Integrated environmental and economic accounting : a case study for Papua New Guinea

THE WORLD BANK SECIOR POLICY AND RESEARCH STAFF Environment Department Integrated Environmental and Economic Accounting A Case Study for Papua New Guinea Peter Bartelmus(UNSO) Ernst Lutz (Wod Ban Stefan Schweinfest (UNSO) July 1992 Environment Working Paper No. 54 This paper has been prepared for internal use. The views and interpretations herein are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations or to any individual acting on their behalt Peter Bartelmus is Officer-in-Charge of the Envhonment and Energy Statistics Branch in the United Nations Statistical Office (UNSO). Ernst LUtz is Senior Economist in the Environmental Policy and Research Division of the World Bank. Stefan Schweinfest is Statistician in the National Income Accounts Division of UNSO. Agnes Tardos, who is a statistician in the Environment Statistics Section of UNSO, contributed Annex 4 and provided additional assistance. The paper reports on findings that are particularly significant in the context of the overall work program of the Environmental Policy and Research Division at the World Bank and of the methodological work of the United Nations Statistical Office. The authors are grateful to the many individuals in Papua New Guinea (PNG), who met with the study team and provided valuable information (see Annex 1 for a complete list). Also, they wish to thank Jan Bojo, Charles Brown, John Burrows, Willy Cruz, Jim Douglas, Salah El Serafy, Uoyd Kenward, Homi Kharas, John Millet, Jessica Mott, John Strongman, Michael Ward, and Jan van Tongeren, for valuable comments and assistance. Additionally, the authors would like to thank the World Bank's Research Committee for providing funding for the study. Departmental Working Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that are circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organization, or to members of its Board of Executive Directors or the countries they represent The views expressed by the staff members of the United Nations are their own and do not necessarily reflect an expression of opinion on the part of the United Nations. Because of the informality and to present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The main purpose of the Papua New Guinea (PNG) case study on environmental accounting was. to apply the integrated environmental and economic accounting framework developed by the United Nations Statistical Office (UNSO) in a country at a relatively early stage of development and where actual environmental problems are still limited. One of the challenges was to see what can be achieved in terms of environmental accounting with a small, mainly external effort in a country with relatively weak institutional capacities and limited data availability. The work consisted of (a) lc,ating relevant data in institutions in PNG, (b) placing them in the integrated accounting framework, and (c) assessing their quality and relevance for integrated accounting. PNG is a small country of about 3.5 million inhabitants, 90 percent of whom live in rural areas. There are very few urban areas, and industrialization is negligible. A few large copper, gold and silver mines contributed almost 60 percent to export revenues in 1990, in spite of the closure of the largest mine due to sabotage actions. Not surprisingly, environmental expenditures by the central go-.rnment are still low, amounting to less than one percent of the national budget for the 1986-90 period of analysis. Depreciation of produced assets was calculated as between 9 and 11 percent of the Gross Domestic Product (GDP), resulting in a traditional Net Domestic Product (NDP) of between 89 and 91 percent of GDP. The cost of depletion (applying the net- price method) in the mining sector was roughly estimated to fluctuate between one and eight percent of NDP, resulting in an Environmentally-adjusted net Domestic Product 1 (EDP1) of between 92 and 99 percent of NDP. The user cost was less than half of the cost of depletion calculated with the net-price method. Both the net-price method and user cost approach have advantages and disadvantages. Both were applied here to compare them but without coming to a general recommendation about which one is superior. Also, while in the UNSO approach new finds are considered as other volume changes, it is recognized that other approaches are possible. Environmental impacts were assessed for the sectors of agriculture, forestry, mining, and energy. Depending on data availability and the nature of the impacts, many assumptions had to be made, and, for valuing the impacts in monetary terms, different methods were used. The very tentative results were that these impacts may amount to 2.1 percent of NDP on average for the 1986-1990 time period. When environmental quality degradation is subtracted from EDP1, the resulting Environmentally-adjusted net Domestic Product 2 (EDP2) was estimated to range from between 90 to 97 percent of NDP, depending on the year in question. The comparison of the share of final consumption in NDP and EDP2 suggests that consumption exceeded (environmentally-adjusted) domestic production in almost all years. In reviewing the results of this st'idy, one needs to keep their very tentative nature in mind. The main purpose of the study was trying to test a methodological approach and to apply it in an actual country context, not in producing fine-tuned numbers or seeking to influence policy. Given the general weakness of the available data, the estimates or the range of estimates produced, are far more illustrative than precise. It is clear that, to improve this work, considerably better data will be needed. INTEGRATE ENIRONMENTAL AND ECONOMIC ACCOUNTING A CASE STURY FOR PAPUA NEW GUINEA Tabled ofCotet Pae No. 1. INTRODUC ION ............................................... 1 2. SNA SATELLITE SYSTEM OF INTEGRATED ENVIRONMENTAL AND ECONOMIC ACCOUNTING ..................................... 2 2.1 Scope and Contents ............................................... 3 2.2 Structure and Accounting Procedures ................................. 5 3. SOCIO-ECON "AIC, ENVIRONMENTAL AND INSTITUTIONAL CHARACTERISTICS OF PNG ........................................ 7 4. ADJUSTMENT OF ECONOMIC ACCOUNTS ............................... 9 4.1 Environmental Protection Services .................................... 9 4.2 Balance Sheets of Tangible Assets .................................... 11 4.2.1 Produced Assets .............................. 12 4.2.2 Subsoil Assets ............................................ 13 S. DEPLETION OF NATURAL RESOURCES ................................. 15 5.1 Non-renewable Resources .......................................... 15 5.1.1 MininginPNG ........................................... 15 5.1.2 User-cost Valuation of Exhaustible Resources .................... 17 5.1.3 Depreciation and Appreciation of Natural Capital ................. 18 5.1.4 Comparison of Results and Methodologies ...................... 21 5.2 Renewable Resources ............................................. 22 * 5.2.1 Physical Balaces .......................................... 23 5.2.2 Valuation Principles ........................... ... . 25 6. ENVIRONMENTAL QUALITY DEGRADATON ................#............6 6.1 Review of Environmental Conditions and Valuation ...................... 27 6.2 Assessment of Sectoral Impacts ...................................... 29 6.2.1 Agriculture .............................................. 29 6.2.2 Forestry................................................. 30 1 ii 6.2.4 Energy ............................................ 33 6.2.5 NaturalEvents ................................... . 35 6.2.6 Other Environmental Effects ................................. 34 6.2.7 Summary ................................................ 36 7. INTEGRATED ACCOUNTS: PNG 1986-1990 - REVIEW AND CONCLUSIONS ..... 37 7.1 Review of Results ............................................... 37 R EFER EN CES ...................................................... .. 41 ANNEX 1: List of Persons and Institutions Consulted ........................... 44 ANNEX 2: Map of Papua New Guinea ...................................... 46 ANNEX 3: Selected Data - Papua New Guinea ................................ 47 ANNEX 4: Comparison of the "User-Cost" and "Net-Price" Methods of Accounting for Use of Natural Resources .......................... 48 ANNEX 5: Integrated Economic and Environmental Accounts- Papua New Guinea 1986-1990 .................................... 52 INT RAE ENVIROM ENTAL ANDl ECONOMIC ACCO-UNTING A CASE STUDY FOR PAPUA NEW GUINEA I. -MOUM Calls for environmentally sound and sustainable development reflect a general agreement on the need to integratm environmental objectives into development policies, programs and projectsy National accounts have proided the most widely used ind ators for the assessment of economic performance, trends of economic growth and of the economic counterpart of social welfare. However, certain drawbacks of national accounts have raised doubts about their usefulness for the measurement of long-term environmentally sound and sustainable economic development. These drawbacks include: (a) the neglect of scarcities of natural resources which threaten the sustained productivity of the economy; (b) I limited extent to which environmental quality effects on human health and welfare are accounted for, and (c) accounting for environmental protection expenditures as increases in national product which may instead be considered as social costs of the maintenance of environmental quality. The feasibility of physical and monetary accounting in the areas of natural resources and the environment was first explored in workshops jointly organized by UNEP and the World BanL The workshops led to a consensus that enough progress had been made to link environmental accounting to the United Nations System of National Accounts, the SNA (United Nations 1968), and to include certain aspects of environmental accounting in the on-going revision of the SNA (ited Nations 1990). In response to this conclusion, a Framework for Integrated hnvironmental-Economi Accounting was prepared by staff and a consultant of the United Nations Statistical Office (UNSO) and presented to national accounting experts at the twenty-firt session of the International Association for Research in Income and Wealth (IARIW) in Lahnstein, 20-25 August 1989 (Bartelmus, Stahmer and van Tongeren 1991). In follow-up to this session, a special IARIW Conference on Environmental Accounting was held in Baden, Austria (27-29 May 1991), where the further development and application of the framework was discussed among other contributions on environmental accounting. At its twenty-fifth session in 1989, the Statistical Commission of the United Nations endorsed the preparation of a Handbook on Integrated Environmental and Economic Accounts. The above-mentioned framework is serving as the basis for this Handbook whith is being prepared by a consultart to UNSO (Mr. Stahmer). In order to gain experience with the implementation of the proposed integrated accounting system, the Papua New Guinea (PNG) N See in particular the report of the World Commission on Environment and Development (WCED 1987), which advocates the world-wide implementation of sustainable development - a topic which is also the theme of the forthcoming United Nations Conference on Environment and Development in Brazil (1-12 June 1992). case study was undertaken as well as oe for Mexico (see Environment Working Paper No. 50, December 1991). The main purpose of the PNG case study was to apply the environmental accounting framework in a country at a relatively early stage of industrial development, where actual environmental problems are still limited, but where integrated accounting might already alert to potentially serious depletion of natural resources and degradation in environmental quality. At the same time, limited statistical and accounting capacities in the country provided for a test of the feasibility of integrated accounting with limited resources and within a restricted time framey As a consequence, no original research or data compilation was carried out in the country. Rather, a large number of lnstitutions (see Annex 1) were consulted and their data sources examined and used. The idea was thus less to provide an accurate picture of past performance, regarding environmentally sound and sustainable development, than to (a) locate relevant data in institutions in PNG, (b) to place them in the integrated accounting framework, and (c) to assess their quality and relevance for integrated accounting. This approach permitted to assess data availability and the usefulness of different accounting concepts and procedures, given the particular environmental conditions and data situation in PNG. This paper summarizes the results of the pilot study. Section 2 describes the System of integrated Environmental-Economic Accounts (SEEA), as applied in the country. Some important general physiographic, socio-economic and environmental features are presented in section 3 as background information. The following three sections (4, 5 and 6) explain the procedures, assumptions and deficiencies of establishing the basic accounting framework and of estimating and valuing natural resource depletion and environmental degradation in PNG. Section 7 reviews the overall results of the study, presents conclusions, and makes recommendations regarding priorities for environmental data collection. 2. SA_SATELMEYSTEM OFN A LM L AND ECONOMIC ACCOUNTING The current revision of the SNA (United Nations 1990) presents a unique opportunity to examine how the various concepts, definitions, classifications and tabulations of environmental and natural resource accounting can be linked to or incorporated in the SNA. In view of the fact that no international consensus has yet been reached on how to incorporate environmental costs and benefits in national accounts, it was thought premature to radically change a well-established system of economic accounts that serves many different, in particular short- and medium-term, socio-economic analyses. Experts working on the current revision of the SNA have therefore repeatedly stressed the need to elaborate the standards of environmental and natural resource accounting in an SNA satellite system of environmental accounts, rather than in the core SNA. N The case study was carried out by the authors with a total input of about twenty staff weeks in preparatory and follow-up work, including a mission of two weeks in PNG. N See Ahmad, El Serafy and Lutz (1989) for an overview of different concepts and approaches, and Peskin with Lutz (1990) for a survey of environmental accounting practices in industrialized countries. -2- 2.1 Se and Contets The proposed SNA satellite System of integrated Environmental and Economic Accounting (SEEA) follows as far as possible the principles and rules established in the SNA (United Nations 1968, 1977, 1990). It is based on SNA's production boundary, follows its analysis of costs and outputs, and incorporates the same accounting identities between supply and use of products and between value added and final demand. The focus of traditional systems of national accounts on market transactions (except for some imputations for *directly competitive' non- market production of goods and services) has effectively excluded the accounting for changes in the quality of the natural environment and the depletion of natural resources. These effects are particularly relevant for the measurement of an adjusted concept of value added, which is compatible with long-term environmentally sound and sustained economic development, and of an adjusted concept of net income, which could take into account further welfare aspects of environmental depletion ard degradation. The following describes the main features of the SEEA: (a) Seregation and