Papua New Guinea - New Britain Smallholder Development Project

RESTR I CTED Report No. P-66 r"'L E C 0P Y This report was prepared for use within the Bank and its affiliated orgonizations. They do not accept responsibility for its accuracy or completeness. The report moy not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE TERRITORY OF PAPUA AND NEW GUINEA December 31, 1968  INTERIATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOI1ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE TER.RITORY OF PAPUA AND NJE.W GUINEA 1. I submit the following report and recomimendation on a proposed credit in an amount in various currencies equivalent to $1.5 rnillion to tlhe Administration of the Territory of Papua and New Guinea. PART I - HI3TORICAL 2. The Territory Administration through the Australian Government had originally asked for an IDA credit of $6 million to assist in financing an agricultural development project consisting of three separate sub-projects: (i) the planting and replanting of coconu.t palms, (ii) the development and stocking of beef cattle ranches, and (iii) the development of an oil palm development scheme, which included a nucleus estate and factory as well as the settlement of 580 indigenous small- holders. Negotiations of a $6 million credit for this project were held, but were suspended until IDA was replenished. The Australian Government, on behalf of the Adt-inistration, then requested the Association to consider a smaller IDA credit out of the available balance of IDA funds. The high priority smallholder palm oil development sub-project included as part (iii) of the original project, was selected to meet the request. 3. Negotiations of the original proposal were held in Vlashington from August 27 to September 7, 1968. The principal negotiators were Mr. G.A. Lowi, Financial Mlinister of the Australian Embassy, representing the Government of the Commonwealth of Australia, Mr. A.W. Charles, Assistant Director, Department of Agriculture, Stock and Fisheries, representing the Territory Administration, Mr. D. Champion, Chairman of the New Britain Palm Oil Development Co. Ltd., and Mr. K.G. Crellin, Managing Director of the Papua and New Guinea Development Bank. Miodifications to the draft credit docxuments resulting from the revision of the original project and the amount of the IDA credit were agreed upon by correspondence during December 1968. 4. In 1966, the President of the Bank informed the Australian Government thlat the Territory was considered eligible for assistance, but that any Bank Group financing should be additional to and not in place of assistance to the Territory by Australia, which the Bank would therefore expect to be continued. I am satisfied that Australia's contribution to the Territory's budget and economy not only continued at the same level but increased appreciably in recent years. 5. This would be the first IDA credit to the Territory. As noted below in Part V of this report dependence on Australian financial assistance is likely to continue for the foreseeable future. The Commonwealth will therefore provide certain assurances concerning future financial support, provision of funds for the project and the availability of foreign currencies to service the Credit. Under the provisions of the Papua and New Guinea Act 1949 - 1968, the Commonwealth of Australia  - 2 - guarantees public loans received by the Administration of the Territory. The Commonw^Tealth Government will confirm that the Act applies to the proposed Credit in a letter on Undertakings by the Commonwealth of Australia. A Bank loan of $7 million for the financing of imported equipment for the improvement and expansion of telecommunication facilities was signed on June 28, 1968; participations amounting to $0.3 million were sold. As contracts for supply of the equipment have not been let, no disbursements have been made. 6. The Association is still considering assistance in financing the balance of the original project, which, however, due to the time elapsed since it was appraised in January 1968, will have to be revised and reappraised. Beyond that, the Administration is expected to request financial assistance for transport projects resulting from the comprehensive UNDP transportation survey which is currently being carried out with the Bank acting as executing agency. PART II - DESCRIPTION OF TIHE PROPOSED CREDIT 7. Borrower: The Administration of the Territory Amount: The equivalent in various currencies of $1.5 million. Purpose: To help finance thle cost of settlement of about 580 smallholders, the develop- ment of about 4,640 acres of oil palms, and the provision of necessary infra- structure and associated services. kaortization: In fifty years including a ten-year period of grace, through semi-annual installments half of 1% from September 1, 1979 through March 1, 1989 and of 11-St from September 1, 1989 through March 1, 2019. Service Charge: 3/4 of 1% per annum. Estimated Economic Return on the Project: 9% per annum. PART III - THE PROJECT 8. A report entitled "Papua and New Guinea New Britain Smallholder Development Project" (PA-1A) on the proposed project is attached. 