2 10.9 11.7 12.6 13.6 14.6 Total Construction Costs 60.3 72.8 60.1 39.5 39.4 46.3 42.4 74.5 Interest during construction 1.6 7.7 11.2 0.0 0.3 0.9 1.5 1.1 Annual Capital Investment 69.9 80.5 71.3 39.5 39.7 47.2 43.9 75.6 Source: Elcom.  - 36 - associated addition of units 4 and 5 (2x15 NW) at auu in 1991, and will be continued with the Ramu 2A Hydroelectric project., 3.12 An important technical issue associated with Elcom's expansion plan relates to the tining of an interconnection between the Ruau and Port Moresby systems through a 220 kV single-circuit 400 km line. This interconnection would allow the Port Moresby system to benefit from the cheaper and more reliable hydroelectric potential of the Ramu basin, in particular, the Yonki Dam and the 92.5 MW Ramu 2A project (which could be commissioned in the late 1990s). Such an interconnection has been studied on several occasions at varying levels of detail. The next to latest feasibility study, carried out by Gibb Australia in 1984, found the interconnection to be part of the least cost solution for the mid-1990s. The most recent study, carried out by Monenco in 1987 with updated cost and demand information, concluded that the interconnection only marginally enters the least cost solution in the late 1990s, and becomes definitely more attractive in the early years beyond the year 2000. Elcom's management is also concerned about the reliability of the Port Moresby system if a major share of its capacity were to depend on a 400 km single-circuit transmission line. On this basis, Elcom has decided to postpone the interconnection until such time as its economic benefits are more than marginal and it becomes feasible to plan for a double-circuit line. 3.13 The implIcation of the postponement of the interconnection is that the commissioning of the Ramu 2A project will be shifted back (to the early 2000s) and the implementation of a hydro scheme for the Port Moresby system (either the Naoro Brown or the Vanana Cascade scheme) will need to be advanced. These adjustments have not yet been reflected in Elcom's investment program (Table 3.3), but are not expected to lead to major changes (in the aggregate). On the basis of this revised expansion plan, Elcom is giving high priority to carrying out the necessary investigations and studies to identify the next hydroelectric project for the Port Moresby system, and improving the quality of the information available on candidate future projects in the major systems. If these studies are carried out in time, its expansion plan appears to be ai4ievable and justified on the basis of its projected growth in demand._ D. Issues Concerning Future Development 3.14 A major issue in relation to the future development prospects of the power supply system relates to the extent to which Elcom will be able to extend its service beyond its currently rather narrow customer base in urban areas (about 43,000 customers, equivalent to about 1OZ of the total house- holds) to the very low load-density rural areas where 88X of the population 2/ The Bank-financed Yonki Project also provides support to Elcom for training, manpower planning and institutional strengthening, as well aa rural electrification. 3/ Elcom's financial performance has been satisfactory and is not expected to constrain the implementation of its expansion program.  - 37 - lives. At present, Elcom's ten-year expansion plan includes the extension of the grid into rural areas. This program is mainly oriented toward the connection to the grid of Government-owned "C" centers, isolated government outposts, and agro-industrial, mining and commercial customers, rather than rural village communities. This is a consequence of strict financial and economic criteria (a 10% real ROR in both cases) which Elcom uses for its investment decisions and the limited ability of the Government to afford the capital cost subsidies required for those projects that would not otherwise meet the financial criteria. At present, the Government, with financial assistance from New Zealand and the EEC, has committed one million kina p.a. for rural electrification, which covers about a third of Elcom's annual rural distribution investment program (which is planned to average 85 km of 22 kV lines and four km of LV lines per year). 3.15 While the financial and economic criteria which Elcom uses for its rural electrification program are basically sound, there may be scope for the introduction of more cost-effective technical design and construction standards in rural areas which could allow a lowering of unit investment costs and the consequent expansion of the commercially viable market for electric- ity. As an example, Elcom currently connects 15 kW of capacity for all resi- dential consumers (based on Australian standards) whereas studies in neighboring countries indicate that 0.5 kW, or even 0.1 kW, may be sufficient to meet the requirements of a large class of potential customers. In view of this, Elcom is undertaking a review of its technical and administrative policies and practices to identify the options available to minimize the cost of electricity supply to rural villages. The results of this review should form the basis of a financially and economically viable expansion of Elcom's proposed rural electrification program. E. Priorities for Donor Funding 3.16 The Public Investment Program 1988-1992 41 includes only a subset of Elcom's investment program, and some of the projects included have already been funded. Cn the basis of the mission's review, the following projects in Elcom's investment program are still unfunded and appear to be of a high priority (with Elcom's tentative cost estimates): (a) Preparatory studies for Port Moresby Hydro: K 6.2 million required beginning in 1988, as discussed in para. 3.13. (b) Divune Mini Hydro Scheme: K 7.6 million to install a 3.6 MW hydro plant to replace diesel generation and facilitate rural electrification at Popondetta. Funding sought from ADB. (c) Rural Electrification: to cover the foreign exchange costs (estimated at about 80X of total costs) associated with Elcom's rural electrification program, which is planned to grow from K2.6 million in 1988 to K 4.7 million in 1995. 4/ Budget Document No. 3, November 1987.  - 38 - (d) Port Moresby Hydro: Although a site has not yet been selected, Elco- projects that a new hydro project vill need to be comissioned by 1995. ikf this projection is correct, financing for this project vill have to be arranged by about 1990.  -I, IV. TRANSPORT A. The Existing System 4.1 The various modes of transport available in PNG generally complement rather than compete with one another. For example, several of the road setworks on the New Guinea mainland are not connected to each other and air transport is often the only link between many key inter- and intra-regional destinations. The same holds for the role played by coastal and inter-island shipping by linking many communities on the mainland as well as on the islands. In terms of passenger and freight volumes, road transport now has the largest market share mainly because of the Highlands highway which links the country's principal sea-port at Lae with a hinterland that encompasses virtually all of the Highlands. Road transport handles over 80% of freight and about 70% of passengers in the Highlands which form the only true corridor for comprehensive transport activities in the country. Over the past two decades, the modernization and expansion of the transport network has been a key government objective. It's present status is as follows: (a) The principal road network totals 20,232 km, approximately 50% of which lies in the very productive Papuan and Highland regions of the country. Approximately 7Z of the network is paved; this consists mainly of national roads which account for 24X of the network but most of the paved roads. The road vehicle fleet totals about 52,000 vehicles, with the popular utility vehicles (pick up) and buses being the fastest growing segments due to the demand for personal travel. (b) In water transport, the coastal and inter-island network extends to approximately 18 principal ports and about 400 other small ports and boat landing points. The shipping fleet has about 250 ships, with a total gross registered tonnage of 20,000 tons, and countless small boats. Most ports serve different hinterlands and cannot readily substitute for each other. (c) There are 20 principal airports and about 450 aerodromes.11 The aircraft fleet (public and private) numbers about 200; these are mostly small craft. 4.2 The transport system as developed in PNG reflects the country's geography, topography and population distribution. It relies heavily on highways, inter-island and coastal shipping for freight transport, and on air transport for passenger movement; there is no railway. The system is not generally considered to be adequate. Many population centers are not connec- ted, costs are high, operations are overregulated, the safety record is poor, maintenance is costly, sectoral institutions are still developing and there is 1/ Many of the aerodromes are small, infrequently used facilities.  - 40- a shortage of trained per3onnel. Since domestic construction capacity is in its infancy, most major works require foreign contractors. 4.3 Surface transport (land and water) services are not well developed due partly to the small, widely dispersed population centers and the largely subsistence nature of the economy. For example, many coastal areas and islands depend on water transport, but since the distances are long and the volume of cargo and number of passengers transported are small, these services are provided at high cost. The same factors cause the road network (20,232 km) to be considered large in terms of km per 1000 persons (6.2) but very inadequate in terms of land area coverage (4 km of roads per 100 sq. km of land area). 4.4 With the country's heavy dependence on foreign trade, it is not surprising that imports and exports generate the largest volume of freight traffic for both road haulers and coastal and inter-island shippers. Imports account for almost twice as much tonnage as exports, not counting timber and copper. All the copper and much of the timber are handled on captive port and road facilities which do not interact to any significant extent with the rest of the transport system. Because of the disparity between import and export volumes, unused freight capacity exists in the export direction. The largest freight flows (about 400,000 tons in 1987) occur along the Highlands highway; about two-thirds of the total flow is inbound. 4.5 Due to the topography and the development of mining (with its typically isolated sites), air transport has played and will continue to play a key role in the country's develoY7ent. Also, passengers continue to prefer air transport for longer journeys._ 4.6 In 1986, the PNG transport system recorded about 200 million ton-km of intercity freight movement and about 80 million km of passenger movement. In the 1980s, in cargo traffic, road transport has grown at about 8Z p.a., followed by water transport at 7X p.a.; air transport has lost freight as roads have developed. In passenger transport, air transport still has the larger share of passenger-km because it is often the only mode for inter- regional movement. However, with the development of the road network, road passenger transport now has the highest growth rate (9X p.a.), followed by air (1%); water transport carries about 30,000 passengers and has shown negligible growth. Table 4.1 summarizes the overall trends. 2/ No country in modern history owes more to air transport than PNG, in which air freighting was pioneered in the 1920's. In 1931, the combined air services of the United States lifted a total of 513 tons of freight, those of the United Kingdom 649 tons, France 1,508 tons, and Germany 2,175 tons; in PNG, Guinea airways alone carried 3,947 tons of freight and 2,607 passengers. Of course, this was largely because air transport was the only viable option in PNG then.  Table 4.1: TRANSPORT AND TRAFFIC TRENDS, 1976-86 Average growth indicator Units 1976 1980 1982 1984 1986 rates (X p.a.) Road Transport Cars (No.) 13,480 13,408 12,580 - - 0 Utility vehicles (No.) 11,068 15,508 17,260 - - 7.0 Buses (No.) 1,125 2,870 2,903 - - 7.0 Trucks (No.) 6,424 7,981 6,742 - - 0.8 Port Cargo Traffic Coastal ('000 tons) 420 440 588 744 812 6.8 International ('000 tons) 1,035 1,475 1,383 1,378 1,615 4.5 Containers (TEU) - 56,091 68,305 71,169 88,763 8.0 Air Traffic Domestic passenger ('000 No.) 1,016 1,119 1,067 1,293 1,134 1.1 International passengers ('000 No.) 126 144 136 88 114 0 Freight tons 37,888 25,691 21,958 22,347 19,272 0 Source: Data provided by PNG authorities. B. Importance of Transport Development 4.7 Transport development is important in PNG because economic growth and social development cannot be sustained without it. Adequate transporta- tion is the key to the development of an exchange economy as it helps link its various sectors and markets. In PNG, the need for transport development is sharpened by the adverse topography and the widely dispersed population and production centers. Improved transport facilities constitute a vital develop- ment input by providing the country's scattered producers with access to markets and sources of inputs and by enlarging the size of domestic markets through reducing market fragmentation. 4.8 Rural roads connecting isolated areas to markets and sources of supply are a prerequisite for converting agriculture from a subsistence to a commercial activity. It has been demonstrated that in areas which were pre- viously inadequately connected, improved roads and the availability of trans- port services helped stimulate agricultural production. A 1985 study by IASER of the Southern Highlands rural development project showed that farm produc- tion and farmgate prices both rose appreciably after the main road was upgraded. Project benefits arose from: (a) reduced vehicle operating costs; (b) savings in time for both passengers and freight; (c) reduced damage to goods; and (d) overall stimulation of the rural economy. Farmers attributed  - 42 - most of these benefits to the road improvement.31 Besides agriculture, the growth prospects of other productive sectors--industry, forestry, etc.--are also closely linked to transport development as the means to overcome the barriers posed by the difficult terrain and to reduce the tosts of moving outputs and inputs. For many of the country's relatively remote, less developed areas, transport development will be a critical element of any strategy to improve their prospects for growth. 4.9 Nationwide, the development of transport infrastructure accounts for over half of all construction activity, which in turn is a major component of the country's annual fixed capital formation. The provision of transport services and the repair and servicing of transport equipment are growing activities in the countryside. These activities, together with direct employment on the construction and maintenance of transport infrastructure, are among the key areas for ready entry of surplus farm labor into the modern economy. 4.10 The Government is assigning a high priority to transport development and has recently been allocating about 18Z of its total annual investment to this sector; most of this allocation (72Z) goes to the road subsector. An analysis of the economy's transport requirements and the Government's develop- ment objectives indicates that there are two main needs to be served by trans- port development. These are: (a) the economic need to provide farmers with access to markets and to lower the present high transport costs; and (b) the social and political need to improve rural welfare by making it easier to provide education, health and other government services as well as increasing personal mobility. C. Major Policy and Institutional Issues 4.11 Network Development and Adequacy. There has been some progress in physical development of the transport network, but mainly at the national level. This is especially true for roads, where the current pace of develop- ment is adequate and should be sustained. On the other hand, the lower classes of roads (prnvincial and district) are largely inadequate. This is a deterrent to growth since it is these roads that are supposed to support more directly the productive sectors of the economy, especially agriculture. A 3/ The broader-based 1983 Provincial Rural Transport Study (financed under L1856-Hwys III) found this difficult to determine ex ante because it was not possible to estimate people's response. The study claimed that expected increases in road traffic were largely due to inbound freight and general passenger movement and that agricultural production and trade might not expand to the extent anticipated. As for the roads' economic justification, any production increment associated with road development was considered small and easily outweighed by increase in passenger movement. These findings are typical of the transport paradox in small, subsistence economies: the traffic levels are initially not adequate to justify investment in transport, but the absence of transport prevents the creation of new activities.  - 43 - rational program for the development of a network of provincial and district roads is needed. For 1988, about K 3.8 million is included in the PIP for economically justified provincial and district roads while elsewhere in the budget an additional K 12.0 million is allocated for another group of these roads. However, this latter group has not been truly planned for, the selection criteria are not clear, and no attempt has been made to plan a rational layout for its many, widely-dispersed road sections. Ir is commenda- ble of the Government to be willing to consistently allocate funds for trans- port development in rural and other less developed areas. What is needed is a mechanism for ensuring that the allocated funds are efficiently and effec- tively used for their intended purpose. A well-prapared program for provin- cial and district roads would provide such a mechanism. Major elemerts of such a program would be: (a) developing a provincial and district roads grid; (b) encouraging the participation of the local construction industry; and (c) strengthening institutional capacities for the execution of the program through improving planning and management at the provincial level. Extensive technical assistance should be provided to develop this program ang,the Bank could take the lead role as it did for the national roads program.- 4.12 Maintenance of the road network is in a somewhat similar state. National roads are reasonably well maintained but considerable improvement is needed in other classes of roads. Ports are well maintained and so are airstrips. However, the airports' communications and control equipment needs to be modernized. 4.13 Efficiency and Utilization Objectives. Systemic characteristics such as high costs, poor services, and the under-utilization of facilities are to be addressed by the Government's deregulation proposals for road and water transport modes. Deregulation is intended to promote a more efficient, intensive utilization of the existing infrastructure, thereby increasing its productivity and at the same time help limit the need for new investments. It is felt that though it may take considerable time to draft and pass legis- lation, the road subsector deregulation will succeed. Ironically, this is where deregulation may have the least effect since the existing regulations are not strictly enforced. This is not so for shipping and air transport. There is overcapacity in some ports and low productivity in others; still the unions succeed in getting wages for workers which are higher than what similarly trained people command elsewhere in the economy. In shipping, there is inadequate competition and excess capacity largely because of restrictive entry barriers. Existing operators use old, unreliable and inefficient ships and merely pass on the costs. They are well organized and are expected to resist government efforts to deregulate. For ports and shipping, the deregulation program is not as far advanced as land transport's. Technical assistance to draft this program is provided under IBRD L-2742. However, the Department of Transport has been slow in making arrangements for using it. 4/ The Transport Operations Policy Study (TOPS) and the Transport Investment Programme Study (TIPS) under L-2265 helped rationalize the now ongoing national roads (and a few provincial roads) development program.  - 44 - 4.14 On the other hand, in civil aviation, the policy now seems to be to move away from formal deregulation, but still obtain some of its advantages by allowing more competition. An American carrier has just begun service to Port Moresby (from Guam), providing another international alternative to Air Nuigini. Domestically, the new "comhuter airlines" category will be allowed to fly on Air Niugini routes, hence offering increased competition. This competition will be largely limited to the level of service provided because the Government will still set the fares. It remains to be seen if this will yield any significant efficiency gains in civil aviation; it may only lead to reduced Air Niugini profitability. 