elaboration of all environment-related flows and stocks of traditionalaccounts. Satellite accounts, in the narrow sense of detailed accounting for expenditures and revenues in major areas of social concern, have been pioneered by France (Institut National 1986). There is now an increased interest in segregating all flows and stocks of assets in national accounts related to environmental issues and, in particular, in estimating the total expenditure for the protection or enhancement of the different fields of environment. One objective of this segregation, as proposed in SEEA, is the identification of the part of the Gross Domestic Product (GDP) which reflects the costs necessary to compensate the negative impacts of economic growth, Le. the so-called "defensive expenditures', rather than increases in 'true" (welfare-relevant) income (Leipert 1989)/ (b) Linkage of physical resource accounting with monetary environaental accounting andbalan.e . Physical resource accounts aim at covering comprehensively the total stock or reserves of natural resources and changes therein, even if these resources are not (yet) affected by the economic system. The proposed accounting for these resources in SEEA is considered as the 'hinge' by which comprehensive physical resource accounts could be linked to the monetary balance sheet and flow accounts of the SNA. Systems of environment statistics such as those proposed by the United Nations (1988 and 1991) should facilitate achieving compatibility between physical and monetary accounts by specifying those parameters that could be valued in monetary terms. Non-monetary data in physical accounts are considered to be an integral part of the SEEA and will be There is wide agreement about the usefulness to identify these costs separately, but there exists no consensus on whether these should be subtracted from GDP. Y See e.g. the Norwegian approach to natural resource accounting (Alfsen, Bye and Lorentsen 1987) or the more complex (including La. interactions in the biophysical environment) French "natural patrimony' accounts (Institut National 1986a). -3- fully elaborated in the planned Handbook on Integrated Environmental and Economic Accounts. (c) Assesmn OfendMAMetA an. In contrast to the above- mentioned narrow approach to satellite accounting, a broader framework fo.r satellite accounting, covering additionally 'external" environmental costs aud benefits, is proposed in SEEA. Taking the current state of knowledge and data availability into account, the system focuses on expanding and complementing the SNA with regard to two major issues, namely: (I) the use (depletion) of natural resources in production and final demand and (ii) the unaccounted changes in environmental quality, resulting from pollution and other impacts of production, consumption and natural events, on one hand, and environmental protection and enhancement, on the other. Possibilities of extending the SEEA for the analysis of environmental welfare effects, Le. the 'damage costs' of the impairment of human health, recreation and other aesthetic or ethical values, will also be discussed in the Handbook. (d) Thueing fo the mainteance of t wl T generally advocated paradigm of sustainable development stresses the need to fully account for the use of both "man-made" and "natural" capital in order to alert to possible non- sustainable growth and development patterns. SEEA extends the concept of capital to cover not only man-made but also natural capital. As a consequence, SEEA will include additional costs for the depletion and degradation of these natural assets which extends the concepts of capital formation into one of capital accumulation. Additionally, this extension could also reflect the transfer or *discoveryO of natural capital for economic use. (e) ElabratiJ.and measurement of indicators of eniromentally adjusted product and ime. The consideration of the depletion of natural resources and changes in environmental quality permits the calculation of modified macro-economic aggregates, such as an Environmentally adjusted net Domestic Product (EDP). Discussions are presently reviewing the possibility of introducing an Environmentally adjusted National Income (ENI) concept by accounting for further welfare effects of environmental impacts. The proposed system attempts to describe the main Interrelationships between the environment and the economy. However, in line with the production boundary of SNA, phenomena that take place wholly within the environment, i.e. outside the economic system, are excluded. Such phenomena are probably better dealt with by complementary physical resource accounts and systems of environment statistics and monitoring. Also, welfare effects from environmental quality degradation that affect 'human capital', i.e. human health and welfare, are only tentatively discussed in the proposed system. .4, 2.2 Stand AMcot m alms Table 1 illustrates the general structure of the system which consists of three basic componentsY Tables 1.1 and 1.2 show the supply and use of goods and services. Table 1.3 comprises the asset accounts with opening and closing assets and the items linking them. Tables 1.2 and 1.3 are connected via the accounts of capital accumulation. The supply Table 1.1 contains an additional row which shows the involuntary "imports" of residuals (wastes etc.) of foreign economic activities which hao been transported to the domestic economy (-1.6). Alternatively, flows of cross-boundary residuals could also be treated as "transfers" from/to the domestic environment, thus affecting an environmentally adjusted national income aggregate rather than domestic product. The use/value added Table 1.2 is extended rowwise and columnwise. The table shows not only the traditional GDP and NDP (net domestic product) but also further corrections due to the use of natural assets (depletion of natural resources, and degradation of environmental assets by residuals and agricultural, recreational and other practices). This use is valued with the costs which would have been necessary to keep the natural capital intact, with the possible exception for exhaustible ("stock") resources (t..g. mineral resorces), for which user-cost or economic-rent valuation approaches have been suggested (see section 5, below). These costs are interpreted as the decrease in (economic) value, estimated in analogy to accounting for changes in stocks and capital consumption. The deterioration of the natural assets could be caused by current production activities (59.8), consumption activities (household consumption 17.1) or by (scraps of) produced assets (5.1). The restoration activities of the government diminish the impacts of the economic activities on the natural assets (-5.0). These activities could affect the domestic (natural non-produced assets: -73.0) and loss of ecological functions of the produced biological assets (-0.9), or could gencrate residuals that are transported to the rest of the world (exports: -4.7). The value of the deterioration of the domestic as well as foreign natural assets caused by domestic sources (59.8 + 17.1 + 5.1 = 82.0) represents the costs that are deducted from NDP to obtain the Environmentally adjusted net Domestic Product (EDP) (185.1)Y The asset accounts (Table 1.3) show the produced assets (including cultivated biological assets) and the non-produced assets which contain only natural assets (wild biota, land, subsoil assets, water and air). Existing market values are applied, except for the depletion (where market values are imputed) and degradation (where cost estimates and other valuations are applied) of natural assets. In order to maintain the consistency between market value at the beginn'ag and the end of the accounting period an adjustment for imputed and non-market (environmental) valuations is introduced, therefore, in the balance sheets. The table is a consolidated version of detailed tabulations. For further details and explanations, the original proposals (Bartelms, Stahmer and van Tongeren 1991) should be consulted; the figures shown in the table are largely fictitious, serving illustrative purposes only. 1 For purpose of a step-wise implementation of SEEA and reflecting an increasing degree of . controversiality in valuation (see below, sections 6 and 7), the calculation of an EDP1, adjusted for costs of natural resource depletion only, is recommended in the (draft) Handbook on Integrated Environmental and Economic Accounts, before estimating EDP2, which would additionally account for environmental degradation costs. This approach is also followed in the present study. -5- Ta~e i Syste for mtegrated Envm~aaemgt Fgondmad. Amtne SE ) (sney -rsnain Ope~ig Vacb (Mat et Valnia) 991.3 83.1 1744.4 +(phus) Domueintecduc Md t4ua UanWtow les Mprod.Tlta 14@nemann Gespmc$s ..........,. lsmppa Ramidusa 591.s 2241 0s5 425 ao .4 13 73.7 293.4 0 V.~ -235 .232 ~17 5sn1 -s5 s.5 .4s .0 4 22.2 -17.5 .s.5 CLOSW Stum OL«w 15. ^ 92Ø +. (plus)- Adjustenea ermsurai as a uak- k> mater vnanua 0.9 81.2 Olber vetaessnge(aated tahan Rcvaniim du g~ åaq ~- (equas) cLoRNO STME (MARKET*VAIJA'DON) 1 ,149.1 93. 2,165.S A The SEEA addresses also the physical counterpart of the monetary environmental accounting system, since physical data provide the basic information on non-marketed environmental assets and services. However, the use of physical variables is limited since they can normally not be aggregated because of the use of different statistical units (e.g. tons and cubic meters) and the lack of knowledge of the relative importance of the variables. In many cases, the only way to obtain comparable data on different physical resources and environmental inpacts is to value the physical assets and the corresponding cost of their depletion and degraddtion in monetary units. Valuation is thus a crucial but still controversial aspect of environmental accountg requiring further exploration with a view to obtaining widely acceptable standard methodologies. The present study is to contribute to this standardization process by evaluating the proposed methodologies in the light of "field' experience. 3. SOCIO*ECONOMIC. ENVIRONMENTAL AND INSTITUTIONAL CHARACTERISTICS OF PNG Out of the total land area of PNG of 465,000 kIn, 85% is mainland, and the rest consists of about 600 islands (see map of Annex 2). Most of the country consists of impenetrable jungle and rugged mountainous terrain. The country is endowed with good soils, abundant rainfall, mineral resources, and fisheries and forestry resources of good commercial potential (EIU 1986, . The total population is estimated at 3.5 million (1986) with an average density of 7.6 per . Most of the population is concentrated in the highlands and a few urban areas. By Western standards, iAdustrialization is negligible, with almost 90% of the population living in rural areas pursuing subsistence activities (Viner 1984, p. 342). In 1988, PNG had a GNP per capita of US$ 770; however, over 85% of the (rural) population has a real income closer to US$ 300. From the first oil shock in 1973 to 1984, the growth of GDP has averaged slightly above 1 percent The economic performance has improved to 3.6 percent during the period 1985 to 1988. The closure of the Bougainville copper and gold mine in May 1989, because of sabotage actions, has had significant macro-economic repercussions, since the mine had contributed about 35% of the country's export earnings, 15% of government revenue and 8% of GDP. Other activities in the province, such as cocoa production/exports also suffered, and these problems came at a time when export prices for most of PNG's commodity exportv were falling sharply. The combination of these factors led to declines of GDP of 1.4 percent in 1989 and of 3.7 petcent in 1990. The structure of growth in the economy over the last decade is summarized in Table 2. In response to the declines in 1989 and 1990, the government implemented a stabilization and structural adjustment program, which is being supported by loans from the IMF and the World Bank, among others. For a more detailed description of macro- economic trends, see the latest country economic report (World Bank 1991). Some additional country data are presented in Annex 3. In-country obstacles to balanced and rapid development include the difficulties of transport over large areas of often rugged, high-elevation or swampy country, so that, for instance, the capital city of Port Moresby has no road connection with any other major population center; the very low densities of population over large, often malarial, areas; the difficulties of "unlocking" land held in customary ownership (97 percent) for development purposes; the low percentage of the population rece any significant formal education (less than one-third of the population over 15 years of age is ; high rates of unemployment among the unskilled urban population; crime and urban violence; the on-going contentions surrounding control of land and its surface or sub-surface resources; unclear or unestablished realms of aothority in the relations of the national administration with provincial governments; and weak institutional capacity on the part of some provincial governments. -7- TaWX 0oiot, "o Sector, 1980-90 shares in 1991 Nominal 9198 1990 Est. GDP Agriculture 1.6 1.8 1.4 -0.5 1.1 27.8 Mining -7.6 18.3 -37.9 10.7 64.9 19.2 Manufacturing 1.5 -0.5 8.4 -14.5 1.5 10.1 Construction & Utilities 5.9 0.2 10.4 -5.1 19.2 8.2 Rest of the Economy (mainly services) 1.8 2.0 3.4 .5.4 1.2 34.6 Gross Domestic Product 1.3 3.6 -1.4 -3.7 9.1 100.0 Memo Item: Non-mining GD? 1.9 1.8 4.9 -5.2 2.4 80.8 a) Includes forestry and fisheries. Source: World Bank Report No. 10319-PNG; data provided by the PNG authorities and staff estimates. In response to these problems, the Government has, among others, taken the following steps: (a) a land mobilization program based on customary land registration has been initiated; (b) the public investment program and its aid financing requirements are being evaluated with a view to maximizing labor absorption, particularly in the construction sector; (c) imposed a night-time curfew in some locations during 6 months in 1991 to stabilize the crime situation and to give time for the longer-term programs, m particular employment creation and education, to take effect; (d) landowners are being mcluded in discussions and negotiations about resource developments and legislation to regulate compensation claims; (e) the provincial government system is being reviewed; and (f) instituted, last but not least, a successful macroeconomic stabilization program. The major actual and potential environmental pioblems of PNG are analyzed below in sections 5 and 6 for incorporation in modified national accounts. They include the depletion and degradation of non-renewable (mineral, soil/land) and renewable or potentially renewable (forest, biodiversity, fish, freshwater, marine) natural resources, and the environmental quality deterioration of land and fresh and marine waters and related ecosystems. Papua New Guinea's much cited Fourth National Goal and Directive Principle from the 1975 Constitution declares that the country's goal is for the *natural resources and environment to be conserved and used for the collective benefit of future generations. On the basis of this goal, -8- together with various acts and the establishment (in 1974) of an Office of Environment and Conservation, Papua New Guinea came to be regarded as the most innovative of Pacific bland mrnments with regard to environmental management and conservation. In 1985, the Office of R ament and Conservation was upgraded to a full government department under the Minister for Environment and Conservation. Despite the early and strong legislation, the effectiveness of Papua New Guinea's environmental management initiative has sometimes faltered. Explanations put forward in a country review prepared for the UNDP Regional Workshop on Environmental Management and Sustainable Development in the South Pacific (Suva, April 1990), included inadequate policy guidelines, poor co-ordination between agencies; scarce resources for the task; and insufficient staff training and experience. Other obstacles to the effective implementation of environmental management in Papua New Guinea include the lack of local understanding and concern, and the lack of integration of environmental planning into development planning. To enhance environmental management and conservation, the Department of Environment and Conservation has now established a program entitled "Environmental Management for Sustainable Development". Briefly, the program's purposes are to develop a National Conservation Strategy, review existing environmental legislation and enact additional legislation as required, improve the database on resources, raise public consciousness of environmental issues, institute conservation projects, and improve monitoring and enforcement procedures. 