9. The economy of tne Territory is almost completely agricultural. Agriculture earns nearly all export income, engages more than half the people in paid employment and most of the self-employed. Agricultural production is still dominantly subsistence in character and about two-thirds  - 3 - of the gross national product is derived from it. The 1963 Bank Survey .Hission and the 1967 Econoric Hissi.on recommended encouragement of cash cropping through a strengthening of extension services and the provision of credit, and endorsed the efforts of the Administration to develop oil palms and other crops, which had not previously been grown in the Territory on a commercial scale. The Administration embarked on a joint venture in oil palm development in 1967 with a well-experienced plantation company, Harrisons & Crosfield, and set up New Britain Palm Oil Development Limited (NIBPOD). The Administration leased to NBPOD 5,400 acres of suitable land for the development of a nucleus estate and construction of an oil mill. 10. The proposed project consists of the settlement in an area adjacent to the nu.cleu.s estate of about 580 indigenous families from other parts of the Territory on 15-acre holdings and the planting of eight acres of oil paLns on each holding, totalling 4,640 acres of oil palms. Supplies of imported planting material would be provided by NBPOD under contract to the Administration. The smallholders would be granted long-term loans by the PaDua and New Guinea Development Bank (P-NqGDB) for on-farm development and subsistence during the initial period of planting. 11. The Administration wouuld provide suitable infrastructure for the settlement area including a bridge, roads and wharf, and necessary welfare and extension services for the smaliholders. The fresh fruit production of the smallholders would be processed and marketed by NBPOD under agreements betwieen the Adrainistration and NBPOD, the execution of which would be a condition of eFfectiveness of the proposed credit. 12. The Administration would carry out the project through its variou.s departments which have the necessary qu.alified and experienced staff for the job. The Papu.a and New Guinea Development Bank, which has been in operation since July 1967 and is an autonomous institution wholly finaLnced by interest-free non-repayable capital appropriations from the Territory bu.dget, would receive up to $600,000 from the proceeds of the credit on a 25 year loan with interest at lVo; it would relend these funds to the smallholders for 11 years at an interest rate of not less than 6%. A satisfactory subsidiary loan agreement between the Administration and PNGDB providing for the relending of part of the proceeds of the credit to PNGDB would be a condition of effectiveness of the credit. 13. The proposed project is estimated to cost $3.3 million. The proposed IDA credit of $1.5 million would provide about 57% of project expenditures after January 1, 1969, equivalent to the estimated import component. However, it would be administratively difficult to relate IDA financing directly to the import ccmponent of the project and disbursements would therefore be made on a percentage basis against expenditures on infrastructure investments, extension services and against disbursements of loans granted to smallholders by PNGDB. The project does not involve any major contractsfor the procurement of major  items which would warrant formal international competitive bidding. The Administration's regular tender procedures have been examined and are considered suitable for the procure;ment of goods and services required for snallholdings and infrastructure. 14. The appraisal report examinles market prospects for palm oil and palm kernels on the world market. It concludes that during the life of the project the c.i.f. Europe price for palm oil will be in the range of US$155 to us$165 per metric ton, and that for kernels in the range of US$134 to US$138. These prices comllpare wjith the following average European market prices for the first eleven months of 1968: palm oil US$170; palm kernels US$155. Prices for palm oil in 1968 weakened sharply in the sumnmer reaching a low of US$141 per metric ton in June, reflecting exceptionally heavy supplies of fish oil, sunflower seed oil and soybean oil. At the end of the year, prices were again hardening but while expected to rise to the range forecast above are not expected to rise to levels experienced earlier in 1968 and in previous years. On the basis of this assumption, individual smallholders would have net earnings of $200 per year six years after the establishment of their smallholdings, rising to $900 per year at full production from the twelfth year onwards. The economic rate of return of the project is estimated at 9%0 per annum. 