4.15 Cost Recovery. The Government's basic policy is to improve cost recovery from transport infrastructure investments. This has been the case over the past 10 years during which cost recovery for road transport improved from about 40% of maintenance costs to adequate levels by end-1986. This was achieved by increasing vehicle license fees as well as taxes and duties on fuel, spare parts and equipment. This is not the case in civil aviation, and to some extent also in water transport, where cost recovery is still inadequate even to cover maintenance costs. This is partly because ships and airplanes are often imported duty free or pay lower duties than vehicles and partly because duties on aviation fuel (10%) and diesel (20%) are not as high as on gasoline (452). There is a need to adjust this policy so as to improve cost recovery in the shipping and aviation subsectors. 4.16 Construction Industry. About twenty years ago, the construction industry was in its infancy. Today, it is still largely at that stage, having failed to develop. It has been bypassed by the major development opportunity presented by the construction of the Highlands highway; it is doubtful if such an opportunity will return soon. Low domestic skill levels, inexperience and the need for rapid, high standard road construction largely restricted the involvement of local firms in the Highlands highway program. This raises the question of how to develop the industry, given the fact chat similar circum- stances still prevail. One alternative would be for the local industry to focus on periodic road maintenance programs. However, this is complicated by the fact that the Department of Works (DW), just like government agencies elsewhere, would rather do maintenance by force account. This leaves still less room for the development of the local industry and increases the need to formulate a strategy. 4.17 In any development of the construction industry, the role of local firms should first be decided on, and then a sustainable strategy for growth that is transparent to all participants should be formulated. A key first step would be to estimate the size of the construction market for the medium to long term, and the probable share of local firms. Secondly, the construc- tion industry serves many sectors and its weaknesses affect them all. There is, therefore, a need for a detailed analysis of improvements needed in the industry as a whole and not just interim measures for road contractors as done  - 45 - in some current World Bank projects.51 Sector work should be carried out to review inter alia the construction industry's (a) size and growth trends; (b) employment creation capabilities; (c) scope and role for local firms; (d) competitiveness and barriers to entry; (e) financial prospects; (f) transfer of skills; and (g) development constraints. If a mineral resource boom develops in the 1990s, it would lead to a greatly increased demand for con- struction, for which it is essential to plan improvements now. However, even without a resource boom, the markets for domestic contractors (road mainte- nance, provincial and district roads, bridges, buildings, etc., as well as a consistent stream of Government spending) are already there; what is needed now is a proper assessment of the industry. 4.18 Institutional Development. Considerable progress has been made at the national level as the agencies concerned--Department of Works (DW), Department of Transport (DT), and the Department of Civil Aviation and Tourism (DCAT)--have been strenthening their capacity to plan, implement and manage transport development. However, much of the credit for this is still due to the use of foreign contract officers to fill key posts and supplement local staff. Extensive technical assistance and training will be needed continually if local staff are to eventually fill all key posts. At the provincial level, there still is very little planning and managerial capacity in most transport departments. The differences in institutional development at the national and provincial levels reflect their histories. In 1970, the then Public Works Department (PWD) was about 99% expatriate staffed. It had some design and planning capability and the Bank accepted PWD prepared detailed engineering for certain sections of the first highway project. Since then, the emphasis has been on substituting trained nationals for expatriates ("localization") while strengthening the overall capacity at the national level. During the now nearly two decades, the local staff has grown to about 30Z and continues to increase. Thus, DW, DT and DCAT are largely institutions in transition and seem to have found that a slow but gradual process of selecting and training local staff suits their purposes. More difficult targets, however, lie ahead and this procedure will be severely tested because it is the less specialized positions which have been localized and most agencies have not yet reached a critical mass of local staff. The PNG Harbors Board is in a similar position. At the provincial level, on the other hand, nothing really existed before and it is not yet clear what should be built up. A study needs to be carried out to assess the needs of provincial agencies and their future role in transport development. 4.19 Sector Planning and Coordination. Sectorwide interagency planning and coordination are seemingly not carried out as well as they ought to be. This can create planning and implementation bottlenecks. The underlying causes seem to be the lack of reliable information flow mechanisms and an incomplete sector database which result in agencies not knowing in a timely fashion what each other is doing. Important statistics are lacking and often 5/ DW, for example, will implement a relatively small-scale program of technical assistance to local contractors (under IBRD L-2265) which is intended to help them improve their planning and management.  become available onily several years later. For example, data on the vehicle fleet fromi the National Statistical Office (NSO) are available only up to 1983. Similarly, the road inventory, especially for provincial roads, is not up to date. There are also no accurate time series data on road passenger and freight transport in the key corridors or at other places. Moreover, friction at times arises between agencies because important planning data on project costs, implementation experience, design parameters, etc., are not readily available from one to another. 4.20 These problems seem to arise largely because (a) interagency report- ing lines are unclear; (b) agencies often re-organize and in their new settings tend to focus first on the more physical aspects of their programs and leave other tasks for some later, unspecified date; and (c) the data gathering exercises (e.g. origin/destination surveys) are simply not done on a regular, systematic hbsis. Some corrective measures need to be taken promptly. A Bank financed data base study had outlined a few steps--setting up traffic counters, computerizing the data base, providing technical assistance to help develop an information system, etc. Their implementation had been started independently by DT but has recently lost momentum. While these steps are necessary, they should also lead to and be part of a more comprehensive, coordinated end-product. To this end, transport agencies could be required to produce jointly a biennial report on the transport sector which could serve as a reference manual for transport planners. This should at least help to make the interagency coordination issues clearer. D. Investment Strategy 4.21 Public Investment Program (1988-92). Based primarily on the TOPS and TIPS studies, DT has compiled a program of road investments for inclusion in the Public Investment Program (PIP). Similarly, DCAT has compiled a 5 year plan for civil aviation improvements and the PNG Harbors Board has prepared a corporate plan for ports, based on the 1984 ADB-financed Ports Development Study. The planned investments in the transport sector seem to be reasonable, both in terms of the projects chosen and the Government's emphasis on rural development. The agencies responsible for roads, ports and airports are for the most part capable of implementing the respective investment plans. The objectives and criteria relating to these plans are briefly discussed below. 4.22 National Roads Improvement Program. This program is to fund econo- mically feasible improvements and extensions to the trunk network. Priority projects in the 5 year plan were subjected to full feasibility studies to prove their economic justification as well as to compute project costs. In order to be included in the program, projects must have an economic internal rate of return of ac least 12Z. If major implementation problems (e.g., land acquisition) arise, projects will be postponed to later years. Major ongoing national road projects totalling some 200 km have been grouped under this program. 4.23 Provincial Transport Assistance Program (PTAP). This program is to provide funding assistance to transport projects which have a high priority in provincial development plans. The projects must also (a) reduce the cost of transport to a minimum of 2,000 people; (b) be feasible to construct and maintain; and (c) not duplicate existing project proposals.  -A7 4.24 Each project that met these criteria was in addition subjected to an economic feasibility study. If the costs of a project were in excess of the potential benefits, verification was sought from the province to ensure the project is the only means through which necessary services can be provided. Once it became clear that a project met the criteria, the Provincial Govern- ment was required to enter into a joint funding agreement with the National Government. In general, this was on a 50/50 basis. In exceptional cases where the project was particularly worthwhile but provincial government funds were insufficient, a funding arrangement more advantageous to the province was considered. An additional condition it that sufficient funds be available for the future maintenance of the project.- 4.25 Assistance to the Trans port Framework. This program is aimed at smoothing the transition toward a relatively less regulated transport sector in the future. Improved systems of monitoring entry barriers, enforcing safety standards, etc., will then be required. In order to qualify, it must be shown that projects will improve efficiency or safety in land or marine transport. 4.26 PIP Details, 1988-92. The PIP provides for various continuing and one new transport program (National Roads II), totalling some K 208.8 million during the period 1988-92 (Table 4.2i. It includes only the economically justified road investments as detailed below: 6/ Some of this logical planning is defeated by the sizeable expenditure outside the PIP for other provincial and district roads. Many of these other roads have negligible or no economic return and in many cases would rank lower than roads rejected by PTAP. However, PNG officials feel that this expenditure is justified because roads play a major role in opening up areas and integrating them with the rest of the country, not only economically but socially as well as politically. Furthermore, most of these "nation building" effects are not captured in standard ERR analyses.  - 48 - Table 4.2: TRANSPORT INVESTMENT PROGRAM, 1988-92 (Total Cost: K'000) 1988 prices Five-Year Programs 1988 1989 1990 1991 1992 Total National roads I 23,831 35,007 33,450 18,490 7,830 118,608 National roads II 550 375 3,175 14,750 28,010 46,860 Bridge replacement 2,703 2,230 2,230 2,280 2,780 12,223 Provincial roads 3,840 5,067 3,635 3,635 3,190 19,367 Transport safety 170 650 1,550 2,890 3,480 8,740 Transport support 400 820 920 560 325 3,025 Total 31,494 44,149 44,960 42,605 45,615 208,823 Source: The Public Investment Program, 1988-92, Budget Document No. 3, November 1987. The program is of adequate size and the individual projects support government priorities. Some 801 of it is for national roads and about 12X is for provincial roads. However, as mentioned above, there are other funds outside the PIP that are available for provincial and distf)ct roads from the National Government as well as from provincial governments.- 4.27 Airports. The PIP provides for equipment replacement, improved safety standards, and rehabilitation of aviation facilities. The program is relatively small (K 28.1 million) and focuses on upgrading existing infra- structure at Jackson airport and at other national airports (Table 4.3). There is a need to modernize the airport facilities more rapidly but this is difficult to justify economically, given the low traffic growth trends. Most projects in the program have at least 10X rate of return; some were also included in the interest of safety, which is justifiable. The program also includes provisions for 'aviation support' which consists of (a) strengthening the national weather service so as to better serve the needs of civil avia- tion; and (b) providing training and technical support to DCAT staff. 7/ Additional funds for provincial and rural roads also come from several other sources or form major components of other projects: e.g., projects funded by (a) the Army; (b) various rural development schemes; and (c) special funds from the Prime Minister's Office. These funds total less than K 5.0 million p.a.  - A. - Tabl: 4.3: CIVIL AVIATION INVESTNTW PROGRAM, 1988-92 (Total Costs: K '000) 1988 prices Five-year Programa 1988 1989 1990 1991 1992 Total Improve National airports 3,930 5,815 5,545 3,600 3,740 22,630 Jackson airport modernization 180 1,500 1,600 0 0 3,280 Aviation support 170 560 560 560 355 2,205 Total 4,0 7,875 7j705 4160 4 Source: The Public Investment Program, 1988-92, Budget Document No. 3, 1987. 4.28 Ports and Shipping. The PNC harbors Board (PNCHB) corporate plan envisages expenditure of some K 59.4 million during 1988-92, up about 7X over the previous plan, mainly for ongoing projects (Table 4.4). The planned investmenits are based on the findings of the 1984 Ports Development Study and are fully justified. However, the growth rates projected in that study were conservative and some of the key ports are already approaching the study's projected 1992 traffic levels. It seems therefore that the PUGHB investment plan might be too modest, especially if a mining or petroleum boom material- izes and leads to significant increases in imports, and that capacity problems could develop which the PNG economy would be sensitive to. A repeat of the severe shipping bottlenecks which occurred in other oil-exporting, less developed countries in the 1970s could occur. A study is therefore needed now to determine when a second port expansion program will be needed. 4.29 In view of this, completion of the corporate plan might not provide adequate capacity in the outer years. It may well just be sufficient for interim needs.  - 50 - Table 4.4: PNG HARBORS BOARD CORPORATE PLAN, 1987-1991: CAPITAL EXPENDITURE PROGRAI FOR PORT DEVEWPMENT (K'000s) 1988 prices Five-year Item 1981 1988 1989 1990 1991 Total Revised Lae port project 5,340 6,300 1,900 - - 13,540 Ports development project 5,220 6,910 3,080 - - 15,210 Special projects 2,160 2,910 5,450 10,250 9,900 30,670 Total construction costs 12,720 16,120 10,430 10,250 9,900 59,420 ADB funding 6,220 8,845 3,403 - - 18,468 PNGHB funding 6,500 7,275 7,027 10,250 9,900 40,952 Source: PNGHB, October 30, 1987.  - 51 - V. HUMAN RESOURCE DEVELOPMENT 5.1 Introduction. Investment in "human capital," or human resource development, has been widely recognized as an indispensable element in the process of economic growth. PNG entered independence in 1975 with a low education base, and this is still reflected in the relatively poor educational qualifications of the labor force and a heavy reliance on expatriates for managerial and technical posts. PNG needs to continue to upgrade its human resources, through both formal education and manpower upgrading programs, in order to ensure self-reliance and sustained economic development. This annex identifies the salient features of PNC's human resource base, in terms of population trends, labor force characteristics and educational coverage. It then examines the implications of continuing rapid population growth for the Government's efforts to improve the coverage of basic services and to provide emplovment. The current government planning and budgetary strategy and the proposed medium-term public investment program for education and training is assessed, both in terms of the stated priorities and the resources allocated. Finally, an analysis of the issues facing the education and training system lays the groundwork for proposed strategies to develop PNG's human resources. A. The Human Resource Base 5.2 Population Trends. PNG's population was estimated i total about 3.5 million in 1987, of which about 88% lived in rural areas.- The popula- tion grew by about 2.3% p.a. during the period 1966-1980. As in most develop- ing countries, mortality in PNG has declined significantly in recent decades, due to improvements in public health services that have particularly reduced infant mortality rates. Average life expectancy had risen from about 40 years in 1971 to about 53 years by 1985. Fertility trends are less clear, as fertility rates appear to have fluctuated considerably during 1971-80. The total fertility rate (average number of live births per woman) is estimated to be about 5.1, which is somewhat lower than in some developing countries, due to a tradition in PNG of birth-spacing based on post-partum abstinence and prolonged breast-feeding. Fertility is nevertheless higher than in neighboring Indonesia (3.7), Malaysia (3.7) or Philippines (4.2). 5.3 Using the 1980 Census as the base, the National Statistical Office (NSO) prepared several projection scenarios for future population growth, which varied principally as regards fertil' y assumptions (mortality was assumed to continue to decline gradually).- NSO selected as "most likely" a scenario that assumed a continuation of a slight decline in fertility observed during 1975-80 (Scenario "B" or medium variant), which would give a 2.4% p.a. 1/ 82% in rural villages and about 6% in "rural non-village" areas (RNVs), such as plantations, mining camps, government stations, etc. 2/ Population Projections for the Citizen Population of Papua New Guinea for the period 1980 to 2015, Bakker, Martin L., NSO, March, 1985.  - 52 - growth rate until the year 2000, bringing total population to about 4. million inhabitants (Appendiz Table II.5). However, another analysis _ concluded that the modernizing influences that may lead to a decline in fertility through a rise in the age at marriage and increased use of contra- ception may also lead to a decrease in the traditional birth-spacing practices that have kept fertility at a relatively moderate level. Fertility would thus not decline (and could even increase) unless this were promoted through a deliberate population policy. Under this assumption, population growth rates would increase from 2.3Z p.a. to 2.81 p.a. by the year 2000, and total popula- tion would be close to 5 million. Most government planning is based on the "medium variant" projections. If fertility has not continued to decline since tIle 1980 Census, as may be very likely, government plans have underestimated the gaps in coverage of basic services and the magnitude of the pressures population growth will continue to place on public services and budgetary resources. Given the present low contraceptive prevalence, a significant decline in fertility would only occur if a large-scale effort to increase family planning practice were undertaken. In the absence of such a program, rapid population growth will continue to erode the Government's efforts to improve the standard of living of PNG citizens. 5.4 The major difference between the high and medium population scenarios is not so much in total population size--which does not substan- tially diverge until after the year 2000--as in the different age structure that would result (Chart 1). PNG already has a relatively "young" population, with approximately 421 of the total population under the age of 15. This gives population growth a built-in momentum, as an expanding number of young women will enter the reproductive years so that even if family size were reduced immediately, the population would still continue to increase. Moreover, if fertility remains high, the number of young people would grow even more rapidly, maintaining a high dependency ratio. PNG currently has a dependency ratio of about 78, which means that every 100 economically active persons (aged 15-64) must support 78 "dependents" under 15 or over 65. If fertility declines, the dependency ratio would decrease. A lower dependency ratio means that a lower proportion of family or national income would be required to provide food, health, education and other services to the dependent population. The income thus "saved" can be used for investment. 