4. ADJUSTMENT OF ECONOMIC ACCOUNTS The draft Handbook on Integrated Environmental and Economic Accounts advocates a stepwise approach for the incorporation of environmental concerns into the economic accounts: in a first step, the existing system of national accounts is to be analyzed and reformatted in order to identify and accommodate environmentally relevant information that is already included in the traditional national accounts. In general, this adjustment of the economic accounts comprises two elements: (a) the identification of environmental protection services and of corresponding expenditures; (b) the inclusion of asset balances for produced and non-produced tangible assets. 4.1 Environmental Protection Services Environmental protection services include all activities to maintain or enhance the quality of environmental assets. In the SEEA, "external" protection services, produced by establishments as main or secondary production for other establishments, are distinguished from *internal services, Le. ancillary activities of the establishment. The results of ancillary activities are not .9- shown as separate output of the establishment, though their "externalization" in special satellite accounts of environmental expenditures could also be conceivedY In PNG, there seem to be no private external environmental protection activities that are marketed. Large companies, e.g. in the mining sector, provide environmental protection services for their own activities under the provisions of national environmental regulations and legislation. However, lack of (readily available) information prevented the establishment of production accounts for these services, either for secondary (for other establishments of the company) or for ancillary production. For the public sector, an attempt was made to investigate whether environmental protection activities are being carried out, in particular at the municipal level (e.g. sanitation or recycling). However, the only data found were budgetary data from central government. A rough attempt at identifying "environmentally motivated" expenditures of central government yields the following list which has been used to compile the estimates of Table 3: Department of Environment and Conservation Policy and Administration Wildlife National Parks Environment Water Resources Department of Forest Research and Development Planning and Investment Resource Development Department of Lands and Physical Planning Environment and Conservation Administration Department of Fishery and Marine Resources Research and Survey Resource Development Inspection and Surveillance. The consolidated version of the SEEA of Table 1 does not show explicitly the supply of external environmental protection services, which is included in more detailed presentations of Table 1.1 as the supply of domestic production, nor does it indicate the inputs into the production of external and internal environmental protection activities as envisaged in a more detailed breakdown of the columns of domestic production in Table 1.2. - 10 - ____ __ 186 987 988 989 1990 Total Expenditure 5.76 7.22 8.65 8.53 9.74 (mio Kina)v Increase Per Annum (%) - 25.3 19.8 -1.4 14.2 Proportion of Total GoVt Budget (%) 0.63 0.74 0.80 0.72 0.78 Proportion of GDP (%) 0.23 0.26 0.28 0.28 0.31 Source: Public Accounts 1990/91, Department of Finance and Planning. Table 3 shows that the total environmental expenditures budgeted for 1990 was 9.74 mio Kina (33.4% of which in the Department of Environment and Conservation and 43.7% in the Department of Forests). This is less than 1 percent of total government expenditures, but can be expected to increase with mounting pressures on the environment. It was not possible to establish what portion of these expenditures were ultimately sold to private households and industries or represent (if not sold) government consumption. These allocation problems, together with lack of information about protection activities of local and provincial government, are the reasons why no attempt was made to identify environmental protection services separately in the integrated accounts for PNG (see section 7 and Annex 4). Accounting for environmental expenditures within the SEEA framework is considered to be an Important area for statistical development and research, in order to assess the level and impact of governmental policies and programs in the field of environment. 4.2 BaaneSheetUs gbleAets Changes in produced capital assets are recorded in conventional accounts as capital formation and depreciation as far as they are brought about by economic production. Other changes due to natural disasters, accidents, discovery of natural resources and price fluctuation have traditionally been accounted for in *reconciliation accounts" of balance sheets.v However, few countries have established full balance sheets that present the total value of tangible assets at the beginning and end of the accounting period. The increased interest in the assessment of national wealth, reflected for example in the current revision of the SNA, and the realization that such wealth includes non-produced environmental assets are the reasons for incorporating full I The annual average exchange rate for 1990 was: 1.00 Kina = US$1.05. Between 1986 and 1989 the kina fluctuated between US$1.03 and $1.16. W The revised version of the SNA (United Nations 1990) will replace the reconciliation accounts with two items, 'other volume changes' and "revaluation.* - 11 - balance sheets of produced and non-produced natural (environmental) assets in SEEA as shown in Table 13. For PNG, full balance sheets were roughly estimated for produced assets and for non- produced sub-soil assets. It appears that other non-produced natural assets have not yet reached a level of non-sustainable exploitation, Le. actual depletion beyond natural capacities of regeneration or replenishment While being included in SEEA in principle-in physical terms (by means of resource accounts)-they are assigned a zero (economic) value in monetary balance sheets. IF 4.2.1 Produced Assets Based on an industrial survey, data on fixed assets and stocks were available for a limited number of enterprises in 1986. Total and sectoral gross output data had therefore to be used for estimating total and sectoral values of produced assets. lime series were calculated by allowing for (net) capital formation over time, using national accounts statistics of net investment and changes in stocks. Also incorporated was independent information on the average annual damage from Voods roughly estimated at 1.1 mo Kina. Revaluation was estimated for each year, based on the World Bank price index for fixed investment (World Bank 1990a), in order to obtain the values of Lhe closing stocks. ly Due to iosurmountable problems of estimating the total monetary value of "environmental" assets, e.g. of ecological capacities of waste absorption, biodiversity or habitat, no full balance sheets are established for these assets in SEEA; only changes in the environmental quality are estimated, allocated to causing agents and mirrored in capital accumulation accounts as described in section Z above. - 12- Tab.. ..B..... 195 1985 19i99: 19 Fixed Assets: Opening Stocka 1,048.4 1,367.7 1,707.5 2,085.1 2,746.9 3,480.7 Investments 446.8 539.2 551.2 737.0 790.7 830.7 Depreciation 216.6 241.5 262.0 279.2 315.5 342.8 - Other Volume -1.1 -1.1 -1.1 -1.1 -1.1 -1.1 Changes Revaluation 90.3 43.2 89.5 205.1 259.8 320.4 aosing Stocks 1,367.7 1,707.5 2,085.1 2,746.9 3,480.7 4,287.9 Stocks:_ Opening Stocka 837.6 935.0 927.0 1,004.3 1,221.4 1,230.2 Changes in Stock 33.8 -31.5 34.1 125.5 -83.4 -25.0 Other Volume 0.0 0.0 0.0 0.0 0.0 0.0 Changes Revaluation 63.6 23.5 43.2 91.6 92.2 97.6) Closing Stocks 935.0 927.0 1,004.3 1,221.4 130.2 1,302.8 a) The inflation rate for 1989 and 1990 has been assumed constant and identical to the one of 198& 4.2.2 Subsoil Assets The quarterly reports of the Department of Minerals and Energy include physical resource balances for almost all major mines and minerals separately. The problem of caculating balance sheets is one of valuation and aggregation. Ideally, the discounted value of the net profits from the (total anticipated) sales of the mineral would refect the current value of the mineral stock. Under certain conditions, the "net price" of the mineral (see section 5.13), multiplied with the total quantity of the stock, equals this value of total current stock. However, in practice only net revenues and average life expectancy per mine are avalable. In Table 5, these two variables have therefore been chosen to determine an opening value for the - 13- stocks of minerals for each year. The details of the calculation of depletion allowances are explained in section 5. Other volume changes relate to new discoveries (including upward revisions) or downwards revisions of the proven reserves. Again, the revised average life expectancy and the net profits were taken to estimate the value of new discoveries. The remaining difference between the stocks (in market values) at the beginning and end of the accounting period is then explained by price fluctuations that, as the table illustrates, are relatively strong in the case of minerals exploited in PNG. stb 5: Balance Sheets For Subsoil Mst ________________ (mio Khnat 1986 1987 1989 1990 Opening Stocks 1,750.0 2,648.7 3,683.7 1,584.4 -154.7 Depletion -126.8 -209.7 -106.3 -25.2 -180.7 Other Volume Changes 9.0 122.8 175.6 -383.3 0.0 Revaluation 1,016.5 1,121.9 -2,168.6 1,330.6 n.a. Closing Stocks 2,648.7 3,683.7 1,584.4 -154.7 n.a. a) Note that much caution should be applied when using these numbers. They reflect various assumptions, and they do not consider the intermediate stages from initial prospecting until the reserves are "proven." If all the leases for minerals prospecting and developing were auctioned off yearly, the incremental values would reflect additions to the capital stock. b) The negative value is not considered an accurate representation of the value of mineral reserves in PNG by the technical specialists working on the country. This illustrates the great difficulties in producing quantitative estimates. Table 5 presents the balance sheets for subsoil (mineral) assets. For the years 1986-88, discoveries, included under other volume changes, contributed to an increase in the value of the mineral stock. The cessation of activities in the Bougainville mine in 1989 led to a negative adjustment of the extractable (and extracted) mineral assets. A slump in mineral prices resulted in negative net prices in the same year.A Under the above-mentioned assumptions (see also section 5.1.3), the (negative) net price reflects the expectations about the profitability of the mines, Le. expectations about cost and price developments. WY To avoid large annual fluctuations, a longterm average price could be used. In the view of sector specialists, a longterm average price should be used. - 14- S. DEPLETION OF NATURAL RESOURCES In many economic activities, scarce natural resources are used as an input, without being recorded in the traditional accounting framework. With the extension of the asset boundary in integrated economic-environmental accounting to include certain types of "natural capital", the net depletion (beyond regeneration or replenishment) of these natural assets has to be registered both, in the asset balances, as well as in the economic flow accounts. The deduction of these "economic" depletion costs of both produced and natural resource capital obtains the "first-step" indicators of adjusted net value added, NVA1 and, as its sum total, EDP1. For PNG, these calculations are presented in Section 7. A distinction is made between renewable resources such as fish stocks and timber on one hand and non-renewable resources like subsoil assets on the other hand. The relevance of this distinction is also addressed below. 5.1 Non-renewable Resources Two different approaches have mainly been proposed for the incorporation of the depletion of (non-renewable) resources as a cost into the production accounts. El Serafy (1989) proposes a "user-cost" approach, distinguishing a "true" (i.e. sustainable) income component of the sales revenues of the minerals from a capital component which is to be deducted from the gross production value as user cost. Repetto et aL (1989), on the other hand, have applied a "depreciation" approach. Gross value added is not affected by this method, allowing for the consumption and increase of natural capital in analogy to produced capital consumption and formation, thus obtaining a further modified (in a4dition to the depreciation of produced fixed assets) net value added of the mining activity. In the following, both methods are discussed and compared as to their relevance in the case study, after a brief review of the structure of the mining sector in Papua New Guinea. 