15. The project is economically and financially justified, particularly bearing in mind that the project has been planned on a relatively small scale because oil paLn is a newi crop in the country and that consequently the burden of infrastructure and overhead cost is relatively heavy. Conditions ror the production of palm oil are very good in New Britain and the chances for a later expansion of the project are excellent. Since only relatively minor additions to the processing and port facilities would be required for such an expansion, the project would set the stage for a further project giving higher returns to the economy. Given the stage of economic development in Papua and New Guinea there are limited opportunities for investments in projects directly benefitting the indigenous population; the proposed project appears to be the most promising one for this purpose at this time. The project would open up a new area of fertile soils for agricultural production, provide scne relief to problems of population pressure in other parts of the Territory and establish settlement techniques which could eventually be applied elsewhere in the Territory and -ith other crops. PAiRT IV - LEGALL INSTRUTENTS AND AUTHORITY 16. The draft Development Credit Agreement between the Association and the Administration of the Territory of Papua and New Guinea and the Report of the Committee required by Article V, Section l(d) of the Articles of Agreement of the Association are being distributed separately. Development Credit Regulations No. 1 w.,ould be applicable to the Developmen-t Credit Agreement with the necessary modifications to take account of the fact that the Borrower is not a member. There is also being distributed the draft of a letter from the Comnaonwealth containing undertakings and assurances with respect to the matters stated in paragraph 5 and also with respect to the completion of the project and certain tax privileges.  17. As stated above (paras. 11 and 12) execution of the several agreements between the Administration and NBPOD and of the subsidiary loan agreement between the Administration and PNGDB is a condition of effectiveness of the Development Credit Agreement. PART V - THE ECONOMY 18. A report "Current Economic Position and Prospects of the Territory of Papua and New Guinea" in two volumes (AS-129b) was circulated to the Executive Directors on August 31, 1967. A memorandum updating that report and presenting a general picture of the Territory's current economic position was distributed to the Executive Directors on June 12, 1968 together with the President's Report on the Telecommunication Project (P-613). Recent developments have not changed significantly the account given in these documents. 19. The Administration's budget for FY 1968/69 (July 1 - June 30) foresees a 14% increase in total gross expenditure over the previous fiscal year. Although internal revenmes are to be raised almost at the same rate, largely by higher revenues from direct taxes and customs duties, the budget continues to be heavily in deficit. Again, as in the past, most of the deficit will be covered by the annual Australian budget grant which will cover about 60% of the Territory Administration's total outlays. Dependence on Australia's financial assistance is expected to continue for the foreseeable future. 20. Exports increased by 34% in FY 1967/68, owing to a vigorous rebound in copra exports, further increases in cocoa and coffee sales and the initiation of tea exports. Although the trade gap widened in absolute terms from $A73.0 million to $A77.7 million, the percentage of imports covered by exports earnings rose to 48% from only 42% in FY 1966/67. Australia's annual budgetary support finances most of the Territory's trade gap. The rapid rise in imports of 18% in FY 1967/68 was because of the acceleration in imports of capital goods in connection with the stepped-up development program. In addition, consumer goods imports have been rising with the growing expatriate community in the Territory and increasing demand by the indigenes for imported goods. 21. The Territory's five-year development program covering Fy 1968/69 through FY 1972/73 was announced in September 1968. The development program takes into account in large measure the recommendations made by the 1963 Bank General Survey Mission and the 1967 Economic Mission. The program appears to be consistent and sound. An economic mission is scheduled to visit the Territory in March to review the economic situation and the five-year development program. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  - 6 - PART VII - REC0MMENDATION 23. I recormend that the Executive Directors adopt the following resolution: RESOLUTIOMN NO. IDA 69 Approval of a Development Credit to the Administration of the Territory on Papua and New Guinea (New Britain Sma-lholder Development Project) in an amount equivalent to US$1,500,000 RESOLVED: THAT thle Assoc.ation shall grant a development credit to the Ad.i-,inistration of the Territory of Papua and New Guinea in an amount in various currencies equivalent to one million five hunidred thousand United States dollars (US$1,500000) to mature on and prior to March 1, 2019, to bear a service charge of three quarters of one percent (3/4 of 1%) per annum and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agree3nent (New Britain Smallholder Development Project) between the Association and the Administration of the Territory of Papu.a and New Guinea, which hias been presented to this meeting. Robert S. McNamara President Attachment by J. Burke Knapp December 31, 1968