5.5 Urbanization and Interprovincial Migration. PNG's population is fairly mobile; the 1980 Census estimated that about 9% of the population did not live in the province of birth. Migration is estimated to account for at least half of the differences in population growth among provinces (Appendix Table II.6). Migration has primarily responded to employment opportunities. The principal destinations for interprovincial migration have been the National Capital District (NCD), Morobe, Western Highlands, East and West New Britain and North Solomons, all provinces of relatively greater economic 3/ The Effects of Population Growth on Social and Economic Development in Papua New Guinea, The Futures Group, Glastonbury, Conn. USA, September 1987. This analysis corresponds roughly to Scenario "D" or high variant of the NSO projection series.  - 5 - Chart 1 POPULATION PROJECTIONS. 198562015 WITH DECLINING & CONSTANT FERTILITY (OOOs) 7000 6000 0 Declining FetilitV l= Constant Fiility 500 4M0- 2000- 1985 2000 2015 1985 2000 2015 1985 2000 2015 1985 2000 20-IS Total Population Age Group 0-4 Age Group 7-12 Age Group 0-14 Wodd Bank -41310  - 54 - growth and formal wage employment (Appendi- Table II.7). A relatively high proportion of the population of these provinces also lived in either urban areas or "rural nonvillage" (RNV) areas, where modern sector employment is concentrated: NCD: 100%; Morobe: 27%; Western Highlands: 17%; East New Britain: 27%; West New Britain: 33Z; North Solomons: 21% (Appendix Table II.8). While trends are not available for the growth of RNVs, the citizen population of urban areas was estimated to have increased by about 7Z p.a. during 1971-80; NCD and Lae, the two major cities, were estimated to have grown by about 8Z p.a. Rural-urban migration may have slowed somewhat in the early 1980s due to the decline in wage employment opportunities; nevertheless, urban areas are likely to continue to grow at close to 5% p.a. At these rates, the estimated urban population of about 500,000 would double to about one million by 2000. 5.6 The PNG Labor Force. Most of the information on 7e PNG labor force is based on the Second National Manpower Assessment (NMA2)._ As Table 5.1 indicates, in 1980, the PNG labor forc of 1.54 million represented 74% of the economically active population (EAP)T Less than 10% of the EAP was in formal wage employment, and over one-quarter was in the subsistence sector. Close to two-thirds of the EAP was engaged in some form of agricultural production, of which 95% were self-employed small-holders or subsistence farmers. Within the urban sector, wage employment accounted for 39% of the EAP and only 3% was in informal money-raising activities. Although men and women participate equally in rural production, males dominate non-agricultural employment. The labor force in urban and RNV areas was almost 80% male, and males accounted for 87% of formal wage employment. Women wage-earners were concentrated in the "white-collar" occupations (Appendix Table II.9). 5.7 Although formal wage employment accounts for a very small proportion of the labor force, almost all of the available employment data refer to this group alone, which considerably limits the analysis. The formal labor force is relatively youthful, inexperienced and with low educational qualifica- tions. About 60X of citizen wage-earners were less than 30 years old in 1980, and 45% had no education or had not completed primary schooling. About half had completed primary or some lower secondary education, 4% had completed upper secondary and only 1% had a university education (Appendix Table II.10). This is particularly a problem for the private sector, where only 17% of workers had lower secondary education or above, compared to 41% for government employees. The relatively limited education and experience of the citizen work force is also reflected in the continuing large employment of non- 4/ National Manpower Assessment, 1982-1992, Department of Finance and Planning, March, 1986. Most of the analysis of the composition of the labor force is based on 1980 census data, 1982 jwiVuyueayL daLa and 1984 enrollment data. 5/ EAP is defined by NMA2 as all persons over 10 years of age, with "labor force" defined as the EAP less students, household workers, the sick, etc. EAP is normally defined as the 15-64 age group, working or in search of work.  Table 5.1: CITIZEN POPULATION 10 YEARS AND OVER BY ECONOMIC ACTIVITY, 1980 Rural Rural non- Nationwide Economic activity village village /a Urban Males Females Total % A. Formal sector wage employment 47,724 54,281 98,387 174,430 25,962 200,392 9.6 B. Informal money-raising activities 511,500 13,863 7,051 266,803 265,611 532,414 25.6 C. Subsistence fishing/farming 542,206 3,882 5,807 242,044 309,851 551,895 26.5 D. Working in the house 56,488 13,899 47,677 3,877 114,187 118,064 5.7 E. Not economically active (young, old, sick and students) /b 331,148 30,489 59,578 235,169 186,046 421,215 20.3 F. Seeking employment 25,674 1,930 10,170 27,528 10,246 37,774 1.8 G. Other activities 180,784 9,892 26,698 139,344 78,030 217,374 10.5 All activities 1,695,524 128,236 255,368 1,089,195 989,933 2,079,128 100.0 Li'1or force /c 1,307,888 83,848 148,113 850,149 689,700 1,539,849 74.1 Participation rates (X) /d 77.1 65.4 58.0 78.0 69.7 74.1 Unemployment rate (%) Low estimate /e 2.0 2.3 6.9 3.2 1.5 2.4 High estimate 7f 15.8 14.1 24.9 19.6 12.8 16.6 /a Nontraditional settlements such as sawmills, plantations, mining camps, government stations, etc. 7T; Includes "Not Stated." /c Codes A, B, C, F and G. 75 The labor force as a percentage of-All Activities. /e Seeking Employrnent (Code F) as a percentage of labor force. 7? Seeking Employment and Other Activities (Code F and G) as a percentage of the labor force. Source: NMA2, Table 1.4.  - 56 - citizens. About 14,000 expatriates accounted for 7% of all wage employment, including 49% of administrative and managerial posts, 17% of professional and technical posts, and 7Z of clerical posts (Appendix Table II.9). The high proportion of expatriates in managerial and technical posts in both the public and private sectors reflects a chronic shortage of trained Papua New Guineans, which constitutes a continuing hindrance to self-reliant growth. The progressive localization of the labor force is thus a major government objective. This will require continuing attention to human resource development. B. Implications of Population Growth 5.8 While PNG's projected population growth rates are not as high as in many developing countries, either the medium or high variant projection scenarios (para. 5.3) would create considerable demand for public services. High rates of urban growth also increase the demand for urban services, particularly housing and related infrastructure. The most immediate impact is reflected in the growing number of children under 15, which particularly increases the demand for health and education services. In the longer term, these children will enter the labor market, intensifying the pressure for employment creation. 5.9 Health Services. The National Health Plan (NHP)61 projects a considerable expansion health service personnel in order just to maintain present service ratios._ For example, about 3100 additional health aides, nursing officers and paramedics would have to be trained and recruited by the year 2000, without taking into account replacements for attrition. If fertility does not decline, the requirements would total 3400. However, these calculations underestimate the additional demands created by continuing higin fertility, which affects most immediately maternal and child health, the prime focus of health care services. With constant fertility, the number of births per annum would increase from about 126,000 in 1985 to almost 200,000 by 2000; with even a slight decline in fertility, this number would amount to less than 170,000 (Appendix Table II.5). The increased number of births would affect the ability to improve the provision of prenatal care (currently 60% coverage) and supervised deliveries (40% coverage) that are major factors in present high maternal mortality. In addition, with constant fertility, children under five years, the highest-risk age group, would increase by 50% by 2000, com- pared to an overall population increase of 47Z during the same period. Demand for health care services for this target group would thus increase faster than NHP calculations, which foresaw an expansion of only 35% in the under-five age group and a population increase of 42% during 1985-2000. Finally, more 6/ National Health Plan, 1986-1990, National Department of Health, 1986. 7/ Under this plan, service ratios for nursing officers would decline from about 1:1300 in 1985 to about 1:1500 in 2000, in order to give priority to the training and deployment of health aides.  - 57 - frequent births and larger families would have a detrimental effect on infant and child nutrition, a major contributor to high mortality among these groups. 5.10 Education Services. Population growth also affects the Government's ability to achieve its long-term objective of improving education coverage. In 1987, about 370,000 pupils were enrolled in primary school, equivalent to about 732 of the school-age population (age 7-12) (Table 5.2). Because fertility declines would not begin to affect the size of the school-age population for at least seven years, the number of 7-12 year olds would be almost the same until the early 1990s whether fertility remained constant or declined slightly. However, the 7-12 age group would grow to 715,000 by the year 2000 with constant fertility, compared to about 685,000 with declining fertility (Appendix Table I1.5). If fertility remains high, in order to achieve an 100l enrollment ratio, or universal primary education (UPE) by the Government's target date of 2000, enrollments would have to increase by over 52 p.a., whereas enrollment growth has averaged less than 41 p.a. during 1980- 1987. If the small class sizes (pupil:teacher ratios of 30-31:1) that have characterized the system persist, then more than 22,000 government-funded teachers would be required, almost double, the present teaching force. Even if the pupil:teacher ratio increases to 38:1, as is the Government objective, about 18,000 primary teachers would be needed, an increase of about 6,000. Because of the momentum of population growth, just maintaining current enrollment ratios would imply an increase of pupils to about 510,000 by the year 2000. Current population growth rates also mean that the 13-16 age group would grow from about 330,000 in 1987 to about 415,000 in 2000. To maintain the present lower secondary enrollment ratio of about 151 would requige building about 45 new provincial high schools (PHS) by the year 2000.X1 8/ Assuming average school size of 320 students, reflecting the PHS currently under construction.  - 58 - Table 5.2: BASIC EDUCATION DATA, 1986 Gross Student: Fees as Enroll- enrollment staff Female Unit X of Level ments ratio Female ratio staff cost /f unit cost (1) (x) (1) (KinaI Primary /a 371,327 73 44 30.2 31 212 8 Lower secondary /a 48,185 15 37 25.5 34 545 32 Upper secondary 7i 1,789 2 28 19.0 32 2,233 3 Vocational centers 6,434 N/A 26 17.1 31 602 5 Primary teacher training 1,966 N/A 39 13.3 39 1,460/c /d Secondary teacher training 461 N/A 33 10.7 19 7,207/c /d Technical colleges 1,641 N/A N/A 7.4 23 4,146Th 7 Universities /b 2,867 N/A 16 8.5 N/A 10,607Th Te /a Includes private international schools but not "permitted" private schools. 7i Data for 1985. Excludes Coroka Teachers' College (secondary teacher training). 7T Source: Advisory Technical Assistance Study on Higher Education in Papua New Guinea, Draft Report, ADB/CHE, April 1987. /d No fees. Students are provided with stipends (NATSCHOL), averaging K 456 p.a. 7T Fees of K 200 paid by Government for NATSCHOL-eligible students. NATSCHOL stipends averaging K 711 p.a. provided to students. /f Public (budgetary) cost plus school fees. Source of other data: The Costs and Financing of Education, World Bank, June 1987, Report No. 6767-PNG. 5.11 While high fertility creates a growing demand for education, improved provision of education to girls can, over the longer term, help reduce fertility and mortality. Better educated mothers are more likely to practice birth-spacing and use modern contraceptive methods to limit family size. Better educated mothers may also avail themselves of prenatal care and birth supervision, reducing maternal mortality, and provide better health care and nutrition to their children, reducing infant and child mortality. PNG has made improved access to education by girls a major government objective, and has performed quite well in this regard. Girls account for 442, 372 and 28Z of primary, lower secondary and upper secondary enrollments, 26Z of vocational center trainees, and 16Z of university students, and about one-third of teachers at all levels are woien. 5.12 Urban Services. An analysis of the demand for urban housing projected a doubling of the number of households in the NCD from about 16,000 in 1980 to about 34,000 in 1995, requiring the construction of about 18,000  - 59 - houses in the 15-year period.91 If the requisite amount of formal housing is not provided by the public and private sectors, squatter settlements would proliferate. Rapid urbanization could also lead to an increase in crime, if growth in employment opportunities does not match the growth in population, since a majority of migrants are young males, presumably looking for work. Open unemployment among urban youth (age 15-19) was estimated at about 242 in 1980 and is expected to have increased since that time. About 602 of all serious crimes are committed by youths 13-25. The number of young urban males is expected to nearly double by 2000, from 75,000 to 135,000. 5.13 Employment Growth. The EAP is estimated to be growing by about 2.42 p.a. Assuming constant labor force participation rates, NMA2 projected an average annual increase in the labor force of about 45,000 during 1984-1990, rising to over 50,000 p.a. during the 1990s. NMA2 includes a projection to 1992 of labor force supply and demand (for the formal sector only), and endeavors to translate this into requirements for education and training (paras. 5.20-5.21). Although NMA2 follows accepted manpower forecasting techniques, this methodology has a number of inherent defects that reduce the usefulness of the projections and related conclusions. Formal sector employ- ment was projected to grow at the same rate as sectoral output (Appendix Table II.11), on the assumption that the factor mix, labor productivity and sector occupational structures remained constant. Wage employment was projected to increase at an overall rate of 3.1Z p.a. during 1984-1992, creating about 7,000 jobs p.a. While the assumptions underlying tIa detailed manpower demand projections, including the sectoral output growth estimates, can be questioned, the overall conclusion reached by NMA2 seems valid: the formal sector would only be able to absorb a small proportion (estimated by N"A2 at 15%) of the new entrants to the labor force. The vast majority would have to seek employment in the informal or subsistence sectors. Given the very small urban informal sector, informal agriculture and related rural activities would have to remain the principal source of livelihood for the growing population. 5.14 Need for a Population Policy. PNG does not yet have an official population policy. Two previous attempts to develop a national population policy in 1978 and 1982 were rejected by the Cabinet. Responsibility for providing family planning services was transferred from the National Depart- ment of Health to provincial governments in 1981. The number of new family planning acceptors has dropped since chat transfer. CvnLrawpLive uac ii lvw, estimated at less than 72 of women aged 15-44. However, in January 1987, the Cabinet directed the establishment of a National Advisory Committee on Popula- tion Policy under the auspices of the National Department of Finance and Planning (DFP). The Committee is expected to draw up a draft policy and program in 1988/89, following a first workshop held in April 1988. Without a vigorous program to promote the use of contraceptives and encourage continued birth=-pacin `, PNC's population i8 likcly to .ro- by at l --t 2.4' p., 9/ Social Implications of Population Growth in Papua New Guinea 1980-1995, de Albuquerque, Klaus and Tauge, Mariget, PNG Institute of Applied Social and Economic Research, March 1985, pp. 24-31.  - 60 - adding about 95,000 people each year, which would double the population in about 30 years, and could increase by 2.8Z p.a., which would double population in 25 years. It is reco_mended that the Government give high priority to developing a population policy so as not to delay the measurem needed to reduce fertility, in order to alleviate the pressures created by rapid population growth. C. Strategy for Human Resource Development: Education and Training Role of Education and Training in Development 5.15 The Government has outlined a strategy that would emphasize invest- ment in the directly productive or "economic" sectors and in the necessary supporting infrastructure. Consequently, although a lack of skilled manpower is frequently cited as a major obstacle to sustained economic growth, educa- tion and training are given rather low priority in the Government's resource allocation policies. The role of education and training in a development strategy can be twofold: first, to develop the basic skills and social attitudes, or "social infrastructure", necessary for the population to participate in or respond to public and private programs and investments designed to stimulate growth; and second, to provide the skilled manpower needed to design and implement such programs and investments. While consider- able attention has been paid to the latter, the importance of basic general education for the former should not be underestimated or neglected. 5.16 The Government has laid yg the following medium-term objectives for the education and training sector:- (a) to extend basic primary education to all rural and urban areas; (b) to link secondary and tertiary enrollment targets, curricula and teacher training to priority manpower needs; (c) to rationalize the number of tertiary training institutions and courses in order to focus on high priority subiects, improve internal efficiency and reduce unit costs; (d) to provide incentives for the private sector to participate in employment-specific training for school leavers; and (e) to restructure student fees so that the beneficiaries of higher education contribute to its cost. These objectives and priorities are generally sound and appropriate, and the Government strategy of seeking to achieve savings from improvements in internal efficiency which could be redirected to priority investments in the sector is endorsed. However, the policies, programs and resources that are proposed for their implementation do not reflect these priorities and would be insufficient to achieve the objectives outlined. In particular, the savings from the higher education subsector that would be redirected to basic education are likely to be far more difficult to achieve than the government strategy assumes. Consequently, although the Bank generally supports the priority given to investments in the directly productive sectors, if the proposed constraints on resources for education and training lead to underinvestment in basic education and manpower upgrading, the Government strategy could result in a deterioration in education coverage and quality. 10/ Planning and Budgetary Strategy 1988-1992, Budget Document No. 1, Department of Finance and Planning, November 1987.  - 61 - Allocation of Public Resources to Education and Training 5.17 Investment Allocations. The Public Investment Program (PIP) proposed for the education and youth development sectors amounts to just under K 75 million for the period 1988-92. (K 62 million for education; K 12.5 mil- lion for youth development). This represents 5.7% of the total PTp for all sectors, and is K 16 million or 20% less than the program proposed for lC87-91. In 1986, the investment program for education and youth development totalled about K 23 million, representing 13.8% of the development budget for that year. For 1988, the same amounts are K 15.5 million and 7.5%, and the share of investments is projected to drop steadily to 4.0% by 1992. In view of the major issues to be tackled in these sectors and the growing target populations, these investments are likely to be quite insufficient. In addition, the distribution of the proposed investments within the education sector is inconsistent with the stated sectoral objectives. The Government has declared that the greater portion of resources for the sector are to be channelled to primary education, and that there is a surplus of lower secondary and technical college graduates relative to manpower demand, implicitly indicating a lower priority for the latter education subsectors. Nonetheless, as Table 5.3 indicates, only about one-quarter of investments has been allocated to primary education while one-half is allocated to secondary education, including expansion of access to lower secondary education, and more than 20% is destined for technical education. Although a rationalization of the planning and delivery of education services by the provinces has been identified as a major issue in controlling education costs, only K 1 million or 1.5% of the sector investment program has been allocated for this purpose. 