5.1.1 Mintg in PNG The mining sector of PNG plays a prominent role in the country's development strategy. In 1990, the sector contributed over 12% of the country's GDP and provided over 60 percent of the total export revenues. Furthermore, mining has generally been a significant source of government revenues in the form of taxes, royalties and dividends from shareholdings. Small-scale mining has generally been of limited importance. During the period of analysis (1985-1990) over 95 percent of the national mineral production originated from the following five mines: Bougainville copper and gold mine: PNG's first major mine which started operations in 1972, is located on the island of Bougainville; by 1988, output had increased to the point where it contributed some 35% of the country's export earnings. However, in early 1989 the mine closed- down, owing to a violent dispute with local landowners that became linked to a secessionist movement in the North Solomons Province, which includes Bougainville Island. There are no immediate prospects for a re-opening of the mine. Ok Tedi told and copper mine: this mine is located in the Star Mountains of Western Province close to the border to Indonesia. It began production of gold in 1984 and of copper in 1987. With an expected lifetime of 25 years it became, after the temporary closure of the Bougainville mine, PNO's main mining project, accounting for 46.8 percent of the export income in 1990. - 15 - Misima gold and silver.mine: the mine is located on the small Island of Misima. It began production in June 1989 and holds an estimated 77 tons of gold and 1125 tons of silver reserves. Mount Victor old mine: the Mount Victor gold mine started mining activities in 1987 and depleted the reserves of approximately 1 ton of gold within three years. Wau gold and silver mine: this field had been active since the 1920s; new open pit activities started in 1986 based on an estimated life span of 8 years. In 1988, however, the reserves originally estimated at 8 tons of gold had to be revised down drastically. This led finally to the closure of the mine in 1990 after the extraction of a total of approximately 3.2 tons of gold and 3.8 tons of silver. Pomera0 l mi: the mine began operating in September 1990. It is expected to produce about 28 tons of gold each year for an expected life span of about 25 to 30 years. For the present analysis, its production figures have not yet been taken into account. Five other major projects are under development. These are: the Uhir gold project (estimated reserves: 585 tons of gold, expected life time: 26-38 years), the Kutubu oil projectl (reserves: 169.8 million barrels, expected start of production: July 1992, expected daily production: 80,000 - 100,000 barrels), the Mt. Kare gold project (estimated reserves: 15 tons, estimated life span 3-4 years), the Hides gas project (estimated reserves: 2.9 trillion cubic feet), and the Hidden Valley gold project (estimated reserves: 77 tons of gold and 1140 tons of silver to be extracted within a 10 year period). There are also several potential mines in an advanced stage of exploration. These include the Lakeamu gold prospect, the Tabar gold prospect, the Urait gold prospect in East New Britain, the Tolukuma gold prospect in Central Province, the Wafi and Hamata gold prospects in Morobe, the Agogo and Usano oil fields in Southern Highlands Province, and the Pandora gas field offshore in the Gulf of Papua. Additionally, prospecting activities by various firms have been approved by government in about 200 locations.1 ly This oil production project (which will start up in July 1992) may well become the single most important event for the PNG economy in the 1990. It will have significant balance of payments impacts and provide tax revenues as indicated in the latest Country Economic Report (World Bank, 1992, Table 5.2). IN Mining Review of January 1991, published in the Post-Courier, January 17, 1991. - 16- 5.12 User-cost Valuation of Exhaustible Resoures For the depletion of exhaustible resources a "user-cost" valuation has been proposed. The idea Is to convert a time-bound stream of (net) revenues from the sales of an exhaustible natural resource into a permanent income stream by investing a part of the revenues (i.e. the "user-cost allowance") over the lifetime of the resource. Only the remaining amount of the revenues should be considered "true income" (El Serafy 1989). Given a particular net revenue for an accounting period, the calculation of the user-cost allowance is straightforward, requiring only two additional parameters, the discount rate (r) and the lifespan (n).A For each mine there exist estimates of its life, based on the knowledge of proven reserves and an average extraction activity. In PNG, if the lifetime was not explicitly available, the ratio of reserves over average yearly extraction rates was used as an estimate. The discount factor was chosen at 10%. The financial statements of the different companies are confidential in nature. Therefore, neither sales revenues nor extraction costs mine by mine (let alone mineral by mineral) were available in PNG. The annual reports of the Bougainville minew provided some information on the cost structure, indicating net earnings before taxation. In order to calculate a normal return, percentages ranging between 8.8% and 11.4% (IMF 1990) were applied to the total shareholders' funds. For missing years, profitability per unit produced was calculated for the nearest available year and applied to the respective total annual production. For other mines, cost structure information from the national statistical office was available, which could be used to estimate total profits. The results of the user-cost analysis are presented in Table 6. In the year 1985, for instance, the capital owners of the mines would have had to make depletion allowances of 8.8 mio Kina, which would reduce the value added of the mining sector by 3.7 percentage points and the overall GDP by 0.4 percentage points. Over the 6-year period, these percentage points ranged between 2.6 and 9.5 for the adjustment of value added, and 0.3 and 1.4 for GDP. The factors that account for the fluctuation of the user-cost adjustment over the years are (apart from price changes) new discoveries and changes in the relative importance of the mines. For existing mines, discoveries extend their expected lifespan. Consequently, the amount that has to be retained for the development of alternative income sources decreases. This phenomenon is responsible for the reduction in the user cost in 1988 as opposed to 1987, as the two major mines Bougainville and Ok Tedi revised upwards the estimates of their total reserves. Another factor that determines the fluctuations of the user costs in PNG is the distribution of income generated among the major mines: during 1989, the Bougainville mine as the then biggest mine ceased production. This did not only decrease its relative size: the sector is now "dominated" by the Ok F If R are the annual net revenues from the sales of the resource, assumed to be constant over its lifetime (of n years), a "true income" element X can be calculated such that R - X represents a scapital" element whose accumulated investment at an interest rate r during the n years would create a permanent stream of income of X (per annum). X is calculated as X = R [1 - 1/(1 +r)']. . Bougainville Copper Limited, Annual Reports 1986 and 1987. - 17- Tedi mine which has a relatively lower depletion allowance of about 15%, given its expected long lifespan of over 20 years. Table 6s UserCo st Anab(y is j (do It se) 1.985 1986 1987 1988 1 1990 User Cost &8 16.2 39.6 24.5 9.2 35.8 Value Added (VA), Mining Sector 239.2 329.8 490.0 609.5 352.7 377.9 Adjusted VA 230.4 313.6 450.4 585.0 343.5 342.1 Adjusted VAfrraditional VA 96.3 95.1 91.9 96.0 97.4 90.5 Traditional GDP 2,423.9 2,555.0 2,831.1 3,140.9 3,013.7 3,103.1 Adjusted GDP 2,415.1 2,538.8 2,791.5 3,116.4 3,004.5 3,067.3 Adjusted GDPITraditional 99.6 99.4 98.6 99.2 99.7 98.8 GDP (%)I I I II a) Note that these estimates should be used with caution, keeping in mind the assumptions made. 5.13 Depreciation and Appreciation of Natural Capital A decrease in produced capital is recorded in the SNA as either a decrease in stocks (for purpose of intermediate consumption or final demand) or depreciation in the case of foreseeable wear and tear (capital consumption) of fixed assets. Increase in capital is accounted for correspondingly as increase in stocks or fixed capital formation. Changes in the quantity or quality of natural capital can exhibit characteristics of all these transactions. For example, soil and land degradation appears to be more in the nature of depreciation of a fixed or permanent asset, while mineral depletion reflects a reduction in nature's stocks of materials. Natural processes of capital formation take place, eg. in cases of growth of renewable resources. In principle, any changes of stocks or permanent assets through depletion or degradation should reflect the change in the economic value, i.e. income-generating power, during the accounting period. Estimates of these economic values have to be based on the discounted future income generated by the use of assets in production. It can be shown that under certain conditions (of perfect competition and optimizing behavior), the *not price" (market price minus all factor costs including a nrmal return to capital) reflects the (discounted) future income - 18 - generation capability and has therefore been applied in the studies of the World Resources Institute (Repetto et al. 1989, p.19). In the present study, the net-price method has been used to estimate an "environmental depletion cost"--a term that is neutral as to the nature of the depleted/degraded natural resource and could thus be deducted either from gross production as intermediate consumption to obtain gross value added or from gross value added as depreciation to obtain net value added.V There are two alternatives of dealing with increases in mineral reserves. On one hand, discoveries, extensions and upgrades of ores could be recorded as (own-account) capital accumulation, thus affecting net domestic product. On the other hand, such capital increases have generally been accounted for outside the production accounts (use/value added accounts of Table 1.2) under "other volume changes" in the baLce sheets (see Table 13). The latter approach has been chosen (at least for the time being) by the SEEA and in PNG. The reason for excluding discoveries from the production accounts is that the increase in natural capital is not the result of economic production, and accounting for its "discovery" as economic production would open up the economic system to non-economic processes of natural growth and accumulation (as well as destructive natural events). As a consequence, well-defined economic processes would be overshadowed by erratic natural fluctuations and events. Table 7 shows that, after deduction of the depletion allowance, the (adjusted) value added of the mining sector ranges from about 50% to 90% of the original values. As a consequence, total net domestic product is reduced by approximately 1% and 9% respectively. The annual depletion rate of natural capital (of mineral resources), compared to the depreciation of produced capital, is significant: in 1987, for example, the inclusion of natural capital almost doubles the total depreciation. Clearly, this conveys a different picture of overall capital/investment efficiencies in the mining sector as compared to one conveyed e.g. by conventional capital-output ratios. The large differences in the adjustments between the years are mainly a result of the strong price fluctuations of the minerals in the world markets to which PNG caters: for example, from 1987 to 1988, the average gold price per ounce dropped by almot 50%. At that point in time, PNG was still highly dependent on its gold production, since one of the biggest mines (Ok Tedi) only started copper production im that year. From 1988 to 1989 the gold prices recovered; however, the copper prices fell by roughly one third. Furthermore, the most profitable mine, Bougainville, stopped production in 1989, which accounts for the relatively low rent in that year. With gold and copper prices high, and a lower value added volume of the whole mining sector, the not price adjustment reached a record high in 1990. & It should be noted that the net-price method is only applicable, where there is an actual market price for the output generated by the use of a natural asset in production. The degradation of "environmental assets,' Le. of environmental quality and corresponding losses of non-arketed environmental services (as reflected in EDP 2), is described in section 6, below. _ 19- .TAI 7x Net-P. alsdt Ikpban Csts and Discowrles .TiOal 19 1 )89 1990 Depletion Cost 74.1 126.8 209.7 106.3 25.2 180.7 Value Added, Mining Sector 239.2 329.8 490.0 609.5 352.7 377.9 Adjusted Value Added 165.1 203.0 280.3 503.2 327.5 197.2 Adjusted Value Added/ 69.0 61.6 57.2 82.6 92.9 52.2 Traditional Value Added (%) Traditicnal GDP 2423.9 2,555.0 2,831.1 3,140.9 3,013.7 3,103.1 Depreciation of 216.6 241.5 262.0 279.2 315.5 342.8 Produced Capital Traditional NDP 2,207.3 2,313.6 2,569.1 2,861.7 2698.2 2,760.3 Adjusted NDP 2,133.2 2,196.8 2,359.4 2,755.4 2,673.0 2,579.6 Adjusted 96.6 94.5 91.8 96.3 99.1 93.5 NDPfI'raditional NDP (%) Discoveries' ).a. 9.0 122.8 175.6 -383.34 0.0 a) When using these numbers and interpreting themv, the assumptions made should be kept in mind. b) Adjusted for depletion of mineral resources only, which happens to cover all natural mource depletion in PNG and thus equals EDP1 (see section 7). c) Including upward revisions; in line with SEBA, discoveries are not reflected in adjusted value added calculations (see test). d) Negative adjustment due to mine closure (see section 422). -20- .1A Comparison of Results and Methodologies Table 8 compares the calculations of user costs with those of the depreciation allowances (including appreciation for discovery and upward revision). With one exception, the user cost is considerably lower (ranging between 12% and 46% of the depreciation allowance). This is not surprising, considering that the user-cost method would split up the net return from sales (equalling the depreciation amount without appreciation) into a true income and a user cost element. In 1988, when appreciation exceeds depreciation, the two approaches clearly diverge, since the user cost approach would consider discoveries only as extensions of the life time of the resource that would still require a (reduced) user-cost allowance, while a negative depreciation would be recorded in the depreciation approach. Of course, in the SEEA and in its PNG application, no such appreciation appears in the production accounts because discoveries are recorded as other volume changes in the balance sheets (see Table 7 and Annex 5). The significance of the modifications applied to value added differs considerably, suggesting a quite different role of natural capital in the sustainability of production vs. income. It is therefore worthwhile to examine the commonalities and differences in the meaning and interpretation of the two valuations. Both methods accept and set out from the general principle that the current value of capital in production is determined by its discounted value of net returns, Le. anticipated income generated from capital use. It can be shown that the user-cost method is a special case of defining depreciation as the change in the discounted value of an exhaustible (mineral) resource, e.g. over a year of exploitation, assuming that the yearly net returns are constant every year of the life of the resource (Hartwick and Hageman 1991). Similarly, it is argued that "the economic depreciation due to the loss of a natural resource is . equal to the present value of all the benefits provided by that resource." In turn, this value (per unit of the resource) is considered equal under perfect market conditions to the net price as defined above (World Resources Institute 1991 and Repetto et al. 1989). The assumptions behind this argument are not fully clear, though it appears that the net-price method neglects future discounted net returns from the remaining (after exploitation during the accounting period) resource as capital gains that should not affect the depreciation allowance of the accounting period.O F Depreciation is generally defined as the change in value of a capital asset during two points in time (t and t+1) where current capital value represents the total of the discounted net rent (net revenue) from capital use: V-V,. = Rt - [r/(1+r)]V,., [where V = value of capital asset, R = net rent and r = discount rate] (Hartwick and Hageman 1991). The net-price method assumes that the discounted value of net revenues from the period t+1 onward, Le. the corrective (negative) item in the above definitory equation of depreciation, can be neglected. In this case, R represents indeed the change in value of the asset due to its exploitation between time t and t+1. The different assumptions behind the user-cost and net-price methods are formally analyzed and compared in Annex 4. -21- Whale S Compariso of User Cost and DUe atha of Mineral Resources (mto Kina) 1985~ 1986 1987 j1988 .1989 1990 (1) User Cost 8.8 16.2 39.6 24.5 9.2 35.8 (2) Net Depreciationb) 74.1 117.8 86.9 -693 25.2 180.7 (1)/(2). 100 11.9 13.8 45.6 -35.4 36.5 19.8 User Cost/Value Added (%) 3.7 4.9 8.1 4.0 2.6 9.5 Depreciation/Value Added (%) 31.0 35.7 17.7 -11.4 7.1 47.8 a) This table combines information from tables 6 and 7; the limitations of the latter should be kept in mind. b) Including appreciation through discoveries for comparative purposes (except for 1985 and 1989: see discoveries in Table 7). There is obviously a need to further discuss and clarify the assumptions of the two methods which attempt to simplify the general depreciation rule presented in footnote 14.A It should be noted that one, possibly unintended, advantage of the net-price method is that, in doing away with future net returns, the valuation of resource depletion is very close to the common accounting practice for withdrawals from stocks of produced commodities. In this manner, the net price method can be seen as an application of stock accounting to a natural exhaustible resource that, by providing material inputs into production, is more of an inventory than a fixed asset. 5.2 Re_newabk Resources The natural resource that best characterizes Papua New Guinea is its forests. Its abundance is striking. about 75% of the total area of Papua New Guinea is covered by forests, a large part of which is barely accessible. The forest industry is relatively small. In 1988 its value added represented 4.1% of the total GDP. Almost the entire production is exported, mainly to Japan. In the same year, the timber logs were the forth largest (after copper, gold, and coffee) source of foreign earnings and accounted for about 7.7% of the total export value. Fish stocks are another renewable resource available for potential exploitation in PNG, an island country with rich fishing grounds. However, to date, the role of the fishing sector is negligible, given its 0.3% contribution (in 1988) to the national product. Again, this market production is mainly destined for foreign consumption. The export of baramundi, prawns, crayfish 2 It would clearly be valuable to undertake a longterm analysis in a country with good data availability. -22- and tuna does not exceed 1% of the export earnings. To this market activity, a certain proportion of the non-market (subsistence) component of GDP, which is estimated for this year at 13.1%, will have to be added in order to reflect more accurately the significance of the fishing activity in PNO. In Papua New Guinea, there are very few estimates of the stocks of natural resources. For instance, no estimates of the fish stocks are available. Special investigations like the Skipjack Tuna Assessment Program, were mainly concerned with defining maximum levels of permitted extraction that do not violate the sustainability of the catch. For all major fish categories, the presently observed levels of catch lie significantly below the estimated sustainable yields. This led to the conclusion that, at this stage, the exclusion of the natural asset "fish stock" from the economic flow analysis, and a zero adjustment of the economic aggregates of capital accumulation and domestic product, are justified. More data on the total balances and the changes therein are available for the forests as a consequence of national and international monitoring activities under the Tropical Forestry Action Plan (TFAP) and the International Tropical Timber Organization (ITO). However, at present, these data reveal significant contradictions and other weaknesses, but had to be used to assess the necessity of making allowances for the quantitative depletion or qualitative degradation of the forests. Activities under the TFAP are expected to produce more reliable information in the future. 5.2.1 Physical Balances Table 9 shows the total area of forest land and its breakdown over the years 1980 to 1990. The total forest land has been classified into two subcategories. On one hand, there are the forests that have a potential economic use for logging activities. On the other hand, there are those forests that are not classified as productive, either because they lie in non-accessible (for logging operations) mountain areas or because of their timber quality (low density and/or low quality of timber species). - The areas of these categories are assumed to be constant over time. Within the category of potential economic use, the area logged over is increasing from 235,000 ha in 1980-to 440,000 ha in 1985 and 745,"00 ha in 1990. This reflects an average annual growth of logged over areas of 41,000 ha in the first five years and 61,000 ha towards the end of the decade. Further deforestation of "non-productive" forests that may impair environmental uses of forests and forest habitat is described and assessed in section 6. Production data of the forest industry are usually available in volume rather than in area terms. For the purpose of valuation, it is hence necessary to convert the resource balances from hectares into cubic meters. It is problematic to use just a simple conversion factor of cubic meter timber per hectare forest. Because of the large variety of forests such a conversion must be considered an over-simplification. However, discussions with experts and study of a variety of documents provided the following insights: the standing volume of timber in PNG is estimated at an average of 100 - 130 U'/ha. This would yield a total volume of about 1,800 million mn for the entire productive forest area. As only trees with a minimum diameter of 20 cm are considered as utilizable for commercial harvesting, and because of the restrictive felling techniques which are officially prescribed, the estimates for the average per hectare yield of logging range from 15 to 30 i. This is consistent with a recent estimate for the National Forest Plan of the total .23- merchantable volume of 269.6 million m', which would correspond to an average yield of 18 m' timber per hectare logged. * Tab~J d F~~ OfYo 9s SOIC T AL SURFACE PNG 46,886 46,886 46,886 TOTAL FOREST LAND 36,420 36,420 36,420 Potential Economic Use 15,000 15,000 15,000 Virgin 14,765 14,560 14,255 Logged Over 235 440 745 Environmental Use (non-timber forests) 21,420 21,420 21,420 Shifting Agriculture 106 162 210 Shrubs 85 85 85 Forest Plantation 23 30 42 Natural Forest 21,206 21,143 21,083 a) Assuming sustainable use, which leaves the total *productive forest lands unaffected. Source: Department of Forestry. Table 10 shows DOF estimates of the sustainable cut of timber based on an assumed regeneration cycle of 76 years. However, there are considerable uncertainties about the Iength of the regeneration cycie, the present level of cut and the sustainable level of cut. It has been pointed out that the current cut level indicated in Table 10 is severely underestimated (Saule, 1990), while the TFAP report suggested that the sustainable cut level had already been exceeded at the time of the 1988 mission. In addition to uncertainties about total annual and sustainable cut for the whole country, non-sustainable cut at local levels poses a further problem. This problem could be neglected only If local depletion is compensated at no cost (of transportation, reallocation of equipment, resettlement, migration, etc.) by regeneration in other areas. However, lack of local-level information prevented the assessment of such compensation costs in the present study. -24- Total timber resources 269.6 Permitted annual cut level 3.6 Sustainable annual cut level High estimate ) 6.7 LOw estimate b) 3.6 Estimated current cut (1989) 2.5 a) Source: Department of Forestry: National Forest Plan and Country Report of Forestry. This figure is being widely considered as too high; its use here should in no way be seen as endorsing it b) Source: Papua New Guinea-Te Forestry Sector-A Tropical Forestry Action Plan Review, World Bank February 1, 1990. Note that data in this sector are very weak but studies are underway which are expected to produce much better figures. Note also that the TFAP has suggested that the sustainable cut level is already being exceeded. A second phenomenon, reflected in Table 9, is the permanent loss of forest through land clearing for shifting agriculture. The area covered by shifting agriculture increased from 106,000 ha in 1980 to 210,000 ha in 1990. There has consequently been a not deforestation over the decade of about 10,000 ha per annum. The data gave no evidence of a significant deforestation caused by other socio-economic activities. The present analysis concentrates therefore on assessing the impacts of logging activities and shifting cultivation on forest lands. 52.2 Valuation Prlaciples Economic and ecological functions and values of the forest are distinguished and treated * separately in the present study. The economic value is derived from the timber content of a particular forest area. The ecological value is based on its ecological functions as habitat and other environmental (including social and spiritual) values fsee below, section 6.2). In this section, the economic value of forests as *timber is discussed. As in the case of mineral extraction, a depletion allowance has to be calculated if there is actual depletion of the resource, Le. if exploitation exceeds regeneration (regrowth and afforestation). Local settings are known where there clearly is depletion of forestry resources in PNG. To what extent exploitation exceeds regeneration at the national level is uncertain until more reliable data is available. Given the lack of reliable information, no depletion allowance was .25- calculated the forestry sector. However, when the improved data is available, such calculations should be made. One could calculate a net price for timber. Such a rent could provide the basis for government to determine the level of taxes and royalties. This is not only a way of generating income, but may also serve the purpose of preventing an increase in forest exploitation beyond sustainable cut levelsA Applying a user-cost allowance in this case would mean that the "true income" level would approach net revenue, since the number of years becomes infinite under truly sustained forest exploitation. - 6. NVIRONMENTAL QUALITY DEGRADATION As pointed out in section 2.2, environmental quality degradation is costed in SEEA at its potential restoration or avoidance costs. Those costs refer to the immediate physical impacts from economic production (and consumption, reallocated to production via the final demand adjustment row see Table 1.2). Such impacts are mainly discharges of (waste) residuals but may also include other environmental quality effects such as soil erosion from improper agricultural or construction practices. Further "damage costs" of losses of environmental functions or consequential health and welfare effects are not allocated to causing agents in the SEEA but are reflected to some extent in separately identified "defensive expenditures," required for dealing with these effects. This approach is recommended because of (a) difficulties in defining the defensive portion of general expenditure categories; (b) the absence of markets of environmental welfare effects for a monetary valuation according to the preferences of the affected people; and (c) problems of tracing back overall welfare effects to their multivariate sources. In PNG, a different approach to assessing certain environmental effects has been taken because of the unique nature of compensation negotiations in the country. Such negotiations can indeed be viewed as a market for welfare effects of environmental impacts in a particular area.-I As a consequence, the scope of environmental effects costed in the present study differs from the coverage recommend in the SEEA. The following estimates of environmental quality degradation, based on the compensation approach, should therefore be seen as more experimental, especially in view of inconsistencies of this valuation with other environmental impacts valued at restoration cost. The further deduction of these costs from value added (EVA1) and EDP1 (already adjusted for depletion of natural resources) yields the "second-step-and more controversial-indicators of EVA2 and EDP2 (see sections 2.2 and 7). At any rate, the underlying qualitative and quantitative (physical) "counterpart' data, presented in the following, have their own information value in showing a more synthetic picture of the nation's state of the environment. & Such charges represent an application of the 'user-pays-principle" by using economic disincentives for discouraging natural resource depletion (Bartelmus, in prep). The SEEA therefore makes provisions for identifying separately such environmental charges. W Off-site effects, however, may not be covered and there are other issues (e.g. limited knowledge of the actual implications of an activity such as commercial logging). .26- 6.1 Revew of Envronmental Conditinsasad-Valuation Table 11 is a synoptic assessment of environmental impacts in the co; mtry by causing agent, Le. economic sector or natural events. Primary production of agriculture, forestry and mining can be held responsible for the main impacts on fresh and marine waters, forests, and related ecosystems. Soil erosion is caused predominantly through natural processes with some contribution from clear-felling of forests and agriculture. Lsses of cultural heritage have resulted in particular from hydropower development, timber harvesting, and agricultural and mining activities. Such losses are experienced in particular when local environments are affected (such as burial sites, healing springs, spirit places and sacred grounds of ancestral origin). The data base for impacts on environmental quality from soil loss/erosion and residuals of economic activities is weak in PNG. There is no independent nation-wide monitoring of emissions or ambient concentrations of pollutants, nor of the contamination of biota and humans. Information on environmental effects is thus either of a descriptive nature or produced as part of an "environmental plan* or impact assessment for selected projects such as logging, hydropower development or mineral exploration. Typically, such assessments are carried out by, or on behalf of the corporation seeking to exploit the natural resource. In a few cases, more independent assessments could be obtained from research conducted by the University of PNG, scientific institutes or international surveys. The situation is similar in the case of soil loss through erosion where only selected local or provincial surveys have been carried out in the country. One obvious conclusion from the data search in this study is thus the need for more comprehensive monitoring and data collection - not only for environmental accounting but also for environmental management. Valuation of environmental degradation in the SEEA is based on the principles of potential damage restoration or avoidance by estimating the cost of these potential actions. Where full restoration or avoida4ce is technically not feasible or prohibitively expensive, the costs of complying with governmental or "expertocratic standards (taking technologically and economically feasible solutions into account) could be taken as minimum values of actual damage incurred. It has been pointed out, however, that the application of *Western! standards to the environmental situation in PNG might be too costly to maintain or may not be appropriate if for example, the environment is more polluted "naturally" (e.g. from natural sedimentation) than by effluents discharged into environmental media (Hicks and Mowbray, in prep.). -27- ater Fresh marine Biota/ m Habitats Othier Cultura lalues Rest of the Word'& a) Import/~prts of ~miale o No signifca iat Some (potentiay signicant) impacts SConiderablem 9 As an alternative, customary land ownership, in combination with traditional compensation requests for "wrongful deeds", have created a unique negotiation process in the field of natural resource exploitation in PNG. Almost all land and water and related natural resources are owned by tribal groups or clans (Waim 1990). Moreover, tribal grouping seems to dominate the national political structure, and central powers are therefore relatively weak. As a consequence, "small but vociferous communities" possess strong bargaining power in negotiations for compensation of land use losses (Viner 1984, p. 342). Since local communities shoulder most of the burden of environmental impacts and direct commercial benefits are accrued by means of direct remuneration of services or payments of royalties, additional compensations typically reflect environmental or environment-related social, cultural or even moral (Senge 1991) value losses in connection with resource exploitation. Negotiation for such compensation can be seen as a simulation of market valuation through direct bargaining for non-marketed environmental quality losses. A detailed description for such losses has been given in connection with a major hydropower project (see below, section 6.2.4). 