5.18 The Government has pointed to the provision of subsidies to supplement or replace primary school fees as a major initiative in support of primary education (K 4 million in 1988). However, this measure could actually result in a net loss of resources to the subsector, as the subsidy program replaces other support services. While studies examining the causes of primary school non-enrollment and drop-outs do mention the burden of school fees, (estimated to range between K 5-K 30), they have not been identified as a major constraint for most families. Rather, it is socio-cultural attitudes and low quality and relevance of schooling that are most often cited as the principal factors. Moreover, payment of fees may actually strengthen parental comuitment to their children's schooling, a factor that would promote improved student performance. Private schools already levy considerable fees, which indicatas a willingness among parents to pay for education. The fee subsidy program that was introduced on a more limited scale in 1981 is not considered to have been an effective way of addressing the constraint that fee costs may pose to some families. A targetted fee waiver program for truly needy families, managed at the school level, would be more effective than a blanket abolition of fees. In addition, the fees, which are mostly retained by the school boards of management, are principally used to pay for school mainte- nance and supplies, and it is feared that these essential inputs would be neglected in the absence of fees. It is recommended that some form of primary cost-sharing be continued or reinstated, as appropriate, combined with a targetted fee waiver program. The funds currently allocated for the fee subsidy program should be used instead to provide inputs that have a more direct and effective impact on education quality and relevance.  - 62 - Table 5.3: lUlA RESOURCE DEVRLOPMEET - PUBLIC IWNVSTMENT PROGRAN, 1988-92 Purpose Amount X (K'000) Total public investment program (PIP) 1,321,000 Education Nonformal: literacy, vocational/agricultural training 975 1.6 Primary: access, quality support, staff development 16,350 26.3 Secondary: Quality support, staff development 20,930 33.6 Construction and upgrading of lower secondary schools (PHS) 9,499 15.3 Technical: expansion and upgrading of facilities, quality support, staff development 13,518 21.7 Management and planning: support to provincial governments 925 1.5 Subtotal 62,197 100.0 Education as Z of PIP 4.7 Youth Youth training 9,470 76.0 Women's training 1,200 9.6 Planning: institutional development 1,800 14.4 Subtotal 12,470 100.0 Youth as X of PIP 1.0 Total, Education and Youth 74,667 Education and youth as Z of PIP 5.7 Source: Budget Document No. 3, DFP, November 1987.  - 63 - 5.19 Budgetary Allocations. The budget for the education sector III has declined in real terms by about 9% since its peak in 1985, although it still represents 18.8% of the 1988 budget for goods and services and 15% of the total budget (including debt service) (Appendix Table II.12). The budget for the Department of Home Affairs and Youth has declined by more than 25% in real terms since its establishment in 1985, although its staff has expanded. Since the target groups of both these sectors are growing by more than 2% p.a., this represents a significant decrease in resources per capita if present coverage ratios are merely maintained. The country's two universities have seen their budgets decline by about 20% in real terms in the same period but have gained 92 in staff, principally through a 28% jump in UPNG staff in 1986. The agency hardest hit by the budget and staffing cuts has been the National Department of Education (NDOE) which has seen its funds reduced by about 10% in nominal terms (equivalent to a 25% real decline) and its staff cut by 16.5% since 1985. NDOE provides quality support services to primary and secondary education (delivered by provincial governments), and is directly responsible for upper secondary education, primary teacher training, and technical educa- tion. A Wylod Bank study on the costs and financing of primary and secondary education _ concluded that although unit costs of primary and secondary education were high, only limited savings were possible in the short- to medium-term through improvements in internal efficiency at those levels. The NDOE budget reductions are likely, therefore, to mean real reductions in the quality support services provided to primary and lower secondary education. 5.20 Manpower Forecasts as a Guide to Resource Allocation. The Govern- ment proposes "to link the quality and quantity of primary, secondary and ter- tiary education wi1q,the country's projected requirements for skilled and un- skilled manpower". However, the detailed education and training requirements that NMA2 derives from the manpower demand projections are unreliable as guides for educational investment. NMA2 assumed: (i) no change in the educational qualifications currently required for particular occupa- tions; (ii) no substitution between levels of education; (iii) no occupational mobility; (iv) institution-based formal education as the only way of acquiring qualifications; and (v) 100% localization of all expatriate-held jobs by 1992. The present unsatisfactory educational composition of the labor force is thus projected forward as a norm, whereas in reality it should and will change as better-educated young people enter the labor force. Based on these questionable assumptions, NMA2 projects training needs for nearly 300 different skills or skill levels. Such detailed, skill-specific projections can be quite misleading if they are u--ed to determine enrollment targets for particular courses or to define program content. 11/ Defined as the budget for the National Department of Education (NDOE), pruvincida DiviLions uf EduuaLiuf aai.d ...e un-ver5ti.e, .ot i expenditures for training under other sectoral departments. 12/ Papua New Guinea: The Costs and Financing of Education, The World Bank, Report No. 6767-PNG, June 1987. 13/ Department of Finance and Planning, op. cit., (November 1987), p.78.  - 64 - 5.21 NMA2 concludes from its projections that, as regards employment possibilities in the formal sector, there will be a significant shortage of university degree-holders, a slight shortage of upper secondary graduates, a substantial surplus of lower secundary leavers and a huge surplus of primary school leavers by 1992. It should be noted that the assumption of full local- ization by 1992 underlies the projected deficit of degree-holders. However, to gear university enrollments to accelerated localization, a one-off demand factor, could induce a permanent expansion of capacity that could result in surplus graduates, or "educated unemployed", once localization is complete. Nonetheless, even if one assumed substitution among university, upper secondary and lower secondary graduates, the conclusion that a high proportion of lower secondary leavers would not find jobs in the formal sector remains inescapable. Priorities Within the Sector 5.22 Given the limitations of manpower forecasting, what conclusions and recommendations can, therefore, be derived from manpower analysis to guide educational planners? If interpreted in too rigid a manner, manpower fore- casting could lead to over-or under-expansion of particular levels of educa- tion or types of training. However, manpower analysis combined with other forms of labor market and economic analysis can give a rough idea of the priorities for education investments. 5.23 As mentioned above (para. 5.13), informal agriculture is expected to continue to absorb the bulk of the incg7ases in the labor force for the foreseable future. Numerous studies - have demonstrated the linkage between basic education and improved productivity of self-employed small farmers, particularly when education is combined with a rural development program. Primary education has been shown to be an important prerequisite for the success of agricultural extension programs, not only by providing the cogni- tive skills (numeracy and literacy) that enable the farmer to absorb the new information and techniques but also by creating positive attitudes toward innovation and entrepreneurship. Increased access to relevant and effective primary education should, therefore, be an essential element in the rural development programs that are a prime component of the Government's develop- ment strategy. 5.24 At the post-primary level, further analysis is needed to clarify the demand for lower secondary school leavers in order to determine enrollment targets for this education level. Lower secondary education can be viewed either as a foundation for further specialized training or as preparation for entry into the labor force. During the 1970s, emphasis was placed on the first aspect, and in 1978, 70% of lower secondary school leavers continued their education. However, as this level of education has expanded 14/ See Farmer Education and Farm Efficiency, Jamison, Dean and Lau, Lawrence, Johns Hopkins University Press, 1982; and "The Monetary and Non-Monetary Returns to Education in Africa", Hinchcliffe, Keith, World Bank Discussion Paper No. EDT 46, 1986.  - 65 - signrficantly in the 1980s, more than 60Z of current grade 10 graduates do not continue their education but must seek employment. Lover secondary education in the past virtually guaranteed employment in the modern sector, and the high social demand for this level of education reflects a continuing public percep- tion of this linkage. However, as opportunities for formal wage employment are limited and growing only slowly, it has been estimated that most lower secondary school leavers will have to find employment in the informal rural sector. Those who are not prepared to do so, would join the ranks of the urban unemployed and, quite possibly, may turn to crime. Whereas other countries with a larger or more rapidly growing formal sector aim at secondary enrollment ratios higher than those currently found in PNG, if lower secondary school leavers have unrealistic job expectations, too rapid an expansion at that level of education could be counterproductive. 5.25 Higher education and upper secondary education 151 are normally geared to formal sector employment or further education. The continuing presence of expatriate staff indicates a shortage of PNG nationals with higher-level training who could replace the costly expatriates. However, intakes at this level have been limited more by shortages of qualified candidates than by a shortage of student places. Whether the output from upper secondary and higher education institutions matches employers' skill needs is also less a question of quantity of graduates than of their quality, and it is this latter issue that must be the guiding factor in higher education planning. A modest expansion of output at this level could be absorbed by the labor market, if graduate quality can be improved while the excessively high unit costs are reduced (see paras. 5.42-5.43). 5.26 Technical and vocational education and skill upgrading programs are expected to be the most closely linked to manpower needs. However, in the short- to medium- term, a reorientation of the format and content of such training is required, rather than an expansion of enrollments. Sector-wide Issues 5.27 Several fundamental issues permeate all levels of the education and training system, and addressing these issues should form part of any strategy for the sector as a whole. These are outlined below. More detailed strategies for each subsector are presented in paras. 5.34-5.44. 5.28 Student Performance Levels. Although a rise in average student achievement levels at the primary level has been documented, student achieve- ment at all levels is still considered relatively low. This is reflected in the need to provide remedial education within each successive education cycle and is linked to the high drop-out rates that are found throughout the system. Highest priority should continue to be given to investment in those inputs which have been demonstrated in other countries to have the most direct 15/ Tertiary or higher education in PNG is defined as all post-lower secondary education with the exception of the national high schools, which provide upper secondary education (grade 11-12).  - 66 - impact on student achievement and retention: provision of relevant and appropriate learning materials, adequate school equipment and supplies, and improved teacher preservice/inservice training and supervision. Education quality is also negatively affected by the considerable teacher transfer rates that occur at all levels of education, reducing continuity and teacher commit- ment. This issue must be addressed by the Teaching Service Comission and other education authorities. Improvements in education quality should influ- ence both student performance and student retention. 5.29 It is recommended that education and training curricula at all levels be simplified to concentrate on adequate transmission of core skills rather than trying to achieve too many learning objectives or to offer too wide a range of training courses. Greater focus on core skills should facili- tate improved student performance. It is further recommended that formal institution-based education and training programs attempt only to provide a general education base, leaving skill-specific vocational training to more flexible formats outside the school (para. 5.32). The importance of providing a culturally relevant education is endorsed, in order not to alienate the PNG student from the rural environment which provides home and livelihood to the vast majority of the population, and this has rightly been a guiding concept in ongoing curriculum development programs. However, a strategy to "voca- tionalize" general education in order to provide skills for rural production may prove costly and ultimately ineffectual in orienting school leavers to rural self-employment. 5.30 Access. While enrollment ratios in PNG are still relatively low compared to its Asian neighbors, access should not be expanded in the short- to medium-term principally through provision of new infrastructure and teachers. Rather, more effective and efficient use should be made of existing physical and human resources, as the Government has proposed. At the primary level, access is relatively satisfactory; the slow progress towards UPE results primarily from low and declining retention and late entry to grade 1, which may /g1better addressed through increasing the quality and relevance of schooling.- While expanded access to lower secondary education is not recommended for the short-to medium-term (Appendix IIA, para. 4), if school places at this level were to be increased, a more intensive use of school facilities through introducing double shifting at smaller PHS would be preferable (Appendix Table II.13). At the post-lower secondary level, since there appears to be significant excess capacity, increased access could be provided by rationalizing and redeploying facilities and consolidating small classes. 16/ Although over the longer term, more teachers would be required in order to expand coverage even if internal efficiency improves.  - 67 - 5.31 Unit Costs. we relatively low rates of return estimated for education investments 111 reflect principally the high unit costs at all levels of education and training (Table 5.2). The combination of high unit costs and high student attrition.(drop-outs) results in extremely high costs per graduate. In view of constraints on budgetary resources in PNG, the Government is proposing to address the issue of high public costs both through improving the internal efficiency of education services and by increasing cost-sharing, and is to be co m nded for its courage in confronting se difficult questions. The recent World Bank education finance study _ found relativeW limited potential for improved efficiency or increased cost sharing - at the primary and lower secondary levels. However, a number of measures that could improve cost effectiveness were recommended (Appendix I), which are still endorsed. Significant potential on both fronts does appear to exist at the higher and, to a lesser extent, upper secondary levels, and the Government is encouraged to pursue these despite the political sensitivity of the necessary measures. Savings that could be achieved through rationaliza- tion and improvements in internal efficiency will, however, be very difficult to achieve unless mechanisms can be developed to redeploy resources among provinces and among government departments (see para. 5.33). Moreover, there is a built-in salary "creepage" in the public service, especially for grade levels covering several "salary points," due to virtually automatic seniority salary increments. Consequently, unit costs in a personnel-intensive sector such as education are likely to resume their upward momentum once one-off cost reductions from program consolidations and staff localization are effected, unless an ove6rll policy to restrain the growth of public sector wages is implemented.- 5.32 Flexible Skill-training Programs. To complement the general education base provided through formal education, more flexible formats should be designed for skill-specific training or manpower upg-ading programs, so that they can respond more rapidly to changes in the labor market. Short, modular courses are preferred, so that training can be provided on a part-time basis or through distance education (e.g. correspondence courses or using radio or video support). Wherever possible, training should be provided in the actual workplace, whether on-the-job or in the village. This would reduce the need for investment in costly equipment for training institutions, 17/ See Education in Papua New Guinea: a case study in wasted resources, Gannicott, Ken, Islands/Australia Working Paper, National Center for Development Studies, the Australian National University, 1986. 18/ World Bank, 1987, op. cit. 19/ At the time the report was prepared, primary schooi fees had not been abolished (see para. 5.18). 20/ For example, the 1987 teacher salary adjustment agreement is expected to increase the costs of primary and lower secondary education by about 4.5% in 1988.  - 68 - increase the relevance of training and allow its adaptation to evolving employment and skill needs. 5.33 Mechanisms for Joint Decision-making. The responsibility for providing education and training is fragmented among national and provincial governments, public and church agencies, and among several different govern- ment departments. However, mechanisms for consultation, coordination, joint decision-making and policy implementation are weak and lack executive authority. This dispersed responsibility is a result of historical and political circumstances and is unlikely to change in the foreseeable future. However, at a time when difficult issues face the education sector, it is essential that a coordinated strategy be decided and implemented in order to concentrate scarce financial, human and physical resources on agreed objec- tives. This is particularly the case regarding national and provincial governments, who share responsibility for primary, lower secondary and non- formal education, as well as regarding the higher education sector, which involves 11 different government departments, several autonomous statutory institutions and a variety of private agencies. For example, the staff of the National Education Board (or some other sector-wide policy committee) and the Commission for Higher Education (CHE) should be strengthened so that they can undertake a more active consensus-building role. Both agencies should be given stronger executive powers to implement sectoral itrategies, particularly if resources are to be redeployed among provinces, among government departments or among subsectors. In addition, support to the provinces in the planning and management of educational services will be necessary if education is to be delivered more cost-effectively. Although such a program is proposed under the PIP, it would need to be expanded in order to have a significant impact. Subsector Strategies for Education and Training 5.34 Primary Education. Primary education is viewed by most governments as a basic human right and the essential foundation for participation in a modernizing society, and PNG is no exception. Universal Primary Education (UPE) has been declared a long-term objective of all PNG governments since independence in 1975. Progress towards this goal was slow during the 1970's but accelerated in the early 1980s, so that total primary n;Follments in 1987 were equivalent to about 73% of the school-age population.11_ It is estimated that 92% of a particular age cohort will enroll in primary school, although close to three-quarters will do so at a later age than 7, the "normal" primary school entry age. Enrollments in grade 1 are also estimated to represent close to 95% of the 7-year age group. Access to primary education facilities does not, therefore, seem to be the fundamental obstacle to achieving UPE, although a small proportion of the population that lives in very remote areas may not be adequately served and some facilities in more densely populated areas have had to turn away eligible children. The relatively low gross 21/ This figure represents the gross enrollment ratio, and includes a significant number of over-age children. The net, or age-specific enrollment ratio, is estimated to be less than 60%.  - 69 - primary enrollment ratio principally reflects high drop-out rates, which in turn reflect both socio-cultural factors and problems of school quality and relevance that reduce the perceived value of schooling. While the education system cannot directly affect the former, investments in in-school factors to upgrade education quality and relevance (which should also ultimately increase the enrollment ratio) should be a high priority. 5.35 A major program of curriculum development and production of relevant learning materials wvas begun under the Education II project, due to close in 1988. In view of the strong impact that appropriate learning materials can have on student achievement, it is recommended that this program be continued, with particular emphasis on the core skills of literacy (English), mathematics and science. Increased resources for effective distribution of the materials to schools must be included in such a program. Resources should also be made available for school supplies and equipment and school maintenance activities, that were previously funded through school fees. While the proposed extension of primary teacher training from 2 to 3 years could also improve primary education quality in the long run, in a situation of budget constraints, the increased recurrent costs of such a program should be balanced against the funds required for activities that could have a more immediate and wider impact, such as the provision of learning materials and intensified inservice training. In order to achieve the government objective of controlling educa- tion costs, support should be given to provincial governments in the planning, rationalization and management of primary education services. The resources needed for this task are likely to be considerably greater than the small amount proposed in the PIP. 5.36 Secondary Education. Access to secondary education expanded relatively rapidly in the decade following independence, although from a low base. The gross enrollment ratio for lower secondary education (grades 7-10) is about 15X. Upper secondary education (grades 11-12) wa 12ynly established in 1978, and total enrollment is only about 1800 students. There is strong social and political pressure for continuing expansion at the lower secondary level, in view of its perceived role in upward socio-economic mobility and modern sector employment. The quality of lower and upper secondary graduates is still considered low, as recent investments in quality improvements have not yet borne fruit. An experimental program to relate lower secondary educa- tion more closely to village life, the Secondary Schools Community Extension Program (SSCEP), has been developed on a pilot basis, but its cost- effectiveness has not yet been tested. 5.37 It is recommended that the present expansion of lower secondary education be curtailed for the short- to medium-term, until analysis can be carried out of the employment experience and prospects of lower secondary school leavers (through tracer studies, etc). It is therefore urged that the High School Support Programme be temporarily suspended following completion of those schools already under construction. The Education III project has 22/ To be increased to about 2200 students by 1989 under an ongoing expansion program within the education III project.  - 70 - financed major investments in quality improvement, including improved teacher training and provision of learning materials, whose effect should begin to show in the near future. Investments in this subsector should decline from the high levels of the mid-1980s once the Education III project is completed in 1989. The expansion of the SSCEP program could increase the relevance of lower secondary education to the rural environment of the majority of the population. However, if it attempts to integrate vocational training into the curriculum, the related costs could outweigh the benefits. This could be particularly risky given the limitations of skill-specific manpower forecasting mentioned earlier (para 5.20). 5.38 Upper secondary education, in contrast, appears to warrant a modest expansion in view of the importance of this education cycle in preparing students for further training for managerial and technical posts, where there are significant shortages g?1trained PNG nationals and a high demand for grade 12 leavers from employers. _ Underutilized higher education facilities could be redeployed for this purpose. At this level also, curricLlum simplification and concentration on core skills is recommended, to give stulents a firm general foundation on which to base further training. While not wishing to reduce quality at this key level of education, it does appear that nonsalary operating costs are unusually high and could bf reduced. Moreover, in view of the considerable discrepancy between the cost-sharing ratios at upper and lower secondary education (see Table 5.2), upper secondary school fees should be raised significantly. 5.39 Vocational, Technical and Non-Formal Education. Vocational training for self-employment or semi-skilled wage jobs is provided to primary school leavers at 95 government-funded vocational centers, with total enrollment of about 6,500. Nonformal skills training is also provided through youth and women's groups, which are estimated to have about 650,000 members. In addition, a variety of nongovernmental organizations provide literacy and basic skills training, primarily oriented toward rural development. The employment or income effects from this training have not been analyzed systematically. More formal vocational education is provided through nine technical colleges (post-lower secondary) that provide Pre-Employment Technical Training (PETT) courses in 28 subjects, and technician certificate courses in 7 specializations. While enrollments in technician certificate courses have remained at about 400 since 1980, PETT enrollments have been steadily cut back from 2,400 in 1980 to about 1,500 in 1986, due to budget cuts, and formal apprenticeships have dropped from a high of about 1,200 in 1982 to about 900 in 1986, reflecting reduced formal employment opportuni- ties. The cumbersome apprenticeship arrangements, requiring "block release" upgrading courses during a 2-year period, may have also reduced employer interest. 5.40 A major review of training provided through the vocational centers is to be completed shortly and should provide useful recommendations for 23/ See Report on Upper Secondary Education in Papua New Guinea, Bacchus, M.K. et. al., June 1985.  - 71 - future policy.241 Major issues to be addressed are staff selection, training and supervision and the need for development of curricula and learning materials for modular training programs that can be adapted to local needs. The PIP allocation for nonformal education would only permit a very modest effort to address these problems. However, in view of budgetary constraints, centers should be encouraged to seek comunity support and to increase current efforts for self-financing by combining training with production or service activities. Other forms of nonformal education are probably best provided by community groups and nongovernmental organ' tions, with the Government performing a support and liaison function. _ 5.41 The technical education program has also been the subject of a major review as part of the Advisory Technical Assistance Study on Higher Education financed by the Asian Development Bank (ADB), (para. 5.43), but the report is not yet available. Nonetheless, declining apprenticeships may be a symptom of serious defects in PETT training. It is recommended that skill training be provided through short, modular courses that could be adapted for part-time or distance education. Moreover, as with formal education, greater attention should be paid in the institution-based preservice training to providing a general foundation on which more specific skill training (that could be provided on-the-job) could build in a more flexible fashion. The present rigid apprenticeship arrangements should be reviewed and revised. Employers should be more closely involved in identifying training needs, in planning and designing preservice training programs, and in providing skill-specific training (see also para. 5.44). Current arrangements apparently do not offer adequate incentives to employers to invest in skill training in view of high occupational mobility. These should be reviewed and ways to reduce the costs of staff development and on-the-job training to employers by sharing such costs with trainees, for example, by reduced "training wages", should be irntroduced. 5.42 Tertiary Education. Tertiary education provides skilled manpower and managerial staff for the modern sector. The subsector includes two uni- versities, the University of Papua New Guinea - UPNG - (including Goroka Teachers' College for secondary teacher training) and the University of Technology, and a variety of professional and technical training institu- tions. Expansion of tertiary education has been constrained by a shortage of secondary school graduates with adequate qualifications, resulting in signifi- cant excess capacity. The other major factor limiting tertiary expansion is its extremely high cost, due in part ti the fragmentation of delivery by a large number of small institutions (over 60) under the aegis of 19 different public or private agencies and with a multiplicity of courses (about 350) for 24/ National Evaluation of Vocational Training in Papua New Guinea, under preparation by the Education Research Unit, UPNG. 25/ See The Coordination, Development and Implementation of Nonformal Education in Papua New Guinea, Michael Olsson, et. al., 1986.  - 72 - a total enrollment of only about 15,OOO students.261 This has prevented economies of scale and resulted in significant underutilization of costly physical and teaching resources. Very high attrition rates in many of the programs further increase the underutilization of resources and raise the cost per graduate. Higher education is heavily subsidized; students not only pay no fees but receive a generous stipend from the Government to cover living expenses, travel, books and "pocket money". The Comission for Higher Educa- tion (CHE) is responsible for coordinating higher education and is endeavoring to rationalize higher education planning, delivery and financing. 5.43 The CHE has prepared a medium-term plan aimed 2trationalizing the highly fragmented and costly higher education subsector.- In addition, a major study financed by ADB has provided a number of recommenigvions for planning and rationalizing the provision of higher education. The task of consolidating the dispersed, inefficient institutions in order to reduce budgetary outlays and improve internal efficiency is to be guided by student unit cost and student:staff ratio norms, which is an appropriate way to proceed, given available data. In the longer term, it is recommended that a more fundamental overhaul of the subsector, as proposed by the ADB study, be considered. This could involve changing to a two-tier structure with two-year "associate" level subdegree programs in a reduced number of core subjects that could be followed by two years of more specialized, bachelor's level degree training either in PNG, for subjects for which there is sufficient demand, or overseas for highly specialized courses which, due to limited demand, are too expensive to provide in PNG. This approach would permit a more efficient use of teaching and physical resources, allow the higher education system greater adaptability to evolving labor market needs, help reduce the present extremely high attrition rates at this level, and provide more para-professional graduates to complement degree holders. Such a major restructuring of higher education would probably require external assistance. While the ADB study does not give guidance on directions for eventual long-term expansion, enrollments in agricultural training programs appear very low in view of the proposed emphasis on agricultural development. This may be addressed by an FAO agricultural manpower study in 1988. The Government has announced the intention of increasing cost-sharing at this level, by having students pay part of direct costs. These proposals, undoubtedly difficult to implement, are strongly endorsed. 5.44 Manpower Upgrading. The low educational qualifications of the PNG labor force suggest that increased attention should be given to upgrading the skills of public and private sector staff at all levels, which could have an 26/ Equivalent to about 10,000 full-time students. 27/ Higher Education Plan: A Strategy for Rationalization, 1986-90, Commission for Higher Education, May 1986. 28/ Advisory Technical Assistance Study on Higher Education in Papua New Guinea, Asian Development Bank/Commission for Higher Education, Draft Report, April 1987.  - 73 - immediate impact on the quality of the labor force. Hanagement training for public service staff has also been identified as a high priority, in view of the need to improve the efficiency of the public sector. Considerable staff development activities are already underway in the public sector, although these may need to be improved, reoriented, or expanded. However, the devel- opment of upgrading programs for the private sector, needed even more acutely, may have been hindered by the high occupational mobility and the lack of an incentive system mentioned earlier (para. 5.41). In view of the high opportunity costs of full-time upgrading courses, it is recommended that a modular approach be developed, adaptable for part-time or distance training, using existing facilities. The active cooperation of employers in identifying skill gaps, linking training with career development and, in some cases, organizing the training, would be essential.  INSTITUTIONAL AND PLAUNING ISSUES PART II rISTITUTIONAL AND PLIANNING IfSUSS  - 74 - VI. INSTITUTIONAL FRAMEWORK FOR DEVELOPMENT A. Introduction 6.1 As is the ca with many developing countries, PNG lacks the insti- tational capabilities _ needed to plan, design, implement and sustain effective development programs. Indeed, certain characteristics of the country compound the problems associated with limited institutional capabili- ties. These include: a still-emerging set of laws, regulations and prece- dents to govern an overlapping distribution of responsibility and power between the center and the 19 semi-autonomous provinces; a decenLralized administrative structure involving 44 separate, major government departments, of which 19 are provincial departments; a large land area, sparsely populated and with limited transportation and communication links; a major proportion of the population living in a largely subsistence agricultural economy; and a severe lack of trained local manpower to run government and private-sector operatiPs, resulting in a heavy (though diminishing) dependence upon expat- riates.- 6.2 Given these conditions, the national authorities and aid donors alike have encountered frequent difficulties and frustrations in their efforts to design, implement and operate development programs and projects. Most of the problems and their causes are fairly well known and documented, not only for PNG but also for many other developing countries. However, what is distinct about PNG in this respect is that since late 1983, work has been underway to redesign the entire institutional framework for the country's economic and social development. 6.3 To understand the current status of PNG's institutional capabili- ties, it is necessary to review the institutional reform effort now under- way. In this annex, the reform effort is described, its strengths and weak- nesses are assessed, its future directions and needs are indicated and certain actions are recommended. B. Institutional Reform in PNG 6.4 Background. Although a number of post-indep'wndence studies and comissions had reviewed, criticized and recommended c.'anges in PNG's institu- tional framework and system of administration, a concerted institutional reform effort began only in late 1983 with the adoption of a set of actions 1/ -The term "institutional capability" as used here includes organizational structures; administrative and managerial systems; administrative policies and staffing quantity and quality. 2/ In 1982, only 1,800 PNG citizens held university degrees.  - 75 - recomended in a World Bank Report,3/ which explicitly 95knowledged agreement with, and reliance upon, the earlier "ToRobert Report."_' The Bank report characterized PNG's system of administration as excessively centralized, com- partmentalized and control-oriented. The Government was assessed as effective in maintaining fiscal discipline and assuring conformity to published rules and procedures for employment, procurement, licensing, contracting and the like, but not sufficiently effective in encouraging innovation or in producing social and economic development results. The 1983 Report cited numerous examples of deficiencies and missing elemerts in the institutional framework PNG inherited at Independence, the more important being that: (a) national objectives were stated in broad terms without prioritization; (b) explicit developmental strategies were gssing; (c) development projects were formu- lated by sectoral departments - and the National Planning Office in the absence of both agreed-upon strategies and inputs from the provincial "grass roots" where development projects were implemented; (d) instruments for planning and budgeting [a "line-item" budget and a projectized National Public Expenditure Plan (NPEP)] adequately controlled total government expenditures but were not sufficiently effective in ensuring that scarce resources were allocated to priority objectives and that the desired results were produced; (e) the administration of the approved budget was tightly controlled at the center, with the prime objective being to ensure that overexpenditure did not occur either in total or for any "vote," while little was done to ensure that products and services were actually produced and delivered efficiently; (f) in the face of a highly centralized personnel regime (established by PNG's Constitution), sectoral and provincial departments lacked the authority, flexibility and incentive to manage scarce manpower resources efficiently; (g) in a political system where responsibilities for specific government func- tions had been delegated in whole or part to the provincial governments--often without a clear segregation of fiscal responsibility--inadequate policies, systems and structures existed to coordinate activities among departments in 3/ Public Sector Management in Papua New Guinea, An Administrative Overview, World Bank Report No. 4396-PNG, June 1983. 4/ Report on Administrative Problems in the Public Service, Government of PNG, National Planning Committee, June 1979. 5/ The term "sectoral department" refers to such departments as Agriculture and Livestock, Health, Lands, Education, Works, etc., with defined sectoral reponsibilities. All sectoral departments are headquartered in Port Moresby and only a few have established offices in the provinces. Each of PNG's 19 provinces is authorized a provincial department which is staffed and resourced to carry out specific functions delegated to the provinces, such as running local schools and hospitals and carrying out agricultural extension programs. The term "central department" is used for departments that provide staff services to all other departments (finance and personnel, for example). The central departments are also headquartered in Port Moresby and some have regional offices. The sectoral and provincial departments are referred to collectively as "operating departments."  - 76 - Port Moresby and the provinces; and (h) PNG's planning and budgeting systems provided little guidance to those responsible for predicting future government manpower needs and developing educational and training programs to meet those needs. 6.5 Designing the Reform Effort. The 1983 diagnosis of PJG's institu- tional problems focused attention on the central departments. It helped those concerned about the overall performance of the government establishment recognize that while breakdowns showed up in the operating departments--poorly prepared development projects, faulty project implementation, insufficient funds, staff vacancies, the wrong skill-mix, low productivity, etc.