6.2 Assessment of Sectoral Imacts 4.2.1 Agriculture Currently, only about seven percent of PNGs land is being cultivated, 97% of which is under traditional land tenure (EIU 1986, p. 12). Environmental impacts from agricultural wastes and residuals can therefore be assumed to be local and temporary. In the absence of systematic monitoring of agricultural pollution, there are only verbal reports about waste from oil palm, copra, cocoa and sugar processing and treatment plants, causing local contamination of coastal and fresh waters (Hicks and Mowbray, in prep.) No valuation of these relatively limited effects is attempted in this study. The main environmental impacts of agriculture stem from the effects of forest clearing for cultivation (see section 5.2). Non-economic, ecological and related social and spiritual values of forests are lost through this conversion of forest land into cultivated areas. Threats to the survival of forest species-among them the tallest trees, the largest butterflies and rare ferns and orchids (World Bank 1990, pp.1I2)-, soil loss, impairment of watershed regulation and nutrient cycles, and increasing risk and intensity of flooding and landslides are the main environmental consequences of the depletion of PNO's forests. The valuation of these environmental losses is based on two alternative estimates of forest depletion through shifting cultivation. The first estimate, using information obtained from the PNG Department of Forestry (presented in section 5.2) assumes an annual conversion rate of 11,200 ha for 1981-1985 and 9,600 ha for 1986-1990 at a growing stock rate of 120 U/ha. The second estimate (Saulei 1990, p380) of an annual conversion of 200,000 ha assumes that most of this conversion took place in already logged-over areas where growing stock had been reduced by commercial harvesting (at a rate of 35 m/ha) to 85 m%/ha. The valuation of losses of ecological functions of forests by conversion to shifting cultivation is at 7 K/m. This rate is the compensation (to be) paid to landowners deprived of traditional uses of the forests by logging activities (Source: Department of Forestry). .29- As a result of these alternative estimates in conversion rates two degradation estimates are obtained for the two five-year periods 1981-85 and 1986-90. The low estimates are 9.408 mio Kina (1981-85) and &064 mio Kina (1986-90) per annum. The high estimate is 119 mio Kina per annum for the whole 1981-90 period. This amounted to 1.2% vs. 18.0% of agricultural net value added or 0.3% vs. 4.4% of NDP (see Table 13). Such variation clearly illustrates the need for further work not only in the area of monetary accounting but also the underlying measurement of physical stocks and flows. 6.2.2 Forestry Similar to agricultural activities, the major environmental impacts of logging activities are losses of ecological and cultural functions of the forest resource through its exploitation. By contrast, and following provisions of obligatory "environmental plans" for sustainable cut, only selective cutting of tree species with a minimum diameter of 20 cm is permitted. Thus, forests are not clear-cut, but are in principle allowed to regenerate over a lengthy period of time (oral communication of the Department of Forestry). Regrowth is estimated to take about 20 years in the case of low-intensity harvesting (Woodlark Island Development Corporation 1990, p. vii), 25 to 30 years for fast growing and 50-70 years for slow growing tree species (Saulei 1990, pp. 380,381). Impacts from erosion seem to be negligible, since logging operations maintain enough forest and vegetation cover, thus contributing only marginally to natural erosion rates (see below, section 6.2.5). However, little is known of the general ecology of PNG's forests, Le. their biodiversity, structure, growth, and their phenological and regeneration patterns. Considering their long regeneration period, it can be assumed that, once logged over, forests do not regain their ecological composition and ecological quality. If logging operations are resumed after regrowth of desired species, the forest is effectively prevented from attaining its original (climax) condition. This seems to be the case for most of the logged-over area of PNG, estimated at some 2.3 mio ha (over the last 40 years) (Saulei 1990, p.380). As already indicated in section 6.2.1, compensation for losses of social, cultural and ecological values has been established through negotiation with logging companies. In principle such compensation would be reflected in the cost accounts of these companies and consequently in conventional national accounts. However, there is some doubt about the actual disbursement (to landowners) and use (e.g. for forest management). For instance, the first major forestry scheme in PNG, the Gogol project in Madang province has been considered to be a disaster for the local population, since "few of the expected benefits from employment, financial compensation for loss of land and resources, and reforestation and agricultural schemes have eventuated" (Hughes and Sullivan 1989, p.41). According to figures obtained from the Department of Forestry, about 40,000 ha have been logged over during 1981-1985 and 60,000 ha during 1986-1990. Applying a commercial harvest rate of 35 m/a and a 7 K (compensation) plus 2 K (forest management levy) rate (oral communication by the Department of Forestry) to these areas, obtains an "actual" environmental cost of 12.6 mio K p.a. (1981-85) and 18.9 mio K p.a. (1986-90), already accounted for "in principl" Even if these values are correctly accounted for in conventional accounts, they reflect only "private costs and values of the negotiating partners. In PNG, there seems to be, however, an .30- argument for accounting the cost and value of the forest resource for society as "social* costs or values. The value added generated in forest sector activities, modifid by actual compensation , Le. private environmental costs, could be taken as a rough estimate of social costs of o in a conservationist approach. This approach would yield costs of about 45 mio K p.a. for 1981 and 61 mIO. K p.a. for 1986-90 (estimates provided by the National Statistical Office). On the other hand, the Tropical Forestry Action Plan for PNG, cautioned against the adoption of trade protection measures and suggested the adoption of allowable cut targets (World Bank 1990, pp. ix, 57). Revenue forgone through the implementation of these targets is estimated at between 10 and 20 million K p.a. based on planned (rather than actual) extraction. Both approaches reflect an avoidance cost valuation for the estimation of the social costs of losses of environmental functions from logging. Depending on the degree of social values assigned to the environment, Le. the conservationist view vs. a compromise of focusing on sustainability, these costs range thus between 10 and 45 mio. K p.a. for 1981-85 and between 10 and 61 mio K p.a. for 1986-90. 6.2.3 MIing Table 12 brings to;ether data on environmental impacts of mining from a variety of sources, including project information, monitoring and research, carried out by national and international organizations. The major impacts stem from the Bougainville (copper) and the Ok Tedi (gold and copper) mines, both of which were largely exempt from environmental regulation (see "remarks* in the table). The main environmental effects are caused by the discharge of mine tailings which, through ambient concentrations of heavy metals, have Impaired and in various instances destroyed auatic life in fresh and marine water. According to oral communication from the Department of Minerals and Energy, other impacts on forests and land, in the vicinity of the mining sites, affect only a relatively small local area compared to the remaining vast untouched land area in PNO. The same source also maintains that sedimentation effects from hard and soft rock disposal are limited, adding only marginally to the large naturally occurring erosion and corresponding sedimentation of rivers and coastal areas. Regarding possible long-term effects of the discharge of mine tailings, the government has essentially three choices: (a) to close the mines, (b) to limit environmental damage by cunstructing tailings storage and treatment facilities and (c) to allow unrestricted dumping of waste, hoping that damage will not be too severe (Hughes and Sullivan 1989, pp. 40, 41). -31 - - - _______________ __________ J dl i i~ I. 1 15 II -*2 The first option which, as in the case of logging, could be labeled as the conservationist position would have serious implications for the economic development of PNG. In general, the decision to leave mineral resources, i.e. part of the national wealth, untouched appears to be prodigal and not viable for countries embarking on economic development. Nevertheless, this extrtme environmentalist view can be assessed by an upper limit value of value added foregone by non-mining of proven reserves. This value is about 211 mio K p.a. for 1983-1985 and 432 mio K p.a. for 1986-1990 (estimates of the National Statistical Office). The other more realistic scenario is based on the avoidance cost of environmental damage. These cost have been obtained from environmental plans for the three main operational mines of Bougainville, Ok Tedi and Misima. Costs range from 35.7 mio K p.a. (based on capital and operational costs of constructing tailings dams and/or detoxifying wastes and hauling waste to safer dumping grounds or the ocean) to 101.2 mio K p.a. if an earthquake-proof solution is applied (source: Department of Minerals and Energy). The conservationist scenario amounts to about 14.7% of NDP (average values 1986-1990), while avoidance costs are 1.3% or 3.8% (for the earthquake-proof approach) of NDP (see Table 13). 6.2.4 Energy Apart from suspected losses of mangrove habitat from mangrove cutting for firewood (Hicks and Mowbray, in prep.), the major environmental impacts from energy production have resulted or are expected to result from the current Yonki hydropower development project in the Arona valley. This project will supply about 50% of PNG's hydropower, with 45 % being supplied by the Sirinumu dam on the Sogeri Plateau. According to an official of the Electricity Commission (Elcom), the Sorgeri Plant and the other small-scale back-up plants have not caused significant environmental disruption. However, since the time of land purchase, by the Government (in 1970/71), required for the Yonki project, and since the beginning of dam construction (accomplished in January 1991), considerable environmental impacts, including those of a more social and cultural nature, have occurred (Waim 1990). Further impacts are expected from the flooding of the Yonki valley, in particular through the displacement of spirits residing in the river system, and the loss of healing springs, sites of ancestral and personal origin and burial places (ibid.). A negotiation process for compensation is currently taking place between landowners and Elcom. In early 1991, the Government rejected the landowners claim for 3 mio K compensation, offering in retura a benefits package of K 900,000 (Bunpalau 1991). An independent "draft! proposal for the benefit package to the Arona valley residents suggests an amount of 1.2 mio K for compensation for environmental effects of the (past) construction phase and the imminent flooding of the valley (Waim 1990). Taking this amount as a possible compromise and assuming that the extent oi environmental impacts is about equally distributed over the construction/displacement phase and the flooding period, K 600,000 could be allocated to the period 1971-1989 and the same amount to the period of flooding the valley. The relatively small annual allocation for the 19-year period of about K 3Z000 as compared to full cost accounting for the flooding effects (possibly K 600,000 in 1991) demonstrates the usefulness of keeping account of environmental effects continuously in order to spread the burden of environmental management over time. Alternatively, delaying such management until environmental effects have accumulated to a degree that social protest forces the action may be costly and destabilizing as evidenced by the closure of the Bougainville mine. - 33 - 4.2.5 Natural Events A wide variety of natural events and processes exert considerable environmental impacts in PNG. The effects of these events, which, depending on their intensity and location, may become disasters, are recorded as "other volume changes" in SEEA. They do not, therefore, affect the environmentally adjusted indicators of value added or income, but may produce significant changes in the balance sheets of natural and produced assets. Since PNG lies within a zone of strong earthquake and volcanic activity, changes in land mass such as the creation of new islands are quite common (Brodie et al. 1990, p, 27). Impacts on the marine environment include fish kills, caused by pollution from volcanic activity, and damage to the coral reef and other disturbance of the marine habitat from seismic activity and tsunamis. No systematic assessment of these effects is available, however (Hicks and Mowbray, in prep.). Similarly, no overall assessment has been made of the ecological effects of erosion which in PNG is predominantly caused by natural factors, in particular rainsplash/surface wash and mass movement (Humphreys 1984, pp.60 et seq.). It is generally maintained that effects of sedimentation on freshwater and marine habitats are localized and temporary in nature. As far as soil productivity of cultivated or cultivable land is concerned, a case study of soil erosion in the erosion-prone Chimbu province came to the conclusion that the average erosion rate of 11 tons per ha per annum should be considered as 'slight" or 'moderate' according to FAO standards (ibid 1984, p.84). Considering that such moderate erosion applies to nearly 70% of cultivated land or land in various stages of regrowth after cultivation, some effects on agricultural productivity can be expected from soil loss through erosion. However, these effects should be quite limited, since only about 20% of such erosion-prone land is used with moderate to high intensity (Bellamy 1986). Consequently, productivity losses from soil loss in PNG are not accounted for in the present study. On the other hand, potential future increases of erosion from increases in land use intensity present an argument for initiating systematic monitoring of erosion and soil loss. One consequence of having to cope with sedimentation loads has been the recurrent migraticn of the alignment of the Bumbu river, frequently increased dramatically by flooding. The largest flood in twenty years occurred in 1983; other major floods occurred in 1973, 1977, 1979, 1980, and 1986 (Snowy Mountains Engineering Corporation, undated). The losses and repair work undertaken in the context of the 1983 flood have been estimated at K 600,000. For the other floods, land and building losses, together with annual repair work, can be assumed to be in the order of K 200,0009. Again, such costs do not affect the key aggregates of value added, product or income, since they are recorded as 'other volume changes" in produced assets of the SEEA balance sheets. Expenditures to remedy this situation, estimated at a total of 5.7 mio K over the 1989/90 - 1993/94 period for a 'priority work program' (ibid., p. 79), are a good example for potential "defensive' expenditures. Such expenditures would raise national product as public capital formation though they serve only to prevent further damAge from natural forces. The prorated annual amount of 1.14 mo K has been recorded in Annex 5 under other volume changes as produced capital depletion. V As predicted for subsequent floods in the case that no mitigative action is undertaken (ibid., p.67). .