--curing those breakdowns in a lasting manner first required changes at the central level. In 1983, the central departments consisted of the Prime Minister's Department; Department of Finance ODF); National Planning Office (NPO); Public Services Commission (PSC); the Department of the Public Services Commission (DPSC) and the Budget Priorities Committee (BPC). The PSC and DPSC were constitutionally established bodies with their specific authorities spelled out in the General Laws of the country. The main rules and procedures mandating the centralized control over financial resource management were also a matter of law. This meant that new or revised laws would have to be enacted by the Parliament if the desired changes were to be realized. Beyond chag2es in the law, the 1983 recommendations called for: (a) a new role for BPC _ to guide and direct the institutional reform effort; (b) closer cooperation between NPO and DF to mesh national objectives, resource allocation, funds availability and controllership and accounting systems; (c) development and installation of budget preparation, presentation and allocation procedures that would relate inputs to outputs whether the expenditures were capital or recurrent in nature; (d) a planning and budget paradigm which would ensure that government activities were coordinated and integrated at the provincial level as well as at the sectoral and central levels; (e) the delegation of authority for financial and personnel functions to the operating departments without sacrificing fiscal responsibility or the principles of a merit-based, nonpolitical civil service; (f) building new and improved capacity in the operating departments to plan and manage financial and human resources previously handled by the central authorities and otherwise to assist them improve their overall performance; and (g) substantial investment in manpower development and training first to develop data, policies and capacities to train government staff and then to do the actual training. 6/ The BPC consisted of the Secretaries of the Prime Minister's Department, and the Departments of Finance and Planning and Personnel Management. In January 1988, the Government renamed BPC as the Resource Management Committee (RMC), giving it a broader mandate including advising the National Executive Council (NEC), a cabinet-wide body, on all submissions made to it for consistency with national objectives, priorities and policies. RMC membership consists of Ministers for Public Service (Chairman), Finance and Planning, and Provincial Affairs, and Secretaries for the Prime Minister's Department (Dy. Chairman), Personnel Management, Finance and Planning, and Provincial Affairs.  - 77 - 6.6 Organizing the Reform Effort. BPC, chaired by the Secretsry of Finance, has been responsible for leading and directing the reform effort. The interaction uf BPC with its ministerial "counterpart," the National Priorities Comnittee (NPC), permitted the development and maintenance of understanding, cooperation and support at and between the political and technocratic levels of government. 6.7 A Prograume Management Unit (PMU) functioned as a staff arm of BPC to plan, design and manage the implementation of the changes recommended by the 1983 Report. Three senior officers were assigned to PMU from within the Government. A public administration advisor funded under a World Bank loan worked closely with PMU through the end of 1987. The Secretary of Finance has served as the head of PMU for most of its existence, and PMU has been attached to Finance for edministrative purposes. PMU's prime tasks were to: work with five sectoral and four provincial departments to help them become more effec- tive and efficient; assist in the reorganization of the central departments; and design a new resource management system (RMS) for the country. 6.8 In addition to its regular staff, funds were made available to PMU to engage short-term local and expatriate consultants for specific advisory and training tasks. Over time, two teams were created in PMU to carry out specific parts of the institutional reform effort. CPAT (Central Planning Assistance Team) and TTU (Transitional Training Unit) were created speci- fically to develop management capabilities in the central and operating departments. Staffing of these teams consists almost equally of local and eipatriate officers. Other institutional reform teams, not formally a part of P1U, worked closely and cooperatively with7 t, e.g., on a project to computerize provincial accounting systems.- 6.9 PNG's decision to accept the 1983 Report's diagnosis and take action to implement i$ recommendations broke new ground in the arena of institu- tional reform._ Instead of attempting to strengthen one or a few isolated parts of an administrative system, PNG began the process of simultaneously redesigning and strengthening its entire system of administration so as to be able to ensure that the parts would form a congruent whole. Although not 7/ PMU's main sources of funds have been the SNAPEM (Strengthening National and Provincial Economic Management) I and II projects, financed jointly by the Government and UNDP and executed by the World Bank. CPAT is partially funded by SNAPEM, while TTU is funded in part from the World Bank Agricultural Support Services loan. The provincial computerization project was prepared under SNAPEM I and is being executed by UNDTCD with UNDP and Australian aid funding. 8/ One of the few comparable programs is that being carried out by the Gov- ernment of Tamaica through its Administrative Reform Program. Jamaica diagnosed its institutional weaknesses in much the same manner as PNG and also mounted a systematic, comprehensive and very similar program of institutional reform. See Jamaica Public Administration Reform Project, Report No. P-3796-JM, IBRD, May 3, 1984.  - 78 - without its frustrations and disappointments and what with hindsight can now be recognized as mistakes, this reform effort has achieved substantial results and stayed on the basic course envisioned in 1983. C. Results of the Reform Effort 6.10 Over the past four years, PNG's institutional reform efforts have produced the following results. Personnel Management Reforms 6.11 Decentralized Personnel Management. As in many former colonies, a Public Services Commission exercised since Independence all legislative, executive and judicial functions in the field of personnel management. "The net result experienced over the years was that the political authorities were not able to make policy, the Government's business was not expeditiously discharged and that the quasi-judicial role had been clouded since the Public Services Commission was responsible for both making the rules, and then assessing, in its quAsi-judicial role, if it itself had acted properly."9/ In April 1986, the PNG Constitution was amended and the Public Service (ianage- ment) Act 1986 was enacted by the Parliament with the effect that the PSC retained only a quasi-judicial role. A new Department of Personnel Management (DPM), reporting to the Minister for Public Service, was created to carry out the policy development and execution functions formerly assigned to PSC. Importantly, DPM was granted authority to delegate certain of its functions to other department heads, a power not given PSC under the previous legisla- tion. The Government's intention was that: "Almost all personnel decisions, appoin /nts, promotions, discipline, will be made by the Departmental Head."_ In addition to decentralization, the new act directed improvements in position classification, performance evaluation, manpower planning, and training and a reduction of excess staff so as to build a more efficient, effective, and affordable public service. 6.12 Revised Personnel Management Procedures. In August 1986, the Government implemented the new legislation by issuing new "General Orders." The latter are a comprehensive, thorough and competently designed set of procedures that are consistent with the spirit of the new Act and the administrative realities of the country. Among other matters, they set forth the procedure through which department head. may exercise the new powers dele- gated to them to recruit, appoint, promote and discipline all staff below the level of senior management. 6.13 Reducing the Size of the Establishment. A system was also estab- lished by the new General Orders to reduce the size of the government 9/ Public Administration Reform in Papua New Guinea: The Department of the Public Services Commission, Public Services Commission, Government of Papua New Guinea, April 24, 1986, p. 1. 10/ Ibid, p. 13.  - 79 - establishment at first through attrition and then through early retirement with special benefits, and otherwise to promote greater efficiency throughout the service. The 1986 Act permitted early retirement and, in 1987, the Government made provision for special redundancy packages to enable its overall staff reduction objectives to be met. (The 1988 budget provides for a reduction of about 500 staff, roughly 1X of the total.) 6.14 Building Personnel Management Capability. While the new law, the revised General Orders and the new organizational structure of DPM are reason- ably sound, the objectives sought by these changes cannot be attained unless sufficient institutional capability (policies, systems and staff) is put in place. The Government is beginning to attend to this need through policy and system development, curricula design and training assistance provided by PMU/ TTU to DPM so that it can effectively manage the new personnel system. A com- puterized personnel management information system, serving both personnel and payroll functions, is expected to be fully operational in 1988. This system will be used by DPM in manpower planning, performance evaluation, training needs assessments, pay and classification, etc. Lo improve effectiveness and efficiency. Operating Department Reforms 6.15 Capability Building. CPAT and TTU staff, augmented with short-term consultants, have been assisting the operating departments improve their planning and managerial effectiveness. Particular attention has been given to strengthening capacities in DAL and four provincial departments. Although the mission was not able to assess fully the results of these efforts to date-- other than to judge the PMU/CPAT/TTU staff as competent and dedicated and assess positively the institutional capability of the one provincial depart- ment it visited (East Sepik) which had received considerable assistance from PMU/CPAT/TTU--it considers the need for efforts such as these as unquestion- able. 6.16 Provincial Accounts. One particularly weak link in PNG's financial management system has been that of ensuring timely and accurate flow of finan- cial data from the provincial departments to the center. With the support of UNDP and Australian aid and in collaboration with PMU, provincial departments are receiving assistance in financial management, largely through the intro- duction of computers, linked to DFP's regional finance offices, and staff training in their use and maintenance. The computerized provincial accounting system was operational in six provinces by October 1987. By the end of 1988, a total of 16 systems are planned for full operation, with the remainder to be installed in 1989. However, questions of computer hardware and software compatibility need to be addressed with respect to this and other efforts, as would questions of adapting the provincial accounting system to support the national planning and resource management system now being formulated.  - 80 - Financial Management Reforms 6.17 Decentralized Authority. As in the personnel management area, financial management authority was also excessively concentrated in the central Department of Finance, thereby severely limiting the speed and flexibility with which the heads of the operating departments (particularly the provincial departments) could respond to inevitably changing circum- stances. In November 1986, the Parliament enacted the Public Finance (Manage- ment) Act, 1986, which, like the Public Services (Management) Act, 1986, created the framework for the delegation of financial management authority to the heads of departments. A revised financial manual was issued in January 1987, giving effect to the new Act through specific delegations, policies and procedures to be followed. Like the counterpart "General Orders," the manual is comprehensive and consistent with the Act. 6.18 Combining Finance and Planning. Following the enactment of the new Financial Management Act, the National Planning Office and the Department of Finance were merged into a single Department of Finance and Planning (DFP) in order to improve coordination between planning and finance. The organiza- tional structure of DFP is basically adequate to carry out the functions of policy analysis, planning, budgeting, controllership, accounting, and cash and debt management, although a number of additional changes will be necessary in the future to fine-tune the organizational structure. (As noted below, policy development, system development and staffing of the "new" DFP are yet to be completed.) 6.19 Building Institutional Capability. In order to attain the objec- tives of the many changes introduced in PNG's financial management system, institutional capability (policies, systems and trained staff) is being developed in DFP. DFP's debt management and revenuey1ollection functions have received considerable capacity-building assistance - and are reportedly well on the way to becoming fully capable. Less-advanced efforts are also underway in other parts of DFP, and much still remains to be done. 6.20 Public Enterprises. The 1986 Financial Management Act required all Commercial Statutory Authorities (CSAs) to adopt the same fiscal year as that of the Government budget, thereby setting the stage for considering the Covernment's contributions to and receipts from CSAs as part of the annual budget. CSAs are now required to submit five-year financial projections in the form of standard, commercial pro formas--Balance Sheet, Income Statement,y Sources and Applications of Funds--to DFP each year in accordance with the budget formulation schedule. DFP analyzes the operating and financial policies and assumptions which drive the financial results and makes recom- mendations to the Minister of Finance and Planning with respect to each CSA. CSAs are subject to company tax, import levies and customs duties and are expected to operate profitably and pay dividends to the Government. Except 11/ From SNAPEM I and Australian aid.  - 81 - for the CSAs,12/ Government intends to divest all or most of its holdings as circumstances permit. 6.21 Resource Management System. Efforts to design and install a new RMS for the country are beginning to show some results. The former IPEP system was discarded largely because of its concentration on the "wedge" of new resources to be allocated (about 25% of total planned expenditure on goods and services by 1985) and its inability to be useful in reducing and/or redirecting the remaining 75Z of expenditure. Another problem with the NPEP was its ever-growing list of "projects" requiring individual scrutiny (over 500 by 1985) and the fact that the list lumped together without differentia- tion very small and very large projects, and projects which produced new capital assets with those that involved only recurrent operational or mainte- nance expenditure. Starting with the 1988 budget, the Government has intro- duced a public investment program (PIP) which includes all major projects for which the Government has arranged or is seeking concessional finance. Proj- ects included in this first PIP are presented over a rolling five-year funding horizon, with costs broken down between local and foreign components and categorized by sector and organizational unit responsible for the project. Operating costs are also projected, thereby permitting the assessment of the future impact of completed projects on the recurrent expenditures of govern- ment. The PIP overcomes one of the two glaring faults of the NPEP by restricting itself to major capital projects. In general, the presentation of the individual projects, the kinds of data shown, the inclusion of CSA proj- ects, and the categorization scheme are good features of the new PIP. The mission recognizes that this "first-version" of the PIP had to be put together quickly to meet budget and CC schedules, and that much remains to be done if the PIP is to become an effective part of the country's RMS. For example: (a) This year's PIP was put together at the "top," by a handful of staff in DFP who, with external consultant assistance, collected, sorted, analyzed and reassembled available project ideas and data. Until such time as the PIP is the result of systematic and coordinated efforts by those many parts of the Government which must be involved, and is also an integral part of the annual budget pre- sented to the Parliament, it can only serve as a broad framework for guiding investment rather than a concrete set of specific investment proposals. (b) As it now stands, the PIP cannot be related to the actual budget ad4. indeed covers only part of the budget. In that respect, it is like its predecessor NPEP in that it excludes the bulk of recurrent expenditures. This is not a criticism of the PIP as such; rather it suggests that a complementary technique to deal with the recurrent budget should be designed (as discussed later in this annex). 12/ Electricity Commission, Post and Telecommunications Corporation, Air Niugini, Harbors Board and the Water Supply and Sewerage Board.  - 82 - (c) Finally, so long as the PIP only contains projects to be financed by external concessional funds, it will remain deficient for the Government's own budget planning, decision-making and monitoring purposes. The PIP should contain all major projects, regardless of the source of funding, and should indicate which constitute the "core" or high-priority set of projects. D. Future Directions and Substantive Needs 6.22 In the mission's judgment, PNG's institutional reform effort is dealing with the correct issues and problems, is headed in the right direction and has produced concrete results. But a great deal of detailed work still remains to be done to preserve and sustain the substantial results achieved so far and to carry the reforms forward. Institutional reform--particularly a comprehensive, government-wide effort such as being undertaken in PNG--is a long-term process which must be developed within, and to suit, the unique circumstances of the country. Moreover, there are no obvious precedents, models and standards to provide clear guidance. For these reasons, no attempt is made in this report to set forth a blueprint for the future of PNG's reform effort. Rather, the key areas requiring future attention are identified and principles, concepts and approaches that might be useful in these areas are suggested. Articulation and Endorsement of the Reform Effort 6.23 The reform effort itself has not been formally articulated, endorsed politically as a comprehensive program and made broadly known, either within PNG or among donors. Coordinating actions within the country and among donors in support of reform could be strengthened by ensuring that all involved-- within and outside the country--appreciate fully what is being done and have before them a coherent, detailed plan and timetable for future actions. Moreover, without formal articulation and national endorsement and prominence, the continuation of the effort may be at the risk of just a handful of people remaining in their present positions. 6.24 The Government's 1988 planning and budgetary strategy document clearly indicates a commitment to completing certain aspects of the insti:u- tional reform effort and sets rather ambitious completion targets for parts of it. Indeed, the mission heard from a number of senior officials that the reform effor% is the most important development activ.ty underway in the coun- try. It is recommended that action be taken to give it the concrete form (as carefully and fully prepared and presented as a major capital project) and prominence that it deeerves and requires. Once it is formally articulated in this way, PNG may wish to put the reform effort permanently on the agenda of the Consultative Group and invite its continuing attention, support and finance. This would provide a framework for donor assistance for institu- tional strengthening in a coordinated and effective manner. The Resource Management System 6.25 An important next step to be taken in PNG's reform effort is to decide clearly the specifics of its new RMS and to put it into implementation.  - 83 - The authorities are well aware of the continuing deficiencies in the planning and budgeting procedures, e.g., a line-item budget system that cannot allocate budgetary resources effectively and weak, ad hoc, arrangements for investment planning and project preparation, and have for some time now been designing approaches and developing planning and resource allocation capabilities in the departments. Progress is being made, particularly in setting sectoral priorities, choosing strategies, and organizing and presenting available information, but for the most part the new RMS is still in the design phase. It is now time to complete the design and move to the implementation phase. To do so, the following actions are required. (a) Adopt a Project Planning Paradigm 6.26 As already noted, the new PIP contains many good features and is clearly a step forward in developing the RMS. The next step to be taken is to decide how the list of projects to be included in the annual PIP is to be generated, i.e., how specific investment projects are to be identified, authorized for preparation, prepared, approved and funded for implementa- tion. This calls for an articulated operating system which allocates roles and responsibilities to the various departments involved, indicates the phasing and cycle of planning activities, specifies the guidelines and formats to be used in preparing the various system documents and makes known the evaluation techniques and standards to be followed. 6.27 As well as usual difficulties, certain features of PNG introduce complexities, particularly the existence of semi-autonomous provinces, distance and communications barriers, the diversity of the country and the importance of rural development projects to the country's overall development strategy. Within these conditions, provincial staff complain that their proposals for what they consider to be their highest development priorities--agriculture/forestry/fishery development projects--are often summarily dismissed by the sectoral departments. Provincial officials claim that differences in development philosophy, lack of knowledge and "feel" for local conditions and internal organizational objectives underlie the problem they face in having their proposals accepted. They also claim that when provincial development projects are selected and prepared by sectoral departments, such projects often lack inter- and intra-sectoral integration and coordination, do not fit local circumstances, and, as a result, are simply not implementable without major revision. Sectoral departments, on their part, cite the lack of capacity on the part of provincial departments to prepare and implement technically sound and cost-effective projects. 6.28 In recognition of these concerns, the mission understands that the Government intends to introduce a "project planning paradigm" with the following features: (a) initial project proposals (project ideas) would be solicited from all sources: provincial departments, sectoral departments and CSAs; DFP would be responsible for organizing submissions and specifying guidelines, standards and formats for project proposals and the techniques and standards to be applied in decision-making, both at the stage of selecting projects for preparation and when deciding on and funding implementation;  - 84 - (b) DFP would establish and manage an annual project proposal review which would, in part, focus on intraprovincial concerns seeking to optimize a set of project proposals against provincial opportuni- ties, needs and capabilities, within the framework of established national priorities; (c) for those project proposals selected for "preparation," preparation responsibility would be assigned to the department which would implement the project when and if approved, and other departments would be assigned supporting roles for that project. In other words, a rural development project, to be implemented largely by the staff of a provincial department, would also be prepared under the management of a provincial department. Sector departments would provide specialized technical staff or consultants to work with and help the provincial staff in preparing such projects. DFP would take on the task of packaging a number of provincial (sub-) projects into a project of the size and scope of interest to donors. A national road project, on the other hand, would be prepared by a sector department and provincial departments would assist the preparation effort in their own provinces; (d) once prepared, projects would return to DFP for review and financing approval as part of the annual resource allocation process; and (e) PMU would manage a special project preparation fund to hire consultants and other temporary staff for the joint purpose of installing, and training staff in the use of, the new project planning system and, at the same time, producing well-designed projects on a timely basis. Central, sectoral and pjiyincial departments would receive assistance from this fund.-' 6.29 In principle, the mission supports the kind of project planning paradigm described above and offers the following design suggestions: (a) Keep it as simple as possible. The actions of many organizations and people will have to be coordinated and a spirit of cooperation developed over time. Simple, clear procedural instructions, guide- lines and formats will be needed for people to learn how to behave * in new ways. Sophistication can be added q l.earning *nd expertise. are developed. (b) Institutional capability must be added before this or any other planning system can be made to work in PNG. Capabilities are lack- ing in all parts of the equation: DFP, DPM, sectoral and provincial departments. Immediate action to build capabilities must take place in that part of DFP called "Planning and Implementation" which will 13/ PNG already has access to donor funds which could be used for this purpose.  - 85 - play a central role in operating the entire RMS, including both capital projects and recurrent expenditures. Efforts underway by PMU/CPAT/TTU to create planning capabilities in the provincial and sectoral departments should continue and accelerate. Creating institutional capabilities must be made an integral part of the design of the planning system; implementation timing must be geared realistically to the installation of new institutional capacity. (c) Recognize in designing the planning process that its final product-- the published PIP--must be capable of being presented in different formats to serve the needs of many users: Parliament, donors, internal and external interest groups, and implementing agencies. This in turn necessitates the design of a coding structure and computing capabilities to produce with speed and accuracy different presentations of the same material. (b) Non-PIP Expenditures 6.30 Developing the kind of project planning and approval system dis- cussed in the preceding paragraphs adds an important and major part to PNG's overall RMS. But resources must also be allocated effectively to recurrent activities. In PNG, recurrent expenditures account for over four-fifths of all government expenditure on goods and services. The Government is concerned that its recurrent expenditures are being made inefficiently, at times for the wrong purposes and on a public service characterized by excessive staffing and an inappropriate skill-mix. 6.31 The Government intends to install a new recurrent budgeting system-- program budgeting--for the following purposes: (a) to shift the focus of recurrent budget preparation, analysis, approval and implementation from identifying and controlling financial "inputs" to specifying the goods and services to be produced by a specific organizational unit, for a given purpose and at a stated cost; (b) to ensure that all departments and managers in the public service develop annually and revise frequently specific (quantified, where possible) output objectives and detailed work programs to attain m thost objectives; and then use these statements of objectives and work programs as the building blocks of the recurrent expenditure' budget; (c) to inform the resource allocation decision-making process of the actual output of goods and services the country is obtaining from its recurrent expenditures; and (d) to permit the reallocation of national resources with greater preci- sion and knowledge of the consequences of actions taken to increase, cut or redirect recurrent expenditures.  - 86 - 6.32 The importance of utilizing recurrent expenditures more effectively in PNC needs little emphasizing, not only because they account for such a large part of the budget, but also because of the significant role recurrent expenditures play in the design, implementation and operation of development investments. The mission, therefore, supports the intention to "projectize" the recurrent budget but, at the sam time, cautions that changes be introduced with care and deliberation, taking into account the following suggestions: (a) keep the system simple and its objectives limited, and install it gradually, starting with a single sector and/or province; (b) adopt a format at the start of the process that is "friendly" and natural to the way people work; Chart 2 is a possible format for use in PNG; (c) avoid trying to quantify the unquantifiable, and do not attempt to distribute overheads at the start; (d) use simple output measures and just a few years of past output and cost data; (e) provide a cross-reference to present expenditure classifications for continuity with prior budgets and a fit with the traditional accounting system. It is most important to build in such cross- references, thereby permitting a phased introduction of the new system at a measured pace; and (f) continue and accelerate the PKU/CPAT/TTU effort to create institu- tional capability as the means of installing the new system. (c) Other Aspects of the Resource Management System 6.33 In addition to the investment planning and recurrent expenditure elements of the RMS, some other parts of the system must be provided for: (a) first and foremost, the overall resource management system, of which investment projects and recurrent expenditures are parts, must be designed and articulated in a coherent and complete manner and capa- city must be put in place in DFP to further develop, modify, refine and otherwise maintain it as a coherent system; (b) a number of matters require attention in completing the design of the overall RMS, including: guidance for the preparation of the annual resource requests to ensure realism with respect to funds availability; the working definition of a capital project; the forward budgeting period for recurrent expenditures (3, 4 or 5 years); the degree of specificity to be sought for the outer years; how to treat the PIP in the context of the overall budget; how to identify "core" projects from contingency projects; how to treat CSA projects within the PIP; how to ensure that the overall complement  - 87 - of permanent civil service positions and the grade distribution are controlled government-wide in a manner consistent with resource allocation decisions; and an array of implementation concerns dealing with monitoring expenditures, reprogramaing during the course of the implementation year, financial controls and integra- tion with the accounting, financial reporting and auditing systems; and (c) developing and using macroeconomic and sectoral data and forecasts to guide those preparing and deciding on the annual resource alloca- tion and expenditure plan is an important element of the RMS. DFP's Economic Policy Unit (EPU) will play a key role in this, but so will other parts of DFP. What is vital here is that EPU and other units produce the required forecasts and data on time for use in the annual resource allocation exercise. The data and forecasts required include a medium-term macroeconomic analysis linking national income, savings, investment, money and credit and the balance of payments to public expenditures and revenues. 6.34 Several points should emerge with clarity from this discussion of developing an effective RMS. It cannot be done in a rush, and it must be carefully planned and well-resourced. The design and implementation of such a system cannot be done by the operating staff of DFP who are already over- burdened with other tasks. PMU is well-placed to carry out this task on behalf of DFP and in close collaboration with DFP staff. When the job is finished, part of PMU should be transferred to DFP to strengthen its institu- tional capacity. Getting and maintaining the needed collaboration is not something that just happens automatically. The Secretary of Finance particularly, but also other members of RHC and all senior managers of DFP, must support and lead the process of system design and implementation with patience and skill. In our judgment, doing what needs to be done is possible in PNG, but the effort has not yet been fully and systematically articulated, planned, resourced and staffed. Creating Institutional Capabilities at the Center 6.35 Mention has been made at several points above of the need to build institutional capability within the various departments and agencies. Given the country's commitment to a decentralized administrative system, it is most important that the central agencies be very well equipped to provide overall direction and leader'ship. It should be recognized that the n& behavior required at the center and elsewhere is different from the behavior staff are used to. This, in turn, necessitates a long-term, consistent effort to train staff to work in different ways. Such training can only be partially accomplished through formal, classroom training. Efforts and expenditures in designing systems and procedures, in acquiring equipment such as calculators and computers and in providing coaches to guide and work with staff as they learn new work behavior are also training investments, perhaps the most effective training investments that can be made.  - 88 - (a) Department of Finance and Planning 6.36 While the new organizational structure adopted by DFP is adequate, the institutional capability to perform along the lines implied by the new structure is lacking in many--but not all--parts of the Department. The areas which need urgent capacity building efforts are the "Planning and Implementa- tion" area which, as noted earlier, will be called upon to operate the new RaS, and the coordination between EPU and Planning and Implementation. 6.37 The mission recomends that high priority be given by PMU to assist DFP to develop an overall "blueprint" of how the Department will operate, what systems will be developed by whom, when to carry out responsibilities assigned to various DFP units and how the coping mechanisms--which will be necessary until new systems are put in place--are to mesh with future permanent systems. Once the "blueprint" is completed, a detailed plan of action can be developed, resourced and implemented to build DFP capabilities and train staff effectively on-the-job. (b) Department of Personnel Management 6.38 As in the case of DFP, DPM also needs a "blueprint" and a long-term institutional capability building plan. The mission recommends that PMU also assist DPM in this matter, and more is said below about the main functions carried out by DPM. Improving DPM and Operating Department Effecti-veness 6.39 PNG's numerous operating departments are too diversified to permit discussion here of their special institutional needs. Rather, we will con- tinue to deal with the issue of operational productivity and performance in the context of the institutional framework within which these departments operate. Through changes in laws, policies and procedures, quite a bit has already been done to strengthen the operating environment of the Government and the intended changes in the planning arzl resource allocation system will go further in this direction. However, there are areas which, in the mis- sion's judgment, have not yet been attended to, probably for the good reason that they are, at least in part, related to and dependent upon changes and improvements in the planning and resource allocation system. Three of the most important are discussed below. (a) Recruitment and Appointment 6.40 As mentioned above, the decision to delegate authority to the oper- ating departments for the recruitment and appointment of staff below the senior management level was, in the mission's opinion, appropriate. However, certain proceduras related to the exercise of this authority still hamper the efficiency of the operating departments. These are: (a) requiring nationwide advertising for each position to be filled; (b) limiting recruitment and appointment to four times a year (when the National Gazette is published); and (c) requiring first a comprehensive and time-consuming national search for local staff to fill a vacant post before beginning an offshore search. Consideration should be given to changes in these procedures in such a way as  - 89 - to allow operating departments to fill their funded vacancies as promptly as possible. DPM can greatly aid in this process by developing standing eligibility lists of qualified local candidates (from within and outside the service) for as many positions as possible and, in the process, declaring the skill shortage areas where international recruitment could be carried out more quickly, at least simultaneously with an internal search for local candi- dates. By so doing, a better balance could be struck between getting work done and giving appropriate opportunity to local candidates. (b) Establishment Approvals 6.41 Although significant appointment and recruitment authority has been delegated to the operating departments, authority to create new or change existing organizational structures and to establish and classify new posts has been retained by DPM according to the new (1986) General Orders. Work struc- turing, assigning duties to jobs, and being fully conscious of cost implica- tions are inherent and important functions of operational management. More importantly, they can only be done well in light of the special needs and circumstances of the operating unit and the particular people a manager has to work with and through. No matter how capable and well-intentioned they may be, central staff who are remote from the scene, and are not operationally knowledgeable and experienced, can contribute little on a case-by-case basis and often cause serious delays and confusion in the vital managerial task of organizing the work to be done. Within certain constraints established by the center (e.g., total number of permanent positions and average position grade or average salary in a department or major part thereof), operating managers should not only be permitted to establish and change their unit's organiza- tional structure, assign duties to positions, and classify positions, but should also be made to accept responsibility for these matters. If managers are to be held accountable for final results, then they must be given commen- surate authority in the important area of organizing the work to be done. (c) Improving Operational Effectiveness 6.42 The 1986 General Orders require each departmental secretary to sub- mit to the Secretary, DPM, an annual management improvement report and plan dealing with staff reduction targets and productivity improvements. DPM's Organization and Methods Unit (O&M) is expected to review and comment upon each annual plan. Such plans form the basis for quarterly reviews conducted by DPM with each operatin1 department secretary, at which,time decisions are made as to which vacant positions may be filled during the next quarter. 6.43 In light of PNC's declared objective of reducing the size of the public service, and in the absence of a satisfactory planning and resource allocation system, the approach being taken by DPM is understandable. However, as the new planning and resource allocation system is put in place, a way to review the implementation of the budget, probably quarterly, will no doubt be established. The mission recommends that the DPM reporting and review process mentioned above give way to a "budget implementation" review procedure which would require each department to hold a quarterly review of the progress and problems involved in implementing its budget. (Under the new RMS, a department's budget will also be its work program.) DFP and DPM should  - 90 - be important participants in these reviews. In this way, the approved budget--which will eventually be predominantly in a projectized, input/output format-can serve as the basis for the measurement of organizational performance and for identifying constraints faced by the operating departments where help might be given by the DPM/DFP staff or others. 