-34 - 6.2.6 Other Environmental Effects As illustrated in Table 11, other more limited (locally or temporarily) or potentially significant environmental impacts from economic production, household, municipal or foreign activities have been observed in PNG. While these impacts seem to be of comparatively low weight in a national assessment of environmental quality, they carry the potential for costly future environmental degradation - especially in view of mounting demographic, urban and industrialization pressures. Careful monitoring of these effects, even in their incipient stages, is essential for anticipatory environmental and socio-economic policies. For this reason, a brief summary review of these impacts from different economic sectors is given in the followingP, even if they are not reflected quantitatively in the environmental accounts of PNG. However, in the accounts for 1989, in Annex 5, selected, potentially significant effects are earmarked by an asterisk. (a) Fishrie. Kills of fish in streams by dumping DDT and lindane for fishing purposes have been observed in PNG (Brodie et al. 1990, p. 28). In addition, widespread fish dynamiting has damaged considerable areas of coral reefs. As indicated in Table 11, destruction of local marine and freshwater ("other") ecosystems might have resulted from these -ctivities. (b) Marine transport. Despite regulations forbidding waste dumping in harbors, this rule is frequently flouted in PNG. Reef damage has also been reported as a result of channel blasting through the reef. (c) Manufacturing. With progress in establishing further industries for secondary processing of natural resources more industrial pollution can be expected in PNG. To date, however, there is very limited heavy industry activity in PNG, except for mining, the emissions of which were assessed above in section 6.2.3. At present there is almost no disposal of industrial waste in the country. Localized coastal pollution has occurred from effluents of canning and bottling plants and soap manufacturing. (d) Municipalities and households. Faecal contamination of coastal waters has resulted from outfalls that are typically too short to keep effluents off the shore. Contaminated water use might thus present a health hazard. In fact, gastrointestinal and helminthic infections are of a high incidence, especially in children. Infrequent outbreaks of cholera and typhoid fever have also occurred in PNG. Waste dumping by households in coastal areas has reduced the recreational value of beaches around villages and townships. (e) Rest of the world. Concern has been expressed about the effects of mine tailings disposal in PNG on the Australian Great Barrier Reef and the Torres Strait As shown in Table 11 such effects can be seen as impacts from mining in PNG on the "rest of the world". On the other hand, the widely publicized attempt of U.S. companies to sell toxic waste to PNG should be recorded - in case these sales are effected - as an impact from the rest of the world on PNG. This is not indicated in Based largely on Hicks and Mowbray, in prep. - 35- Table 11, because to date no final decision has been reached on this matter (Hill et al. 1990). .2.7 Summary Table 13 provides an overview of the range of estimates made for the environmental impacts of four primary production sectors in PNO. As indicated in the footnotes of the table and elaborated above, different valuation methods were applied, based on available information and according to different standards applied in evaluating environmental impacts. In addition to inconsistencies due to this mix of valuation procedures, the eWtimates of physical environmental impacts at the national level had to be based on numerous assumptions whose validity requires further testing; better still, those assumptions should be replaced by information from more systematic monitoring and surveys. Keeping in mind these caveats, Table 13 suggests that physical environmental impacts in the country can possibly obtain a significant value in monetary accounting analysis--both relative to the level of economic activity that causes the impacts, as well as to overall national product. 1981-85 1986-91 % of NVA) % of NDP) c) c) c) c) Agriculture) 9.4 119.0 &1 119.0 1.2 18.0 03 4.4 Forest& 10.0 45.0 10.0 61.0 6.4 39.3 0.4 2.3 m m35.7 101.2 35.7 101.2 15.5 44.0 1.3 3.8 Ene 0.03 0.03 0.3 0.03 0.1 0.1 0.0 0.0 Total 55.1 265.2 53.8 281.2 5.0 25.9 2.0 10.4 a) Note that these values should be interpreted very cautiously. They contain many underlying assumptions which should be kept in mind. Comparisons between sectors should be done even more cautiously given the different valuation methods. b) 1986-90 average cost (if not available: 1980-90 average) over 1989 net value added (NVA) of the respective sector or NDP (source: Annex 5). c). Upper-range estimates. d) Compensation values. e) Avoidance cost values. -36- Sections 4, 5, 6 above reflect a step-by-step approach to the implementations of the SEBA as recommended by the Special Conference of the International Association for Research in Income and Wealth (IARIW) (Baden, Austria, 27-29 May 1991). The first step consisted of adapting the national accounts framework in PNG to the structure of the SEEA in order to identify environmental expenditures and to incorporate balance sheets of produced and non-produced (natural) tangible assets. However, lack of data prevented the separate presentation of environmental protection expenditures for any of the economic agents in PNG. The lack of environmental expenditure data is thus one of the major lacunae of environmental data bases in PNG. Similarly, the absence of physical resources accounts, with the notable exception of mineral resources, made the estimation of scarcities in other renewable and non-renewable resources a fairly tentative effort. The monetary valuation of these scarcities was attempted in the second step. Comparing two different proposals for calculating depletion costs of the use of scarce natural resources led to the conclusion that both methods are a simplification of the theoretically correct assessment of the change in the economic value, i.e. income-generating power of (natural) capital employed during the accounting period. Such simplification is justified, considering the difficulties of correctly anticipating net returns of future capital use. However, the validity of applying simplified methods depends on the assumptions made and their validity in concrete country situations. More research would be required to determine which situation prevails in PNG and to what extent the application of either method distorts the actual losses of economic value of natural resource capital in the country. In the present study, only net-priced estimates of depletion costs were deducted from net value added of the mining sector and thus NDP in order to obtain estimates of Environmentally adjusted net Value Added (EVAI) of the sector and Environmentally adjusted net Domestic Product (EDPI) of the P=nomy. As indicated above in section 5.1.4, the net-price method follows more closely the actual changes in the inventory of an exhaustible natural resource, for which physical resource accounts had been established in PNG; it is thus more closely related to changes in production/extraction intensity than the income-based user-cost calculation. From this point of view, user costs might be the appropriate modification for calculating an Environmentally adjusted National Income (ENI). In order to distinguish the relatively straightforward measurement and interpretation of the economic value of tangible (natural) assets used in production from the more controversial assessment of environmental services, the latter was implemented in a separate further step. Different valuation procedures were applied to a relatively weak data base on physical environmental impacts. While shedding some light on the nature of those impacts in PNG (including their socio-cultural effects) and on their place in environmental accountin& the information produced in this step is thus quite experimental in nature. Nonetheless, further adjusted indicators of EVA2 and EDP2, allowing for additional costs of environmental degradation, have been calculated and included in the tabulations of Annex 5. 1.1 Review of Results Table 14 summarizes the results of the country study, presented for the whole system in Annex 5. For 1989 (as the most recent year with complete information), a more detailed table is -37 - included in the Annex, showing sectoral value added and (environmental) costs. The methods applied in the environmental cost estimates have been described above. Only the lower values of alternative estimates are included in Annex 5 and Table 14, with the exception of net-price based values of depletion that are generally higher than user cost allowances. The reason for this presentation is discussed above in section 5.1.4. As can be seen from the table, EDP1 reduces NDP by amounts ranging between 1% and 8%, and EDP2 between 3% and 10%. Of coure, the short time period covered does not permit any conclusion about trends in the costs of environmental depletion and degradation. The move from EDP1 to EDP2 calculations, i.e. the additional accounting for environmental quality degradation, reduces NDP on an average by a further 2.1% (calculated as EDP1-EDP2 as percentage of NDP and considering only the low range of environmental impact values). As already discussed in detail in the preceding sections, the mining sector is a depleting activity, causing an 11% reduction of net value added in 1989. However, as several recent CEMs indicate, the minerals sector has made a very significant contribution to PNGs economic development and in particular to fiscal revenues and the balance of payments. Depletion of minerals, particularly in a country with a high probability of significant additional discoveries of reserves, should therefore not necessarily be seen as something negative but as a natural part of the sector whose business is about finding something and then depleting it. Finally, the comparison of the ratios of final consumption over NDP and EDP2, respectively, shows that consumption exceeded net (environmentally adjusted) domestic production in most yearsA H It has been pointed out (memorandum by H. Kharas, World Bank) that one should not conclude from this that the people of PNG are living off their capital base. For example, to take the case of inflation accounting for external debt, PNG has a ratio about 75% disbursed and outstanding debt (DOD)/GNP. The capital gain from erosion of this debt in real terms is about 4% of GNP. If one takes a very broad concept of capital, a significant adjustment to "income" would have to be made which would reverse any conclusions on apparent non-sustainability of consumption in every year except 1990 (in earlier years, inflation was higher and the PNG debt ratios were higher). -38- 1986 1987 1988Total 1990 NDP 2,313.6 2,569.2 2,861.6 662.6 154.9 229.9 2,6981 2,760.2 EDP 1 2,186.8 2,359.5 2,755.3 662.6 154.9 204.7 2,672.9 2,579.5 EDP 2 2,132.9 2,305.6 2,701.6 654.6 144.9 169.0 2,619.2 2,525.7 N-DP-EDP2 o 7.8 103 5.6 1.2 6.5 26.5 2.9 8.5 NDP NDP-EDP1 lo 5.5 8.2 3.7 0.0 0.0 11.0 0.9 6.5 NDP - to 97.1 94.6 89.2 99.1 99.8 NDP C to 105.4 105.5 94.5 102.1 109.1 EDP2 a) Given the many underlying assumptionst to be made, the values presented here s oud be interpreted and used with considerable caution. Source: Annex 5. 7.2 Coclusions As indicated in the Introduction, the objective of the country study was less to provide an accurate measurement of the social (environmental) costs of development than to assess the feasibility of integrated environmental and economic accounting in a country with limited financial (but abundant natural) resources. The authors believe that their work, carried out within narrow constraints of time and human and financial resources but with the cooperation of experts in many governmental and non-governmental organizations, demonstrated the feasibility but also the difficulties and limitation of such accounting in PNG. Considerably more research is required regarding the actual use of modified accounts and accounting indicators in macro-economic and sectoral planning and policies. In this sense, the present study reflects only the first stage in more comprehensive programs of integrated accounting and policy analysis. The study also revealed many significant data gaps which had to be bridged by numerous assumptions and rough estimates. One useful result of the present study would be to provide some guidance on priorities for environmental data colection. Such data programs might include: (a) the establishment of natural resource accounts and balance sheets in the areas of forests, soils, sub-soil assets of minerals, gas and oil, and fish stocks, supported by more comprehensive land use statistics; (b) nation-wide monitoring of the effluents and loadinga of water pollutants from agriculture, mining, industry and municipalities; -39- (c) monitoring of (changes In) biodiversity, focusing on unique species in the country; and (d) development of statistics of environmental (protection) expenditures by government (at all regional levels), industry and households. An improved physical data base would not only provide better accounting indicators but would permit more rational decisions in the management of natural resources and would also provide early-warning signals on potentially hazardous impacts, notably in those areas that were earmarked with an asterisk in Anne% 5. It is hoped that this first pioneering study, together with a parallel project in Mexico, will provide insights to others who are considering similar projects, regarding the practical difficulties involved in undertaking integrated environmental and economic accounting. Already, the experience gained in this effort led to numerous re-assessments and reformulations of concepts and methods originally proposed in the (draft) SEEA; they will be fully incorporated in the planned United Nations Handbook on Integrated Environmental and Economic Accounts. In particular, the study revealed the need for further discussion and testing of the different valuation methods used in the assessment of environmental depletion and degradation costs. It appears now, that mounting interest in these new methodologies as a tool of effective integration of environmental and economic objectives will prompt the international community to put the further development and application of integrated accounting on the Agenda for the Twenty-First Century of the forthcoming United Nations Conference on Environment and Development (UNCED). The present study should therefore also be seen as a substantive contribution to UNCED, indicating both limits and opportunities in the use of environmental accounting for sustainable development. W At the international level, concepts and methods of environment statistics have been proposed in order to assist the development of national programs and to facilitate international data collection (United Nations 1988 and 1991). . 40- RF 1RENCES Ahmad, YJ., El Serafy, S., and Lutz, E. (1989): EnviMnMOtal Accounting for Sustainable Dopq mfnt. The World Bank, Washington, D.C., 1989. Alfsen, K H., Bye, T. and Lorentsen, L (1987): Natural Resource Accounting and Analysis. The Norweplan Experience. 1978-1986. Central Bureau of Statistics of Norway, Oslo, 1987. Bartelmus, P., Stahmer, C. and van Tongeren, J. (1991): "Integrated Environmental and Economic Accounting: Framework for a SNA Satellite System," The Review of Income and Wealth. ser. 37(2), pp. 111-148. Bartelmus, P., (in prep.); "Accounting for Sustainable Growth and Development." Stuctural Dnmic Bellamy, J.A. (1986): PNG Inventory of National Resources, Population Distribution and Land Use, CSIRO (Australia). Brodie, J.E. et. al (1990): State of the marine environment in the South Paciflc Re&fon. UNEP Regional Seas Reports and Studies No. 127, prepared in Co-operation with SPREP, FAO and IOC.