6.44 Tndeed, as the new RIS is put in place, DPM will want to reconsider the roles now assigned to its O&M Unit and to the Administrative College. One possible division of labor could be to convert the 0&M unit to one which con- ducts management audits of departments or parts thereof and otherwise looks after the establishment as a whole to keep it rational, tidy and under con- trol. This could include dealing with the question of the size of the perma- nent establishment and the average salary, both for the entire Government and also for each major part. The Administrative College might be given both man- agement training and management consulting responsibilities so that management training and structural and procedural design can be more closely related. In so doing, the College should reconsider the utility of running public service- wide courses which result in diplomas and certificates in favor of taking direct action to produce effective workers within specific departmental con- texts and utilizing a broader array of techniques, including training, to pro- duce such results. Training 6.45 PNG is committed to heavy investments in staff training. The mis- sion fully supports this commitment. In fulfilling it, it recommends that the design, installation and instruction in the use of new systems be considered the major staff training effort in the country. The objective of staff train- ing for any organization should be the production of effective workers, and not the granting of certificates and diplomas. People learn how to be effec- tive and productive (or ineffective and nonproductive) by the way they actu- ally spend their working days on the job, which in turn is mainly influenced by the work system they are required to follow. Emphasizing work effective- ness training in this manner does not imply that there is no place for more traditional training, i.e., by courses in the classroom. On the contrary, there is a definite need for the latter, and the Government should get on with it forthwith but with recognition that there is no way for any government to provide formal training to develop all the skills it requires. What the Gov- ernment can do is to provide skill training in the classroom to specific cadres or career groupings w4 staff whp constitute reasonably large and dis- tinct categories, e.g., finance officers, personnel officers, teachers, agri- cultural extension agents, supervisors, managers, and administrative clerks. 6.46 To do this both quickly and effectively, the concept that the gov- ernment workforce consists largely of cadres or career-groupings populated by staff who enter at the bottom and climb through the ranks to the top should be adopted. For each cadre, a systematic curriculum should be developed through which all staff would be trained at certain times in their career, perhaps as one of the requirements for promotion to higher grades. DPM has an important role to play in developing both the cadre concept and organizing the training programs. But functional people must also be heavily involved and take responsibility for the "professional development" of their own cadre. DFP,  - 91 - for instance, should be involved in the professional develop ment of finance officers, with perhaps the Secrwtary of Finance serving as the head of a finance officer cadre, assisted by a smll staff who would attend to the needs and concerns of the cadre by, inter alia, specifying the educational and work experience required for finance officers to move from one grade level to the next. Then, working with DPH, the curriculum of courses to be given to such officers would be developed and the actual training effort planned, imple- mented and revised over time. Similar approaches could be taken for other cadres, including perhaps an entry-level "management cadet" cadre.  Chart 2: ILLUSTRATIVE PRESENTATION OF RECURRENT BUDGET ESTIMATES 1987 7a TRAFFIC ENGINEERING BRANCH NINISTRY OF HIGHWAYS IN A PROGRAM BUDGET FORNAT PROBLEM DEPINITION AM COAL ccen et7n "lo | uo e low. "C The existing road network facilities are in- Traffic EnSincering 4 Survey 2110 106S 2145 1080 adequate for safe mnd efficient trasport- TrfiEnneig Suey ation. it is estimated that improved road safety facilities can decrease traffic acci- dents by 30% and reduce fuel consumption by 500,000 gallons anmually. The goal of the Traffic Engineering Branch is to improve xisting road safety facilities This Financial Year the Traffic Branch will effect improvements to two intersections, remark 100 miles of roadway. install 1500 traffic signs, rehabilitate 80 trarfic signals, and conduct a traffic study of TARGET POPULATION ! _,I Approximately 2.2 million people (Motorists, pedestrians. commiters) will benefit from the improved road safety facilities. Taxation Revemae 2110 106S 2145 /1S The intersection improvements will benefit an estimated 20,000 motorists who traverse the junctions daily. PERFORMANCE CRITERIA i) Intersectien improvements to be completed by March 1988 , 3 ii) A response time of not greater thin 24 hours for any malfunctioning traffic signal Rehabilitation of Traffic Sipals 80 SO 0O iii) Re-marking 100 miles of roadway Estimated Avg. Cost per sigal $5,000 S5,000 S5.000 $2,462 iv) Installing 1500 traffic signs Improving Intersections 2 _ 2 v) Conducting 1 major traffic study, in conjunction with Cost per intersection $100,000 $370,000 improved traffic flow measures, as well as *utine studies Road Marking (Miles) 100 so -so 24 at 100 urban and rural locations. Cost per mile $3,000 S3.000 - SS,375 Performance 1986/87 - Installing Road Signs S500o 600 600 196 Cost per sign $400 $300 $2S0 $S63 1. Minor improvement to Rd Conducting Traffic Studies - 189 30 200 Intersection Cost per study $600 $600 $650 $47S 2. Rehabilitate 6 Traffic Signals, Maintain 80 3. 50 Miles of Roadway marked 4. 600 Road Signs installed S. Traffic counts done at 189 Rural g Urban locations.  rt 2 (continued) PREFERRE3 SOLUTION: IMPACTS AND BENEFITS This Budget will finance the following works a) Effect improvements to two intersections b) Rdabili te and maintain 80 traffic signals c) Remark 100 W!es roadway TRAFFIC ENGINEERING tRANCH d) Install 1500 traffic signs e) Conduct traffic studies at 100 intersections BWNCTIONS *DEEFITS GOALS The intersection inprovemets will reduce delays at the junctions by an estixated 50%. Rehabilitation of traffic signals, Install Signs Improfe Ldace remarking of roadway and installation of signs will lmprove Traffic Traffic road safety conditions with a corresponding reduction in traffic Safety Accidents accidents The traffic studies to be conducted will form the Remark Roadway fundamental base for future re-design of intersections. Rehabilitate Traffic Sigals Reduce Reduce Improve Intersections Traffic Ftel Conduct Traffic Studies Delays Consumption %0 ANAYSI u <n r raicwo |um nfrcuu |PADO ACTUA d - ~~- -_ I I I Personal Eoluments 01 Staff Hours 331 11S 127 115 Travel Expenses/S&bsistence 02 90 19 30 42 Supplies and Materials 03 66S 02 537 412 Rental of Property 04 iS - 1S - Public Utility Services 06 400 1S 5 Operating/MaintAhance 07 420 184 189 9 Interdepartmental Purchases/ Services 12 49 16 40 492 Equipment 14 40 40 iS - Lands/Structures 16 100 74 740 - 2,110 1,065 J.693 1030  i ~~ ~ ~SI  - 94 - APPENDIX I PAPUA NEW GUINEA REPORT ON THE COSTS AND FINANCING OF EDUCATION 1/ Recommendations Planning, Budgeting and Management 1. The planning, manage ent and financing of education in PNG is com- plicated by the number of actors and of political/administrative levels that must be taken into account, and the lack of any source of line authority for the entire syst2m. If a nationwide education strategy and corresponding poli- cy measures are to be agreed and implemented, improved mechanisms for sector policymaking, resource allocation and resource management would have to be introduced. These should permit joint decisions to be taken on overall poli- cies and priorities while retaining flexibility in the implementation of na- tional objectives at the provincial or local level. 2. The present education budget structure and criteria work well for accounting purposes but are inadequate tools for expenditure planning, re- source allocation decisions or resource monitoring. This lack of budget transparency, as well as the limitations to redeployment of resources imposed by the peculiar definitions of the recurrent and development budgets in PNG, hamper the efficient use of scarce budget funds and the allocation of re- sources according to strategic priorities. It is recommended that a budget structure organ:zed by subsector or education t-ype and with consistent func- tional classifications, be introduced at the national, provincial and school levels in order to allow priorities to be reflected in resource allocation decisions. This would facilitate investment programming, the redeployment of existing resources according to agreed criteria and objectives, and more effective resource use monitoring. 3. The role of the NDOE vis-a-vis the provinces should be reassessed with a view to concentrating on management, planning and pedagogic support servic 3s, and progressively delegating administrative tasks to provinces and schools. A major overhaul of the current administratively cumbersome system for teacher appointment, ranking, promotion and assignment should also be undertaken in order to decrease present high teacher turnover rates and reduce teacher disincentives to combining small classes. Priorities 4. In the short-to-medium-term, in view of current and prospective budgetary constraints, enrollments cannot continue to expaud at all levels. It is recommended that the Government (a) give priority to expansion of 1/ Report No. 6767-PNG, June, 1987.  - 95 - primary education as the essential foundation for human ,esource development and the most appropriate base for rural development and agricultural moderni- zation; (b) curtail the expansion of lower secondary education while carrying out more analysis of the employment patterns of grade 10 leavers* (c) ezpand modestly upper secondary education to provide more candidates for university training and to eliminate the university Preliminary Year; (iv) consolidate higher education programs to focus on priority fields and improve internal efficiency. In the longer term, assuming budgetary constraints ease, it is expected that enrollment expansion at lover secondary and higher education levels would resume. Improved Cost-Effectiveness 5. The cost-effectiveness of the education system could be improved by cost reductions due to increased internal efficiency, greater cost-sharing and a reallocation of resources within the sector. It is recomended that the following measures be undertakea: (a) Cost Reduction: (i) reduce overhead costs by streamlining adminis- trative tasks and enlisting teaching staff in the delivery of qua- lity support services to lower education levels; (ii) increase the primary pupil:teacher ratio by limiting increases in the teaching force, redeploying teachers from low to high demand areas, increas- ing maximum and minimum class sizes and combining small cle.ses into multiple-grade classes; (iii) continue the progressive localization of the post-primary teaching force and seek extra-budgetary financ- ing from untapped external aid for expatriate teachers; (iv) reduce reliance on boarding at the secondary level by encouraging local day students; (v) decrease boarding and school operating costs at upper secondary and higher education institutions to levels closer to those at lower secondary; (vi) introduce double-shifting in academic secondary facilities to increase utilization rates; and (vii) real- locate underutilized facilities to priority educational purposes. (b) Cost-Sharing: (i) maintain or increase fee differentials between day and boarding students; (ii) raise upper secondary fees to levels similar to lower secondary; (iii) eliminate the pocket allowance from the NATSCHOL student stipends; (iv) carry out household income and expenditure analyses in order to estimate the affordability and the impact on equity of access, of alternative fee levels and cost recovery arrangements; (v) progressively introduce cost recovery, particularly for boarding costs, at higher education institutions; and (vi) replace the "fee subsidy" program with a targetted scho- larship program for secondary and higher education students. (c) Reallocation: reallocate budgetary savings generated by internal efficiency improvements or increased cost-sharing to: (i) rein- forcement of quality upgrading at the primary level; and (ii) in- creased primary intakes and enrollments.  - 96 - APPENDIX II ACKGROUND DATA TO ANNEXES List of Tables AGRICULTURE II.1 Production of Major Export Crops by Producer, 1977-b6 11.2 Major Agricultural, Fisheries and Forestry xzport Volumes and Average Noinal f.o'.b. Prices, 1981-86 II.3 Projected Major Agricultural Export Volumes, 1988-95 II.4 Public Investment Program, 1988-92: Proposed Allocation to Agriculture and Livestock by Major Project or Program HUKAN RESOURCE DEVELOPMENT II.5 Population Projections, 1985-2015, with Declining and Constant Fertility II.6 Citizen Population by Province, 1980-2000 II.7 Economic Activity by Province, 1980 II.8 Provincial Populations by Rural/Urban Categories, 1980 II.9 Employment by Major Occupation Groups, Sex and Citizenship, 1982 11.10 Educational Attainment by Major Occupation Groups, 1982 I1.11 Projected Employment by Sector II.12 Education Budget Trends, 1983-88 11.13 Provincial High Schools: Estimated Capital Costs, Single and Double-Shift Schools  vable, jLj.1: xU .0- ^ & 9 1977-U _- - _- __-- - - -- -- -- -- - -- - - -*- - - @- - - -- -- -------- 1. Coffee Production by Type of Producer (tons) Smaliholder Estoe Total Ptrcent Percent Amount of Tota Amount of Total Amount 1977 26,252 706 11,213 8o0 87,470 1937 88S,51 706 14,310 8 47,61 1370 88,200 706 14,161 8so 47,861 1930 86,355 663 17,844 2 54,1" 1931 88,040 70X 14,162 80x 47,2(4 1ff2 25,778 706 12,881 80x 41,104 1968 8s,8" 753 13,129 253 52,513 1964 82,620 73X 12,811 27X 44,081 1965 25,6S 65X 15,878 85X 44,059 196 80,734 S69 14,186 81X 44,940 Groeth p.o., 1977-36 1.3X 2.6x 2.0X 2. Coco Production by Type of Producer (tons) Smallholder Estate Total Percent Percent Amount of Total Amount of Total Amount 1977 14,291 493 14,697 s1X 2,93 1976 16,006 s1X 15,262 49x 81,267 1979 16,000 54X 12,567 46X 27,557 1960 14,231 52% 1S,813 43X 27,649 1961 16,652 sex 1S,84 42% 81,986 1962 16,064 60e 10,572 40X 26,626 1968 19,198 6ex 9,046 82X 28,244 1984 28,506 713 9,448 29s 82,943 1935 20,046 6sx 3,627 S1X 23,378 1986 28,650 723 9,801 23x 82,951 Growth p.n., 1977-88 65.6 -5.1X 1.43 8. Oil Palo Production by Type of Producer (tons) S liholder Estate Total Percent Percent Amount of Total Amount of Total Amount 1977 94,692 66x 44,607 82X 189,859 1976 102,626 69x 45,466 313 147,961 1979 117,851 61% 78,769 89X 191,120 1960 109,149 55N 88,602 46X 197,651 1981 102,271 48X 108,684 52X 210,956 1982 190,866 48X 207,733 52X 898,696 1983 194,899 48X 206,711 52X 401,110 1984 276,315 54X 283,079 46x 518,894 1986 294,289 521 268,021 43x 562,810 1966 284,064 51X 272,184 49s 665,268 Growth p.a., 1977-86 12.2X 20.1X 15.l4 4. Copra Production by Type of Producer (tans) Sm liholder Etatet Total Percent Percent Amount of Total Amount of Total Amount 1977 54,346 453 65,272 553 119,617 1976 66,699 49x 71,781 51x 140,430 1979 71,264 49X 74,112 51X 146,e86 1980 71,671 51X 66,674 4sx 140,346 1981 73,254 52X 66,612 4sx 189,866 1982 82,619 eox 56,891 403 138,410 1988 76,780 68% 54,453 42X 130,233 1984 89,166 e62 56,7*o a3x 144,861 1986 89,869 633 68,302 87X 142,661 1966 109,408 64X 61,6351 6X 170,934 Growth P.O., 1977-86 7.03 -O.63 8.6x Source; Departmnt of Agriculture and Livestock.  -8 - Tabl- MM MAJOR AaRICULRAL, FISHERIES AND FOREST EXPORT VOU AND AVEtAGE NOMINAL FM PRICES, 1901-90 _______________________________________________________________________________ VOMLES AND F06 PICES 1061 1902 1983 1964 1961 1906 Coffee (tons) 47,006 40,345 52,024 47,34 41,020 53,680 K/ton, gren been 1,577 1,62' 1,02 2,232 2,344 3,087 Cocoa (tons) 26,479 29,407 27,224 84,900 31,902 31,823 K/ton 1,226 1,118 1,571 1,9064 2,020 1,820 Copra (tons) 06,390 74,357 78,711 94,458 106,844 92,906 K/ton 194 178 80 528 824 109 Coconut Oil (tons) 84,772 37,590 86,178 40,367 $8,762 41,109 K/ton 360 322 554 909 56 265 Plol Oil (ton) 44,031 76,715 77,940 110,871 128,161 128,907 K/ton 828 232 806 570 490 229 Palo Kernel (tons) 2,608 13,541 9,076 18,673 16,U60 14,420 K/ton 117 148 152 828 221 I1 Rubber (tons) 4,586 2,387 2,735 8,009 5,125 4,944 K/ton 751 602 792 346 729 748 Tea (tons) 6,959 6,476 7,238 7,680 7,026 6,828 K/ton 1,026 1,082 1,486 2,651 1,897 1,840 Cardamom (kg.) 10,259 49,491 00,888 166,686 828,981 387,268 K/kg 4.4 4.6 6.1 10.4 7.8 4.6 Tuna (tons) 29,768 2,726 641 1,724 8,486 2 K/ton 670.0 628.0 684.0 512.0 48F.0 1,000 Crayfish and Prawns (tons) 1,27'1 :,OUe 1,171 1,120 1,448 1,565 K/ton C,S44 5,951 7,602 6,111 6,754 6,692 Plywood ('000 Sq. T.) 1,455 959 623 708 99 0 K/'000 Sq. M 2,062 2,244 2,23W 1,826 2,126 0 Timber Logs ('000 Cu. M.) 749 1,067 1,004 1,201 1,141 1,299 K/Cu. M. 42 47 48 51 49 48 Timber Lumber (Cu. U.) 24,950 19,948 14,1SV 18,188 9,154 7,854 K/Cu. . 15S 176 176 206 196 -- Woodehips (tons) 102,000 21,000 117,000 127,000 91,000 81,000 K/ton U4 54 55 54 52 62 Source: Department of Agriculture and Liveotock.  - 9, - Table 11.8S PROXJCTV "MLW AMIOLULAL WxPoT VOLUKES, 19-95 (Is Tees) am 19 1990 lalqm am ion 1994 i19 Cottee 42,000 48,000 49,920 51,917 U,9ft 56,158 u,m 6O,78 Cocoa 87,600 40,100 48,100 46,100 49,100 52,100 55,100 58,100 Copra 96,000 96,000 96,000 96,000 96,000 96,000 06,000 0,000 Coconut Oil 41,000 41,000 41,000 41,000 41,000 41,000 41,000 41,000 Palo Oil 184,900 160,999 187,000 204,658 228,765 244,757 267,781 299,000 Palm Kernel 20,250 24,160 2S,050 80,68 8S,568 86,714 40,160 44,060 Rubber 5,600 5,700 5,900 6,100 6,800 S,600 6,700 6,900 Tea 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 Source: Staff t timate.  - 100 - Table 11.4: PULIUC IW5OTlM P.Oi 198- 2: PUP1111 ALLOCTI TO AMIL1W NO URVSTbO B MUM rwacT 111 P506* PIIa pagan 1- (la mll. of Coootet 10on Kim.) Prej.ctPruegrm . w Io 1tom Coffee RebebI Station od Dis... Control (CDA) 5.8 .5 5.2 1O.S 10.4 44 . SmolIholdor Cocoe/Copra R.bb I Itatlo aNd Expensio Project 1.1 8.0 8.4 4.0 5.0 16.5 East New Sr:taln Coeoa/Copra DevOlopmet Project 1.6 2.6 2.6 1.5 1.4 10.1 Oil Palo NES Projeoct 1/ 9.0 16.4 11.9 t9 14.2 61.4 Cape Rodney S.l lIkolder Rubber Development ProJect 6.4 5.6 4.5 4.2 8.4 24.1 Gavien Rubber Productlon 0.4 0.6 1.0 1.1 0.9 4.0 Smallholder Market Access and Food Supply Proj oct 1.2 2.4 8.8 4.7 5.4 17.0 Marketed Fruit and Vegetable. Project 1.4 2.7 2.4 *.1 *.6 18.2 Minor Crope Developmnt 0.8 1.2 1.4 2.0 2.2 7.1 Development of Small Animal. 1.2 1.0 1.4 2.5 2.4 9.1 Agro-forestry 0.3 1.2 1.3 2.8 2.1 6.2 Agricultural/Livestock Extension 0.2 2.1 2.7 4.6 5.1 14.7 Agricultural Support Service 2.2 2.2 2.2 2.8 2.8 12.2 General Agriculture Credit 2/ 16.9 2.09 81.1 19.5 15.2 117.6 Support for AWPNG 1.1 1.9 1.7 1.4 1.4 7.5 TOTAL 52.2 62.1 76.6 78.8 75.0 859.2 Memorandum Item: TOTAL PIP 207.2 276.8 271.5 276.4 2U8.1 1122.0 Of which: Share of Agriculture A Liveetock (M) 2 29 26 27 26 27 Source: The Public Investment Program, 1066-9, Oudget Docuent No. 8, Novemer, 1907. 1/ Includee funding for MlIne Bay, Open Bay, Wee.s Na Britain, Now Ireland, Embi Oirua, Collingwood Bay, and Mamal Boibar& projects. 2/ Excludes K 16.9 *illion credit lines for NES included In otber Items.  - 101 - Table II.5: POPULATION PROJECTIONS, 1985-2015 WITH DECLINING AND CONSTANT FERTILITY ('000.) 1985 1990 1995 2000 2005 2010 2015 iotal pipulation Declining fertility /a 3,331 3,743 4,226 4,764 5,362 6,021 6,742 Constant fertility f5 3,331 3,760 4,277 4,893 5,622 6,478 7,487 Total fertility rate Declining fertility 5.1 4.9 4.6 4.4 4.2 4.0 Constant fertility /b 5.3 5.3 5.3 5.3 5.3 5.3 Birth rate Declining fertility 35.7 35.9 34.7 33.2 31.9 30.4 Constant fertility /b 36.7 37.5 37.8 37.6 37.1 36.7 Average annual births Declining fertility 126 143 156 168 181 194 183 Constant fertility /b 130 150 173 197 224 256 296 Death rate 12.4 11.6 10.6 9.6 8.7 7.8 Life expectancy 53.4 55.7 58.0 60.3 62.5 64.6 Growth rate Declining fertility 2.33 2.43 2.40 2.36 2.32 2L26 Constant fertility /b 2.42 2.58 2.69 2.78 2.84 ? Age group 0-4 Declining fertility 524 555 638 706 774 845 915 Constant fertility 524 572 673 785 908 1,045 1,207 Age group Q-14 Declining fertility 1,379 1,490 1,671 1,857 2,079 2,291 2,504 Constant fertility 1,379 1,508 1,722 1,986 2,323 2,698 3,124 Age group 7-12 Declining fertility 511 556 624 684 785 867 953 Constant fertility 511 556 631 714 847 990 1,198 Economically active population /c Declining Tertility 2,288 2,570 2,897 3,262 3,691 4,188 4,713 Constant fertility 2,288 2,570 2,897 3,278 3,740 4,313 4,968 Dependency ratio /c Declining fertilrty 78.1 75.2 76.1 74.5 74.3 71.9 70.4 Constant fertility 78.1 76.0 78.2 79.2 81.8 82.4 83.4 /a Scenario "B" (medium variant, NSO projection scenarios). 7-b Scenario "D" (high variant). Constant fertility scenario assumes that fertility has not declined since 1980. /c Economically active population defined as 10-64. Dependency ratio defined as ratio of age group 15-64 to >15 and <65 groups. Source: Mission projections, based on Bakker, M.L., Population Projections for the Citizen Population of Papua New Guinea for the Period 1980- 2015, NSO, March 1985.  - 102 - Table II.6: CITIZEN POPULATION BY PROVINCE, 1980-2000 1980 Growth rate census (X p.a.) Province population 1966-80 1980-200 1985 1990 19)5 2000 Western 78,337 1.7 2.6 89,000 101,100 114,400 129,200 Gulf 63,843 1.0 1.8 70,000 76,700 85,000 95,200 Central 116,361 3.7 2.1 129,400 14-A,100 161,800 181,300 Nat'l Capital Dist. 112,429 3.7 3.9 136,300 158,200 178,200 197,400 Milne B