- UNEP. Bunpalau, W. (1991): K 3m compensation for Arona land is rejected. Post-Courier (PNG) January 28. Currey, NA. (in prep.): Review of Heavy Metal Concentrations in the Marine Environment of the South Pacific, University of Technology, Lae. El Serafy, S., "The Proper Calculation of Income from Depletable Natural Resources". In Ahmad, El Serafy and Lutz (1989), pp. 10-18. EIU The Economist Intelligence Unit 1986-87 (1986): Country Profile, Pap,a New Opinea London: The Economist Publications Ltd. Hartwick, J.M. and Hageman, A.P. (1991): "Economic Depreciation of Mineral Stocks und the Contribution of El Serafy," Divisional Working Paper No. 27, The World Bank, November 1991. Hicks, J.H. and Mowbray, D.L (in prep.): Review of the State of the Marine Environment of . Papua New Guinea and the Solomon Islands, University of Papua New Guinea. Hill, L, Kaluwin, C., Griffin, F. and Hicks J. (1990): Toxic Waste in Papua New Guinea. ]mg Mine 13 December. Hughes, P. and Sullivan, M. (1989): Environmental Impacts Assessment in Papua New Guinea: Lessons for the Wider Region. Pacific V i n 30 (1), 34-55. Humphreys, G.S. (1984): The Environment and Soils of Chimbu Province, Papua New Guinea. with Particular Reference to Soil Erosion. Research Bulletin no. 35, Port Moresby, Department of Primary Industry. -41 - Institut National de la Statistique et des Etudes Economiques (1986): LWs Comotes Satellites de l'EnvLon t. Mthodes at RI Collections d I'INSEE Ser. C 130, Paris: INSEE Institut National de la Statistique et des Etudes Economiques (1986a): Le Comptes du Patrimoine Nles collections do INSEE, Ser. C. 137/138, INSEE, Paris, 1986. International Monetary Fund (IMF) (1990). International Financial Statistic. Vol. XLII Leipert, C. (1989): *National Income and Economic Growth, The Conceptual Side of Defensive Expenditures, L al of EconomicIues. voL 23 (3), pp. 843-856. Pernetta, J.C. (1988): Ptentia ImpacI of minin k the River. UNEP Regional Seas Reports and Studies No. 99, prepared in co-operation with SPC, SPEC and ESCAP. UNEP. Peskin, I.L with Lutz, E. (1990): A Survey of Resource and Environmental Accounting in Industrialied Countris Environment Working Paper No. 37, The World Bank, Washington, D.C. Placer (P.N.G.) Pty. Ltd. (1987): Misima Project, Environmental Plan, Vol. B: Main Report, CR 206/5, February. Repetto, R., W. Magrath, M. Wells, C. Beer and F. Rossini (1989): Wasting Assets. Natural Resources in the National Income Aont World Resources Institute. Saulei, S.M (1990): Forest Research and Development in Papua New Guinea. Abjo VoL 19 No. 8, 379-382. Senge, F. (1991): Compensation bids for damaged morale too hard to swallow. Post-Courier (PNG), January 19, 1991, 11. Snowy Mountains Engineering Corporation Ltd. (undated): Papua New Guinea, Lae Flood Mitigation Study, Final Report (prepared for the Australian International Development Assistance Bureau). United Nations (1968): A Ssm of NinlA un Ser. F, No. Z Rev. 3. United Nations, New York United Nations (1977): Provisional Internationatuidelines on the National and Sectoral Balance-Sheet and Reconciliation Accounts of the System of Ntional Acount United Nations, New York. United Nations (1988): Cne" od Methods o r StalI : Human Settlements Statistis - A Technical Reort. Ser. F, No. 51. United Nations, New York. United Nations (1990): Revised System of National Accounts, Preliminary Draft Chapters. Provisional. Future ST/ESA/STAT/SER.FfLMRev.4. United Nations, New York. United Nations (1991): Concepts and Methods of !!nvionment Statistiks: Statistics of the Natural Ser. F, No. 57. United Nations, New York. Viner, A. B. (1984): Environmental Protection in Papua New Guinea. Aggjg, Vol 13 no 5-6, 342-344. .42- Waim, J.Y. (1990): Environmental Impact Assessment of Yonki Hydropower Scheme and Proposed Benefit Package to Affected Residents of the Arona Valley, draft report, 21 May 1990. Woodlark Island Development Corporation (1990) Envonmental Plan for Timber Harting on Woodlark Island August. World Bank (1990): Papua New Guinea, The Forestry Sector A Tropical Forestry Action Plan Review, February 1. World Bank (1990a): World Tables 1989/90 Edition. The Johns Hopkins University Press, Baltimore and London. World Bank (1991): Papua New Guinea: Structural Adjustment, Growth and Human Resource Development, May 1, 1991. * World Bank (1992): Papua New Guinea: Competitiveness, Growth and Structural Adjustment, 8 Report No. 10319-PNG, March 31, 1992. World Commission on Environment and Development, Our Common Future, Oxford University Press, Oxford and New York, 1987. World Resources Institute (1991): "Accounts Overdue: Natural Resource Depreciation in Costa Rica," Washington, D.C. -43- ANNEX 1 Page 1 of 2 List of Pemons and Institutlons Consulted Department of Environment and Conservation Mr. Iamo Ba Secretary Mr. John Douglas AS, Water Conservation and Planning Mrs. Onike Kimui AS, Environment Planning and Assessment Mr. John Duguman Senior Environment Planner National Statistical Office Mr. Nick Suvalu Acting Head Mr. Philip Lichtwark Assistant National Statistician Mr. Kila Geberi Chief Economic Accounts Mr. Michael Andrews Statistician Office the Prime Minister Mr. Paul Barker Economic Advisor Department of Minerals and Enery Mr. Charles Brown FAS, Policy and Coordinator Mr. Michael Kennedy Policy and Coordination Department of Agriculture and Livestock Mr. B. M. Wayi Chief Land Use Officer Mr. Mikka Andrew Systems Specialist Department of Forestry Ms. Ruth Turia Assistant Secretary Mr. Alan Ross Assistant Secretary Mr. Michael Yagro Reforestation Officer Mr. Prem Srivastava Chief Research Officer Mr. Bernard Cuyno AS, Resource Branch Mr. Goodwill Amos Senior Management Officer Department of Finance and Planning Ms. Fu Williame Assistant Director, OIDA Mr. Gerald Mmayubu Principal Programs Officer, OIDA Mr. Raymond Kamanabi a/FAS EAD .44- . ь '�' е � у в � � � • � ��� �а�'�'��' . г� t� r� � r� r� � ё� ,� � � ►е д г� b �,� � ��-. �b� . � � . � �'� х b � � � �' �� � � � м �, � � � `� � � � �b � � ' • � �' � . � � �' `� �� � � w ~ А � м � � � � � � � N �'в1 и А►NNEa� 2; Мар of Рариа Nвw Guinea W' в1' � У V � � � ' 1 м, н л: � ' PAAUA NEW бU1ИВА т...»....«�.���...в i � ( i � � �еi�н : и . ♦ ! Г в м о i �� Г i ' � Г�...1в ^ [. иwwвr +им ! i � ; • лн+ � ьиr � �,Ч 1.♦. •. е: i:в• е ам W г / 1 1 rYO УМ�вМУМ � , ` , вв�/ � е.е� r f! в Г � �~`"��� � -«�.а ww.� < �- Г , `~ � , .в..w......и�.� �.�вве�АWмП11 и 1 / ��У..�...�r�ми i 111111 .j : l�, i t ..i М.и�J�. � w в в в ье в• Z � �� ~ � ♦ f \•�` � . � t е� ц..�.�., ♦ � j � ��� О 1.. " ! �� и•�,на f wfat мвw 1t�t вгм `� i.���«� ; z ---'� 1 ;"""'� � ' ~-� � ги , '�. Q� о i � � � ♦� � ЯN+в < � •�� . в� � / � iв .w�i � �"��♦ , � ! 1 N У � { ♦ Г � ` t, � I • 1� '`J l Г � � �� � %/♦ 7С j �"`' �° f 1 i t.sr иги� егГr„и i '�i < � �у;г иогОf♦ { i , .i � �! � РйМ � � ``,� КМ J `�♦ 1 1 1 /' А 1 ( � I' p�W I i l•, м `\ � j S Oj I О в� О в S• О � � �•�� •b' �� i� ' � � �fet w � �ь.r ..���� ...�....� � { � � ...www 1 � 1 Qd/! 0/ Ч • Г и f г н � � ( / ( } j PaOro � � 1 � ( (' �eАΡ�r' J-� 1 � �� � �.l�у мiiнl 1,r р�а с ' ! ' С ,,�..... �� а v к в `� � �0 10 с• а n 1 V..J • и.аw i с tигвеt i � ' в. � � � +cs.... � � �в в1Мв�1 � � I ' � вввввв� вв� й 1 � .ь,.... J � Се,о: iSse � ::.. а I вв+�вг 1 � �.�.rw.тwыв.вlы.ы .г�.�в�вь�.�. �.в.�.ви.ывв.�вi ��irвв �j�/ 4�_вв , �__ � в.-.вь ... ' � � � ЧГ д М И/ в• м � � • � • Seleeted Data - Papua New Guinea 441,7W 64 b;" 8.6 911,114" (Itu) 7.6 per *q kø (1964) popøl4t146 ~ W~PlutISE m* LI" C~ r~ (pop &,« 37.0 pøøø341kløft 964» øk"14149 C~ f~ (~ le~ U.G p*#016414" pose boogitat b2 Ufe h~ *oy Ma øl~ 6%.0 bi~ Cl~ M-Sel &IMIV*t4^1 on R4~ w -id-- ao u le to POP C&PI*A topøly *fl "14 Ilte"" ro40 calael*m (P« day) 2,146 pr;~#7 0~ 1 *"Polt (19*s 44 pro"Ing per der) 40 enrot 1~% (ms) (%) 4.4 CW Pep C994* to Ilse: W14196 *Pøle* O~ Ic ppedvet In 1969 AfingeI ROL øf -4r9~ M. 1981 gel"* I -66 1967,89 3.24e994 667.3 26.1 -3.3 16.7 Gro** fist1,4*81 =.6 14.4 Cormmt sceemat hal~ -34%.7 -10.4 aspe~ *f 994de" ?WS 1,647.4 44.7 uffr" Labep popo*, MV& P*"* 111m114 Alplevltum 111n.111 35.6 1.29 24.9 radm~y V.l. 0.06 3.6 17.7 54p¥;,Cm 31.3 *.V U.4 ST.,$ tot& l 1M.4 1.90 Um.* 194.3 1,00.0 4=m~.22.~ 44m@ mmøb ni" x -øf ", aft -gi' ýnø. cup~ *mm; an U.L 29.9 -29.4 cur~4 CAP~Ituro, 162 in 31.0 V.? 23.4 curmm% supolge OG 90 O.l. 2.2 3.0 C6pital capomliture 97 in 2.8 -37 -19 ja Most Irecent estimte, Soulme: Worid Bank (1989) -47- ANNEX 4 Page 1 of 4 Comparison of the "User-Cost" and the "Net-Price" Methods of Accounting for the Use of Natural Resources ' "In principle, the value of subsoil assets ... is determined by the discounted, or present, value of the expected net profits resulting from the commercial exploitation of those assets, although such valuations are subject to great uncertainty and liable to considerable revision" (United Nations 1990). Based on the above definition the value of a mineral resource can be expressed for 0 two consecutive time periods t and t+1 as: Vt = Rt + [1/(1+i)]*R,., + [1/(1+i)J*R,+2 + ... + [1/(1+i)")*Rt.a, Vt*I = RIO + [1/(1 +i)]*R,2 + [1/(1+i)I]*R,+3 + ... + [1/(1+i)"]*Rt where V, = Value of the natural resource in year t R, = Expected net rent (net revenue) in year t I - Rate of interest n = Remaining life of the mine (after year t) By rearranging the above equations V, can be expressed as follows: Vt = Rt + [1/(1+i)]*Vt,1 that is R, plus the discounted value of Vt.,. From this follows that the change in value from year t to year t+1 is a result of two opposite movements. On one hand, there is a decrease in value in the amount of R due to the fact that the future earning capacity in year t+1 does not contain any more the earning which was available in year t On the other hand, there is an increase in value because one year's discount factor [1/(1+i)] "disappear" in year t+1. The value [1/(1+i)]*V+, in year t increases to (1+i)*[1/(1+i)]*V,+, (that is V,., in year t+1). As a result, Vt+I- Vt = [(1+i)/(1+i)]*V,l - {R, + [1/(1+i)]*V,.1 = = -Rt + li/(1+i)]*Vtl The interpretation of the positive element [fl(1 +i)]*V, is straightforward: it is the expected return on the invested capital. I This note was prepared by A Tardos in collaboration with P. Bartelmus of the Statistical Office of the United Nations. -48- ANNE4 Page 2 of 4 Applying the generic definition of the depreciation of fxed assets as the change in value (i.e. income generating capacity from year t to year t+1) to the deposit of a mineral asset and assuming that the expectation of future earning flows has not been modified during the accounting period, the economic depreciation of the mineral resource can be defined as the difference V,., - V, derived above. An example of the application of this approach is the *user-cost* method recommended by El Serafy (1989). Originally, this method did not define economic depreciation but can be interpreted as such (Hartwick and Hageman 1991). Under the assumption that the future annual earnings and extracted quantities of the mine will equal the amounts of the present year, the values of the mineral resource in years t and t+1 can be defined as: V, = R + [1/(1+i)]*R + [1/(1+i)I*R + ... + [1/(1+i)]*R V,, = R + [1I/(1+i)]*R + [1/(1+i)I*R + ... + [1/(1+1*]*R where R = Expected net rent (net profit) in each year Economic depreciation is then obtained as V,, . V, = -[1/(1+i)j*R It has also been recommended to treat mineral resources as stocks. In this case, the increase of the value of the reserve due to the decreasing discount factor (as time passes by) and relative price changes should be reflected only in the revaluation accounts of balance sheets, and the total value of the R, should be accounted as the cost of production. One application of this approach is the "net-price! method by Repetto (1989), who recommends treating the net rent Rt as a cost of production. His reasoning is derived from the assumption that the rent per unit of quantity extracted and sold increases annually by the rate of interest due to the increasing scarcity of the resource (World Resources Institute 1991, p. 18 and footnote 13). The increasing revenue from the sale of one unit neutralizes the effect of the discount factor. As a consequence, the value of the miner' resource can be expressed as follows: According to this assumption: Pt+e - pt(1+i) where p, = rent per unit of quantity in year t. .49- ANNEX 4 Page 3 of 4 The general equation V, = R, + [1/(1+)]*R,. + [1/(1 +i)I*R,.2 + ... + [1/(1+i)]*R,.. can therefore be reformulated as V1 Q*p1 + [1/(1 +i)]*QO,1,p,(1 +i) + [1/(1 +f)1*Q,,*p(1+i)2 +.. + [1/(1+1)j*Q. +*pp(1 +1) + or VS = ( + Q,1 + Qt.2 + ... + Ot.)P. = Q * p, where = Extracted resource in year t = Total quantity of the mineral resource in year t. As a result of the above assumption, the change in value of the mineral resource stock is Vl - V = (O-QJpt(1+i) - Opv Assuming that the price increase from p, to p,(1+i) should be accounted as -revaluation" in the balance sheets, the cost of production in resource exploitation is indeed: Vg+t-Vj = (0-0).t - Opt = - Qtpt = - Re To present the differences among the two approaches and to clarify some common misunderstanding around the El Serafy Ouser-cost! and the Repetto -net-price' methods, the effect of the fixed asset and the stock approaches on the cost of production and revaluation are compared under "El Serafy" and "Repetto circumstances in Tables II and M below. Table L Value and cost of mineral resources General approach Fixed asset approach Stock approach VI Z [1/(1+i)k*R,., E [1/(1+i)1*R,,k ha@ kee V,,, ..z .4 E[1/(1 +i)*R,,z.E [1/(1 +f)1*R,l, V . -V4. , - [I/(1+i)1*V,, R, - [il(1+i1]V,, Cost of R, - [l/(1+i)]*V,,R production__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Revaluatfon 0 [il(1 +i) *V'I - 50 - ANNEXA Page 4 of 4 Table IL Value and cost of mineral resources "User cost" method!) Fixed asset approach Stock approach Vt i Vt E [1/(1+i)JR E[1/(1+i)1*R k-0 kn1f/(1 +i)k]*R [1(+iI* V, - Vti [1/(1+i)fJ*R 1/(1+i)*R Cost of [1/(1+i)"]*R R production Revaluation 0 {[(1+i)a-11(1+i)"}*R a) The annual earning and extracted quantity of the mine in . fture are assumed to equal those of the present year. Table IL Value and cost of mineral resources "Net-price" methods) Fxed asset approach Stock approach V. Q*p, *p, V_________ (Q-Q,) * P,(1+i) (Q-Q,) *p,(1+i) Y . - V.2 Q4-i(1+i)110-Q)p ... Q*Ppi(1 +i)1(Q-Q0,_ Cost of Q*p[i/(1 +i)](Q- pt Q * pt = Rt production Revaluation 0 [l(1+i)1(O-Opp a) The net rent/unit of quantity increases annually by the rate of interest due to the increasing scarcity of the resource. -5S1- 于勝 6 F1 V1 9 . &. &t 介． 댜 · 糾 。 � а!ь@ � � ��� �К�q � I ���IC�� ��� I9�9S'а�Э%Sя°�IyI�I � �+�� � � �S� ��I}.. .. g �ё �ё � I IIiI � I IaI 1�I� �� �� I� (3 I I I� I' I (�I IaI� 9 I� I� I 1 1? I! 1 1?1 1�I� `� � а Ig 1а I j 1 1l�1! 1 1�1 1а1� �� ' � 1� 1� 1 � I I3;I' I I�I IsI�.. '. � I� (� I ���'t � 1 11�1! 1 1�1 1'1а �' '�� 1R 1� 1 ��,��j 1 1� 1! 1 1s1 1д1а ���� �� т 1г 1f 1 �.��� � i: i� i� i i�i isi� .. '.. i� ij i £1 : 1I1!1 1ё1191.��Я' !1�1f1 � � Э ���! � ��� �i�g Э д Э" S �� �� � :@ � tË1 � �Э) �!� � � � � ь I� @ а 61lI � ! _�i �� 1�I�Я�Id'�дВ il�� ��й Бi Э� 誹―華論釁莖．馴童輩―叫 __-_―盔二―_―亡雙亡―_―主竺＿_-_―豐― ―二巨巫巨盔．匹憂•二二二二匹曰l匹呂召― 二匹盔日呂日蘊襼，一竺坐竺匹呂二匹匹．二二二二二二一一不．二二―二二二二二二匹巨巨 ?!.!!!! ―匹〕〕―二二亟―盛―二二二〕〕 ―二召日二巫．匹亟！二二二二匹必．匹盔呂― l’兀二二二誠鱸．細不二．--;-－兀一不不嬴一不不‘-&&&. аг �� ��г� �� ��''дrq�гtlгi� �8 i1 г i� W kд .; F' ;!Б` i�� �g �� � ' b � � I I I..__._... IEI IEI I I I �е � f I а� �I g,.,:�,k..3 EIEI IEI I I I �� I W 1 1 1 1�1 1Е1 11 1 �q' 1� ���..__..�Е������п В���19 ё� �g� �й � I � �� ... �i� I � �:� �'ыt� [���д��� € � :: ICI IiI I. I I I I .. I�I I I_I�I I F�I I�I:I;I � I�I IEI I,,..I I I I{__._.... ISI I I IiI I �I'I:I I' . 1�1 1�1 1. 1 1 1 1 .j ;,' 11 11 1,1 1'�1lг4�11�11 1....1 1 1 1,;;..l.1➢ 1.1 11 11 1 tииlгU1�11 � � �� w'•i.ŭ, ё 3 �EI � I � � � Е � д� I